##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549



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FORM 10-K

FOR ANNUAL AND TRANSITION
REPORTSPURSUANT TO SECTIONS 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934



(Mark One)

[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

For the fiscal year ended December 31, 2001

or

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

For the transition period from      to

Commission File Number 000-29809

OTG Software, Inc.
(Exact name of registrant as specified in its charter)

|                                                                       |  |                                               
|---------------------------------------------------------------------- |  | ----------------------------------------------
|Delaware(state or other jurisdiction of
incorporation or organization) |  | 52-1769077(IRS Employer
Identification Number)

2600 Tower Oaks Blvd.
Rockville, MD 20852
(240) 747-6400

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common stock,
par value $0.01 per share





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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 the 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 voting stock of OTG Software, Inc. held by
non-affiliates on January 31, 2002 was approximately $244,092,000. As of
January 31, 2002, there were issued 33,313,990 shares and outstanding
33,219,790 shares of OTG Software, Inc. common stock, $0.01 par value per
share.

Document Incorporated By Reference

Information required by Part III of the Form 10-K
will be incorporated by reference from certain portions of the Companys definitive Proxy Statement to be used in
connection with the annual meeting of stockholders for the year 2002,
or will be included in a subsequent amendment to the Form 10-K.













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OTG Software, Inc.
Form 10-K
Year Ended December 31, 2001

Table of Contents

|                                                                                       |  |      |    | 
|-------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                       |  | Page
|                                                                                       |  |     
|Part I                                                                                 |  |      |    | 
|Item 1.     Business                                                                   |  |      | 1  | 
|Item 2.     Properties                                                                 |  |      | 21 | 
|Item 3.     Legal Proceedings                                                          |  |      | 22 | 
|Item 4.     Submission of Matters to a Vote of Security Holders                        |  |      | 22 | 
|Part II                                                                                |  |      |    | 
|Item 5.     Market for Common Equity and Related Stockholder Matters                   |  |      | 23 | 
|Item 6.     Selected Financial Data                                                    |  |      | 25 | 
|Item 7.     Managements Discussion and Analysis of Financial Condition
and Results of |  |      |    | 
|Operations                                                                             |  |      | 26 | 
|Item 7A.  Quantitative and Qualitative Disclosures about Market Risk                   |  |      | 54 | 
|Item 8.     Consolidated Financial Statements and Supplementary Data                   |  |      | 55 | 
|Item 9.     Changes In and Disagreements With Accountants on Accounting and
Financial  |  |      |    | 
|Disclosure                                                                             |  |      | 90 | 
|Part III                                                                               |  |      |    | 
|Item 10.    Directors and Executive Officers                                           |  |      | 90 | 
|Item 11.    Executive Compensation                                                     |  |      | 90 | 
|Item 12.    Security Ownership of Certain Beneficial Owners and Management             |  |      | 90 | 
|Item 13.    Certain Relationships and Related Transactions                             |  |      | 90 | 
|Part IV                                                                                |  |      |    | 
|Item 14.    Exhibits, Financial Statement Schedules and Reports on Form 8-K            |  |      | 91 | 
|Signatures                                                                             |  |      | 94 | 





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Part I

Item 1.  Business

Overview

OTG, founded in 1992, is a provider of online data storage and data access
software solutions for business applications, email management and related
services. Our software enables enterprises to move, store, manage and access
data and email quickly and efficiently over a variety of network architectures,
including the Web and storage area networks. Our software supports many
different types of storage devices, is easy to install and use, and can manage
storage systems ranging in size from a single storage device to an
enterprise-wide network storage system. In addition, our products can be run
on Windows NT, Windows 2000, Unix and Linux operating systems, as well as
multiple storage architectures including direct attached storage (DAS), network
attached storage (NAS) and storage area networks (SAN).

On February 20, 2002 OTG entered into an Agreement and Plan of Merger with
Legato Systems, Inc., whereby OTG will merge with and into a wholly-owned
subsidiary of Legato, and become a wholly-owned subsidiary of Legato (the
Merger). In the Merger, OTG public stockholders will receive merger
consideration of 0.6876 shares of Legato common stock, plus $2.50 in cash for
each share of OTG common stock. The closing of the Merger is subject to
customary conditions, including shareholder approval by both companies and
regulatory approval of the transaction. The closing is expected to occur in
the second quarter of 2002.

In this report, references to we, us, our and the Company refer to OTG
Software, Inc. and its wholly-owned subsidiaries, including UniTree Software, Inc.
(UniTree), Smart Storage, Inc. (Smart Storage), OTG Sales, Inc. (OTG Sales) and
OTG E-Mail Corp. (OTG
E-Mail), which was formerly named xVault, Inc. (xVault).
Certain information contained herein should be considered forward-looking
information within the meaning of the Federal Private Securities Litigation
Reform Act of 1995. Forward-looking information is subject to a number of
substantial risks and uncertainties that can cause actual results to differ
materially. These risks and uncertainties include the timely development and
market acceptance of our products and our ability to manage our growth.
Statements contained herein that are not statements of historical fact may be
deemed to be forward-looking information. Without limiting the foregoing, words
such as anticipates, believes, could, estimate, expect, intend,
may, might, should, will, would and other forms of these words or
similar words are intended to identify forward-looking information. For
example, our forward-looking statements include statements regarding:



| |  |  | revenue growth;                                                                    
| | - |  | -----------------------------------------------------------------------------------
|
| |  |  | development, deployment and acceptance of new products;                            
|
| |  |  | technological changes;                                                             
|
| |  |  | use of the proceeds from our initial public offering and follow-on public offering;

1



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| |  |  | variations in gross margin;                                                       
| | - |  | ----------------------------------------------------------------------------------
|
| |  |  | expansion plans;                                                                  
|
| |  |  | spending on research and development;                                             
|
| |  |  | levels of expenditures generally, including investments in property and equipment;
|
| |  |  | changes in account receivables, including collections activities; and,            
|
| |  |  | sufficiency of our liquidity and capital resources.                               

Such forward-looking statements including, but not
limited to, information about expected trends and related
information, are made only as of the date of this report.

Important factors known to us that could cause such material differences in
forward looking statements are discussed under the caption Risk Factors
below, including the announced agreement to merge OTG with and into a
subsidiary of Legato. These factors may materially impact the future
events, developments, or results described by the forward-looking
statements in this report. In light of
these risks, uncertainties and assumptions, the future events, developments, or
results described by the forward-looking statements in this report could turn
out to be materially different from those discussed or implied. We undertake no
obligation to update or revise any forward-looking information, whether as a
result of new information, future events or otherwise.

Industry Background

The growth of data storage

The growth of data-intensive computing functions such as e-commerce, email,
multimedia applications, complex enterprise computer applications and the
conversion from paper to electronic storage has fueled rapid growth in the
amount of data stored within an enterprise. For example, International Data
Corporation, an independent information technology research firm referred to as
IDC, projects that the number of email messages sent per day worldwide will
grow from approximately 9.7 billion in 2000 to 35 billion in 2005. This growth
has resulted in an increased demand for more efficient methods to store and
retrieve data. IDC estimates new hard disk drive shipments are adding over
1.75 million terabytes of storage capacity annually, with the annual increment
expected to reach 26.3 million terabytes by 2004. A byte is the amount of
computer memory required to store one number, letter or symbol; a terabyte is
equal to one trillion bytes.

The dramatic growth in data storage is driving the demand for many types of
storage technology, such as new storage devices, networking hardware, network
transmission technology and software. Many enterprises are trying to manage
larger amounts of data, creating a demand for software that can automate this
task. Industry analysts predict that demand for data storage management
software in particular will grow significantly. Gartner Group, an independent
information technology research firm, estimates that the data storage
management software market will grow from $5.3 billion in 2000 to $16.7 billion
in 2005.

2



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Traditional data storage and back-up

Users traditionally have stored data on hard disks or other storage devices
connected to their personal computers or computer networks, a configuration
referred to as primary storage or direct attached storage (DAS). According to a
joint study by McKinsey & Company and Merrill Lynch, up to 80% of storage
implementations today are architected using DAS. In addition to primary
storage, enterprises have widely adopted back-up processes to insure against
the loss of data by creating and storing duplicates of existing data files. The
traditional back-up process moves large volumes of data to alternative storage
devices not directly accessible by users and applications. Typically, under
traditional backup and data storage methodologies, an enterprise will perform a
full back-up of all data once a week and incremental back-ups on each of the
other six days of the week. An incremental back-up operation copies only those
files that have changed since the last full back-up. There are several
significant problems with traditional data storage and back-up methods:



| |  |  | Expensive primary storage capacity is consumed rapidly. Hard
drives and other storage devices used for primary storage are more
expensive than remote and back-up storage devices and have a limited
capacity. This capacity is often quickly exhausted, and the user or
the enterprise must then either purchase additional capacity or delete
data. An enterprise incurs additional expense not only for the
purchase of additional storage devices, but also for the
administrative time required to install, allocate and manage this
additional primary storage capacity.                                                                                                                                                                                                                                                                                                                      
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Repetitive back-up consumes network transmission capacity. As the
amount of data increases, repeatedly backing up the same data consumes
increasing amounts of network transmission capacity, or bandwidth.
Computer networks have a limited amount of bandwidth, and most of this
capacity is consumed during business hours by the demands of the
networks users. As a result, networks lack the capacity to transmit
data to storage devices for back-up during business hours. In
addition, as enterprises expand their operations internationally, as
the Internet makes networks more accessible and as the workday becomes
longer, the number of hours available each day for back-up is
shrinking. As a result, network administrators have smaller windows of
time in which they can back up increasing amounts of data without
impairing the performance or accessibility of the network.
|
| |  |  | Failure to manage data results in an inefficient back-up process.
Most files on a typical file server are not frequently accessed more
than 30 days after they are created. Repeatedly backing up the same
unchanged data consumes more back-up storage capacity unnecessarily,
and requires an enterprise to expand its storage capacity with each
subsequent back-up. In addition, because network administrators cannot
determine which files are important, they often either save most files
or randomly delete them.                                                                                                                                                                                                                                                                                                                                                                          

3



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| |  |  | Access to stored data is limited. Infrequently accessed data is
typically migrated from primary storage devices to secondary storage
devices, such as tape libraries, magnetic optical disks, CD and DVD
libraries, NAS, and SAN devices. Once this process has occurred, the
time and effort necessary to retrieve a migrated file is significant.
A user will need to know information such as the file name, the
original storage location and the date of the back-up. When this information has been determined, the network
administrator will then use this information to retrieve the file
manually. This process is inefficient for the user, who must wait for
the needed file, and for the network administrator, who must act as an
intermediary and retrieve the file. In addition, files that have been
deleted from primary storage and only reside on secondary storage
devices are not easily and readily accessible to end users and/or
software applications that may need the data contained in the file.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Data is stored randomly at diverse locations. The distribution of
data and applications on multiple personal computers and servers
throughout a computer network has led to islands of stored data
throughout an enterprise, the decentralization of data storage
management and the distribution of storage resources throughout the
network. Distributed storage management on expensive primary storage
devices throughout a network results in inadequate storage management,
increased administrative time and costs and inefficient use of storage
devices.                                                                                                                                                                                                                                                                                                                                                                                                                                                             

Impact of traditional solutions on total cost of ownership

Surging demand for storage capacity and greater access is driving up the total
cost of ownership for business information in three ways:



| |  |  | Rising Costs Organizations are buying more storage than necessary.
While the cost of storing a megabyte has gone down, overall hardware and
software expenditures continue to grow. Eighty percent of todays
storage is still directly attached to the server, resulting in under- and
over-utilized capacity for both servers and storage. In this
environment, there is always a point when new servers and disk space must
be purchased to support that additional storage. In addition, most
corporations re-evaluate and replace portions of their storage
architectures every three years.                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Lost Productivity Labor costs are one of the largest indirect costs
associated with increased storage capacity. Inefficient data storage
management can handcuff entire organizations  for instance, keeping
everyone waiting too long for network backups. End users cannot do their
jobs without asking Information Technology administrators to retrieve
archived data. Top information technology (IT) administrators are
pulled away from higher-value work and are duplicating effort as they
maintain multiple archive islands. Traditional storage management tools
allow one administrator to effectively manage less than 1 terabyte (TB)
of storage on DAS or 4 TB on networked storage (according to the research
firm Enterprise Storage Group) but experts estimate that average site
capacity will have grown to 53 TB by 2005 (according to the research firm
Strategic Research Corporation). If better solutions are not
implemented, the number of administrators needed to manage storage will
soon become untenable.

4



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|
|
|

The emergence of networked storage

In response to the limitations of traditional data storage and back-up methods,
networked storage has emerged. This encompasses storage area networks (SANs)
and networked attached storage (NAS) topologies, and comprises approximately
20% of storage implementations today according to the McKinsey and Merrill
Lynch study. A storage area network is a network of servers and data storage
devices that are interconnected at high speeds, typically using fiber channel
transport technology, which allows network resources to be located at remote
and diverse locations. Enterprises are beginning to deploy storage area
networks in an effort to move data storage operations off of their local area
networks to a separate network dedicated to data storage. Moving these
operations to storage area networks frees up bandwidth on the local area
network for more efficient operation of enterprise software applications and
communications. Storage area networks can be significantly less expensive to
maintain and expand than traditional data storage systems because they enable
shared, high-speed access to stored data. IDC estimates the SAN attached disk
market segment to be $4.2 billion in 2001, growing at a rate of 80% while SAN
connectivity (e.g., fiber switches) is estimated to be a $2.14 billion market
in 2001 growing at 67%.

Another alternative to direct attached storage is network attached storage, the
fastest growing market segment of networked storage, with an estimated $2.84
billion market size in 2001 and a 97% growth rate according to IDC. NAS offers
the benefit of adding capacity to the network itself rather than to an
individual server, while presenting data at a file-level similar to direct
attached storage. Like SANs, NAS enables organizations to realize a lower cost
of storage than DAS. However, unlike SAN, NAS architectures offer a lower
price point and plug and play functionality without any additional network
components.

Despite the greater capacity and speed, and the reduced cost offered by
networked storage, these emerging storage topologies do not address the need to
make management and access of data more efficient. Like DAS configurations,
networked storage configurations fail to determine which data should be stored,
do not provide efficient and automated migration of data to the storage media,
fail to integrate with front-end applications, do not enable immediate access
to data and cannot provide an effective index of stored data.

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The need for data management software

In order to address the problems of traditional storage and back-up methods,
and to take advantage of the power of networked storage, a data management
solution must enable better utilization of storage assets (both people and hardware), provide automated migration of data
and deliver better access to stored data. Specifically, to be effective and
efficient a solution must:



| |  |  | automatically apply policies that determine whether, or for how long,
data should be stored, while enabling these policies to be easily set
by organizations/customers;         
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | provide efficient transfer of data to and from storage devices
throughout networks, including local area networks, networked attached
storage devices and storage area networks;
|
| |  |  | maximize the effective capacity of existing storage devices;                                                                                                                    
|
| |  |  | automatically consolidate data that is distributed on
servers across the network and provide centralized storage
management for that data;                                      
|
| |  |  | provide a detailed index of stored data so users can perform specific searches;                                                                                                 
|
| |  |  | enable rapid and easy retrieval of stored data selected by users and software applications regardless of where and how that
data is stored;                                     
|
| |  |  | seamlessly integrate access to stored data with existing business applications                                                                                                  
|
| |  |  | provide secure Web as well as local area network access; and                                                                                                                    
|
| |  |  | work on file systems, email systems and databases, and
across multiple operating systems including Windows, Unix and
Linux.                                                     

The problems of email management and storage

Email is an integral part of business communications. As a result of the
increased use of email both as a messaging system and an information delivery
system, system administrators need to manage and store large volumes of email
messages and attachments without compromising the reliability of the system or
restricting message or attachment size. System administrators are also
confronted with the challenge of protecting and restoring email communications,
including protection and restoration during and after computer virus attacks.
In addition, as email becomes increasingly more important, the lack of
administrative control threatens an enterprises record management procedures
and its ability to comply with applicable regulatory and legal requirements.

The need for email management and storage software

In order to address the problems of email management and storage, and to enable
an enterprise to take full advantage of the speed and convenience of email, an
email management and storage solution must:

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| |  |  | automatically apply policies that determine whether, or for
how long, data should be stored, while enabling these policies to
be easily set by organizations/customers;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | provide fast and efficient search capability and access to stored email messages and attachments;                                                                      
|
| |  |  | reduce messaging system back-up time and enhance performance while reducing costs;                                                                                     
|
| |  |  | eliminate the need for administrative restrictions on message or attachment size;                                                                                      
|
| |  |  | facilitate management of message stores and guard against the loss of information following virus attacks, enabling
recovery within hours rather than days; and        
|
| |  |  | ensure adherence to formal email policies that correspond to an enterprises traditional record management policies and
requirements.                                  

The OTG Software Solution

We are a provider of online data storage management and data access software.
Our software provides customers with the following benefits:



| |  |  | Server consolidation and centralized management.Our
software provides automated consolidation of stored
data and centralized data storage management. This
enables improved capacity utilization of primary
servers, and increased IT efficiency in managing
distributed storage. It also presents to both the
IT administrators and the end-users a single,
logical view of stored data, independent of where
the data is physically located.                                                                                                                   
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Policy based data migration and management.Our
software enables automated storage management across
a diverse storage environment from primary disk to
secondary storage devices, including policy-based
data migration to less expensive alternative storage
devices and networks. This enables inactive data to
be moved off primary storage without manual IT
intervention. OTGs software manages the movement
of data according to rules the IT administrator
specifies, balancing the needs of applications for
data access with the total cost of storage.
|
| |  |  | Increased efficiency of back-up systems.Our
software reduces the time required for data back-up,
maximizes use of back-up storage capacity and
increases available network bandwidth by eliminating
the repetitive back-up of unchanged data.                                                                                                                                                                                                                                                                                                                    
|
| |  |  | Storage virtualization and direct data access.Our
software virtualizes data stored in multiple devices
and media into a single pool of information that is
accessible natively within user applications.
Because our software indexes and tracks the data, it
enables easy and direct access to that archived data
for users and software applications, including secure Web access.                                                                                                                                                                             

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| |  |  | Diverse storage options.Our software supports many
different types of data storage devices within the
same data storage system to maximize performance and
minimize cost. This facilitates better management
of legacy data stored on varied devices and media.                                                                                                                                                                                                                                                                            
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Complete email management.Our software provides
efficient storage, indexing, archiving and retrieval
of email messages and attachments. In addition,
our software offers administrators the ability to
centrally identify and purge email attachment files
known to contain viruses, and authorize supervisors
with the ability to monitor employee emails.                                                                                                                                                                                
|
| |  |  | Integration with front-end applications for
intelligent management of electronic content.Our
software is easily integrated with a wide variety of
front-end software applications to provide direct
end-user access to stored data through native
interfaces. In addition, our software offers the
ability to capture, organize and manage virtually
any type of electronic content, while providing
intelligent, indexed access via a universal
interface, which helps organizations streamline
management and improve business processes.
|
| |  |  | Fast and easy installation and use.Our software
makes installation, configuration and use quick and
easy through an intuitive graphical user interface,
which allows a user to interact with our product
through the use of windows and icons in a
point-and-click system.                                                                                                                                                                                                                                                                 
|
| |  |  | Flexibility and scalability.Our software expands
quickly and easily to accommodate changes in the
size of a data storage system, from a single storage
device to an enterprise-wide network storage system.
Our software supports the Unix, Linux, Windows
platforms, Oracle databases, and major messaging
systems including Microsoft Exchange and Lotus
Notes/Domino.                                                                                                                                                                   

The OTG Software Strategy

Two of the most critical challenges organizations face today are (1) reducing
the total cost of ownership of data storage by better leveraging IT resources,
both for hardware and people, and (2) increasing productivity by enabling
better access to information, thereby making quicker and faster decisions. For
ten years this has been OTGs focus. Our software virtualizes
pools of stored data both to the end-user and to the IT administrator while integrating with most
applications. OTG can reduce the back-up window, lower the overall cost of
storage and enhance the value of information across the organization. Our
strategy is built on the benefits our technology brings, our worldwide
distribution channel, and our ability to execute.

8



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As part of our strategy, we intend to:

Continue to develop our sales channels. We intend to continue to expand and
leverage our base of approximately 600 partners worldwide (OEMs, distributors,
and value-added resellers, or VARs) to sell additional products to our
end-users. We intend to enhance our international partner base as we
internationalize, localize and bring to market existing and new products. And,
we intend to focus on developing systems integrators and other strategic
partners to open new avenues of distribution for our products.

Continue to focus on international growth. Europe, the Middle East, Africa,
Japan and Asia represent attractive markets for expansion, with Europe
representing an estimated $2 billion data storage management market in 2001 and
Asia $800 million in 2001 according to Gartner. We intend to continue to
internationalize and localize our products to penetrate this marketplace. Our
Smart Storage acquisition in 2001 added offices, partners and expertise in both
Europe and Asia, and by bringing to these markets the full complement of our
data storage, content and messaging products and services, we intend to grow
our international revenues.

Remain focused on one of our core strengths of scaling from department to
enterprise. Given todays soft economic climate, IT spending is tight and
customers require products with attractive price points and demonstrable value.
Our sales force and resellers leverage our storage and data management
solutions to demonstrate the value of our approach for one department, such as
accounting, and then use the success in that area to expand to other
departments, such as human resources. This strategy, which leverages our
application-oriented storage technology, has proven to be effective in growing
our business.

Grow and penetrate the messaging
marketplace. We intend to leverage our position as
a provider of both email storage and email content management solutions to
continue to grow in the messaging market. Our email archiving solution is now
being bundled with NAS hardware appliances through major distributors. Our
email content management offerings, particularly the supervisor monitoring
capabilities, are seeing traction in the financial and brokerage markets to
assist in compliance with SEC and NASD regulations. Additionally, our ability
to offer our email products on Exchange, Lotus and Unix Sendmail is serving to
differentiate us along with the breadth of our solutions. We intend to pursue
additional strategic alliances with other leading providers of email solutions,
such as email system integrators. We are also leveraging our message archiving
technology to broaden the adoption of our solution in the electronic
collaboration market, which includes applications such as instant messaging.

Increase enterprise level deals through our UNIX and database offerings, as
well as our direct sales opportunities. According to Gartner, as much as 60%
of stored data is in structured or database environments, and the Unix segment
of the storage management software market is growing from $2.79 billion in 2001
to $3.77 billion in 2002. These areas represent new target markets for OTG
given the DiskXtender Unix and DiskXtender Database products we introduced in
2001. To date, there have been few ways to manage and increase efficiency of
databases, and the few tools that do exist require users to run dual queries
against active and historical data. OTGs technology does not require query
modification, virtualizes all stored data, and streamlines back-up processes.
We plan to leverage domestic and international direct sales to sell our database
product. Unix presents a similar opportunity, one that represents
enterprise environments and also favors a direct sales model. Our breadth of
Unix platform support, including HP-UX, Sun Solaris, Compaq Tru-64, SGI-IRIX
and Red Hat Linux is unique, and we believe gives us a competitive advantage in
penetrating the Unix enterprise storage market.

9



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Products and Services

The XtenderSolutions product suite includes a number of application-focused
products to provide customers with the ability to move, store, manage and
access data across diverse platforms. The following table summarizes our
XtenderSolutions product suite:

|                   |  |                                                                                                                                                                                                                                                                                                                                                  
|------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Products           |  | Description                                                                                                                                                                                                                                                                                                                                      
|                   |  |                                                                                                                                                                                                                                                                                                                                                  
|DiskXtender        |  | Our core product enables comprehensive data storage management
for an enterprises business data, including databases, as well as
enables storage consolidation, aggregation and virtualization;
available for Windows, Unix and Linux platforms; Unix platforms
supported include HP-UX, Sun Solaris, Compaq Tru-64, SGI-IRIX and Red
Hat Linux.
|                  
|ApplicationXtender |  | Provides access to electronic content through a universal
interface by intelligently indexing, organizing and storing business
information.                                                                                                                                                                                                      
|                  
|WebXtender         |  | Provides access to information managed within ApplicationXtender
over an intranet or the Internet using a standard Web browser.                                                                                                                                                                                                                  
|                  
|EmailXtender       |  | Provides intelligent email storage, indexing, archiving and
retrieval for leading email platforms including Microsoft Exchange,
Lotus Notes/Domino and Unix Sendmail.                                                                                                                                                                            
|                  
|SANXtender         |  | Provides automated, centralized management of storage area
network data, enabling users and applications to access this data
directly.                                                                                                                                                                                                           
|                  
|COLDXtender        |  | Manages the storage of computer-generated data for use in
preparing forms and reports in standardized formats.                                                                                                                                                                                                                                   
|                  
|ERMXtender         |  | Provides enterprise report management of data and makes
electronic reports accessible over the Web.                                                                                                                                                                                                                                              
|                  
|VideoXtender       |  | Provides automated storage management and high performance data
access for video server applications while enabling automated delivery
of large volumes of video data to multiple destinations
simulatneously.                                                                                                                                   

10



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|               |  |                                                                                                                                                            
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|OnlineStor.com |  | Provides our XtenderSolutions product suite on an
outsourced/hosted basis over the Web through application service
providers and storage service providers.

Our product pricing is generally established on a per license basis. An example
of a representative customers requirements would include the need to move,
store, manage and access approximately 10 terabytes of data by 25 concurrent
users accessing data from the customers network and 100 concurrent users
accessing data over the Web. Under this scenario, a product configuration would
include:



| |  |  | DiskXtender.The list price of DiskXtender for one StorageTek 9740-326
tape library (representing 10 terabytes of data) is approximately
$37,000. In addition, the customer would need to purchase four
additional DiskXtender Data Manager licenses to support servers
required in its network for a total license price of approximately
$43,000, with annual maintenance of $8,170.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | ApplicationXtender.To support 25 concurrent users accessing the data
from the network, the customer would need to purchase 25
ApplicationXtender licenses at a list price of approximately $38,000,
with annual maintenance of $7,220.                                                                                                                                               
|
| |  |  | WebXtender.To support 100 concurrent Web users, the customer would
need to purchase 100 WebXtender licenses at a list price of
approximately $62,000, with annual maintenance of $11,780.                                                                                                                                                                                            

The list price for this XtenderSolutions configuration would be approximately
$143,000, with annual maintenance of approximately $27,170.

An example of a representative customers requirements for email management
would include the need to move, store, manage and access messages and
attachments for 1000 mailboxes, with a subset of 100 mailboxes requiring
monitoring. Under this scenario, a product configuration would include:



| |  |  | DiskXtender.The list price of DiskXtender for one Hewlett-Packard
surestor 1200mx optical library (representing 1 terabyte of data) is
approximately $16,000. In addition, the customer would need to
purchase one additional DiskXtender Data Manager license to support
servers in its network for a total license price of approximately
$17,500, with annual maintenance of $3,325.                                     
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | EmailXtender.To support the full management of up to 900 mailboxes,
the customer would need to purchase an EmailXtender license for a
total list price of approximately $23,800, with annual maintenance of
$4,520. To support the monitoring of up to 100 mailboxes, the
customer would need to purchase an EmailXaminer module license for a
total list price of approximately $26,500, with annual maintenance of
$5,035.

11



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The list price for this XtenderSolutions configuration would be approximately
$67,800, with annual maintenance of $12,880.

Products

DiskXtender.The cornerstone of our product suite is DiskXtender. DiskXtender
is a server-based, Windows NT, Windows 2000, UNIX and Linux solution that
enables centralized, policy-based management of data throughout an enterprises
network. DiskXtender Database Edition provides these same capabilities for
very large databases such as Oracle 8i and IBM DB2. DiskXtender enhances a
data storage system by automatically managing data across a diverse storage
environment including primary disk storage, secondary devices and networked
storage. DiskXtender increases server storage capacity by migrating
infrequently accessed data to alternate storage media, while maintaining
constant accessibility to that data, and integrating stored files with other
enterprise applications. DiskXtender uses advanced features such as caching
technologies, which temporarily store frequently accessed or recently accessed
data and thereby speed up an applications access to data; intelligent data
movers, which automatically migrate data to storage devices based upon
configurable rules; and storage virtualization, which provides a logical view
of stored data to users and applications, and enables storage consolidation and
centralize management. This approach provides end users and applications with
direct access to stored data through native interfaces, without requiring
modifications to applications or administrator intervention. In addition,
DiskXtender can help an organization improve its data backup and recovery time,
as only active data and metadata need to be backed up and restored.

DiskXtender is currently the only storage solution that manages all major types
of storage devices, from optical and tape, to CD-ROM, DVD, RAID, near line
devices and NAS. We provide a DiskXtender application programming interface
allowing end-users and original equipment manufacturers to integrate
DiskXtender with front-end software applications.

ApplicationXtender.ApplicationXtender provides access to virtually any type
of data file by integrating data generation, management and access into a
single comprehensive solution. By intelligently indexing, organizing and
storing business information ApplicationXtender enables searching and access to
virtually any type of electronic content through a universal interface.
ApplicationXtender is tightly integrated with DiskXtender, so that electronic
content can be easily and cost-effectively stored for the long term, while
remaining accessible. As with DiskXtender, an application programming
interface toolkit allows customers and original equipment manufacturers to
integrate ApplicationXtender with existing applications.

WebXtender.WebXtender provides access to data managed within
ApplicationXtender over an enterprises intranet or the Internet using standard
Web browser interfaces. WebXtender offers data display and search functionality
in any ApplicationXtender application, while providing remote access to stored
data. Because WebXtender requires only a standard Web browser to be installed
on the users workstation, WebXtender minimizes overhead and costs of client
software distribution and configuration.

12



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EmailXtender.EmailXtender is full-featured product tightly integrated with
leading email platforms that provides comprehensive support for both email
storage and email content management, including archiving, server management, life-cycle management,
end-user search and retrieval, and supervisory monitoring. This technology
provides for dynamic, real-time capture of email messages and attachments into
a central repository without administrator intervention, eliminating the need
for administrative restrictions on message or attachment size, and allowing
enterprises to conform their email management to their record management
policies and applicable regulatory and legal requirements. EmailXtender also
permits timely recovery from virus attacks; preserves non-infected messages,
preventing loss of critical information; and allows for system recovery in one
central location. A module of EmailXtender named EmailXaminer enables
organizations to sample and monitor emails for review processes, and provides a
simple mechanism for classifying and storing email for audit records.

SANXtender.SANXtender applies our core data storage management and access
technology to the storage area network. SANXtender links storage area network
technologies to local area network applications, allowing data transfer and
storage without moving data through servers on the local area network.
SANXtender automatically identifies and coordinates available switches, routers
and storage devices in a storage area network to enable more efficient movement
of data. SANXtender frees the resources of the local area network and provides
applications and users with the ability to access data at the faster speed of a
storage area network.

COLDXtender.COLDXtender manages the storage of computer-generated output data
for use in preparing forms and reports in standardized formats, such as
insurance claims and reports. COLDXtender stores, compresses and catalogues
report data in searchable databases.

ERMXtender.ERMXtender is based on our COLDXtender product and provides
enterprise report management of data for use in preparing forms and reports in
standardized formats. In addition, ERMXtender manages complex, high volume
streams of data and makes electronic reports accessible over the Web.

VideoXtender.VideoXtender works in conjunction with our DiskXtender product
to provide automated storage management and high performance data access for
video server applications. Designed specifically for the performance and
accessibility requirements of real-time video serving, non-real time media
asset management and digital content creation applications, VideoXtender
enables automated delivery of large volumes of video data to multiple
destinations simultaneously.

OnlineStor.com.We offer our products as an outsourced hosted data storage and
management service under the name OnlineStor.com. These services are offered
through application service providers and other partners.

Professional services and support

We maintain a professional services division responsible for providing
customers with maintenance and technical support, consulting and training
services related to our XtenderSolutions products, which consist of:



| |  |  | analysis of a customers requirements for data storage software
and data management software;
| | - |  | ---------------------------------------------------------------------------------------------

13



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| |  |  | software design and implementation;          
| | - |  | ---------------------------------------------
|
| |  |  | business process analysis and implementation;
|
| |  |  | product installation and upgrading;          
|
| |  |  | custom documentation; and                    
|
| |  |  | training.                                    

When a customer licenses our products, we make available a support package that
includes installation, configuration and testing, access to an on-call
technical help desk, a technical support website and software updates. We also
host regularly scheduled training seminars in the Washington D.C. metropolitan
area, on the West Coast and, upon request, at a customers site. In addition to
our own capabilities, our value-added resellers and system integrators perform
similar professional services for our customers.

Product Development

To remain competitive, we must continue to enhance existing products and
develop new products and technologies. Since our formation, we have made
significant investments in developing and enhancing our core DiskXtender
product and other related products. Our current initiatives include:



| |  |  | continuing our efforts to enable our XtenderSolutions suite
of products to operate on additional UNIX operating systems such as
AIX, and with other storage software such as SRM (storage resource
management) and hardware such as new nearline storage offerings;            
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | continuing strength in Windows market with support for
Windows XP and other new Microsoft offerings;                                                                                                                                                                           
|
| |  |  | extending our EmailXtender technology for use with
electronic collaboration applications, such as corporate instant
messaging platforms; and                                                                                                                                   
|
| |  |  | integrating with leading enterprise applications such as
those offered by SAP and Siebel for front-end client side
partnerships. We also announced a partnership with webMethods to
develop an intelligent adaptor for their EAI (enterprise
application integration) platform.

Our research and development expenses were $18.0 million for 2001, $12.1
million for 2000 and $6.9 million for 1999. As of December 31, 2001 we had 135
employees dedicated to research and development. We intend to continue to make
significant investments in research and development activities.

14



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Technology

DiskXtender is the foundation of the XtenderSolutions product suite.
DiskXtender employs a variety of advanced technology features, including a
storage policy engine, virtualization capabilities, storage consolidation and
caching techniques. These features enable DiskXtender to provide automated
storage management support for diverse storage systems and devices, in
virtually any storage environment. DiskXtender uses software agents that
prevent the file server hard disk from running out of free space by checking
space utilization against a watermark, or threshold setting, that can be
established by the customer. Migration, space management and retention policies
are defined by the user and can be customized for any application requirements,
based, for example, on age, size or file name. Based on these rules,
DiskXtender can migrate eligible files among storage devices, including
secondary storage. In addition, based on defined watermarks, DiskXtender
truncates the original file data to make space for additional data. File
truncation removes the original file data from the file server hard disk,
leaving behind a stub file, or place marker, freeing the space for other use.

When the contents of a file server hard disk are viewed by an application, such
as Windows Explorer, DiskXtender displays the contents of the file server hard
disk in a way that makes the application see the original file size instead of
the stub file.

When an application attempts to open the original file, DiskXtender:



| |  |  | captures the request to open the file;                                                                                                                    
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | refers to the stub file associated with the file;                                                                                                         
|
| |  |  | determines the storage device to which the file was migrated; and                                                                                         
|
| |  |  | retrieves the file from the extended storage system by copying it back
to the original file server hard disk for use by the application that
requested it.

DiskXtender manages all file migration based on incoming file requests and
defined storage policies. Recall of file data from secondary storage devices is
performed automatically. When the contents of a file server hard disk are
accessed by a back-up application, DiskXtender recognizes the back-up
application and intelligently manages the back-up data. Instead of backing up
all data on the extended storage system, it allows the back-up application to
back up only the stub files, which represent a significantly smaller amount of
data. This feature reduces the time required for back-up and also reduces the
amount of data that must be backed up.

Customers

We have licensed our products to over 16,000 corporations, government agencies
and other organizations across a broad spectrum of industries. The following
table lists some of our customers, each of which has purchased more than
$25,000 in software or services since January 2000.

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|                                      |  |                                  
|------------------------------------- |  | ---------------------------------
|Automobile Association of America     |  | Caterpillar, Inc.                
|Celera Genomics                       |  | Clarian Health Partners          
|Czech Telecom                         |  | Federal Aviation Administration  
|Federal Communications Commission     |  | Harrington Benefits              
|First Nationwide Mortgage Corporation |  | Hawaiian Airlines                
|Industrial & Commerical Bank of China |  | Ingram Entertainment             
|Lockheed Martin                       |  | Mayo Clinic                      
|Medical Center of Central Georgia     |  | Merrill Lynch                    
|NASA                                  |  | NASD                             
|NextStar Financial                    |  | Pitney Bowes                     
|Raytheon                              |  | Sodexho Marriott                 
|State of Washington                   |  | State of North Carolina          
|U.S. Department of Defense            |  | U.S. Department of Labor         
|Unity Mutual Life Insurance           |  | U.S. Navy                        
|The Washington Post                   |  | Veterans Administration Hospitals

How two of our customers have used our data storage management and data access
solutions

Revamping a paper-based system at American Airlines Federal Credit Union. With
36 branch locations and 180,000 employee members, the American Airlines
Employees Federal Credit Union (AAEFCU), based in Fort Worth, Texas, uses our
content management system in conjunction with Hewlett Packard jukeboxes to
ensure the financial safety of its membership. The 350-employee AAEFCU is a
separate entity of American Airlines, Inc. and is a benefit the airline offers
its active and former employees, creating a widespread international customer
base.

AAEFCU did away with a paper-based system that was causing miscommunication,
lowering membership service, and had the potential for fraud. In addition, the
organization had to deal with 3,000  4,000 COLD (computer output to laser
disk) reports and 200 multi-page loan documents generated daily, all of which
were stored on microfiche.

After an extensive review process, AAEFCU chose our offerings as the best
solution to meet their needs. Compatibility with existing systems was important
as their data processing software, the software that runs credit union
operations from tracking balances to payroll, needed to work with the
electronic document system. In addition, since AAEFCU did not have a staff of
programmers, they needed a solution with low maintenance architecture. AAEFCU
appreciated that the OTG Software system could be easily installed, did not
require extensive training of the staff and was easy to use. AAEFCU uses
DiskXtender to drive the Hewlett Packard jukebox that stores all the
information, ApplicationXtender for client-side software and COLDXtender to
automatically download and archive reports.

Loan documents are now scanned into AAEFCUs system as a single file and these
scanned images are stored on the jukebox. COLD reports are similarly saved,
indexed and filed on the system. The OTG Software system is now installed on
employee desktops at all 36 branches. According to AAEFCU, the return on investment was achieved in 15 months. The new system has increased
employee productivity, allowed for backup and disaster recovery, provided fast
access to reports, and has improved customer service.

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Managing email at Davenport & Company LLC:Founded in 1863, Davenport &
Company LLC, a New York Stock Exchange member firm, is an employee-owned,
full-service firm. Davenport serves the investment needs of individuals and
businesses by offering investment advice, research, asset management,
investment banking, and advisory services. With more than 400 employees, the
firm oversees nearly $10 billion in client assets.

Email was becoming a distinct problem for Davenport, and they needed to find a
cost-effective solution to protect this essential business data and
correspondence. As a New York Stock Exchange member firm, Davenport must
adhere to strict SEC regulations regarding email communications between its
customers and brokers. These regulations include specific requirements related
to the storage and archival of email or electronic records for a certain period
of time, as well as the requirement to make the archives easily accessible to
compliance personnel. The biggest challenge of complying with SEC regulations
lies in identifying and collecting all email regarding business as such, and
retaining it in a system that meets the specific archival and record-keeping
requirements of the regulation.

After weighing its options, Davenport selected OTG Softwares EmailXtender in
March 2001. Installation of EmailXtender took less than two hours. Since
EmailXtenders search utility integrated into the Microsoft Outlook client,
Davenports compliance officers were trained in less than a half-hour. In the
first six months after installing EmailXtender, Davenport sent, received and
archived more than 500,000 email messages  an archive of about 33 gigabytes.
At the same time, search and review of messages for compliance purposes has
been expedited from days to minutes, with compliance officers, rather than IT
administrators, doing the bulk of the searches.

In December of 2001 Davenport added EmailXaminer module licenses, which provide email monitoring and
surveillance functions to assist firms in complying with NASD requirements.

Sales and Marketing

We sell our products primarily through relationships with original equipment
manufacturers, value-added resellers and distributors. Our distribution through
these channels accounted for 81% of our total revenues in 2001, 89% of our
total revenues in 2000, and 84% of our total revenues in 1999, with no single
original equipment manufacturer, value-added reseller or distributor accounting
for more than 10% of our total revenues in these periods. Revenues from our OEM
channel increased to $8.7 million in 2001 from $8.2 million in 2000. We are
also expanding our direct sales force to provide better coverage for larger
clients. As of December 31, 2001 we had 145 employees dedicated to sales and
marketing.

17



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Indirect Sales Channels

Original Equipment Manufacturer Relationships.We currently have 17 original
equipment manufacturer relationships. These original equipment manufacturers
buy our products to incorporate into their own product offerings or resell our
products under their own label. We have original equipment manufacturer
relationships with Maxtor Corporation, Quantum Snap Appliances, Inc., Agilent
Technologies, recently acquired by Philips Medical Systems, Cerner, SCT Global
Education Solutions, Legato Systems, StorageTek, GE Medical System Information
Technologies, and International Business Machines Corporation (IBM), among
others.

Value-added Reseller and Distributor Relationships.We currently have over 575
value-added reseller and distributor agreements and relationships, including
Affiliated Computer Systems, Cranel, Datalink, Electronic Data Systems, IKON,
JVC, National Computer Systems, Optical Laser, Bell Microproducts, DICOM, USERS
(a division of Fiserv), Symitar, CDW Computer Warehouse, and Tech Data. These
resellers service North America, Europe, East Asia and Latin America. Pursuant
to these alliances, our value-added resellers and distributors typically market
the entire XtenderSolutions product suite, receiving a discount on products
sold.

We expect that a significant portion of our revenues will continue to come from
our OEM, distributor and reseller partners. We have little or no control over
the shipping dates or volumes shipped by these partners, and they have no obligation to ship
systems incorporating our software. In addition, credit terms with certain of
our indirect sales channel partners include payment terms extending up to 180
days, and collection of the related receivables may be affected by changes in general
economic conditions to varying degrees during their term. See
Risk Factors.

Direct Sales Force

We maintain a direct sales staff with responsibilities for pursuing and
managing larger customers and certain market opportunities, as well as
providing support to our distributors, value-added resellers and original
equipment manufacturers. We have been hiring additional salespersons and expect
to continue to do so.

Marketing

Our marketing department consists of marketing professionals dedicated to
marketing communications, developing sales tools and sales support programs,
public relations, product launch support, events and channel partner programs.
Our marketing efforts focus on building brand recognition and developing leads
for our sales force.

18



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To achieve these objectives, we maintain a strategic marketing program
that includes:



| |  |  | sales tools and training for XtenderSolutions;                                                                                                       
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a comprehensive Web marketing program and website;                                                                                                   
|
| |  |  | lead generation by marketing to targeted IT audiences via the web and other media;                                                                   
|
| |  |  | programs to enhance communication with our original equipment manufacturers, value-added resellers and distributors,
including our annual conference;
|
| |  |  | trade-shows and seminars to increase the visibility of our solutions and generate leads for our sales force;                                         
|
| |  |  | press and industry analyst outreach; and                                                                                                             
|
| |  |  | corporate and product collateral development.                                                                                                        

Competition

We face a variety of competitors that offer products with some of our products
features. Some potential customers may elect to develop internal capabilities
similar to those provided by our products rather than buying solutions from us
or another outside vendor, and smaller companies exist which offer
competing products to some or all of our products. Although our products generally enhance traditional
data back-up capabilities offered by companies such as VERITAS Software, Legato
Systems, Computer Associates International and IBM, our products may compete
against such traditional back-up solutions when a potential customer seeks to
address its storage needs with only a data back-up solution. Furthermore,
VERITAS Software offers a Windows NT-based product and a Unix-based product
that compete with DiskXtender and a Microsoft Exchange-based archival product
for email attachments that competes with EmailXtender. Sun offers a product
for Unix based data management that runs only on Solaris that competes with
DiskXtender Unix/Linux. Finally, FileNET offers a suite of products that
compete with our ApplicationXtender, WebXtender and ERMXtender product set.

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

Many of our competitors and potential competitors have substantially greater
financial and technical resources than we do. Our competitors may attempt to
increase their presence in the data storage management software market by
acquiring or forming strategic alliances with other competitors or business
partners. This competition may cause us to lose sales and may limit the growth
of our revenues and business.

Intellectual Property

Our products are substantially based upon our internally developed intellectual
property and other proprietary rights, and third party software that we have
acquired or are licensing. We rely on a combination of copyright, trademark and
trade secret laws, confidentiality agreements and contractual provisions to
protect our intellectual property. However, we believe that these laws and
agreements afford us only limited protection. Despite our efforts to protect
our intellectual property, unauthorized parties may infringe upon our proprietary rights. In addition, the
laws of some foreign countries do not provide as much protection of our
proprietary rights as do the laws of the United States.

19



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Acquisitions

Acquisition of xVault

We acquired xVault in April 2000, in a transaction accounted for as a purchase.
xVault was a provider of email management and archiving solutions. We have
since renamed xVault OTG E-Mail Corp. Our financial statements and related
information include the activities of xVault since the acquisition date of
April 25, 2000. OTG incorporated xVaults technology into its EmailXtender
product. See Note 4(a) to Consolidated Financial Statements for additional
information regarding the acquisition of xVault.

Acquisition of Smart Storage

In March 2001 we acquired Smart Storage in a transaction accounted for as a
pooling of interests. Products acquired from Smart Storage include
standards-based DVD and CD storage management software. These product offerings
enable companies to increase the availability of information for their
employees and customers by utilizing diverse networking architectures;
networked servers such as Windows NT, UNIX and NetWare; and storage devices
including CD-ROM, CD-R, DVD-ROM, DVD-R and DVD-RAM media.

The Smart Storage acquisition provided us with a
quality research and development staff and with new market opportunities in one of the fastest growing
sectors of the storage market-rich media and streaming video. In addition,
Smart Storage has a well-developed international infrastructure and sales
channel. See Note 4(b) to Consolidated Financial Statements for additional
information regarding the acquisition of Smart Storage.

Acquisition of UniTree

In July 2001 we acquired Unitree in a transaction
accounted for as a purchase. OTG has incorporated the technology acquired
from UniTree into its products to provide advanced technology for UNIX and
Linux-based data storage and database storage management products that
cost-effectively manage growing volumes of data. Please see Note 4(c) to
Consolidated Financial Statements for additional information regarding the
acquisition of Unitree.

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Foreign Operations

Our sales to customers in foreign countries primarily include those located in Europe and
Asia. No foreign country accounts for more than 10% of our revenue. Long-lived assets
held in any foreign country are not material to the consolidated
financial statements. See Note 16 to Consolidated Financial Statements for
additional information regarding our foreign operations.

Employees

As of December 31, 2001 we had a total of 406 employees. Of these employees,
145 were involved in sales and marketing; 135 were involved in research and
development; 71 were involved in customer support and professional services;
and 55 were involved in administrative and corporate functions.

Executive Officers

As of February 28, 2002, our executive officers were:

|                 |  |     |    |          |  |                                                              |  | 
|---------------- |  | --- | -- | -------- |  | ------------------------------------------------------------ |  | 
|Name             |  | Age |    | Position
|                 |  |     |    |         
|Richard A. Kay   |  |     | 46 |          |  | Chairman of the Board, President and Chief Executive Officer
|F. William Caple |  |     | 43 |          |  | Executive Vice President, Secretary and Director            
|Ronald W. Kaiser |  |     | 48 |          |  | Chief Financial Officer and Treasurer                       

Richard A. Kay, our founder, has served as Chairman of our Board of Directors,
President and Chief Executive Officer since our inception in 1992. Prior to
founding OTG Software, Mr. Kay co-founded National Operator Services, Inc., a
reseller of telephone operator services, and NOS Communications, a reseller of
AT&T long distance services.

F. William Caple has served as our Executive Vice President since May 1996. Mr.
Caple has served as a member of our Board of Directors since December 1997.

Ronald W. Kaiser has served as our Chief Financial Officer and Treasurer since
June of 1998. From April 1998 to June 1998, Mr. Kaiser was an employee of
Network Associates, Inc., an Internet security company, following the
acquisition of Trusted Information Systems, Inc. by Network Associates, Inc.
From May 1996 to April 1998, Mr. Kaiser served as the Chief Financial Officer
of Trusted Information Systems, Inc., an information security company.

Item 2. Properties

Our operations are headquartered in one 93,735 square foot facility in
Rockville, Maryland that is leased under an agreement expiring on May 31,
2011. We also maintain field offices in California, Colorado, Illinois, New
Hampshire and Massachusetts, and internationally in England, Germany, Japan, China
and India.

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Item 3. Legal Proceedings

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

These cases are at an early stage, and the Company has not formally responded
to the allegations. However, we intend to defend the Company and its officers
vigorously. Our management believes that it is not possible at the current time
to estimate the amount of a probable loss, if any, that might result from this
matter. Accordingly, no provision for this matter has been made in our
consolidated financial statements.

The Company is currently involved in a dispute with a former employee regarding
the terms of that individuals separation from the Company. Though the former
employee has expressed intent to file a lawsuit, to date no complaint has been
filed and the Company cannot, at this time, determine the outcome of this
dispute. Accordingly, we cannot reasonably estimate the financial impact, if
any, that this dispute will have upon
future reporting periods. The Company intends to vigorously defend any legal
action arising out of this dispute.

In addition, we are occasionally involved in legal proceedings from time to
time arising through the normal course of business. We are not currently a
party to any other legal proceedings in which an unfavorable outcome would have
a material effect on our results of operations or financial position.

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

No matters were submitted to a vote of security holders during the fourth
quarter of 2001.

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Part II

Item 5. Market for Common Equity and Related Stockholder Matters

Price Range of Common Stock

Our common stock, $0.01 par value per share (Common Stock), began trading on
the Nasdaq National Market on March 10, 2000, under the symbol OTGS. The
following table sets forth for the indicated periods in 2000 and 2001 the high
and low sales price of our Common Stock as reported by the Nasdaq National
Market.

|                                             |  |      |         |     |  |   |        | 
|-------------------------------------------- |  | ---- | ------- | --- |  | - | ------ | 
|                                             |  | High |         | Low
|2000                                         |  |      |         |     |  |   |        | 
|First quarter (subsequent to March 10, 2000) |  | $    | 61.4375 |     |  | $ | 29.00  | 
|Second quarter                               |  | $    | 42.5625 |     |  | $ | 13.00  | 
|Third quarter                                |  | $    | 44.00   |     |  | $ | 19.375 | 
|Fourth quarter                               |  | $    | 47.00   |     |  | $ | 6.00   | 
|                                            
|2001                                         |  |      |         |     |  |   |        | 
|First quarter                                |  | $    | 23.75   |     |  | $ | 4.5625 | 
|Second quarter                               |  | $    | 7.82    |     |  | $ | 5.00   | 
|Third quarter                                |  | $    | 7.29    |     |  | $ | 4.34   | 
|Fourth quarter                               |  | $    | 10.30   |     |  | $ | 4.49   | 

Holders of Record

As of January 31, 2002, there were 33,313,990 shares of our Common Stock issued
and 33,219,790 outstanding held by 203 stockholders of record. The number of
holders of record of Common Stock is not representative of the number of
beneficial holders because depositories, brokers or other nominees hold many
shares.

Dividends

We made distributions to our stockholders of approximately $34,000 and $5.5
million during the years ended December 31, 1999 and 1998, respectively.
Following the closing of our initial public offering in March 2000, we
distributed $1.2 million to cover S corporation tax liabilities of our
then-existing stockholders. We do not anticipate paying cash dividends in the
foreseeable future. We currently intend to retain all future earnings, if any,
for use in the operation and growth of our business. Our commercial credit
facility currently prohibits the payment of dividends.

23



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Recent Sales of Unregistered Securities

OTG acquired xVault, Inc. (xVault) on April 25, 2000. We paid $1.75 million
in cash and issued 159,996 shares of our Common Stock to the former stockholders of
xVault as merger consideration. xVault was a provider of email software. See Note 4 to Notes to
Consolidated Financial Statements for additional information related to our
purchase of xVault. No more than 35 former xVault stockholders were issued
shares of our Common Stock and each was either an accredited investor as
defined in Rule 501 of the Securities Act of 1933 or received information
required to be provided by Rule 506. These securities were issued in reliance
on the exemption from registration set forth under Rule 506 of the Securities
Act of 1933. No underwriters were involved in the foregoing sales of
securities.

During 2000, prior to the filing of the Registration Statement on Form S-8
relating to our 1998 Stock Incentive Plan, 2000 Stock Incentive Plan and 2000
Employee Stock Purchase Plan, we granted stock options to purchase an aggregate
621,900 shares of our Common Stock to employees and directors. These securities
were issued in reliance on the exemption from registration set forth under Rule
701 of the Securities Act of 1933. No underwriters were involved in the
foregoing sales of securities.

On March 29, 2001 we acquired Smart Storage, Inc. in a transaction accounted
for as a pooling of interests. Smart Storage is a provider of standards-based
DVD and CD storage management software. Pursuant to the merger agreement, we
issued 3,081,108 shares of our Common Stock to the former Smart Storage
shareholders as merger consideration. Of the shares issued, 308,087 are being
held in escrow for a period of twelve months to secure certain indemnification
obligations of certain former Smart Storage shareholders. In addition, we
reserved 468,219 shares of Common Stock for issuance upon the exercise of the
outstanding options to purchase Smart Storage common stock, which we assumed as
part of the merger agreement. See Note 4 to Notes to Consolidated Financial
Statements for additional information related to our purchase of Smart Storage.

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

On July 25, 2001 we acquired UniTree Software, Inc. in a transaction accounted
for as a purchase. UniTree is a provider of advanced technology for UNIX and
Linux-based data storage and database storage management. Pursuant to the
merger agreement, we issued 1,466,667 shares of our Common Stock to the former
UniTree shareholders, paid $6.0 million in cash and issued $4.8 million in
promissory notes bearing interest at 7% per annum, payable over eighteen
months, subject to the continued employment with OTG of certain former UniTree
employees, as merger consideration. Of the shares issued, 266,667 are being held
in escrow for a period time not to exceed three years to secure certain
indemnification obligations of certain former UniTree shareholders. See Note 4
to Notes to Consolidated Financial Statements for additional information
related to our purchase of UniTree.

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

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Item 6. Selected Financial Data

The following selected consolidated financial data should be read in
conjunction with our Consolidated Financial Statements and the related notes,
and with Managements Discussion and Analysis of Financial Condition and
Results of Operations, included elsewhere in this report. The historical
results presented below are not necessarily indicative of results that may be
expected for any future period.

Consolidated Statements of
Operations (in thousands, except per share amounts)

|                                    |  |                          |         |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        | 
|----------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | - |  | - | ------ | 
|                                    |  | Years ended December 31,
|                                    |  |                         
|                                    |  | 2001                     |         | 2000 |  | 1999 |        | 1998 |  | 1997
|                                    |  |                          |         |      |  |      |        |      |  |     
|Total revenues                      |  | $                        | 64,924  |      |  | $    | 52,358 |      |  | $    | 32,896 |   |  | $ | 22,499 |   |  | $ | 16,938 | 
|Total cost of revenues              |  |                          | 13,166  |      |  |      | 8,248  |      |  |      | 4,956  |   |  |   | 2,623  |   |  |   | 2,155  | 
|                                    |  |                          |         |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        | 
|Gross profit                        |  |                          | 51,758  |      |  |      | 44,110 |      |  |      | 27,940 |   |  |   | 19,876 |   |  |   | 14,783 | 
|Total operating expenses            |  |                          | 64,338  |      |  |      | 44,079 |      |  |      | 26,493 |   |  |   | 20,343 |   |  |   | 13,980 | 
|                                    |  |                          |         |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        | 
|Income (loss) from operations       |  | $                        | (12,580 | )    |  | $    | 31     |      |  | $    | 1,447  |   |  | $ | (467   | ) |  | $ | 803    | 
|                                    |  |                          |         |      | 
|Income (loss) before income taxes   |  | $                        | (9,104  | )    |  | $    | 3,002  |      |  | $    | (588   | ) |  | $ | (1,729 | ) |  | $ | 635    | 
|                                    |  |                          |         |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        | 
|Provision (credit) for income taxes |  |                          | (1,554  | )    |  |      | (166   | )    |  |      | 105    |   |  |   | 393    |   |  |   | 3      | 
|                                    |  |                          |         |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        | 
|Net income (loss)                   |  | $                        | (7,550  | )    |  | $    | 3,168  |      |  | $    | (693   | ) |  | $ | (2,122 | ) |  | $ | 632    | 
|                                    |  |                          |         |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        | 
|Basic earnings per share            |  | $                        | (0.24   | )    |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        | 
|Diluted earnings per share          |  | $                        | (0.24   | )    |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        | 
|Cash dividends                      |  | $                        | *       |      |  | $    | *      |      |  | $    | *      |   |  | $ | *      |   |  | $ | *      | 



|*       |  | We made distributions to our stockholders of approximately $34,000, $5.5
million, and $600,000 for the years ended December 31, 1999, 1998, and
1997, respectively. Following the closing of our initial public offering
in March 2000, we distributed $1.2 million to cover S Corporation tax
liabilities of our then-existing
stockholders. We did not make any distributions to any shareholders in
2001.                                                                                              
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       
|Note 1: |  | As discussed in Note 4 in Notes to Consolidated Financial
Statements, which are contained in Part II, Item 8 of this report,
our results for 2001 and 2000 include certain amounts related to
purchase accounting adjustments, including charges associated with
the write-off acquired in-process research and development,
amortization of acquired intangibles, other acquisition-related
charges, and their related tax effects totaling $6.3 million and
$1.2 million in 2001 and 2000, respectively.
|       

25



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|Note 2: |  | As discussed in Note 9 in Notes to Consolidated Financial
Statements, OTG was treated as an S Corporation for income tax purposes prior to our
initial public offering in March 2000. Smart Storage was subject to
tax as a regular corporation for all periods presented.
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Consolidated Balance Sheet Information (in thousands)

|                                     |                                                                      |   |                    |       |      |   |         |     |      |   |         |        |  |   |         |        |  |   |        |       | 
|------------------------------------ | -------------------------------------------------------------------- | - | ------------------ | ----- | ---- | - | ------- | --- | ---- | - | ------- | ------ |  | - | ------- | ------ |  | - | ------ | ----- | 
|                                     |                                                                      |   | As of December 31,
|                                     |                                                                      |   |                   
|                                     |                                                                      |   | 2001               |       | 2000 |   | 1999    |     | 1998 |   | 1997   
|                                     |                                                                      |   |                    |       |      |   |         |     |      |   |        
|Cash and cash equivalents            |                                                                      | $ | 89,294             |       |      | $ | 102,197 |     |      | $ | 4,296   |        |  | $ | 959     |        |  | $ | 1,907  |      
|Working capital (deficit)            |                                                                      | $ | 96,061             |       |      | $ | 107,061 |     |      | $ | (18,648 | )      |  | $ | (5,528  | )      |  | $ | (2,137 | )    
|Total assets                         |                                                                      | $ | 150,560            |       |      | $ | 138,322 |     |      | $ | 16,427  |        |  | $ | 9,033   |        |  | $ | 7,485  |      
|                                    
|Debt:                                |                                                                      |   |                    |       |      |   |         |     |      |   |         |        |  |   |         |        |  |   |        |      
|                                     | Current portion of long-term debt
and capital lease obligations      |   | $                  | 94    |      |   | $       | 61  |      |   | $       | 13,803 |  |   | $       | 1,437  |  |   | $      | 250   | 
|                                     | Current portion of notes payable                                     |   |                    | 225   |      |   |         | 225 |      |   |         | 5,070  |  |   |         | 2,345  |  |   |        | 2,367 | 
|                                     | Current portion of notes payable
to shareholders                     |   |                    | 2,400 |      |   |         | 67  |      |   |         | 1,969  |  |   |         | 1,969  |  |   |        | 1,024 | 
|                                     | Long-term debt and capital lease
obligations, net of current portion |   |                    | 327   |      |   |         | 23  |      |   |         | 3,529  |  |   |         | 16,341 |  |   |        | 200   | 
|                                     | Notes payable, net of current portion                                |   |                    | 120   |      |   |         | 225 |      |   |         |       |  |   |         | 10     |  |   |        | 25    | 
|                                     | Notes payable to shareholders, net
of current portion                |   |                    | 831   |      |   |         | 18  |      |   |         | 84     |  |   |         | 145    |  |   |        | 145   | 
|                                     |                                                                      |   |                    |       |      |   |         |     |      |   |         |        |  |   |         |        |  |   |        |      
|Total debt                           |                                                                      | $ | 3,997              |       |      | $ | 619     |     |      | $ | 24,455  |        |  | $ | 22,247  |        |  | $ | 4,011  |      
|Total stockholders equity (deficit) |                                                                      | $ | 121,879            |       |      | $ | 116,876 |     |      | $ | (20,112 | )      |  | $ | (20,051 | )      |  | $ | (991   | )    

Note: See Notes 1 and 2 above under Consolidated Statements of Operations.

Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of the Companys financial condition and results of
operations should be read in conjunction with other information contained
within this report, most notably, the Consolidated Financial Statements
contained in Part II, Item 8 of this report.

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



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

Such forward-looking statements including, but not limited to, information
about expected trends and related information, are made only as of the date of
this report.

Important factors known to us that could cause such material differences are
discussed under the caption Risk Factors below, including the announced
agreement to merge OTG with and into a subsidiary of Legato. These factors may
materially impact the future events, developments, or results described by the
forward-looking statements in this report. In light of the risks, uncertainties
and assumptions noted above, the future events, developments, or results
described by the forward-looking statements in this report could turn out to be
materially different from those discussed or implied. We
undertake no obligation to update or revise any forward-looking information,
whether as a result of new information, future events or otherwise.

Overview

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

27



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OTG was founded in March 1992. As discussed below, in April 2000 we acquired
xVault; in March 2001 we acquired Smart Storage; and in July 2001 we acquired
UniTree.

On February 20, 2002 OTG entered into an Agreement and Plan of Merger with
Legato Systems, Inc., whereby OTG will merge with and into a wholly-owned
subsidiary of Legato, and become a wholly-owned subsidiary of Legato (the
Merger). In the Merger, OTG public stockholders will receive merger
consideration of 0.6876 shares of Legato common stock, plus $2.50 in cash for
each share of OTG Common Stock. The closing of the Merger is subject to
customary conditions, including shareholder approval by both companies and
regulatory approval of the transaction. The closing is expected to occur in
the second quarter of 2002.

We have recorded net losses in prior periods, including a net loss for the
years ended December 31, 2001 and 1999, but we were profitable for the year
ended December 31, 2000. For the year ended December 31, 2001 we recognized a
net loss of approximately $1.3 million before giving effect to approximately
$6.3 million in expenses attributable to merger and acquisition costs
associated with our acquisition of Smart Storage, the amortization of costs
associated with our acquisitions of xVault and UniTree, the write off of
in-process research and development associated with our acquisition of UniTree,
and the related tax effect of these costs. As of December 31, 2001 we had an
accumulated deficit of $28.2 million.

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

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Initial Public Offering, Follow-On Public Offering and Related Transactions

On March 10, 2000, OTG issued 5,000,000 shares of our Common Stock, $0.01 par
value per share, in an initial public offering, generating net proceeds to us
of $87.0 million after considering the direct costs of the offering (the
IPO). A portion of the net proceeds of the IPO was used to repay all
outstanding balances under our commercial credit facility ($5.0 million), our
senior subordinated notes ($4.5 million) and certain obligations to our
stockholders and other related parties ($8.7 million).

In conjunction with the IPO, all of our outstanding convertible subordinated
notes were converted into 4,161,506 shares of Common Stock. Prior to
conversion, the principal amount of these notes was $7.6 million and the
related accrued interest was $1.2 million; we were not obligated to pay any
accrued but unpaid interest on the converted notes at the time of conversion.

On November 17, 2000 we issued 1,650,000 shares of Common Stock in a follow-on
public offering, generating net proceeds to us of $32.8 million after
considering the direct costs of the offering, including approximately $0.4
million of direct costs that were accrued as of December 31, 2000, and paid in
2001.

We intend to use the remaining net proceeds of the IPO and the follow-on public
offering for working capital and general corporate purposes as well as in
support of advancing strategic objectives, including the possible acquisition
of other businesses, products or technologies that are complementary to our
business. See Part II, Item 5 of this report for additional information.

Acquisition of xVault

We acquired xVault in April 2000 for merger consideration of 159,996 shares of
our Common Stock and $1.75 million in cash in a transaction accounted for as a
purchase. xVault was a provider of email management and archiving solutions.
We have since renamed xVault OTG E-Mail Corp. Our financial statements and
related information include the activities of xVault since the acquisition date
of April 25, 2000. OTG incorporated xVaults technology into its EmailXtender
product.

Acquisition of Smart Storage

In March 2001 we acquired Smart Storage in a transaction accounted for as a
pooling of interests. Pursuant to the merger agreement, we issued 3,081,108
shares of Common Stock to the former Smart Storage shareholders as merger
consideration. Of the shares issued, 308,087 are being held in escrow for a
period of twelve months to secure certain indemnification obligations of
certain former Smart Storage shareholders. In addition, we have reserved
468,219 shares of Common Stock for issuance upon the exercise of the
outstanding options to purchase Smart Storage common stock, which we assumed
pursuant to the terms of the merger agreement. Our financial results and
related information have been restated to include the activities of Smart
Storage for all periods presented as if Smart Storage had always been a
subsidiary of the Company.

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

The Smart Storage acquisition provided us with a quality
research and development staff and with new
market opportunities in one of the fastest growing sectors of the storage
market-rich media and streaming video. In addition, Smart Storage has a
well-developed international infrastructure and sales channel.

Acquisition of UniTree

In July 2001 we entered into an Agreement and Plan of Merger with UniTree
Software, Inc., a California corporation, and the principal stockholders of
UniTree named therein. Pursuant to the terms of the merger agreement, on July
25, 2001 Unitree merged with and into OTG Software. We paid the former Unitree
shareholders approximately $17.8 million, comprised of $6.0 million in cash,
1,466,667 shares of Common Stock and notes payable as merger consideration. The
Company issued $4.8 million in promissory notes, payable over eighteen months,
which are contingent upon the continued employment with OTG of certain key
former UniTree employees. Of the $4.8 million, $2.6 million has been allocated
as a portion of the purchase price. The remaining $2.2 million of the
promissory note represents a compensatory arrangement and is being recorded
ratably over an eighteen month period.

OTG has incorporated the technology acquired from UniTree into its products to
provide advanced technology for UNIX and Linux-based data storage and database
storage management products that cost-effectively manage growing volumes of
data.

Critical Accounting Policies

Revenue Recognition



| | We generate revenues principally from licensing our software products and
providing related professional services including maintenance and technical
support, consulting and training. The Company recognizes software license
revenues and service revenues in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) No. 97-2,
Software Revenue Recognition, and related interpretations and amendments.
SOP 97-2 requires that revenue recognized from the sales arrangements that
include software licenses be allocated to the various elements of the
arrangement based on the relative fair values of the constituent elements,
such as maintenance and technical support, training, and consulting
services. The Company follows the residual method of accounting under SOP
97-2. Under the residual method, the aggregate arrangement fee is allocated
to each of the undelivered elements in an amount equal to their fair values,
with the residual arrangement fee allocated to the delivered elements. The
relative fair value of the delivered elements included in the Companys
multi-element sales arrangements is based on vendor specific objective
evidence (VSOE). The Company determines VSOE of the fair values of
maintenance and technical support based on annual renewal rates provided to
customers and for consulting services based on standard hourly rates.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | We derive software license revenues from licenses of our software programs
to customers primarily through indirect sales channels, including original
equipment manufacturers, distributors, and value-added resellers. We also
sell through our direct sales force. Original equipment manufacturers (OEMs)
either bundle our products with the products they offer or resell our
products under their own label. Distributors and resellers resell our
products either as stand-alone products or in connection with their own
software solutions. We recognize software license revenues when an original
equipment manufacturer licenses a copy of its products incorporating one or
more of our products and then reports that licensing through purchase orders
or license fee reports. Our license agreements with original equipment
manufacturers generally contain no minimum sales requirements, and we cannot
assure you that any original equipment manufacturer will either commence or
continue shipping our products in the future. Moreover, following the
execution of new OEM license agreements, a significant period of time may
elapse before any revenues are generated due to the development work which
we often undertake under these OEM agreements and the time needed for the
sales and marketing groups within these original equipment manufacturers or
other customers and resellers to become familiar with our products.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | We offer extended payment terms to certain customers, primarily select OEMs,
distributors and resellers. Extended payment terms are offered to these
customers as part of market penetration programs that are designed to
increase the presence of our products in the marketplace and attract
targeted customers and industries, gain forecast visibility or solidify
long-term relationships with these selected OEMs, distributors, and
resellers. In connection with its credit term arrangements, the Company
performs credit assessments for the credit terms being considered on a
customer-specific basis as transactions occur. For arrangements with
payment terms within six months, we recognize the revenue when the agreement
is signed, the arrangement fee is fixed and determinable, delivery of the
software has occurred and collection of the fee is considered probable. For
arrangements in which payment terms extend beyond six months, the Company
recognizes revenue when payment by the customer is made or becomes due, if
all other revenue recognition criteria have been met. As of December 31,
2001 net amounts due from such arrangements totaled $9.3 million, an
increase of approximately 2.2% from $9.1 million due from such arrangements
as of December 31, 2000.                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Our services revenues consist of fees derived from annual maintenance
agreements, consulting and training and other professional services.
Revenues from maintenance and technical support, which typically consists of
unspecified when-and-if-available product updates and customer telephone
support services, are recognized ratably over the term of the service
period. When all obligations under maintenance and technical support
arrangements are specifically identifiable, revenues are recognized as the
services are completed. In September 2000 we began to require that at least
one year of customer maintenance support be purchased with new license
purchases on substantially all of the Companys products. Customers have the
option of renewing maintenance agreements annually. We provide consulting
and other professional services, for which we charge a fee based upon the
amount of time worked and the
cost of the materials used in providing the services. We provide classroom
and on-site training to our customers on a daily fee basis. We recognize
revenue for such services on a percentage-of-completion or milestones
achieved basis. Professional services and training services typically have lower gross
margins than sales of software licenses and customer support.                                                                                                                               

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| | Deferred Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | As of December 31, 2001 and 2000, the Company had net deferred tax assets of
$4.6 million and $3.4 million, respectively. In assessing the realization
of deferred tax assets, management considers whether it is more likely than
not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependant upon
the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. In order to fully
realize the deferred tax asset as of December 31, 2001, the Company will
need to generate future taxable income of approximately $11.8 million.
Based upon the projections for future taxable income over the periods for
which the deferred tax assets are deductible, management believes that it is
more likely than not that the company will realize the benefit of these
deductible differences, excluding net operating losses and certain tax
credits related to foreign operations. Management has recorded a valuation
allowance of $299,000 and $166,000 as of December 31,
2001 and December 31, 2000, respectively, against the net operating losses
and tax credits from foreign operations. The amount of the deferred tax
assets considered realizable, however, could be reduced in the near term if
estimates of future taxable income are reduced.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Recent Accounting Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|In June 2001 the FASB issued SFAS No. 141, Business Combinations, (SFAS No.
141) and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142).
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations. SFAS No. 141 specifies criteria that intangible
assets acquired in a business combination must meet to be recognized and
reported separately from goodwill. SFAS No. 142 will require that goodwill
and intangible assets with indefinite useful lives no longer be amortized,
but instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible
assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121 and subsequently, SFAS No. 144
after its adoption.                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and
SFAS No. 142 is effective January 1, 2002. Goodwill and intangible assets
determined to have an indefinite useful life acquired in a purchase business
combination completed after June 30, 2001, but before SFAS No. 142 is
adopted in full, are not amortized. Goodwill and intangible assets acquired
in business combinations completed before July 1, 2001 continue to be
amortized and tested for impairment prior to the full adoption of SFAS No.
142. Accordingly, the goodwill related to the Unitree acquisition in July
2001 has not been amortized, and the goodwill related to the xVault in April
2000 has been amortized through December 31, 2001.                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Upon adoption of SFAS No. 142, the Company is required to evaluate its
existing intangible assets and goodwill that were acquired in purchase
business combinations, and to make any necessary reclassifications in order
to conform with the new classification criteria in SFAS No. 141 for
recognition separate from goodwill. The Company will be required to
reassess the useful lives and residual values of all intangible assets
acquired, and make any necessary amortization period adjustments by the end
of the first interim period after adoption. If an intangible asset is
identified as having an indefinite useful life, the Company will be required
to test the intangible asset for impairment in accordance with the
provisions of SFAS No. 142 within the first interim period. Impairment is
measured as the excess of carrying value over the fair value of an
intangible asset with an indefinite life. Any impairment loss will be
measured as of the date of adoption and recognized as the cumulative effect
of a change in accounting principle in the first interim period.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|In connection with SFAS No. 142s transitional goodwill impairment
evaluation, the Statement requires the Company to perform an assessment of
whether there is an
indication that goodwill is impaired as of the date of adoption. To
accomplish this, the Company must identify its reporting units and determine
the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of January 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

32



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|The Company will then have up to six
months from January 1, 2002 to determine the fair value of each reporting
unit and compare it to the
carrying amount of the reporting unit. To the extent the carrying amount of
a reporting unit exceeds the fair value of the reporting unit, an indication
exists that the reporting unit goodwill may be impaired and the Company must
perform the second step of the transitional impairment test. The second
step is required to be completed as soon as possible, but no later than the
end of the year of adoption. In the second step, the Company must compare
the implied fair value of the reporting unit goodwill with the carrying
amount of the reporting unit goodwill, both of which would be measured as of
the date of adoption. The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit to all of the assets
(recognized and unrecognized) and liabilities of the reporting unit in a
manner similar to a purchase price allocation, in accordance with SFAS No.
141. The residual fair value after this allocation is the implied fair
value of the reporting unit goodwill. Any transitional impairment loss will
be recognized as the cumulative effect of a change in accounting principle
in the Companys statement of income.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|As of the date of adoption of SFAS No. 142, the Company expects to have
unamortized goodwill in the amount of $12.7 million and unamortized
identifiable intangible assets of $5.3 million, all of which will be subject
to the transition provisions of SFAS No. 142. Because of the extensive
effort needed to comply with adopting SFAS No. 141 and No. 142, it is not
practicable to reasonably estimate the impact of adopting the Statements on
the Companys financial statements at the date of this report, including
whether it will be required to recognize any transitional impairment losses
as the cumulative effect of a change in accounting principle.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|In August 2001 the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144).  SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets.  This Statement requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated
by the asset.  If the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value
of the asset.  SFAS No. 144 requires companies to separately report discontinued operations
and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution
to owners) or is classified as held for sale.  Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.  The Company is required to adopt SFAS No. 144 on January 1, 2002.                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

33



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Foreign Operations

We currently have sales and services offices in the United States and Canada
and provide sales and services support in Europe and Asia through employees
located in England, Germany, France, the Netherlands, Japan and China. We also
have a subsidiary in India that is primarily devoted to research and
development activities. We plan to continue to expand our international
operations by establishing additional foreign offices, hiring additional
personnel and recruiting additional international resellers. Our international
sales are primarily generated through indirect sales channels. Revenues derived
from foreign countries, most of which are denominated in U.S. dollars,
accounted for approximately 13% and 16% of our total revenues for the year
ended December 31, 2001 and 2000, respectively.

Products Released in 2001

In March 2001 we announced that we had internationalized our DiskXtender and
EmailXtender products. By internationalizing our products, we empower
enterprises worldwide with the ability to localize or port our proven and
reliable online data storage, access and email management solutions into other
languages. This is part of our ongoing strategy to be a leading worldwide
player in the email and storage management industry. DiskXtender is currently
available in English and Japanese. EmailXtender is currently available in
English, German and Italian and will soon be available in French and Spanish.

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

34



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

Results of Operations

The following section pertains to activity included in our Consolidated
Statements of Operations (see Part II, Item 8 of this report), comparing
results of operations for certain periods. As mentioned previously, the
Companys historical results, together with related information, have been
restated to include the activity of Smart Storage for all periods presented.

The table below presents the line items included in our Consolidated Statements
of Operations as a percentage of total revenues. This table excludes
amortization expenses associated with certain intangible assets and other
expenses associated with our acquisition of UniTree in July 2001, merger costs
related to our acquisition of Smart Storage in March 2001, amortization
expenses associated with certain intangible assets resulting from our
acquisition of xVault in April 2000, and amortization expenses associated with
Smart Storages acquisition of certain intangible assets in the first quarter
of 2000. In addition, this table excludes the write-off of in-process research
and development of $620,000 associated with our acquisition of xVault in April
2000, and the write-off in the fourth quarter of 2001 of in-process research
and development of $3.7 million associated with our acquisition of UniTree in
July 2001. These acquisition-related items are discussed in detail in Note 4
to Notes to Consolidated Financial Statements.

35



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|                              |                                                           |                              |                          |    |                          |    |      |    |      |    |    |    |     |    | 
|----------------------------- | --------------------------------------------------------- | ---------------------------- | ------------------------ | -- | ------------------------ | -- | ---- | -- | ---- | -- | -- | -- | --- | -- | 
|                              |                                                           |                              |                          |    | Years ended December 31,
|                              |                                                           |                              |                          |    |                         
|                              |                                                           |                              |                          |    | 2001                     |    | 2000 |    | 1999
|                              |                                                           |                              |                          |    |                          |    |      |    |     
|Revenues                     
|                              | Software licenses                                         |                              |                          | 70 | %                        |    |      | 76 | %    |    |    | 75 | %  
|                              | Services                                                  |                              |                          | 30 |                          |    |      | 24 |      |    |    | 25 |    
|                              |                                                           |                              |                          |    |                          |    |      |    |      |    |    |   
|                              |                                                           | Total revenues               |                          |    | 100                      |    |      |    | 100  |    |    |    | 100 |   
|                             
|Cost
of revenues             
|                              | Software licenses                                         |                              |                          | 8  |                          |    |      | 6  |      |    |    | 5  |    
|                              | Services                                                  |                              |                          | 11 |                          |    |      | 10 |      |    |    | 10 |    
|                              |                                                           |                              |                          |    |                          |    |      |    |      |    |    |   
|                              |                                                           | Total cost of revenues       |                          |    | 19                       |    |      |    | 15   |    |    |    | 15  |   
|                              |                                                           |                              |                          |    |                          |    |      |    |      |    |    |   
|Gross profit                  |                                                           |                              | 81                       |    |                          |    | 85   |    |      |    | 85 |   
|                             
|Operating
expenses           
|                              | Sales and marketing                                       |                              |                          | 46 |                          |    |      | 44 |      |    |    | 44 |    
|                              | Research and development                                  |                              |                          | 27 |                          |    |      | 23 |      |    |    | 21 |    
|                              | General and administrative                                |                              |                          | 16 |                          |    |      | 14 |      |    |    | 16 |    
|                              | Merger-related costs                                      |                              |                          |   |                          |    |      |   |      |    |    |   |    
|                              | Amortization of acquired intangible assets                |                              |                          |   |                          |    |      |   |      |    |    |   |    
|                              | Write-off of acquired in-process research
and development |                              |                          |   |                          |    |      |   |      |    |    |   |    
|                              |                                                           |                              |                          |    |                          |    |      |    |      |    |    |   
|                              |                                                           |                              | Total operating expenses |    |                          | 89 |      |    |      | 82 |    |    |     | 81 | 
|                              |                                                           |                              |                          |    |                          |    |      |    |      |    |    |   
|Income (loss) from operations |                                                           |                              | (8                       | )  |                          |    | 3    |    |      |    | 4  |   
|                             
|Other
income (expense)        |                                                          
|                              | Interest income                                           |                              |                          | 6  |                          |    |      | 7  |      |    |    |   |    
|                              | Interest expense                                          |                              |                          |   |                          |    |      | (1 | )    |    |    | (6 | )  
|                              | Foreign exchange gain (loss)                              |                              |                          |   |                          |    |      |   |      |    |    |   |    
|                              | Other income (expense)                                    |                              |                          |   |                          |    |      |   |      |    |    |   |    
|                              |                                                           |                              |                          |    |                          |    |      |    |      |    |    |   
|                              |                                                           | Total other income (expense) |                          |    | 6                        |    |      |    | 6    |    |    |    | (6  | ) 
|                              |                                                           |                              |                          |    |                          |    |      |    |      |    |    |   

|                                    |  |  |    |    |  |  |   |   |  |  |    |    |  |  | 
|----------------------------------- |  |  | -- | -- |  |  | - | - |  |  | -- | -- |  |  | 
|Income (loss) before income taxes   |  |  | (2 | )  |  |  | 8 |   |  |  | (2 | ) 
|Provision (credit) for income taxes |  |  |   |    |  |  |  |   |  |  |   |   
|                                    |  |  |    |    |  |  |   |   |  |  |    |   
|Net income (loss)                   |  |  | (2 | )% |  |  | 8 | % |  |  | (2 | )%
|                                    |  |  |    |    |  |  |   |   |  |  |    |   

36



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

2001 Compared With 2000

Revenues

Total revenues increased 24% to $64.9 million for 2001 from $52.4 million for
2000. Our revenues consist of software license revenues and services revenues.
Software license revenues are derived primarily from licenses of the Companys
software products. Services revenues are derived primarily from contracts for
software maintenance and technical support and, to a lesser extent, consulting,
training and other professional services. We believe that the percentage
increase in total revenues achieved in this period may not necessarily be
indicative of future results due to the difficulty of maintaining
high percentage increases as our base of revenue increases.

Software license revenuesSoftware license revenues increased 13% to $45.2
million for 2001 from $39.9 million for 2000. The increase in total software
license revenues was primarily due to an increase in overall demand for data
storage management products, increased market acceptance of our products,
introduction of new products and continued expansion of sales through our
indirect distribution channels. For 2001 we recognized revenues of $20.0
million, or 44% of our total license revenues during that period and 31% of our
total revenues during that period, under arrangements with payment terms
extending up to six months. For 2000, the comparable amounts were $15.6
million, 39%, and 30%, respectively. As mentioned above, extended payment term
contracts are primarily with select OEMs, distributors, and resellers.

Services revenuesServices revenues increased 58% to $19.7 million for 2001
from $12.5 million for 2000. The increase was primarily due to increased sales
of maintenance and technical support contracts on new license sales, increased
renewals of maintenance contracts by our expanding installed base of licensees
and, to a lesser extent, increased demand for consulting, training and other
professional services. Maintenance revenues comprised 77% of total services
revenues in 2001 and 71% of total services revenue in 2000. In September 2000,
we began to require that at least one year of customer maintenance support be
purchased with new license purchases.

Cost of revenues

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

37



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Cost of software license revenuesCost of software license revenues increased
85% to $6.0 million for 2001 from $3.3 million for 2000 primarily due to an
increase in related license revenues, associated royalty expenses, and the
amortization of certain intangible assets. As a result of the increase in
royalty expenses, gross margin on software license revenues decreased to 87%
for 2001 from 92% for 2000. The gross margin on software license revenues may
vary from period to period based on changes in the mix of products comprising
software license
revenues with certain products having higher royalty rates than other products.
The Company does not expect significant improvement in gross margin on software
license revenues.

Cost of services revenuesCost of services revenues increased 43% to $7.1
million for 2001 from $5.0 million for 2000 primarily due to personnel
additions in our customer support, training and consulting organizations in
anticipation of increased demand for, and in connection with providing these
services. Gross margin on services revenues increased to 64% for 2001 from 60%
for 2000 due primarily to the increase of higher-margin maintenance revenues as
a percentage of total services revenue in proportion to the increase in
services revenue from consulting services engagements. The gross margins on
services revenues may vary from period to period based upon changes in the mix
of maintenance and technical support, consulting and training services
comprising services revenues.

Operating Expenses

Sales and marketingSales and marketing expenses consist of salaries, related
benefits, commissions, consultant fees, tradeshow, advertising and other costs
associated with our sales and marketing efforts. Sales and marketing expenses
increased 28% to $29.8 million for 2001 from $23.3 million for 2000. The
increase in sales and marketing expenses is attributable to an increase in the
number of sales and marketing employees and increases in marketing programs. As
a percentage of total revenues, sales and marketing expenses increased to 46%
for 2001 from 44% for 2000 due primarily to the same reasons as the overall
dollar increase in sales and marketing expenses. We intend to continue to
expand our global sales and marketing infrastructure, and, accordingly, we
expect the dollar amount of sales and marketing expenses to increase in future
periods.

Research and developmentResearch and development expenses consist primarily of
salaries, related benefits and other software engineering-related costs.
Research and development expenses increased 49% to $18.0 million for 2001 from
$12.1 million for 2000. The increase was due to a number of factors, including
an increase in the number of research and development personnel, acceleration
of initiatives to internationalize and localize our products in foreign
languages, and certain compensation expenses associated with the acquisition of
UniTree. As a percentage of total revenues, research and development expenses
increased to 28% in 2001 from 23% in 2000, due primarily to the same factors.
We believe that a significant level of research and development investment is
required to remain competitive, and expect that the dollar amount of these
expenses will continue to increase in future periods.

38



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##### 



General and administrativeGeneral and administrative expenses consist
primarily of salaries, related benefits, fees for professional services, such
as legal and accounting services, and bad debt expenses. General and
administrative expenses increased 37% to $10.4 million for 2001 from $7.6
million for 2000, primarily due to additional personnel costs, our relocation
to a new facility, and other expenses associated with our efforts to support
the continued expansion of our operations. In the fourth quarter of 2001 we
incurred a bad debt charge of approximately $850,000 attributable to one of our
distributor partners following the restructuring of their hardware and software
distribution business. As a percentage of total revenues, general and
administrative expenses increased to 16% for 2001 from 14% for 2000, due
primarily to the bad debt charge. We expect the dollar amount of general and
administrative expenses to continue to increase as our operations expand.

Other income (expense)Other income increased on a net basis to $3.5 million
for 2001 from $3.0 million for 2000. This change is due to primarily to a
decrease in interest expense to $171,000 in 2001 from $671,000 in 2000. An
increase in interest income to $3.8 million in 2001 from $3.7 million in 2000
was largely offset by an increase in other expenses of $152,000 related to the
disposal of certain fixed assets during 2001.

Provision for income taxesOTG was treated as a Subchapter S corporation for
federal and state income tax purposes prior to our initial public offering in
March 2000. Under Subchapter S of the Internal Revenue Code, OTGs income was
allocated and taxable to our stockholders. Accordingly, OTG did not recognize
any federal or state income taxes prior to the consummation of our initial
public offering. Upon consummation of the initial public offering, OTG ceased
to be treated as a Subchapter S corporation. Accordingly, OTG has
been subject to federal and state income taxes since our initial public
offering. Smart Storage was subject to tax as a regular corporation for all of
2001 and 2000.

For 2001 we recorded a tax benefit of $1.6 million reflecting an effective tax
rate of 17% for that period. Our effective income tax rate for 2001 reflects
the impact of certain non-deductible merger related costs. Comparatively, we
recognized a benefit of $166,000 in 2000 on pre-tax income of $3.0 million.
This benefit is attributable to a deferred tax benefit of $1.3 million
resulting from the reduction in the valuation allowance against certain
deferred tax assets. During 2000, we determined that it was more likely than
not that we would realize the benefit of certain deferred tax assets of Smart
Storage and reduced the valuation allowance accordingly. We expect our
effective income tax rate to increase to a fully-taxed rate of approximately
39%-42% in future years.

2000 Compared with 1999

Revenues

Total revenues increased 59% to $52.4 million for 2000 from $32.9 million for
1999. Our revenues consist of software license revenues
and services revenues. Software license revenues are derived primarily from
licenses of the Companys software products. Services revenues are derived
primarily from contracts for software maintenance and technical support and, to
a lesser extent, consulting, training and other professional
services. We believe that the percentage increase in total revenues
achieved in this period may not necessarily be indicative of future
results due to the difficulty of maintaining high percentage
increases as our base of revenue increases.

39



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Software license revenuesSoftware license revenues increased 61% to $39.9
million for 2000 from $24.8 million for 1999. The increase in software license
revenues was primarily due to an increase in overall demand for data storage
management products, increased market acceptance of our products, introduction
of new products and continued expansion of sales through our indirect
distribution channels, including OEM sales. For 2000, we recognized revenues
of $15.6 million, or 39% of our total license revenues during that period and
30% of our total revenues, under arrangements with payment terms extending up
to six months. For 1999, the comparable amounts were $1.9 million, 8%, and 6%
respectively.

Services revenuesServices revenues increased 54% to $12.5 million for 2000
from $8.1 million for 1999. The increase was primarily due to increased sales
of maintenance and technical support contracts on new license sales increased
renewals of maintenance contracts by our installed base of licensees and, to a
lesser extent, increased demand for consulting, training and other professional
services. Maintenance revenues comprised 71% of total services revenues in
2000 and 66% of total services revenue in 1999. In September 2000, we began to
require in most cases that at least one year of customer maintenance support be
purchased with new license purchases.

Cost of revenues

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

Cost of software license revenuesCost of software license revenues increased
101% to $3.3 million for 2000 from $1.6 million for 1999 primarily due to an
increase in royalty expenses and, to a lesser extent, costs incurred in 2000
related to the amortization of certain intangible assets. As a result, gross
margin on software license revenues decreased to 92% in 2000 from 93% in 1999.
The gross margin on software license revenues may vary from period to period
based on changes in the mix of products comprising software license revenues
with certain products having higher royalty rates than other products. The
Company does not expect significant improvement in gross margin on software
license revenues.

Cost of services revenuesCost of services revenues increased 50% to $5.0
million for 2000 from $3.3 million for 1999 primarily due to personnel
additions in our customer support, training and consulting organizations to meet increased demand for these services. Gross
margin on services revenues increased to 60% for 2000 from 59% for 1999 due
primarily to the margins achieved on certain consulting services engagements.
The gross margins on services revenues may vary from period to period based
upon changes in the mix of maintenance and technical support, consulting and
training services comprising services revenues.

40



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Operating Expenses

Sales and marketingSales and marketing expenses consist of salaries, related
benefits, commissions, consultant fees, tradeshow, advertising and other costs
associated with our sales and marketing efforts. Sales and marketing expenses
increased 61% to $23.3 million for 2000 from $14.5 million for 1999. As a
percentage of total revenues, sales and marketing expenses remained unchanged
at 44% for 2000 and 1999. While the percentage of revenue remained unchanged,
the overall dollar increase in sales and marketing expenses was attributable to
an increase in the number of sales and marketing employees and increases in
marketing programs. We intend to continue to expand our global sales and
marketing infrastructure, and, accordingly, we expect the dollar amount of
sales and marketing expenses to increase in future periods.

Research and developmentResearch and development expenses consist primarily of
salaries, related benefits and other software engineering-related costs.
Research and development expenses increased 75% to $12.1 million for 2000 from
$6.9 million for 1999. As a percentage of total revenues, research and
development expenses increased to 23% in 2000 from 21% in 1999. The increase
in research and development, including the increase in research and development
as a percent of total revenue, was primarily due to an increase in the number
of research and development personnel. We believe that a significant level of
research and development investment is required to remain competitive, and
expect that the dollar amount of these expenses will continue to increase in
future periods.

General and administrativeGeneral and administrative expenses consist
primarily of salaries, related benefits, fees for professional services, such
as legal and accounting services, and bad debt expenses. General and
administrative expenses increased 48% to $7.6 million for 2000 from $5.1
million for 1999, primarily due to additional personnel costs and other
expenses associated with our efforts to support the continued expansion of our
operations. As a percentage of total revenues, general and administrative
expenses decreased to 14% for 2000 from 16% for the same period in 1999. The
decrease as a percentage of total revenues was primarily due to the increase in
total revenues. We expect the dollar amount of general and administrative
expenses to continue to increase as our operations expand.

Other income (expense)Other income (expense) increased on a net basis to
income of $3.0 million for 2000 from expense of $2.0 million for 1999. This
change is due to a number of factors. First, we used proceeds from our initial
public offering in March 2000 to repay outstanding balances under our credit
facility, retire our senior subordinated notes and retire all notes payable to
certain stockholders. Further, the conversion of our convertible subordinated
notes into Common Stock in conjunction with our initial public offering
eliminated related interest expense. In addition, the remaining proceeds from
our initial public offering as well as the net proceeds of our
follow-on public offering in November 2000 increased our levels of cash and cash
equivalents available for investment, resulting in a significant increase in
interest income in 2000.

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Provision for income taxesOTG was treated as a Subchapter S corporation for
federal and state income tax purposes prior to our initial public offering in
March 2000. Under Subchapter S of the Internal revenue Code, OTGs income was
allocated and taxable to our stockholders. Accordingly, OTG did not recognize
any federal or state income taxes prior to the consummation of our initial
public offering. Upon consummation of the initial public offering, OTG ceased
to be treated as a Subchapter S corporation. Accordingly, OTG has been subject
to federal and state income taxes since our initial public offering. Smart
Storage was subject to tax as a regular corporation for all of 2000 and 1999.

We recognized a benefit of $166,000 in 2000 on pre-tax income of $3.0 million.
This benefit is attributable to a deferred tax benefit of $1.3 million
resulting from the reduction in the valuation allowance against certain
deferred tax assets. During 2000, we determined that it was more likely than
not that we would realize the benefit of certain deferred tax assets of Smart
Storage and reduced the valuation allowance accordingly. Comparatively, we
recognized income tax expense of $105,000 in 1999 on a pre-tax loss of
$588,000. This expense is the result of certain taxable income generated
during 1999 from Smart Storage that could not be offset by OTGs losses.

Liquidity and Capital Resources

As of December 31, 2001 cash and cash equivalents totaled $89.3 million,
representing 59% of total assets. As of December 31, 2000, cash and cash
equivalents totaled $102.2 million, representing 74% of total assets. In March
2000, we raised $87.0 million of net proceeds from an initial public offering.
In November 2000, we raised an additional $32.8 million of net proceeds from a
follow-on public offering. For 2001 and 2000, respectively, we earned interest
income of $3.8 million and $3.7 million on cash and cash equivalents. As of
December 31, 2001 we had interest-bearing debt outstanding of approximately
$3.2 million, representing the accreted value of notes payable to certain
shareholders pursuant to the terms of the acquisition agreement with UniTree.
In addition, the Company held interest-bearing debt of $225,000 related to a
note payable associated with Smart Storages acquisition of certain intangible
assets in 2000, $120,000 related to a note payable securing economic
development funds received from the State of Maryland, and $421,000 of debt
related to certain equipment acquired under a capital lease. As of December
31, 2000, we had interest-bearing debt outstanding of $85,000 relating to a
note payable to a shareholder, $450,000 in notes payable relating to Smart
Storages acquisition of certain intangible assets in 2000, and approximately
$84,000 relating to certain equipment acquired under a capital lease. Please
also see Note 10 and 12 in Notes to Consolidated Financial Statements for
further discussion of notes payable and other obligations.

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For 2001 net cash used for operating activities was approximately $3.7 million.
For 2000, operating activities provided net cash of approximately $457,000.
The increase in cash used for operating activities was primarily attributable
to operating expenditures resulting from our acquisitions and subsequent integrations of Smart Storage and UniTree in 2001,
as well as the move to a new headquarters facility in June 2001. Approximately
$1.6 million of costs associated with the acquisition of Smart Storage were
classified as operating expenses under the pooling method, and the Company
continues to incur expenses related to the integration of the personnel and
technology acquired in each of the acquisitions. Additionally, the Company
moved to a new headquarters facility in June 2001. The net increase in rent
for the seven months we occupied the new building in 2001 was approximately
$1.2 million, and the Company paid lease termination fees and other costs for
the prior headquarters of $100,000. One of the primary factors of our ability
to generate positive cash flows from operating activities is our ability to
collect accounts receivable when they become due, including sales with extended
payment terms. In addition, even if our collections efforts are ultimately
successful, the timing of the receipts may impact cash flows during a quarterly
period. In addition, we expect to begin paying income taxes in future years.
The timing and
extent of those payments, which are dependent on the amount of our taxable
income, if any, could materially adversely affect our cash flows from
operations.

Net cash used for investing activities increased to $10.0 million in 2001 from
$6.3 million for 2000. The increase of $3.7 million is the result of
approximately $5.0 million invested in property and equipment during 2001 as
compared with $4.1 million in 2000, and net cash used in acquisitions increased
to $5.0 million in 2001 as compared with $2.2 million in 2000. We expect to
continue to invest in property and equipment in the ordinary course of business
as required.

For 2001 net cash provided by financing activities was $745,000, which reflects
proceeds from the exercise of stock options totaling $1.9 million, partially
offset by $461,000 paid to repurchase common stock, net payments on notes
payable and long term debt of $262,000, and $432,000 paid for direct costs of
our follow-on public offering incurred in 2000 but paid in 2001. For 2000 cash
provided by financing activities was $103.8 million, reflecting $87.0 million
raised in our initial public offering, $33.2 million raised in our follow-on
public offering, partially offset by net repayments of debt totaling $16.8
million, and other offsetting items.

In October 2000, we amended and restated our commercial credit facility with
PNC Bank. Under the amended loan agreement, the maximum available borrowing
under the revolving line of credit was increased from $5 million to $10
million, including a $5 million sub-line of credit for establishing letters of
credit. As of December 31, 2001 OTG had a $2.8 million letter of credit
established under this sub-line of credit. The Company borrowed $4.0 million
at the end of the third quarter of 2001, which was repaid early in the fourth
quarter of 2001. The maximum borrowings under the loan agreement at any time,
including amounts under the revolving line of credit and the sub-line of
credit, are limited to the lesser of $10 million or 80% of qualified accounts
receivable, as defined in the agreement. Borrowings under the line of credit
bear interest at the prime rate or LIBOR rate plus 2.5%, as selected by us, and
are secured by certain of our assets.

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

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Risk Factors

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

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

Revenues increased
sequentially by approximately 24%, 59%, and 46%, year-over-year, in
2001, 2000, and 1999, respectively. Due to the difficulty in
maintaining high percentage increases as our base of revenue
increases, we may not be able to maintain high rates of revenue
growth in future periods. In addition,
general economic conditions, growing competition, lower-than-expected market
acceptance of Microsoft products, such as Windows NT or Windows 2000, lower
than expected acceptance of UNIX and Linux as available platforms for our
products, or the failure of the markets for storage area networks, storage
service providers or network attached storage to develop, could also affect our
revenue growth.

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

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

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



| |  |  | the unpredictability of the timing and level of sales through our
indirect sales channels;                           
| | - |  | ---------------------------------------------------------------------------------------------------------------------
|
| |  |  | the timing and magnitude of large orders;                                                                            
|
| |  |  | changes in the mix of our sales, including the mix between
higher margin software licenses and lower margin services;
|
| |  |  | the timing and amount of our marketing, sales and product
development expenses;                                      
|
| |  |  | the cost and time required to develop new software products
and new versions of our existing software products;      
|
| |  |  | the introduction, timing and market acceptance of new
products introduced by us or our competitors;                  

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| |  |  | changes in data storage and networking technology or the
introduction of new operating system upgrades, which could require
us to modify our products or develop new products;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the rate of growth and adoption of Windows NT, Windows 2000,
Windows XP, and future Windows-based operating systems;                                                          
|
| |  |  | the rate of growth and adoption of UNIX and Linux;                                                                                                                            
|
| |  |  | the rate of growth and adoption of storage area networks;                                                                                                                     
|
| |  |  | pricing policies, including levels of discounts, payment terms and
distribution terms;                                                                                        
|
| |  |  | the failure of customers, especially those to whom we have
granted extended payment terms, to pay amounts owed when due; and                                                  
|
| |  |  | the timing and size of additional acquisitions, if any.                                                                                                                       

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

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

The planned merger with Legato may adversely impact our stock price.

On February 20, 2002, OTG entered into an Agreement and Plan of Merger with
Legato Systems, Inc., whereby OTG agreed to merge with and into a wholly-owned
subsidiary of Legato (the Merger). In the Merger, each share of OTG common
stock will be converted into the right to receive 0.6876 shares of Legato
common stock and $2.50 in cash. Since the Company may terminate the agreement
only in very limited circumstances and the exchange ratio is not subject to
adjustment, the value of the consideration payable in the Merger, as well as
the price of OTG common stock, will be affected by changes in the price of
Legato common stock. Accordingly, the Companys stockholders are subject to
the risk of downward movement in the price of OTG common stock, including as a
result of adverse developments in Legatos business. In addition, the
Company's business may be disrupted because of the pending merger.  Moreover, if for any
reason the Company is unable to complete the Merger with Legato, the
Company and the price of
OTG common stock may be adversely affected. Legato has agreed to file with the
SEC a Registration Statement on Form S-4, including a Joint Proxy
Statement/Prospectus.

Investors are urged to read these documents carefully
when they are available because they will contain important information about Legato, OTG, the transaction and related matters, including
additional risk factors. Investors will be able to obtain free copies of these
and other documents filed by Legato and OTG with the SEC through the web site
maintained by the SEC at www.sec.gov. In addition, investors will be able to
obtain free copies of the Registration Statement and the Joint Proxy
Statement/Prospectus from the Company.

Our business significantly depends on the acceptance of Microsoft Windows-based
operating systems, as well as UNIX and Linux operating systems to run computer
networks, and a decrease in their rates of acceptance could cause our revenues
to decline.

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

Future Windows-based operating systems may not gain market acceptance. In
addition, users of previous versions of Windows-based operating systems may
decide to migrate to another operating system. We have expended significant
resources on the development of Windows-compatible versions of our product
suite and our future success depends upon sales of this product suite. If
users of Windows-based networks do not widely adopt and purchase our products, our revenue and business would suffer.

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We expect the percentage of our revenues attributable to UNIX- and Linux-based
products to increase over time. We have expended significant resources
developing and acquiring technology to make UNIX- and Linux-compatible versions
of our products. If users of UNIX and Linux networks do not widely adopt and
purchase our products our revenue and business would suffer.

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

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

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

We continue to increase the scope of our operations and have grown our
headcount substantially through internal growth and acquisitions. As of
December 31, 2001 we had a total of 406 employees, compared to a total of 385
and 233 employees as of December 31, 2000 and 1999, respectively. Our
productivity and the quality of our products may be adversely affected if we do
not integrate and train our new employees quickly and effectively, including
work forces obtained by acquiring other companies. We also cannot be sure that
our revenues will continue to grow at a rate sufficient to absorb the costs
associated with a larger overall headcount.

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

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

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

We have derived the substantial majority of our revenue from the sale of our
XtenderSolutions product suite. For 2001, 2000 and 1999, sales of our
XtenderSolutions products exceeded 65% our total revenues. We expect that
these products will continue to account for a large portion of our revenues for
the foreseeable future. Accordingly, our business and future operating results
depend on the continued market acceptance of our XtenderSolutions products and
future enhancements to these products. Any factors adversely affecting the
pricing or demand for or market acceptance of our XtenderSolutions products,
including competition or technological change, could cause our revenues to
decline and our business and future operating results to suffer.

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

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



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

Indirect sales: We expect that a significant portion of our revenues will
continue to come from indirect sales. These include sales to original equipment
manufacturers that incorporate our data storage management software into
systems they sell. We also expect future revenues from distributors and
value-added resellers that sell our software, often bundled with their own
software or services. We have little or no control over the shipping dates or
volumes shipped by our original equipment manufacturers, distributors, or
value-added resellers, and they have no obligation to ship systems
incorporating our software. In addition, credit terms with certain of our
indirect sales channel partners include payment terms extending up to 180 days,
and collection of the related receivables may be affected by changes in general economic
conditions to varying degrees during their term. They generally have no minimum
sales requirements and can terminate their relationship with us on short notice. We develop customized versions of
our products for some of our original equipment manufacturers to be included in
their systems software and other products. Developing products for these
original equipment manufacturers causes us to divert resources from other
activities that are also important to our business. If these versions do not
result in substantial revenues, our business and financial results could be
adversely affected.

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

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

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

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

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

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



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

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

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

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

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

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

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

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

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

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

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

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

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



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

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

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

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

51



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##### 



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

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



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

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

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

Products we sold to customers outside the United States accounted for
approximately 13% of our revenues in 2001. For 2000 and 1999, products sold to
foreign customers accounted for approximately 16% and 14%, respectively, of our
total revenues. We plan to increase our international sales activities, but
these activities are subject to a number of risks, including:



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

52



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##### 



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

General economic conditions and current economic and political uncertainty
could adversely affect the Company.

Our revenues and gross margins depend significantly on the overall demand for
online data storage and data access software solutions, particularly in the
product segments in which we compete. The economic downturn that occurred in
2000 and 2001 may continue and may result in softening demand for our products
which in turn may result in decreased revenues, earnings levels or growth rates
and problems with the collectibility of customer receivables. The global
economy has weakened and market conditions continue to be challenging. Should
global and regional economic conditions fail to improve or continue to
deteriorate, demand for the Companys products could be adversely affected, as
could the financial health of its original equipment manufacturers,
distributors, and value-added resellers. This may have a negative effect on
our business and future operating results.

The terrorist attacks that took place on September 11, 2001, have created many
economic and political uncertainties and have had a strong negative impact on
the global economy. The long-term effects of the September 11, 2001 attacks on
the Companys future operating results and financial condition are unknown.
The national and international responses to terrorist attacks and the potential
for future terrorist attacks and other acts of war or hostility have created
many economic and political uncertainties which could adversely affect the
Companys future operating results and financial condition.

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

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



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

53



---



##### 



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

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

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

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

We do not currently hold any derivative financial instruments and do not invest
in derivative financial instruments. We invest excess cash in short-term,
highly-liquid investments. In addition, our long-term indebtedness is comprised
of primarily of acquisition-related obligations and capital leases. As of
December 31, 2001 the Companys long-term indebtedness (including the current
portion) consisted of the accreted value of long-term notes payable to certain
former UniTree shareholders totaled $3.2 million, capital lease obligations of
$421,000, notes payable related to certain acquired intangible assets of
$225,000, and a note payable securing economic development funds received from
the State of Maryland of $120,000. All of our long-term debt obligations bear
fixed interest rates. As a result, we believe that our exposure to
interest rate risk is not material to our financial condition or results of
operations.



54



---



##### 



Item 8. Consolidated Financial Statements and Supplementary Data

The Board of Directors and Stockholders
OTG Software, Inc.:

We have audited the accompanying consolidated balance sheets of OTG Software,
Inc. and subsidiaries (the Company) as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders equity (deficit),
and cash flows for each of the years in the three-year period ended December
31, 2001. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 financial position of OTG Software, Inc.
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.

KPMG LLP

McLean, Virginia
January 28, 2002, except for Note 21,
     which is as of February 20, 2002

55



---



##### 



OTG Software, Inc.
Consolidated Balance Sheets, December 31,
(in thousands except share and per share amounts)

|                              |                                                                                                                                                                                                                |                                                                               |                           |                                                                                                       |         |         |         |         |         |         |         |  
|----------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ------------------------- | ----------------------------------------------------------------------------------------------------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | -
|                              |                                                                                                                                                                                                                |                                                                               |                           |                                                                                                       |         | 2001    |         | 2000    |        
|                              |                                                                                                                                                                                                                |                                                                               |                           |                                                                                                       |         |         |         |         |        
|Assets                        |                                                                                                                                                                                                                |                                                                               |                           |                                                                                                       |         |         |         |        
|Current assets                |                                                                                                                                                                                                                |                                                                               |                           |                                                                                                       |         |         |         |        
|                              | Cash and cash equivalents                                                                                                                                                                                      |                                                                               | $                         | 89,294                                                                                                |         |         | $       | 102,197 |        
|                              | Accounts receivable, net of allowance                                                                                                                                                                          |                                                                               |                           | 25,120                                                                                                |         |         |         | 20,613  |        
|                              | Deferred income taxes                                                                                                                                                                                          |                                                                               |                           | 2,997                                                                                                 |         |         |         | 2,066   |        
|                              | Other current assets                                                                                                                                                                                           |                                                                               |                           | 2,966                                                                                                 |         |         |         | 2,919   |        
|                              |                                                                                                                                                                                                                |                                                                               |                           |                                                                                                       |         |         |         |        
|                              |                                                                                                                                                                                                                |                                                                               | Total current assets      |                                                                                                       |         | 120,377 |         |         |         | 127,795 |        
|Other assets                  |                                                                                                                                                                                                                |                                                                               |                           |                                                                                                       |         |         |         |        
|                              | Property and equipment, net                                                                                                                                                                                    |                                                                               |                           | 10,146                                                                                                |         |         |         | 4,744   |        
|                              | Goodwill, net                                                                                                                                                                                                  |                                                                               |                           | 12,715                                                                                                |         |         |         | 2,510   |        
|                              | Other intangibles, net                                                                                                                                                                                         |                                                                               |                           | 5,267                                                                                                 |         |         |         | 1,212   |        
|                              | Deferred income taxes                                                                                                                                                                                          |                                                                               |                           | 1,588                                                                                                 |         |         |         | 1,302   |        
|                              | Other noncurrent assets, net                                                                                                                                                                                   |                                                                               |                           | 467                                                                                                   |         |         |         | 759     |        
|                              |                                                                                                                                                                                                                |                                                                               |                           |                                                                                                       |         |         |         |        
|                              |                                                                                                                                                                                                                |                                                                               | Total other assets        |                                                                                                       |         | 30,183  |         |         |         | 10,527  |        
|                              |                                                                                                                                                                                                                |                                                                               |                           |                                                                                                       |         |         |         |        
|                              |                                                                                                                                                                                                                |                                                                               |                           | Total assets                                                                                          |         | $       | 150,560 |         |         | $       | 138,322 |  
|                              |                                                                                                                                                                                                                |                                                                               |                           |                                                                                                       |         |         |         |        
|Liabilities                   |                                                                                                                                                                                                                |                                                                               |                           |                                                                                                       |         |         |        
|Current liabilities           |                                                                                                                                                                                                                |                                                                               |                           |                                                                                                       |         |         |        
|                              | Accounts payable                                                                                                                                                                                               |                                                                               | $                         | 2,625                                                                                                 |         |         | $       | 4,080   |        
|                              | Income taxes payable                                                                                                                                                                                           |                                                                               |                           |                                                                                                      |         |         |         | 1,143   |        
|                              | Accrued expenses                                                                                                                                                                                               |                                                                               |                           | 9,783                                                                                                 |         |         |         | 7,572   |        
|                              | Current portion of capital lease obligations                                                                                                                                                                   |                                                                               |                           | 94                                                                                                    |         |         |         | 61      |        
|                              | Current portion of notes payable                                                                                                                                                                               |                                                                               |                           | 225                                                                                                   |         |         |         | 225     |        
|                              | Current portion of notes payable to shareholders                                                                                                                                                               |                                                                               |                           | 2,400                                                                                                 |         |         |         | 67      |        
|                              | Current portion of deferred rent                                                                                                                                                                               |                                                                               |                           | 281                                                                                                   |         |         |         |        |        
|                              | Current portion of deferred revenues                                                                                                                                                                           |                                                                               |                           | 8,908                                                                                                 |         |         |         | 7,586   |        
|                              |                                                                                                                                                                                                                |                                                                               |                           |                                                                                                       |         |         |         |        
|                              |                                                                                                                                                                                                                |                                                                               | Total current liabilities |                                                                                                       |         | 24,316  |         |         |         | 20,734  |        
|Other liabilities             |                                                                                                                                                                                                                |                                                                               |                           |                                                                                                       |         |         |         |        
|                              | Capital lease obligations, net of current portion                                                                                                                                                              |                                                                               |                           | 327                                                                                                   |         |         |         | 23      |        
|                              | Notes payable                                                                                                                                                                                                  |                                                                               |                           | 120                                                                                                   |         |         |         | 225     |        
|                              | Notes payable to shareholder, net of current portion                                                                                                                                                           |                                                                               |                           | 831                                                                                                   |         |         |         | 18      |        
|                              | Deferred rent, net of current portion                                                                                                                                                                          |                                                                               |                           | 2,368                                                                                                 |         |         |         |        |        
|                              | Deferred revenues                                                                                                                                                                                              |                                                                               |                           | 719                                                                                                   |         |         |         | 446     |        
|                              |                                                                                                                                                                                                                |                                                                               |                           |                                                                                                       |         |         |         |        
|                              |                                                                                                                                                                                                                |                                                                               | Total other liabilities   |                                                                                                       |         | 4,365   |         |         |         | 712     |        
|                              |                                                                                                                                                                                                                |                                                                               |                           |                                                                                                       |         |         |         |        
|                              |                                                                                                                                                                                                                |                                                                               |                           | Total liabilities                                                                                     |         |         | 28,681  |         |         |         | 21,446  |  
|Commitments and contingencies |                                                                                                                                                                                                                |                                                                               |                           |                                                                                                       |         |         |         |        
|Stockholders equity          |                                                                                                                                                                                                                |                                                                               |                           |                                                                                                       |         |         |         |        
|                              | Preferred stock, $0.01 par value; 5,000,000 shares
authorized; none issued and outstanding                                                                                                                     |                                                                               |                           |                                                                                                      |         |         |         |        |        
|                              | Common stock, $0.01 par value; 65,000,000 shares
authorized; 33,344,021 shares issued and
33,249,821 shares outstanding at December 31,
2001 and 30,883,478 shares issued and
outstanding at December 31, 2000 |                                                                               |                           | 333                                                                                                   |         |         |         | 309     |        
|                              | Additional paid-in capital                                                                                                                                                                                     |                                                                               |                           | 152,168                                                                                               |         |         |         | 140,025 |        
|                              | Deferred compensation, net                                                                                                                                                                                     |                                                                               |                           | (845                                                                                                  | )       |         |         | (1,637  | )      
|                              | Accumulated other comprehensive income (loss)                                                                                                                                                                  |                                                                               |                           | 27                                                                                                    |         |         |         | (28     | )      
|                              | Accumulated deficit                                                                                                                                                                                            |                                                                               |                           | (28,211                                                                                               | )       |         |         | (20,741 | )      
|                              |                                                                                                                                                                                                                |                                                                               |                           |                                                                                                       |         |         |         |        
|                              |                                                                                                                                                                                                                | Stockholders equity before stock
subscriptions receivable and treasury stock |                           |                                                                                                       | 123,472 |         |         |         | 117,928 |        
|                              |                                                                                                                                                                                                                |                                                                               |                           | Less: stock subscriptions receivable                                                                  |         |         | (1,132  | )       |         |         | (1,052  | )
|                              |                                                                                                                                                                                                                |                                                                               |                           | Less: treasury stock, at cost
(94,200 shares at December 31,
2001 and no shares at
December 31, 2000) |         |         | (461    | )       |         |         |        |  
|                              |                                                                                                                                                                                                                |                                                                               |                           |                                                                                                       |         |         |         |        
|                              |                                                                                                                                                                                                                |                                                                               |                           | Total stockholders equity                                                                            |         |         | 121,879 |         |         |         | 116,876 |  
|                              |                                                                                                                                                                                                                |                                                                               |                           |                                                                                                       |         |         |         |        
|                              |                                                                                                                                                                                                                |                                                                               |                           | Total liabilities and
stockholders equity                                                            |         | $       | 150,560 |         |         | $       | 138,322 |  
|                              |                                                                                                                                                                                                                |                                                                               |                           |                                                                                                       |         |         |         |        

See accompanying notes to consolidated financial statements.

56



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##### 



OTG Software, Inc.
Consolidated Statements of Operations, Years Ended December 31,
(in thousands, except per share amounts)

|                                                    |                                                           |                              |                          |        |       |        |        |        |        |        |        |        |        |        | 
|--------------------------------------------------- | --------------------------------------------------------- | ---------------------------- | ------------------------ | ------ | ----- | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | 
|                                                    |                                                           |                              |                          |        | 2001  |        | 2000   |        | 1999  
|                                                    |                                                           |                              |                          |        |       |        |        |        |       
|Revenues                                            |                                                           |                              |                          |        |       |        |        |        |        |        |        |       
|                                                    | Software licenses                                         |                              | $                        | 45,177 |       |        | $      | 39,878 |        |        | $      | 24,815 |       
|                                                    | Services                                                  |                              |                          | 19,747 |       |        |        | 12,480 |        |        |        | 8,081  |       
|                                                    |                                                           |                              |                          |        |       |        |        |        |        |        |        |       
|                                                    |                                                           |                              | Total revenues           |        |       | 64,924 |        |        |        | 52,358 |        |        |        | 32,896 | 
|                                                   
|Cost of revenues                                    |                                                           |                              |                          |        |       |        |        |        |        |        |        |       
|                                                    | Software licenses                                         |                              |                          | 6,045  |       |        |        | 3,273  |        |        |        | 1,629  |       
|                                                    | Services                                                  |                              |                          | 7,121  |       |        |        | 4,975  |        |        |        | 3,327  |       
|                                                    |                                                           |                              |                          |        |       |        |        |        |        |        |        |       
|                                                    |                                                           |                              | Total cost of revenues   |        |       | 13,166 |        |        |        | 8,248  |        |        |        | 4,956  | 
|                                                    |                                                           |                              |                          |        |       |        |        |        |        |        |        |       
|Gross profit                                        |                                                           |                              | 51,758                   |        |       |        | 44,110 |        |        |        | 27,940 |       
|                                                   
|Operating expenses                                  |                                                           |                              |                          |        |       |        |        |        |        |        |        |       
|                                                    | Sales and marketing                                       |                              |                          | 29,834 |       |        |        | 23,280 |        |        |        | 14,482 |       
|                                                    | Research and development                                  |                              |                          | 18,007 |       |        |        | 12,072 |        |        |        | 6,893  |       
|                                                    | General and administrative                                |                              |                          | 10,378 |       |        |        | 7,553  |        |        |        | 5,118  |       
|                                                    | Merger-related costs                                      |                              |                          | 1,585  |       |        |        |       |        |        |        |       |       
|                                                    | Amortization of goodwill and acquired intangible assets   |                              |                          | 834    |       |        |        | 554    |        |        |        |       |       
|                                                    | Write-off of acquired in-process research
and development |                              |                          | 3,700  |       |        |        | 620    |        |        |        |       |       
|                                                    |                                                           |                              |                          |        |       |        |        |        |        |        |        |       
|                                                    |                                                           |                              | Total operating expenses |        |       | 64,338 |        |        |        | 44,079 |        |        |        | 26,493 | 
|                                                    |                                                           |                              |                          |        |       |        |        |        |        |        |        |       
|Income (loss) from operations                       |                                                           |                              | (12,580                  | )      |       |        | 31     |        |        |        | 1,447  |       
|                                                   
|Other income (expense)                              |                                                           |                              |                          |        |       |        |        |        |        |        |        |       
|                                                    | Interest income                                           |                              |                          | 3,844  |       |        |        | 3,727  |        |        |        | 70     |       
|                                                    | Interest expense                                          |                              |                          | (171   | )     |        |        | (671   | )      |        |        | (2,113 | )     
|                                                    | Foreign exchange gain (loss)                              |                              |                          | (45    | )     |        |        | (85    | )      |        |        | 8      |       
|                                                    | Other income (expense)                                    |                              |                          | (152   | )     |        |        |       |        |        |        |       |       
|                                                    |                                                           |                              |                          |        |       |        |        |        |        |        |        |       
|                                                    |                                                           | Total other income (expense) |                          |        | 3,476 |        |        |        | 2,971  |        |        |        | (2,035 | )     
|                                                    |                                                           |                              |                          |        |       |        |        |        |        |        |        |       
|Income (loss) before income taxes                   |                                                           |                              | (9,104                   | )      |       |        | 3,002  |        |        |        | (588   | )     
|Provision (credit) for income taxes                 |                                                           |                              | (1,554                   | )      |       |        | (166   | )      |        |        | 105    |       
|                                                    |                                                           |                              |                          |        |       |        |        |        |        |        |        |       
|Net income (loss)                                   |                                                           | $                            | (7,550                   | )      |       | $      | 3,168  |        |        | $      | (693   | )     
|Other comprehensive income (loss):                  |                                                           |                              |                          |        |       |        |        |        |        |        |        |       
|                                                    | Foreign currency translation                              |                              |                          | 55     |       |        |        | (35    | )      |        |        | 7      |       
|                                                    |                                                           |                              |                          |        |       |        |        |        |        |        |        |       
|Comprehensive income (loss)                         |                                                           | $                            | (7,495                   | )      |       | $      | 3,133  |        |        | $      | (686   | )     
|                                                    |                                                           |                              |                          |        |       |        |        |        |        |        |        |       
|Net income (loss) per common share                  |                                                           |                              |                          |        |       |        |        |        |        |        |        |       
|                                                    | Basic                                                     |                              | $                        | (0.24  | )     |        |        |        |        |        |        |        |       
|                                                    | Diluted                                                   |                              | $                        | (0.24  | )     |        |        |        |        |        |        |        |       
|Weighted shares used for computation                |                                                           |                              |                          |        |       |        |        |        |        |        |        |       
|                                                    | Basic                                                     |                              |                          | 32,053 |       |        |        |        |        |        |        |        |       
|                                                    | Diluted                                                   |                              |                          | 32,053 |       |        |        |        |        |        |        |        |       
|Pro forma statements of operations data (unaudited) |                                                           |                              |                          |        |       |        |        |        |        |        |        |       
|                                                    | Income (loss) before income taxes, as reported            |                              |                          |        |       |        |        | 3,002  |        |        |        | (588   | )     
|                                                    | Pro forma provision (credit) for income taxes             |                              |                          |        |       |        |        | (521   | )      |        |        | 105    |       
|                                                    |                                                           |                              |                          |        |       |        |        |        |        |        |        |       
|                                                    | Pro forma net income (loss)                               |                              |                          |        |       |        | $      | 3,523  |        |        | $      | (693   | )     
|                                                    |                                                           |                              |                          |        |       |        |        |        |        |        |        |       
|                                                    | Pro forma net income (loss) per common share              |                              |                          |        |       |        |        |        |        |        |        |        |       
|                                                    |                                                           | Basic                        |                          |        |       |        |        | $      | 0.13   |        |        | $      | (0.04  | )     
|                                                    |                                                           | Diluted                      |                          |        |       |        |        | $      | 0.12   |        |        | $      | (0.04  | )     
|                                                    | Pro forma weighted average shares used for computation    |                              |                          |        |       |        |        |        |        |        |        |        |       
|                                                    |                                                           | Basic                        |                          |        |       |        |        |        | 27,260 |        |        |        | 19,232 |       
|                                                    |                                                           | Diluted                      |                          |        |       |        |        |        | 30,493 |        |        |        | 19,232 |       

See accompanying notes to consolidated financial statements.

57



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##### 



OTG Software, Inc.

Consolidated Statements of Changes in Stockholders Equity (Deficit)
(in thousands, except shares amounts)

|                                                                                    |  |              |            |            |  |          |     |          |  |              |         |               |  |               |      |            |  |       |        |       |  |   |         |   |  |   |     |   |  |   |        |   |  |   |         |  
|----------------------------------------------------------------------------------- |  | ------------ | ---------- | ---------- |  | -------- | --- | -------- |  | ------------ | ------- | ------------- |  | ------------- | ---- | ---------- |  | ----- | ------ | ----- |  | - | ------- | - |  | - | --- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                    |  | Common stock |            | Additional |  |          |     |          |  |              |         |               |  |               |      |            |  | Other |        | Stock |  |   |         |  
|                                                                                    |  |              |            | paid-in    |  | Treasury |     | Deferred |  | Accumulated  |         | comprehensive |  | subscription  |      |            |  |      
|                                                                                    |  | Shares       |            | Amount     |  | capital  |     | stock    |  | compensation |         | deficit       |  | income (loss) |      | receivable |  | Total
|                                                                                    |  |              |            |            |  |          |     |          |  |              |         |               |  |               |      |            |  |      
|Balance, December 31, 1998                                                          |  |              | 19,228,730 |            |  | $        | 192 |          |  | $            | 2,855   |               |  | $             |     |            |  | $     |       |       |  | $ | (22,121 | ) |  | $ |    |   |  | $ | (977   | ) |  | $ | (20,051 | )
|Distribution to stockholders                                                        |  |              |           |            |  |          |    |          |  |              | (34     | )             |  |               |     |            |  |       |       |       |  |   |        |   |  |   |    |   |  |   |       |   |  |   | (34     | )
|Deferred compensation for stock
options granted                                     |  |              |           |            |  |          |    |          |  |              | 2,886   |               |  |               |     |            |  |       | (2,886 | )     |  |   |        |   |  |   |    |   |  |   |       |   |  |   |        |  
|Amortization of deferred compensation                                               |  |              |           |            |  |          |    |          |  |              |        |               |  |               |     |            |  |       | 329    |       |  |   |        |   |  |   |    |   |  |   |       |   |  |   | 329     |  
|Compensation expense on related party
stock transaction                             |  |              |           |            |  |          |    |          |  |              | 330     |               |  |               |     |            |  |       |       |       |  |   |        |   |  |   |    |   |  |   |       |   |  |   | 330     |  
|Foreign currency translation adjustment                                             |  |              |           |            |  |          |    |          |  |              |        |               |  |               |     |            |  |       |       |       |  |   |        |   |  |   | 7   |   |  |   |       |   |  |   | 7       |  
|Net loss                                                                            |  |              |           |            |  |          |    |          |  |              |        |               |  |               |     |            |  |       |       |       |  |   | (693    | ) |  |   |    |   |  |   |       |   |  |   | (693    | )
|                                                                                    |  |              |            |            |  |          |     |          |  |              |         |               |  |               |      |            |  |       |        |       |  |   |         |   |  |   |     |   |  |   |        |   |  |   |         |  
|Balance, December 31, 1999                                                          |  |              | 19,228,730 |            |  | $        | 192 |          |  | $            | 6,037   |               |  | $             |     |            |  | $     | (2,557 | )     |  | $ | (22,814 | ) |  | $ | 7   |   |  | $ | (977   | ) |  | $ | (20,112 | )
|Distribution to stockholders                                                        |  |              |           |            |  |          |    |          |  |              |        |               |  |               |     |            |  |       |       |       |  |   | (1,160  | ) |  |   |    |   |  |   |       |   |  |   | (1,160  | )
|Sale
of common stock in an initial
public offering, net of direct costs
of offering |  |              | 5,000,000  |            |  |          | 50  |          |  |              | 86,985  |               |  |               |     |            |  |       |       |       |  |   |        |   |  |   |    |   |  |   |       |   |  |   | 87,035  |  
|Coversion on long-term debt into
common stock                                       |  |              | 4,161,506  |            |  |          | 42  |          |  |              | 8,791   |               |  |               |     |            |  |       |       |       |  |   |        |   |  |   |    |   |  |   |       |   |  |   | 8,833   |  
|Sale
of common stock in a secondary
public offering, net of direct cost of
offering |  |              | 1,650,000  |            |  |          | 17  |          |  |              | 32,750  |               |  |               |     |            |  |       |       |       |  |   |        |   |  |   |    |   |  |   |       |   |  |   | 32,767  |  
|Acquisition of xVault                                                               |  |              | 159,996    |            |  |          | 1   |          |  |              | 2,172   |               |  |               |     |            |  |       |       |       |  |   |        |   |  |   |    |   |  |   |       |   |  |   | 2,173   |  
|Exercise of warrants                                                                |  |              | 30,000     |            |  |          |    |          |  |              | 55      |               |  |               |     |            |  |       |       |       |  |   |        |   |  |   |    |   |  |   |       |   |  |   | 55      |  
|Exercise of stock options for cash and
note receivable                              |  |              | 634,857    |            |  |          | 7   |          |  |              | 1,126   |               |  |               |     |            |  |       |       |       |  |   |        |   |  |   |    |   |  |   | (10    | ) |  |   | 1,123   |  
|Sale
of common stock through employee
stock purchase plan                           |  |              | 18,389     |            |  |          |    |          |  |              | 260     |               |  |               |     |            |  |       |       |       |  |   |        |   |  |   |    |   |  |   |       |   |  |   | 260     |  
|Income tax benefits resulting from
exercises of employee stock options              |  |              |           |            |  |          |    |          |  |              | 2,093   |               |  |               |     |            |  |       |       |       |  |   |        |   |  |   |    |   |  |   |       |   |  |   | 2,093   |  
|Reversal of deferred compensation
related to forfeited stock options                |  |              |           |            |  |          |    |          |  |              | (244    | )             |  |               |     |            |  |       | 244    |       |  |   |        |   |  |   |    |   |  |   |       |   |  |   |        |  
|Accretion of interest on stock
subscription receivable                              |  |              |           |            |  |          |    |          |  |              |        |               |  |               |     |            |  |       |       |       |  |   | 65      |   |  |   |    |   |  |   | (65    | ) |  |   |        |  
|Amortization of deferred compensation                                               |  |              |           |            |  |          |    |          |  |              |        |               |  |               |     |            |  |       | 676    |       |  |   |        |   |  |   |    |   |  |   |       |   |  |   | 676     |  
|Foreign currency translation adjustment                                             |  |              |           |            |  |          |    |          |  |              |        |               |  |               |     |            |  |       |       |       |  |   |        |   |  |   | (35 | ) |  |   |       |   |  |   | (35     | )
|Net income                                                                          |  |              |           |            |  |          |    |          |  |              |        |               |  |               |     |            |  |       |       |       |  |   | 3,168   |   |  |   |    |   |  |   |       |   |  |   | 3,168   |  
|                                                                                    |  |              |            |            |  |          |     |          |  |              |         |               |  |               |      |            |  |       |        |       |  |   |         |   |  |   |     |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2000                                                          |  |              | 30,883,478 |            |  | $        | 309 |          |  | $            | 140,025 |               |  | $             |     |            |  | $     | (1,637 | )     |  | $ | (20,741 | ) |  | $ | (28 | ) |  | $ | (1,052 | ) |  | $ | 116,876 |  
|Acquisition of UniTree                                                              |  |              | 1,466,667  |            |  |          | 15  |          |  |              | 9,201   |               |  |               |     |            |  |       |       |       |  |   |        |   |  |   |    |   |  |   |       |   |  |   | 9,216   |  
|Exercise of employee stock options                                                  |  |              | 917,793    |            |  |          | 9   |          |  |              | 1,452   |               |  |               |     |            |  |       |       |       |  |   |        |   |  |   |    |   |  |   |       |   |  |   | 1,461   |  
|Sale
of common stock through employee
stock purchase plan                           |  |              | 76,083     |            |  |          |    |          |  |              | 439     |               |  |               |     |            |  |       |       |       |  |   |        |   |  |   |    |   |  |   |       |   |  |   | 439     |  
|Income tax benefits resulting from
exercises of employee stock options              |  |              |           |            |  |          |    |          |  |              | 1,212   |               |  |               |     |            |  |       |       |       |  |   |        |   |  |   |    |   |  |   |       |   |  |   | 1,212   |  
|Reversal of deferred compensation
related to forfeited stock options                |  |              |           |            |  |          |    |          |  |              | (161    | )             |  |               |      |            |  |       | 161    |       |  |   |        |   |  |   |    |   |  |   |       |   |  |   |        |  
|Stock repurchased                                                                   |  |              | (94,200    | )          |  |          |    |          |  |              |        |               |  |               | (461 | )          |  |       |       |       |  |   |        |   |  |   |    |   |  |   |       |   |  |   | (461    | )
|Accretion of interest on stock
subscription receivable                              |  |              |           |            |  |          |    |          |  |              |        |               |  |               |     |            |  |       |       |       |  |   | 80      |   |  |   |    |   |  |   | (80    | ) |  |   |        |  
|Amortization of deferred compensation                                               |  |              |           |            |  |          |    |          |  |              |        |               |  |               |     |            |  |       | 631    |       |  |   |        |   |  |   |    |   |  |   |       |   |  |   | 631     |  
|Foreign currency translation adjustment                                             |  |              |           |            |  |          |    |          |  |              |        |               |  |               |     |            |  |       |       |       |  |   |        |   |  |   | 55  |   |  |   |       |   |  |   | 55      |  
|Net loss                                                                            |  |              |           |            |  |          |    |          |  |              |        |               |  |               |     |            |  |       |       |       |  |   | (7,550  | ) |  |   |    |   |  |   |       |   |  |   | (7,550  | )
|                                                                                    |  |              |            |            |  |          |     |          |  |              |         |               |  |               |      |            |  |       |        |       |  |   |         |   |  |   |     |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2001                                                          |  |              | 33,249,821 |            |  | $        | 333 |          |  | $            | 152,168 |               |  | $             | (461 | )          |  | $     | (845   | )     |  | $ | (28,211 | ) |  | $ | 27  |   |  | $ | (1,132 | ) |  | $ | 121,879 |  
|                                                                                    |  |              |            |            |  |          |     |          |  |              |         |               |  |               |      |            |  |       |        |       |  |   |         |   |  |   |     |   |  |   |        |   |  |   |         |  

See accompanying notes to consolidated financial statements.

58



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##### 



OTG Software, Inc.
Consolidated Statements of Cash Flows, Years Ended December 31,
(in thousands)

|                                                     |                                                                                                |                                                                                                   |                                       |                                                      |        |        |         |        |        |         |         |        |     |        |        |  
|---------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | ------------------------------------- | ---------------------------------------------------- | ------ | ------ | ------- | ------ | ------ | ------- | ------- | ------ | --- | ------ | ------ | -
|                                                     |                                                                                                |                                                                                                   |                                       |                                                      |        | 2001   |         | 2000   |        | 1999   
|                                                     |                                                                                                |                                                                                                   |                                       |                                                      |        |        |         |        |        |        
|Cash and cash equivalents at beginning of period     |                                                                                                | $                                                                                                 | 102,197                               |                                                      |        | $      | 4,296   |        |        | $       | 959     |       
|                                                     |                                                                                                |                                                                                                   |                                       |                                                      |        |        |         |        |        |         |         |       
|Cash flows from operating activities:                |                                                                                                |                                                                                                   |                                       |                                                      |        |        |         |        |        |         |         |       
|Net income (loss)                                    |                                                                                                |                                                                                                   | (7,550                                | )                                                    |        |        | 3,168   |        |        |         | (693    | )     
|                                                     | Adjustments to reconcile net income (loss) to
cash provided by (used for) operating activities |                                                                                                   |                                       |                                                      |        |        |         |        |        |         |         |        |    
|                                                     |                                                                                                | Write-off of acquired in-process research and
development                                         |                                       |                                                      | 3,700  |        |         |        | 620    |         |         |        |    |       
|                                                     |                                                                                                | Amortization of acquired intangible assets                                                        |                                       |                                                      | 1,527  |        |         |        | 554    |         |         |        |    |       
|                                                     |                                                                                                | Depreciation and amortization                                                                     |                                       |                                                      | 2,568  |        |         |        | 1,536  |         |         |        | 911 |       
|                                                     |                                                                                                | Loss on disposal of assets                                                                        |                                       |                                                      | 152    |        |         |        |       |         |         |        | 6   |       
|                                                     |                                                                                                | Stock compensation expense                                                                        |                                       |                                                      | 631    |        |         |        | 676    |         |         |        | 659 |       
|                                                     |                                                                                                | Deferred cash compensation expense                                                                |                                       |                                                      | 604    |        |         |        |       |         |         |        |    |       
|                                                     |                                                                                                | Provision for bad debts and returns                                                               |                                       |                                                      | 2,229  |        |         |        | 1,247  |         |         |        | 368 |       
|                                                     |                                                                                                | Deferred income taxes                                                                             |                                       |                                                      | (1,821 | )      |         |        | (3,368 | )       |         |        |    |       
|                                                     |                                                                                                | Changes in certain assets and liabilities, net of
assets acquired and certain liabilities assumed |                                       |                                                      |        |        |         |        |        |         |         |        |     |       
|                                                     |                                                                                                |                                                                                                   | Accounts receivable                   |                                                      |        | (6,736 | )       |        |        | (12,790 | )       |        |     | (3,751 | )     
|                                                     |                                                                                                |                                                                                                   | Other current assets                  |                                                      |        | 343    |         |        |        | (2,494  | )       |        |     | (390   | )     
|                                                     |                                                                                                |                                                                                                   | Accounts payable and accrued expenses |                                                      |        | 525    |         |        |        | 4,427   |         |        |     | 3,571  |       
|                                                     |                                                                                                |                                                                                                   | Income taxes payable                  |                                                      |        | (366   | )       |        |        | 3,236   |         |        |     | 165    |       
|                                                     |                                                                                                |                                                                                                   | Deferred revenues                     |                                                      |        | 480    |         |        |        | 3,645   |         |        |     | 1,481  |       
|                                                     |                                                                                                |                                                                                                   |                                       |                                                      |        |        |         |        |        |         |         |       
|                                                     |                                                                                                |                                                                                                   |                                       | Net cash provided by (used for)
operating activities |        |        | (3,714  | )      |        |         | 457     |        |     |        | 2,327  |  
|Cash flows from investing activities:                |                                                                                                |                                                                                                   |                                       |                                                      |        |        |         |        |        |         |         |       
|                                                     | Purchases of property and equipment                                                            |                                                                                                   |                                       | (4,969                                               | )      |        |         | (4,056 | )      |         |         | (1,182 | )  
|                                                     | Acquisition of UniTree, net of cash acquired                                                   |                                                                                                   |                                       | (5,020                                               | )      |        |         |       |        |         |         |       |    
|                                                     | Acquisition of xVault, net of cash acquired                                                    |                                                                                                   |                                       |                                                     |        |        |         | (1,731 | )      |         |         |       |    
|                                                     | Acquisition of intangible assets                                                               |                                                                                                   |                                       |                                                     |        |        |         | (500   | )      |         |         |       |    
|                                                     |                                                                                                |                                                                                                   |                                       |                                                      |        |        |         |        |        |         |         |       
|                                                     |                                                                                                |                                                                                                   |                                       | Net cash used for investing activities               |        |        | (9,989  | )      |        |         | (6,287  | )      |     |        | (1,182 | )
|Cash flows from financing activities:                |                                                                                                |                                                                                                   |                                       |                                                      |        |        |         |        |        |         |         |       
|                                                     | Net proceeds from initial public offering                                                      |                                                                                                   |                                       |                                                     |        |        |         | 87,035 |        |         |         |       |    
|                                                     | Net proceeds from secondary public offering                                                    |                                                                                                   |                                       |                                                     |        |        |         | 33,220 |        |         |         |       |    
|                                                     | Direct costs of secondary public offering                                                      |                                                                                                   |                                       | (432                                                 | )      |        |         |       |        |         |         |       |    
|                                                     | Proceeds from other issuances of common stock                                                  |                                                                                                   |                                       | 1,900                                                |        |        |         | 1,383  |        |         |         |       |    
|                                                     | Proceeds from exercise of warrants                                                             |                                                                                                   |                                       |                                                     |        |        |         | 55     |        |         |         |       |    
|                                                     | Repayments on notes payable                                                                    |                                                                                                   |                                       | (4,622                                               | )      |        |         | (5,010 | )      |         |         | (2,300 | )  
|                                                     | Borrowings on notes payable                                                                    |                                                                                                   |                                       | 4,517                                                |        |        |         |       |        |         |         | 5,000  |    
|                                                     | Repayments on long-term debt and capital lease obligations                                     |                                                                                                   |                                       | (72                                                  | )      |        |         | (1,814 | )      |         |         | (481   | )  
|                                                     | Notes receivable and amounts due from employees                                                |                                                                                                   |                                       |                                                     |        |        |         | (116   | )      |         |         |       |    
|                                                     | Borrowings under long-term debt                                                                |                                                                                                   |                                       |                                                     |        |        |         | 31     |        |         |         |       |    
|                                                     | Repayments of stockholders notes                                                              |                                                                                                   |                                       | (85                                                  | )      |        |         | (9,858 | )      |         |         | (34    | )  
|                                                     | Repurchase of common stock                                                                     |                                                                                                   |                                       | (461                                                 | )      |        |         |       |        |         |         |       |    
|                                                     | Distributions to stockholders                                                                  |                                                                                                   |                                       |                                                     |        |        |         | (1,160 | )      |         |         |       |    
|                                                     |                                                                                                |                                                                                                   |                                       |                                                      |        |        |         |        |        |         |         |       
|                                                     |                                                                                                |                                                                                                   |                                       | Net cash provided by financing activities            |        |        | 745     |        |        |         | 103,766 |        |     |        | 2,185  |  
|                                                     |                                                                                                |                                                                                                   |                                       |                                                      |        |        |         |        |        |         |         |       
|Effect of changes in foreign exchange rates          |                                                                                                |                                                                                                   | 55                                    |                                                      |        |        | (35     | )      |        |         | 7       |       
|                                                     |                                                                                                |                                                                                                   |                                       |                                                      |        |        |         |        |        |         |         |       
|Net increase (decrease) in cash and cash equivalents |                                                                                                |                                                                                                   | (12,903                               | )                                                    |        |        | 97,901  |        |        |         | 3,337   |       
|                                                     |                                                                                                |                                                                                                   |                                       |                                                      |        |        |         |        |        |         |         |       
|Cash and cash equivalents at end of period           |                                                                                                | $                                                                                                 | 89,294                                |                                                      |        | $      | 102,197 |        |        | $       | 4,296   |       
|                                                     |                                                                                                |                                                                                                   |                                       |                                                      |        |        |         |        |        |         |         |       

See accompanying notes to consolidated financial statements.

59



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##### 



OTG Software, Inc.
Notes to Consolidated Financial Statements

1.     Basis of Presentation and Nature of Operations

The accompanying consolidated financial statements include the accounts of OTG
Software, Inc. (OTG Software or OTG), and its wholly-owned subsidiaries, including UniTree
Software, Inc. (UniTree), Smart Storage, Inc. (Smart Storage), OTG Sales, Inc.
(OTG Sales) and OTG E-Mail Corp. (OTG E-Mail). All significant inter-company
balances and transactions have been eliminated in consolidation. OTG Software,
UniTree, Smart Storage, OTG Sales and OTG E-Mail are sometimes collectively
referred to as the Company. References such as we, our, and us also
refer to OTG Software and its wholly-owned subsidiaries. The statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America (GAAP) and the applicable rules and regulations of
the United States Securities and Exchange Commission (SEC).

Headquartered in Rockville, Maryland, OTG is a provider of on-line data
storage, data access and e-mail management software. Our products enable
enterprises to store, track and retrieve data over a variety of network
architectures, including the Web and storage area networks. Our products
combine storage with access and e-mail management and are available through a
worldwide network of value-added resellers (VARs), distributors and original
equipment manufacturers (OEMs) as well as directly from us. Our primary product
line is sold under the registered trademark XtenderSolutions.

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

OTG acquired Smart Storage on March 29, 2001. The acquisition of Smart Storage
was accounted for using the pooling of interests method of accounting.
Accordingly, our balance sheets, statements of operations and cash flows and
related information for all periods presented in this report have been restated
to include the results of Smart Storage as if Smart Storage had always been a
part of the Company. See Note 4(b) for additional information.

OTG acquired UniTree on July 25, 2001. The acquisition of UniTree was accounted
for using the purchase method of accounting; therefore, the assets acquired
and liabilities assumed from UniTree were adjusted to fair value as of July 25,
2001 and consolidated with our balance sheet as of that date. Activity of the
former UniTree entity is recognized in our financial results beginning July 26,
2001. See Note 4(c) for additional information.

60



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##### 



2.     Summary of Significant Accounting Policies



| | (a) |  | Cash equivalents
| | --- |  | ----------------



| | All highly liquid investments purchased within three months of maturity are
classified as cash equivalents. These investments are primarily composed of
money market securities of various financial institutions. These money
market securities represent underlying investments in commercial paper
issued by financial institutions and other companies with high credit
ratings and securities issued by or backed by the U.S. Government. Cash
equivalents are stated at amortized cost, which approximates fair value due
to the highly liquid nature and short maturities of the underlying
securities.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | Property and equipment
| | --- |  | ----------------------



| | Property and equipment are stated at cost. Property and equipment under
capital leases are stated at the present value of minimum lease payments.
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives, on a
straight-line basis. The estimated service lives used in determining
depreciation are three years for computer hardware and software, and seven
years for furniture and equipment. Property and equipment under capital
leases and leasehold improvements are amortized on a straight-line basis
over the shorter of the estimated useful life of the asset or the term of
the related lease.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | Maintenance and repairs are charged to expense as incurred; additions and
betterments are capitalized. Upon retirement or sale, the cost and related
accumulated depreciation of the disposed assets are removed and any
resulting gain or loss is credited or charged to operations.                                                                                                                                                                                                                                                                                                                                                                                                             



| | (c) |  | Goodwill and other intangible assets
| | --- |  | ------------------------------------



| | Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over five years.
The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash
flows of the acquired operation. The amount of goodwill impairment, if
any, is measured based on projected discounted future operating cash flows
using a discount rate reflecting the Companys average cost of funds. The
assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved. Other intangible assets are
amortized on a straight-line basis over the expected periods to be
benefited, generally three to five years.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | Accumulated amortization related to goodwill and other intangible assets was
$969,000 and $1.4 million, respectively, as of December 31, 2001, and
$386,000 and $421,000, respectively, as of December 31, 2000. For the years
ended December 31, 2001 and 2000, amortization expense related to goodwill
was $583,000 and $386,000, respectively. For the years ended December 31, 2001 and 2000, amortization expense related to
other intangibles was $945,000 and $421,000, respectively.                                                                                                                                                                                                                                                                                                                                                                            

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| | (d) |  | Recoverability of long-lived assets
| | --- |  | -----------------------------------



| | The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. This Statement
requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e) |  | Foreign Currency Translation
| | --- |  | ----------------------------



| | The financial statements of the Companys wholly-owned German, Indian,
United Kingdom, and Canadian subsidiaries are measured using the U.S.
dollar as the functional currency. All gains and losses are included in
determining net income (loss) for the period in which exchange rates
change. The financial statements of the Companys wholly-owned Japanese
subsidiary are measured using the Japanese yen as the functional currency.
The Japanese subsidiarys translation gains and losses are included in
other comprehensive income.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (f) |  | Comprehensive Income (Loss)
| | --- |  | ---------------------------



| | Comprehensive income or loss encompasses net income or loss and other
comprehensive income or loss, which includes all other non-owner
transactions and events that change stockholders equity. Our other
comprehensive income (loss) reflects the effect of foreign currency
translation adjustments on the accounts of our foreign operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (g) |  | Revenue recognition
| | --- |  | -------------------



| | Revenues are generated from licensing software and providing services,
including maintenance and technical support, training and consulting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | Software license revenues consist of fees for licenses of the Companys
software products generated primarily through purchase orders, contracts by
customers, or upon activation or installation. OTG sells a majority of its
software products through value-added resellers, distributors and original
equipment manufacturers. The Company offers extended payment terms to
certain customers. For such arrangements in which payment terms are within
six months, OTG recognizes the revenue when the agreement is signed, the
arrangement fee is fixed and determinable, delivery of the software has
occurred, and collectibility of the fee is considered probable. Typically
such arrangements have payment terms within six months, however, for
arrangements in which payment terms extend beyond six months, the Company
recognizes revenue when payment by the customer is made or becomes due, if
all other revenue recognition criteria have been met.

62



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| | Services revenues consist of maintenance and technical support, training
and consulting. Revenues from maintenance and technical support, which
typically consists of unspecified when-and-if-available product updates and
customer telephone support services, are recognized ratably over the term
of the service period. When all obligations under maintenance and
technical support arrangements are specifically identifiable, revenues are
recognized as the services are completed. Other services revenues include
packages of standard and custom service programs for training, software
environment analyses, custom software installations and related conversion
code package generation. These services are recognized as the related
services are provided or, in cases where
customer acceptance occurs at defined project milestones or at completion
of the project, when those milestones have been reached and satisfied or
when the customer has accepted the work.                                                                                                                                                                                                                                                                   
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | In December 1999 the SEC issued Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements (SAB 101), as amended by SAB
101A and SAB 101B, which expresses the SECs views in applying generally
accepted accounting principles to revenue recognition in financial
statements. The Company adopted the accounting and disclosure requirements
of this SAB in the fourth quarter of 2000. The application of this SAB did
not have a material impact on the Companys financial statements and
related disclosures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | The Company recognizes software license revenues and service revenues in
accordance with the American Institute of Certified Public Accountants
(AICPA) Statement of Position (SOP) No. 97-2, Software Revenue
Recognition, and related interpretations and amendments. SOP 97-2
requires that revenue recognized from the sales arrangements that include
software licenses be allocated to the various elements of the arrangement
based on the relative fair values of the constituent elements, such as
maintenance and technical support, training, and consulting services. The
Company follows the residual method of accounting under SOP 97-2. Under
the residual method, the aggregate arrangement fee is allocated to each of
the undelivered elements in an amount equal to their fair values, with the
residual arrangement fee allocated to the delivered elements. The relative
fair value of the delivered elements included in the Companys
multi-element sales arrangements is based on vendor specific objective
evidence (VSOE). The Company determines VSOE of the fair values of
maintenance and technical support based on annual renewal rates provided to
customers and for consulting services based on standard hourly rates.



| | (h) |  | Cost of revenues
| | --- |  | ----------------



| | The cost of software license revenues consists primarily of royalties,
media, manuals and distribution costs. The cost of services revenues
consists primarily of personnel-related costs.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | (i) |  | Deferred revenues
| | --- |  | -----------------



| | Deferred revenues primarily relate to billings and payments made for
maintenance and technical support prior to the performance of the services.
Deferred revenues classified as other liabilities on the Companys balance
sheets relate to advanced payments for maintenance and technical support
that are expected to be recognized as revenue beyond one year from the
balance sheet date.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (i) |  | Software development costs
| | --- |  | --------------------------



| | Software development costs are accounted for in accordance with SFAS No.
86, Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed. Under this standard, capitalization of software
development costs begins upon the establishment of technological
feasibility, subject to net realizable value considerations. To date, the
period between achieving technological feasibility and the general
availability of such software has been short; therefore, software
development costs qualifying for capitalization have been immaterial.
Accordingly, the Company has not capitalized any software development costs
and has charged all such costs to research and development expense.
Research and development costs are expensed as incurred.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (k) |  | Advertising costs
| | --- |  | -----------------



| | Advertising costs are expensed as incurred. Total advertising expenses were
approximately $339,000, $907,000 and $552,000 for 2001, 2000 and 1999,
respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (l) |  | Stock-based compensation
| | --- |  | ------------------------



| | The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations
including FASB Interpretation No. 44, Accounting for Certain Transactions
involving Stock Compensation an interpretation of APB Opinion No. 25
issued in March 2000, to account for its fixed plan stock options. Under
this method, compensation expense is recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise
price. SFAS No. 123, Accounting for Stock-Based Compensation,
established accounting and disclosure requirements using a fair value-based
method of accounting for stock-based employee compensation plans. As
allowed by SFAS No. 123, the Company has elected to continue to apply the
intrinsic value-based method of accounting described above, and has adopted
the disclosure requirements of SFAS No. 123.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (m) |  | Net income (loss) and pro forma net income (loss) per common
share
| | --- |  | ------------------------------------------------------------------



| | In connection with its initial public offering, OTG converted to an entity
subject to tax as a regular corporation under the Internal Revenue Code.
Accordingly, the accompanying pro forma statement of operations data has
been prepared as if OTG were treated as an entity subject to tax as a
regular corporation for federal and state income tax purposes from
January 1, 1999. Smart Storage was subject to tax as a regular corporation for all
periods presented. See related information under Note 9.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

64



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| | The Company computes net income (loss) and pro forma net income (loss) per
common share in accordance with SFAS No. 128, Earnings Per Share (SFAS
128) and SAB No. 98 (SAB 98). Under the provisions of SFAS 128 and SAB 98,
basic net income (loss) and pro forma net income (loss) per common share is
computed by dividing the net income (loss) or pro forma net income (loss)
available to common stockholders for the period by the weighted average
number of shares of common stock outstanding during the period. Net income
(loss) and pro forma net income (loss) per share on a diluted basis is
computed by dividing the net income (loss) or pro forma net income (loss)
for the period by the weighted average number of common and dilutive common
stock equivalent shares outstanding during the period.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | Certain stock options and warrants outstanding were not included in the net
income (loss) and pro forma net income (loss) per common share on a diluted
basis as such amounts would be anti-dilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



| | (n) |  | Recent Accounting Pronouncements
| | --- |  | --------------------------------



| | In June 2001 the FASB issued SFAS No. 141, Business Combinations, (SFAS No.
141) and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142).
SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations. SFAS No. 141 specifies criteria that intangible
assets acquired in a business combination must meet to be recognized and
reported separately from goodwill. SFAS No. 142 will require that goodwill
and intangible assets with indefinite useful lives no longer be amortized,
but instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible
assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121 and subsequently, SFAS No. 144
after its adoption.                                                                                                                                                              
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and
SFAS No. 142 is effective January 1, 2002. Goodwill and intangible assets
determined to have an indefinite useful life acquired in a purchase
business combination completed after June 30, 2001, but before SFAS No. 142
is adopted in full, are not amortized. Goodwill and intangible assets
acquired in business combinations completed before
July 1, 2001 continue to be amortized and tested for impairment prior to
the full adoption of SFAS No. 142. Accordingly, the goodwill related to
the Unitree acquisition in July 2001 has not been amortized, and the
goodwill related to the xVault in April 2000 has been amortized through
December 31, 2001.                                                                                                                                                                                                                                                                                                                                                            
|
| | Upon adoption of SFAS No. 142, the Company is required to evaluate its
existing intangible assets and goodwill that were acquired in purchase
business combinations, and to make any necessary reclassifications in order
to conform with the new classification criteria in SFAS No. 141 for
recognition separate from goodwill. The Company will be required to
reassess the useful lives and residual values of all intangible assets
acquired, and make any necessary amortization period adjustments by the end
of the first interim period after adoption. If an intangible asset is
identified as having an indefinite useful life, the Company will be
required to test the intangible asset for impairment in accordance with the
provisions of SFAS No. 142 within the first interim period. Impairment is
measured as the excess of carrying value over the fair value of an
intangible asset with an indefinite life. Any impairment loss will be
measured as of the date of adoption and recognized as the cumulative effect
of a change in accounting principle in the first interim period.

65



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| | In connection with SFAS No. 142s transitional goodwill impairment
evaluation, the Statement requires the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of the date of
adoption. To accomplish this, the Company must identify its reporting
units and determine the carrying value of each reporting unit by assigning
the assets and liabilities, including the existing goodwill and intangible
assets, to those reporting units as of January 1, 2002. The Company will
then have up to six months from January 1, 2002 to determine the fair value
of each reporting unit and compare it to the carrying amount of the
reporting unit. To the extent the carrying amount of a reporting unit
exceeds the fair value of the reporting unit, an indication exists that the
reporting unit goodwill may be impaired and the Company must perform the
second step of the transitional impairment test. The second step is
required to be completed as soon as possible, but no later than the end of
the year of adoption. In the second step, the Company must compare the
implied fair value of the reporting unit goodwill with the carrying amount
of the reporting unit goodwill, both of which would be measured as of the
date of adoption. The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit to all of the assets
(recognized and unrecognized) and liabilities of the reporting unit in a
manner similar to a purchase price allocation, in accordance with SFAS No.
141. The residual fair value after this allocation is the implied fair
value of the reporting unit goodwill. Any transitional impairment loss
will be recognized as the cumulative effect of a change in accounting
principle in the Companys statement of income.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | As of the date of adoption of SFAS No. 142, the Company expects to have
unamortized goodwill in the amount of $12.7 million and unamortized
identifiable intangible assets of $5.3 million, all of which will be
subject to the transition provisions of SFAS No. 142. Because of the
extensive effort needed to comply with adopting SFAS No. 141 and No. 142,
it is not practicable to reasonably estimate the
impact of adopting the Statements on the Companys financial statements at
the date of this report, including whether it will be required to recognize
any transitional impairment losses as the cumulative effect of a change in
accounting principle.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | In August 2001 the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This Statement requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future net cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the fair value of
the asset. SFAS No. 144 requires companies to separately report
discontinued operations and extends that reporting to a component of an
entity that either has been disposed of (by sale, abandonment, or in a
distribution to owners) or is classified as held for sale. Assets to be
disposed of are reported at the lower of the carrying amount or fair value
less costs to sell. The Company is required to adopt SFAS No. 144 on
January 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

66



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| | (o) |  | Income taxes
| | --- |  | ------------



| | Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (p) |  | Use of estimates
| | --- |  | ----------------



| | The preparation of financial statements in conformity with GAAP requires
management to make certain assumptions and estimates that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the financial statements and the
reported amount of revenues and expenses during the reporting period.
Significant estimates include reserves for uncollectible accounts
receivable, deferred tax asset valuation allowances, accounting for loss
contingencies, and recoverability of goodwill and acquired intangible
assets. Actual results could differ from those estimates.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (o) |  | Reclassifications
| | --- |  | -----------------



| | Certain reclassifications have been made in the 2000 and 1999 financial
statements to
conform to the 2001 presentation.
| | -----------------------------------------------------------------------------------------------------------------------

3.     Public Stock Offerings

On March 10, 2000 the Company issued 5,000,000 shares of common stock, $0.01
par value, in an initial public offering. The transaction generated net
proceeds to the Company of $87.0 million after direct costs of the offering
(the IPO). A portion of the net proceeds of the IPO was used to repay all
outstanding balances under the Companys commercial credit facility ($5.0 million), its senior subordinated notes ($4.5 million) and certain obligations
to stockholders and other related parties ($8.7 million).

On November 17, 2000 the Company issued 1,650,000 shares of common stock in a
follow-on public offering, generating net proceeds to the Company of $32.8
million after considering the direct costs of the offering (including
approximately $0.4 million of direct costs that were unpaid but accrued as of December 31, 2000).

67



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4.     Acquisitions



| | (a) |  | xVault Acquisition
| | --- |  | ------------------



| | On April 25, 2000 OTG Software acquired xVault for consideration consisting
of a cash payment of $1.75 million and 159,996 shares of the Companys
common stock. xVault is a provider of email management and archiving
solutions. xVaults products provide organizations with tools to
enforce email policies, increase employee productivity, comply with
statutory and regulatory mandates and secure electronic data against loss or
espionage. xVault has since been renamed OTG E-Mail Corp.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | The cash component of the acquisition price was paid by OTG Software from
cash on hand. The value of the common stock component of the consideration
was determined to be $2.2 million based on an analysis prepared by a
third-party appraiser. The common stock component of the consideration was
issued subject to certain restrictions on sale of these shares. The
acquisition was accounted for using the purchase method and, accordingly,
activity related to the former xVault entity is included in the Companys
financial statements beginning April 26, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | The Company acquired net liabilities from xVault of approximately $72,000
and incurred direct costs associated with the acquisition of approximately
$325,000. The Company recorded goodwill of $2.9 million and other intangible
assets totaling $804,000 resulting from the acquisition. The other
intangible assets include developed technology, assembled workforce and
acquired customer base. The goodwill is being amortized over five years and
the other intangible assets are being amortized over lives ranging from
three to four years. In addition, the Company recognized a write-off of
$620,000 related to in-process research and development resulting from the
acquisition. In-process research and development reflects the portion of the
cost of acquisition representing technology that did not meet the accounting
definition of completed technology. As such, under generally accepted
accounting principles, the amount allocated to in-process research and
development is required to be immediately charged against earnings. The
assessment of in-process research and development involved analyzing the
discounted cash flows associated with each of the technologies that were
under development at the time of the acquisition, including estimated cash
flows from successful completion and cash flows necessary to complete each
project. The resulting cash flows are adjusted for certain risks before
being discounted to present value. Risks taken into consideration include
estimates of market size, timing of completion, technical risks, product
pricing and competitive factors for each of the acquired technologies. The
discount rate used reflects xVaults estimated weighted average cost of
capital plus a risk premium related to the successful completion of the
in-process research and development projects. The acquired technologies were
in various stages of
completion ranging from 13% to 43% of completion, with estimated completion
dates no later than 2001. A third-party appraiser was used to determine the
fair value of the assets (including intangible assets) and liabilities
acquired from xVault as well as the amount of acquired in-process research
and development.

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The following unaudited pro forma financial information was prepared as if
the acquisition occurred on January 1, 1999. Activity of the former xVault
entity is recognized in our actual financial results for the entire year of
2001. This information excludes the write-off of in-process research and
development discussed above. In the opinion of OTG Softwares management,
all adjustments necessary to present fairly such information have been made
based on the terms and structure of the transaction. The following
information is presented for illustrative purposes only and does not
necessarily represent the financial results that would have resulted had the
acquisition actually occurred on the date indicated nor are the results
indicative of the future results of operations or financial condition of OTG
Software on a consolidated basis.

|                            |  |                                                      |        |      |  |   |        |  
|--------------------------- |  | ---------------------------------------------------- | ------ | ---- |  | - | ------ | -
|                            |  | Years ended December 31,                            
|                            |  |                                                     
|                            |  | 2000                                                 |        | 1999
|                            |  |                                                      |        |     
|                            |  | (in
thousands, except per share
amounts) (unaudited)
|Revenues                    |  | $                                                    | 52,464 |      |  | $ | 32,978 |  
|Pro forma net income (loss) |  |                                                      | 3,237  |      |  |   | (2,427 | )
|                            |  |                                                      |        |      |  |   |        |  
|Pro forma EPS-Basic         |  | $                                                    | 0.12   |      |  | $ | (0.13  | )
|                            |  |                                                      |        |      |  |   |        |  
|Pro forma EPS-Diluted       |  | $                                                    | 0.11   |      |  | $ | (0.13  | )
|                            |  |                                                      |        |      |  |   |        |  

The information presented above is based on the Company being treated as an
entity subject to income taxes as a regular corporation. See Note 2(m) and
Note 9 for related information.



|(b) |  | Smart Storage Acquisition
|--- |  | -------------------------

On March 29, 2001 we acquired Smart Storage in a transaction accounted
for using the pooling of interests method of accounting. Pursuant to the
merger agreement with Smart Storage, we issued 3,081,108 shares of our
common stock, $0.01 par value per share, to the former Smart Storage
shareholders as merger consideration. Of the shares issued, 308,087 are
being held in escrow for a period of twelve months to secure certain
indemnification obligations of certain former Smart Storage shareholders.
In addition, we reserved 468,219 shares of common stock for issuance upon
the exercise of the outstanding options to purchase Smart Storage common
stock that we assumed pursuant to the terms of the merger agreement. In
connection with our acquisition of Smart Storage we incurred merger and
acquisition related expenses of approximately $1.6 million in the first
quarter of 2001. Included in the merger and acquisition related expenses
was $240,000 related to employee termination benefits. At December 31, 2001
there was no remaining liability for such benefits.

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

69



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For the period January 1, 2001 through March 28, 2001, Smart Storages
revenues and net loss were $1.8 million and $1.9 million, respectively.
Smart Storages stand-alone results for this period include merger-related
costs (e.g., attorneys and accountants fees) of approximately $0.9
million. For the year ended December 31, 2000 Smart Storages revenues and
net loss were $8.5 million and
$2.4 million, respectively. For the year ended December 31, 1999 Smart
Storages revenues and net income were $7.5 million and $0.8 million,
respectively. As stated above, the Companys results and related
information for all periods presented in this report reflect the activity
of Smart Storage as if Smart Storage had always been a part of the Company.
The Smart Storage results described above do not necessarily represent the
results that would have occurred if the merger had taken place at a date
earlier than the actual consummation date of the merger.



|(c) |  | UniTree Acquisition
|--- |  | -------------------

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

The merger consideration for UniTree consisted of 1,466,667 shares of the
Companys common stock valued at $9.2 million and an additional $6.0
million in cash. The Company also issued $4.8 million in promissory notes
bearing interest at 7% per annum, payable in two equal installments of $2.4
million on July 25, 2002 and January 25, 2003, subject to the continued
employment of certain UniTree employees. Of the $4.8 million, $2.6 million
has been allocated as additional purchase price, resulting in an aggregate
purchase price of $17.8 million. The remaining $2.2 million of the
promissory notes represents a compensatory arrangement that is being
recorded ratably over the eighteen-month term of the note increasing the
note payable balance reflected in the financial statements. As of December
31, 2001 the note payable balance was approximately $3.2 million.

The value of the 1,466,667 shares of our common stock issued to the former
stockholders of UniTree was determined based on the average market price of
a share of the Companys common stock over the three day period before the
date of the acquisition. Of the 1,466,667 shares issued, 266,667 shares are
to be held in escrow for a period of time not to exceed three years to
secure certain indemnification obligations of the former UniTree
stockholders. In addition, the terms of the merger agreement provided for
additional consideration of up to 222,222 shares of common stock and $2.0
million in cash to be paid to certain of the former UniTree stockholders
upon the achievement of specific performance objectives in 2001. The
Company believes no further consideration is due under the agreement, as
these objectives were not achieved. The achievement of these objectives is
subject to further analysis and audit at the option of certain former
UniTree stockholders.

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The following table summarizes the estimated fair value of the assets
acquired, including intangible assets for which OTG has obtained
third-party valuations, and liabilities assumed at the date of the
acquisition of UniTree.

|                                  |                           |                  |        |        |  
|--------------------------------- | ------------------------- | ---------------- | ------ | ------ | -
|                                  |                           | At July 25, 2001
|                                  |                           |                 
|                                  |                           | (in thousands)  
|Current assets                    |                           | $                | 1,527  |       
|Property and equipment            |                           |                  | 95     |       
|Goodwill                          |                           |                  | 10,737 |       
|In-process research & development |                           |                  | 3,700  |       
|Intangible assets                 |                           |                  | 5,000  |       
|                                  |                           |                  |        |       
|                                  | Total assets acquired     |                  |        | 21,059 |  
|Current liabilities               |                           |                  | (1,555 | )     
|Long-term liabilities             |                           |                  | (1,661 | )     
|                                  |                           |                  |        |       
|                                  | Total liabilities assumed |                  |        | (3,216 | )
|                                  |                           |                  |        |       
|                                  | Aggregate purchase price  |                  | $      | 17,843 |  
|                                  |                           |                  |        |       

The $5.0 million intangible asset represents acquired technology with an
estimated useful life of five years. The Company recognized a write-off in
2001 of $3.7 million related to in-process research and development
resulting from the acquisition. In-process research and development
reflects the portion of the cost of acquisition representing technology
that did not meet the accounting definition of completed technology. As
such, under generally accepted accounting principles, the amount allocated
to in-process research and development is required to be immediately
charged against earnings. The assessment of in-process research and
development involved analyzing the discounted cash flows associated with
each of the technologies that were under development at the time of the
acquisition, including estimated cash flows from successful completion and
cash flows necessary to complete each project. The resulting cash flows are
adjusted for certain risks before being discounted to present value. Risks
taken into consideration include estimates of market size, timing of
completion, technical risks, product pricing and competitive factors for
each of the acquired technologies. The discount rate used reflects
UniTrees estimated weighted average cost of capital plus a risk premium
related to the successful completion of the in-process research and
development projects. The acquired technologies were in various stages of
completion ranging from 62% to 90% of completion, with estimated completion
dates no later than 2002. Third-party appraisers were used to determine the
fair value of the assets (including intangible assets) and liabilities
acquired from UniTree as well as the amount of acquired in-process research
and development. Of the $10.7 million of goodwill, we do not expect any of
the amount to be deductible for tax purposes.

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The unaudited pro forma financial information following this paragraph was
prepared as if the acquisition of UniTree occurred as of the beginning of
each period presented. This information includes a one-time charge of stock
compensation expense of $2.2 million related to the sale of shares to
certain UniTree employees in June 2001 prior to the acquisition. In
addition, this information includes an adjustment of $1.6 million and $2.8
million for the years ended December 31, 2001 and December 31, 2000,
respectively, of amortization expenses associated with certain intangible
assets and other expenses associated with the UniTree acquisition. This
information excludes the write-off of in-process research and development
discussed above. In the opinion of the Companys management, all
adjustments necessary to present fairly such information have been made
based on the terms and structure of the transaction. The table of
information following this paragraph is presented for illustrative purposes
only and does not necessarily represent the financial results that would
have resulted had the acquisition actually occurred on the date indicated
nor are the results indicative of the future results of operations or
financial condition of the Company on a consolidated basis.

|                            |  |                                                     |        |      |  |   |        | 
|--------------------------- |  | --------------------------------------------------- | ------ | ---- |  | - | ------ | 
|                            |  | Year Ended                                         
|                            |  | December 31,                                       
|                            |  |                                                    
|                            |  | 2001                                                |        | 2000
|                            |  |                                                     |        |     
|                            |  | (in thousands, exceptper share amounts) (unaudited)
|Revenues                    |  | $                                                   | 66,229 |      |  | $ | 54,491 | 
|Pro forma net income (loss) |  |                                                     | (6,554 | )    |  |   | 1,172  | 
|                            |  |                                                     |        |      |  |   |        | 
|Pro forma EPS  Basic       |  | $                                                   | (0.20  | )    |  | $ | 0.04   | 
|                            |  |                                                     |        |      |  |   |        | 
|Pro forma EPS  Diluted     |  | $                                                   | (0.20  | )    |  | $ | 0.04   | 
|                            |  |                                                     |        |      |  |   |        | 

The information presented above is based on the Company being treated as an
entity subject to income taxes as a regular corporation. See Note 2(m) and
Note 9 for related information.

5.     Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, and
accounts payable approximates the fair values due to the short-term nature of
these instruments. The carrying amount of the notes payable approximates the
fair values based on interest rates currently offered to the Company for debt
instruments of comparable maturities. These estimates are subjective
in nature
and involve uncertainties and matters of significant judgment and, therefore,
cannot be determined with precision. Changes in assumptions could significantly
affect the estimates.

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6.     Other Current Assets

Other current assets include other (non-trade) accounts receivable and prepaid
expenses.

7.     Property and Equipment

Property and equipment consists of the following:

|                                               |  |                |        |      |  |   |        |  
|---------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                                               |  | December 31,  
|                                               |  |               
|                                               |  | 2001           |        | 2000
|                                               |  |                |        |     
|                                               |  | (in thousands)
|Computer hardware                              |  | $              | 4,983  |      |  | $ | 3,729  |  
|Computer software                              |  |                | 3,074  |      |  |   | 1,737  |  
|Furniture, fixtures and office equipment       |  |                | 2,248  |      |  |   | 1,422  |  
|Leasehold improvements                         |  |                | 4,179  |      |  |   | 411    |  
|                                               |  |                |        |      |  |   |        |  
|                                               |  |                | 14,484 |      |  |   | 7,299  |  
|Less accumulated depreciation and amortization |  |                | (4,338 | )    |  |   | (2,555 | )
|                                               |  |                |        |      |  |   |        |  
|Property and equipment, net                    |  | $              | 10,146 |      |  | $ | 4,744  |  
|                                               |  |                |        |      |  |   |        |  

Property and equipment under capital leases at December 31, 2001 and December
31, 2000 was $605,000 and $196,000, respectively. The related accumulated
amortization as of December 31, 2001 and 2000 was $141,000 and $88,000,
respectively.

8.     Other noncurrent assets, net

These assets include amounts representing security deposits for leased
facilities and the long-term portion of a prepaid software maintenance
agreement.

9.     Income taxes

Prior to our IPO in March 2000, OTG had elected to be treated as a Subchapter
S corporation for federal and state income tax purposes. Under Subchapter S of
the Internal Revenue Code, OTGs taxable income or loss was reported by the
stockholders and, accordingly, no federal or state income taxes were provided
for in the financial statements prior to the Companys IPO. In connection with
the Companys IPO, OTG ceased to be a Subchapter S company. OTG is now subject
to federal and state income taxes. Smart Storage was subject to tax as a
regular corporation for all periods presented.

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Total income taxes for the years ended December 31, 2001, 2000, and 1999 were
allocated as follows:

|                                                                 |  |                         |        |      |  |      |        |   |  |   |     | 
|---------------------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | --- | 
|                                                                 |  | Year Ended December 31,
|                                                                 |  |                        
|                                                                 |  | 2001                    |        | 2000 |  | 1999
|                                                                 |  |                         |        |      |  |     
|                                                                 |  | (in thousands)         
|Income from continuing operations                                |  | $                       | (1,554 | )    |  | $    | (166   | ) |  | $ | 105 | 
|Stockholders equity, for tax benefit
of stock options exercised |  |                         | (2,093 | )    |  |      | (1,212 | ) |  |   |    | 
|                                                                 |  |                         |        |      |  |      |        |   |  |   |     | 
|                                                                 |  | $                       | (3,647 | )    |  | $    | (1,378 | ) |  | $ | 105 | 
|                                                                 |  |                         |        |      |  |      |        |   |  |   |     | 

The components of the Companys provision for income taxes is summarized as
follows:

|                    |         |                         |        |                         |        |      |      |        |        |   |     |    |     | 
|------------------- | ------- | ----------------------- | ------ | ----------------------- | ------ | ---- | ---- | ------ | ------ | - | --- | -- | --- | 
|                    |         |                         |        | Year Ended December 31,
|                    |         |                         |        |                        
|                    |         |                         |        | 2001                    |        | 2000 |      | 1999  
|                    |         |                         |        |                         |        |      |      |       
|                    |         |                         |        | (in thousands)         
|Current provision:  |         |                         |        |                         |        |      |      |        |        |   |     |   
|                    | Federal |                         | $      | 43                      |        |      | $    | 2,601  |        |   | $   | 80 |    
|                    | State   |                         |        | 130                     |        |      |      | 576    |        |   |     | 1  |    
|                    | Foreign |                         |        | 94                      |        |      |      | 25     |        |   |     | 24 |    
|                    |         |                         |        |                         |        |      |      |        |        |   |     |   
|                    |         | Total current provision |        |                         | 267    |      |      |        | 3,202  |   |     |    | 105 | 
|Deferred provision: |         |                         |        |                         |        |      |      |        |        |   |     |   
|                    | Federal |                         |        | (1,393                  | )      |      |      | (2,758 | )      |   |     |   |    
|                    | State   |                         |        | (428                    | )      |      |      | (610   | )      |   |     |   |    
|                    |         |                         |        |                         |        |      |      |        |        |   |     |   
|                    |         | Total deferred benefit  |        |                         | (1,821 | )    |      |        | (3,368 | ) |     |    |    | 
|                    |        
|                    |         | $                       | (1,554 | )                       |        | $    | (166 | )      |        | $ | 105 |   
|                    |         |                         |        |                         |        |      |      |        |        |   |     |   

As of December 31, 2001 the Company has net operating losses (NOL)
carryforwards for federal and state income tax purposes of approximately $6.2
million and $4.8 million respectively, which begin expiring in 2019. In
addition, at December 31, 2001, the Company has research and development
carryfowards of approximately $1.2 million. The utilization of approximately
$5.3 million of the NOLs is limited pursuant to Internal Revenue Code Section
382 as a result of prior ownership changes.

United States taxes have not been provided on the earnings of foreign
subsidiaries since the subsidiaries earnings are considered permanently
reinvested outside the United States.

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Significant components of the Companys deferred tax assets and liabilities
consist of the following:

|                    |                                                                        |   |                         |        |      |   |     |        |  
|------------------- | ---------------------------------------------------------------------- | - | ----------------------- | ------ | ---- | - | --- | ------ | -
|                    |                                                                        |   | Year Ended December 31,
|                    |                                                                        |   |                        
|                    |                                                                        |   | 2001                    |        | 2000
|                    |                                                                        |   |                         |        |     
|                    |                                                                        |   | (in thousands)         
|Deferred
tax assets |                                                                        |   |                         |        |      |   |     |       
|                    | Net operating losses (US)                                              | $ | 2,267                   |        |      | $ | 964 |       
|                    | Accrued compensation costs and other
expenses not currently deductible |   |                         | 1,454  |      |   |     | 1,206  |  
|                    | Credit for increasing research and
experimentation expenditures        |   |                         | 1,232  |      |   |     | 425    |  
|                    | Allowances for doubtful accounts and sales
returns                     |   |                         | 1,029  |      |   |     | 599    |  
|                    | Deferred software and services revenues                                |   |                         | 554    |      |   |     | 373    |  
|                    | Foreign tax credits and net operating losses                           |   |                         | 299    |      |   |     | 166    |  
|                    | Other credits and carryovers                                           |   |                         |       |      |   |     | 46     |  
|                    |                                                                        |   |                         |        |      |   |     |       
|                    | Total deferred tax asset                                               |   |                         | 6,835  |      |   |     | 3,779  |  
|                    | Valuation allowance on foreign tax credits
and net operating losses    |   |                         | (299   | )    |   |     | (166   | )
|                    |                                                                        |   |                         |        |      |   |     |       
|                    | Deferred tax asset, net of allowance                                   |   |                         | 6,536  |      |   |     | 3,613  |  
|                    | Deferred tax liability:                                                |   |                         |        |      |   |     |        |  
|                    | Acquired intangible assets                                             |   |                         | (1,918 | )    |   |     | (245   | )
|                    | Other deferred tax liabilities                                         |   |                         | (33    | )    |   |     |       |  
|                    |                                                                        |   |                         |        |      |   |     |       
|                    | Total deferred tax liability                                           |   |                         | (1,951 | )    |   |     | (245   | )
|                    |                                                                        |   |                         |        |      |   |     |       
|                    | Net deferred tax asset                                                 |   |                         | 4,585  |      |   |     | 3,368  |  
|                    | Less: current portion, deferred tax assets                             |   |                         | (2,997 | )    |   |     | (2,066 | )
|                    |                                                                        |   |                         |        |      |   |     |       
|                    | Noncurrent portion, deferred tax assets                                |   | $                       | 1,588  |      |   | $   | 1,302  |  
|                    |                                                                        |   |                         |        |      |   |     |       

In assessing the realization of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependant upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. In order to
fully realize the deferred tax asset, the Company will need to generate future
taxable income of approximately $11.8 million. Based upon the projections for
future taxable income over the periods for which the deferred tax assets are
deductible, management believes that it is more likely than not that the
Company will realize the benefit of these deductible differences, excluding net
operating losses and certain tax credits related to foreign operations.
Management has recorded a valuation allowance of $299,000 and $166,000 as of
December 31, 2001 and December 31, 2000, respectively, against the net
operating losses and tax credits from foreign operations. The amount of the
deferred tax assets considered realizable, however, could be reduced in the
near term if estimates of future taxable income are reduced.

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The differences between the expected tax provision based on the federal income
statutory rate and the actual provision are presented in the table below:

|                                  |                                                                           |  |              |      |      |  |      |       |  
|--------------------------------- | ------------------------------------------------------------------------- |  | ------------ | ---- | ---- |  | ---- | ----- | -
|                                  |                                                                           |  | December 31,
|                                  |                                                                           |  |             
|                                  |                                                                           |  | 2001         |      | 2000
|                                  |                                                                           |  |              |      |     
|Federal statutory rate            |                                                                           |  | (34.0        | )%   |      |  | 34.0 | %    
|Increases (decreases) related to: |                                                                           |  |              |      |      |  |      |      
|                                  | State income taxes                                                        |  |              | (1.3 | )    |  |      | 6.4   |  
|                                  | In-process research and development write-off                             |  |              | 16.2 |      |  |      | 7.3   |  
|                                  | Expenses, principally related to stock-based
compensation, not deductible |  |              | 8.1  |      |  |      | 10.9  |  
|                                  | Research and development credits                                          |  |              | (8.0 | )    |  |      | (16.4 | )
|                                  | Benefit from termination of Subchapter S status                           |  |              |     |      |  |      | (40.0 | )
|                                  | Increase in valuation allowance on foreign NOLs                           |  |              |      |      |  |      | (2.0  | )
|                                  | Other credits and adjustments                                             |  |              | 1.9  |      |  |      | (5.7  | )
|                                  |                                                                           |  |              |      |      |  |      |      
|                                  |                                                                           |  | (17.1        | )%   |      |  | (5.5 | )%   
|                                  |                                                                           |  |              |      |      |  |      |      

10.     Notes Payable and Long-Term Debt

In October 2000 the Company amended and restated its commercial credit facility
with PNC Bank. Under the amended loan agreement, the maximum available
borrowing under the revolving line of credit was increased from $5 million to
$10 million, including a $5 million sub-line of credit for establishing letters
of credit. As of December 31, 2001 OTG had a $2.8 million letter of credit
established under this sub-line of credit. The maximum borrowings under the
loan agreement at any time, including amounts under the revolving line of
credit and the sub-line of credit, are limited to the lesser of $10 million or
80% of qualified accounts receivable, as defined in the agreement. Borrowings
under the line of credit bear interest at the prime rate or LIBOR rate plus
2.5%, as selected by the Company, and are secured by certain assets of the
Company.

On June 9, 1998, the Company purchased from a former stockholder all of his
shares for $11.5 million. The Company recorded this transaction as the
re-purchase and retirement of treasury stock. The Company paid $6.0 million in
cash and issued a note with a face value of $5.5 million and a 10% rate of
interest to the former stockholder. The Company recorded the note at its face
value, which approximated the fair value at the date of issuance. In January
2000 a payment of $1.3 million was made on the note. In March 2000 the Company
retired the note with a final payment of $4.2 million.

On June 9, 1998, the Company borrowed $12.0 million by issuing notes to fund
payments required under the stock re-purchase as described above, fund
distributions to other stockholders, and to provide working capital to the
Company. The notes were made up of convertible subordinated notes amounting to
$7.6 million and senior subordinated notes amounting to $4.4 million. In March
2000 subsequent to its IPO, the Company retired all of its outstanding senior
subordinated notes. At retirement, the principal amount of these notes was $4.4
million and the related accrued interest was $0.1 million. In addition, in
March 2000 and subsequent to the Companys IPO, all of the Companys
outstanding convertible subordinated notes were converted into 4,161,506 shares
of common stock. Prior to conversion the principal amount of these notes was $7.6
million and the related accrued interest was $1.2 million; the Company was not
obligated to pay any accrued but unpaid interest on the notes at the time of
conversion.

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Pursuant to an agreement with the Companys principal stockholder, the Company
repaid promissory notes with an aggregate principal amount of $3.0 million in
March 2000. These notes had terms similar to the Companys senior subordinated
notes.

As of December 31, 2000 we had interest-bearing debt outstanding of
approximately $85,000 relating to a note payable to a shareholder, bearing 10%
interest annually, and $450,000 in notes payable relating to Smart Storages
acquisition of certain intangible assets in 2000, bearing 9% interest annually.
The note payable to the shareholder was paid in full in October 2001 and the
notes payable related to certain intangible assets is due in two equal
installments of $225,000 on January 31, 2001 and 2002.

As of December 31, 2001 we had interest-bearing debt outstanding of
approximately $3.2 million, representing the accreted value of notes payable to
certain shareholders pursuant to the terms of the acquisition agreement with
UniTree (see Note 4(c)). In addition, the remaining balance on the note
payable related to Smart Storages acquisition of certain intangible assets in
2000 was $225,000 as of December 31, 2001.

In December 2001 the Company received $120,000 in economic development funds
from the State of Maryland. These funds are secured by a note payable to
Maryland for the face amount of $120,000, bearing interest at 5% annually.
Upon the achievement of certain objectives over the term of the note, portions
or all of the note balance will be forgiven. The objectives primarily relate
to the hiring of a specified number of employees during the term of the
arrangement. If the objectives are not met, quarterly principal and interest
payments become due and payable beginning October 15, 2004, continuing until
the balance is paid off no later than September 15, 2008.

11.     Employee Retirement Plans

As of December 31, 2001 the Company has one active 401(k) Retirement Plan (the
401(k) Plan) covering substantially all its employees. Participants in the
401(k) Plan may elect to defer up to 15% of their compensation. The Company may
make a discretionary matching contribution. The Company will match 25% of
employee contributions up to 6% of compensation.

Smart Storage has a 401(k) savings plan that became inactive in December 2001
and will be merged into the Companys 401(k) Plan in 2002. Under this plan,
Smart Storage generally matched 20% of employee contributions to the plan up to
a maximum of 5% of gross wages.

The amounts recorded as 401(k) match expense for 2001, 2000 and 1999 were
approximately $255,000, $197,000 and $135,000, respectively.

The Company also has a benefit plan covering certain senior executives,
contributions to which are discretionary. The Company made no contributions to this plan in 2001, 2000 or
1999.

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12.     Commitments and Contingencies



| |  | (a)    Leases                                                                                                                                                                                                                                                              
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company leases its facilities and certain office equipment under capital
and non-cancelable operating leases. Future minimum lease payments under
capital leases and non-cancelable operating leases with initial terms of one
year or more consisted of the following:

|                                                  |  |                |     |           |  |   |        | 
|------------------------------------------------- |  | -------------- | --- | --------- |  | - | ------ | 
|                                                  |  | Capital        |     | Operating
|Year                                              |  | leases         |     | leases   
|                                                  |  |                |     |          
|                                                  |  | (in thousands)
|2002                                              |  | $              | 117 |           |  | $ | 3,625  | 
|2003                                              |  |                | 98  |           |  |   | 3,338  | 
|2004                                              |  |                | 98  |           |  |   | 3,010  | 
|2005                                              |  |                | 98  |           |  |   | 2,906  | 
|2006                                              |  |                | 73  |           |  |   | 2,906  | 
|Thereafter                                        |  |                |    |           |  |   | 12,834 | 
|                                                  |  |                |     |           |  |   |        | 
|Total minimum lease payments                      |  | $              | 484 |           |  | $ | 28,619 | 
|Less interest on capital leases                   |  |                | (63 | )         |  |   |        | 
|                                                  |  |                |     |           |  |   |        | 
|Net present value of minimum
lease payments       |  |                | 421 |           |  |   |        | 
|Less current portion                              |  |                | (94 | )         |  |   |        | 
|                                                  |  |                |     |           |  |   |        | 
|Capital lease obligations, net of
current portion |  | $              | 327 |           |  |   |        | 
|                                                  |  |                |     |           |  |   |        | 



| |  | Rent expense of approximately $3.1 million, $1.5 million and $1.0 million
was charged to operations for 2001, 2000 and 1999, respectively. Rent
expense in 2001 was net of $164,000 related to the amortization of a $2.8
million lease incentive provided by the lessor under the terms of the lease
agreement. As of December 31, 2001 the remaining balance of the lease
incentive was $2.6 million and is reported as deferred rent on the
consolidated balance sheet.                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In June 2000 the Company entered into a lease commitment for a portion of an
office building being constructed in Rockville, Maryland. The lease was
amended on April 2001 to change the occupancy date to June 1, 2001 from
April 15, 2001. In June 2001 we relocated to our new facilities. In
connection with our relocation from our prior facilities, we paid our prior
landlord approximately $100,000 in additional rent and termination fees and
eliminated approximately $1.4 million in future lease obligations related to
our prior facility. Our current lease provides for payments of approximately $242,000 per month during the first year of
the agreement escalating each subsequent year based on the lesser of 2.5% of
the amount of the annual base rent for the preceding lease year or three
times the increase in the Consumer Price Index as defined in the agreement.

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| |  | (c)     Concentration of credit risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Financial instruments that potentially subject the Company to credit risk
include accounts receivable and cash and cash equivalents balances with
financial institutions. The Company extends credit to its customers on an
unsecured basis in the normal course of business and maintains an allowance
for potential losses as identified. In connection with its credit term
arrangements, the Company performs credit assessments for the credit terms
being considered on a customer-specific basis as transactions occur.
Included in accounts receivable at December 31, 2001 is $9.3 million related
to arrangements with extended payment terms. The amounts due under these
arrangements are all due within six months of December 31, 2001. Amounts
due under similar arrangements as of December 31, 2000 totaled $9.1 million.
|
| |  | The Company invests cash not immediately needed for operations in money
market securities of various financial institutions. These money market
securities represent underlying investments in commercial paper issued by
financial institutions and other companies with high credit ratings and
securities issued by or backed by the U.S. Government. The Company has not
experienced any losses in such accounts and believes it is not exposed to
any significant credit risk on cash.                                                                                                                                                                                                                                                                                                                                               
|
| |  | (d)     Other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | The Company has employment contracts with certain officers, directors, and
employees. The Company also has bonus agreements with certain employees
based upon net income, as defined in the agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | OTG maintains a marketing development program whereby eligible customers are
reimbursed for qualified marketing and advertising costs. The program is
structured to comply with the requirements proscribed by Emerging Issues
Task Force Issue No. 00-25, Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendors Products,to recognize the
consideration paid as a cost rather than as a reduction of revenue. The
Companys unrecorded contingent obligation under this program at December
31, 2001 is approximately $266,000.                                                                                                                                                                                                                                                                   
|
| |  | The Company is obligated to make payments in the amount of $80,000 per year
for the years 2002 through 2003 to the estate of a former employee. The
payments are contingent upon the Company meeting certain financial targets
and other criteria as defined in the agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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13.     Stockholders Equity (Deficit)



| |  | (a)     Common stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company is incorporated in the State of Delaware and has the authority
to issue 65,000,000 shares of common stock, par value $0.01. As of December
31, 2001 there were 33,344,021 shares of common stock issued and 33,249,821
shares of common stock outstanding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | On January 18, 2000 the Companys Board of Directors declared a two-for-one
split of the Companys common stock in the form of a stock dividend and
recommended to the Companys stockholders the adoption of an Amended and
Restated Certificate of Incorporation, which increased the authorized number
of shares of common stock to 65,000,000. By written consent dated February
17, 2000 the Companys stockholders approved the adoption of the Companys
Amended and Restated Certificate of Incorporation. The Companys Amended and
Restated Certificate of Incorporation became effective upon filing with the
Secretary of the State of Delaware on March 9, 2000. All common share, per
common share and conversion amounts related to common stock, stock options
and stock purchase warrants included in the Financial Statements and
accompanying Notes to Consolidated Financial Statements have been
retroactively adjusted to reflect the stock split.
|
| |  | As discussed in Note 3, on March 10, 2000 the Company issued 5,000,000
shares of common stock in the IPO. In addition, in conjunction with the IPO,
all of the Companys outstanding convertible subordinated notes were
converted into 4,161,506 shares of common stock. Prior to conversion the
principal amount of these notes was $7.6 million and the related accrued
interest was $1.2 million; the Company was not obligated to pay any accrued
but unpaid interest on the notes at the time of conversion. The Companys
follow-on public offering of 1,650,000 shares common stock is also discussed
in Note 3.                                                                                                                                                                                                                                                                                                                                                
|
| |  | In November 2000 the holder of warrants to purchase 30,000 shares of the
Companys common stock exercised those financial instruments. The
transaction generated proceeds to the Company of $55,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | As discussed in Note 4(b), on March 29, 2001 we issued 3,081,108 shares of
common
stock, to acquire Smart Storage, including 308,087 shares that are being
held in escrow for twelve months to secure certain indemnification
obligations of certain former Smart Storage shareholders. In addition, we
have reserved 468,219 shares of common stock for issuance upon the exercise
of outstanding options to purchase Smart Storage common stock, that we
assumed pursuant to the terms of the merger agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | As discussed in Note 4(c), on July 25, 2001 we issued 1,466,667 shares of
common
stock to acquire UniTree, including 266,667 shares to be held in escrow for
a period of time not to exceed three years to secure certain indemnification
obligations of the former UniTree stockholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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| |  | (b)     Preferred Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Companys Amended and Restated Certificate of Incorporation authorizes
the Company to issue up to 5,000,000 shares of preferred stock with a par
value of $0.01 per share (Preferred Stock). The Preferred Stock may be
issued at the discretion of the Companys Board of Directors in one or more
series and on one or more occasions. Each series of Preferred Stock will
have such number of shares, designations, preferences, voting powers,
qualifications and special or relative rights or privileges as the Companys
Board of Directors may determine.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | (c)     Treasury Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | In September 2001 the Company began acquiring shares of its common stock in
connection with a stock repurchase program announced on September 17, 2001
(Stock Repurchase Program). The Stock Repurchase Program authorizes the
Company to repurchase up to 1,000,000 shares of its common stock from time
to time on the open market starting September 17, 2001. The Company had
repurchased 94,200 shares of common stock under this program as of December
31, 2001 at an aggregate cost of approximately $461,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | (d)     Stock subscriptions receivable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | As of December 31, 2001 and 2000, the Company had stock subscription notes
receivable and accrued interest of approximately $1,132,000 and
approximately $1,052,000 respectively, from certain employees of the Company
with interest rates ranging from 5% to 8%. The majority of the notes were
issued in connection with the issuance of 745,444 shares of the Companys
common stock. Approximately 476,190 of the shares were issued in connection
with a restricted stock purchase under the Companys 1998 Stock Incentive
Plan. Approximately $103,000 of the notes due in January 2002 were extended
through June 2002 with an increase in the interest rate from 8% to 10%, and
approximately $874,000 of the notes are due in October 2004. The Company
has full recourse against the employees to collect these notes, which are
collateralized by the stock. These notes receivable are recorded as an
offset to stockholders equity in the accompanying consolidated balance
sheets. The Company began to accrue interest on the notes upon completion of
its initial public offering in March 2000 (the accrued interest is reflected
on the Companys Consolidated Balance Sheets as an increase in the balance
of the notes and a decrease in accumulated deficit). For the years ended
December 31, 2001 and 2000, the Company recorded interest of approximately
$80,000 and $65,000, respectively. The remaining amount of the stock
subscription notes receivable includes notes receivable for approximately
$10,000 from employees in exchange for the exercise price of stock
options.
|
| |  | (e)     Stock-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | In 1998, the Company adopted the 1998 Stock Incentive Plan. The Board of
Directors determined that, subsequent to February 17, 2000, no additional
awards of stock-based compensation will be granted under the Companys 1998
Stock Incentive Plan. As of December 31, 2001 and 2000, respectively, there
were 2,341,248 and 3,256,723 shares outstanding under this plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

82



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| |  | On January 18, 2000 the Companys Board of Directors adopted, and on
February 17, 2000 the Companys stockholders approved the 2000 Stock
Incentive Plan (2000 SIP) and the 2000 Employee Stock Purchase Plan (the
Purchase Plan). Under the 2000 SIP, 1,000,000 shares of the Companys common
stock were reserved for issuance as incentive stock options, non-statutory
stock options, awards of unvested common stock and other stock-based awards.                                                                                                                                                                                                
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During 2001, 2000 and 1999, all stock options granted were granted to
employees and directors of the Company. During 2001 employee exercises of
stock options resulted in proceeds to the Company of approximately $1.5
million and the issuance of approximately 917,793 shares of common stock.
During 2000 employee exercises of stock options resulted in proceeds to the
Company of approximately $1.1 million, including a note receivable for
approximately $10,000, and the issuance of approximately 634,857 shares of
common stock.                                                                                                          
|
| |  | The Amended and Restated 2000 ESPP (the Purchase Plan) authorizes the
issuance of up to 600,000 shares of the common stock to participating
employees. Eligible employees are permitted to purchase common stock up to
10% of the employees base pay at a purchase price equal to 85% of the
lesser of the closing price of the common stock on the first and last days
of the offering period, as defined in the Purchase Plan. During 2001 and
2000, 76,083 and 18,389 shares of common stock, respectively, were issued
under the Purchase Plan, resulting in proceeds to the Company of
approximately $0.4 million and $0.3 million, respectively.
|
| |  | The table below summarizes stock option activity for the years ended
December 31, 2001, 2000 and 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|                                    |  |         |           |          |  |          |       | 
|----------------------------------- |  | ------- | --------- | -------- |  | -------- | ----- | 
|                                    |  |         |           |          |  | Weighted
|                                    |  |         |           |          |  | average 
|                                    |  | Stock   |           | exercise
|                                    |  | Options |           | price   
|                                    |  |         |           |         
|Stock options:                      |  |         |           |          |  |          |       | 
|Outstanding as of December 31, 1998 |  |         | 3,405,451 |          |  | $        | 1.76  | 
|Granted                             |  |         | 1,044,614 |          |  |          | 3.40  | 
|Exercised                           |  |         |          |          |  |          |      | 
|Forfeited                           |  |         | (472,661  | )        |  |          | 2.14  | 
|                                    |  |         |           |          |  |          |       | 
|Outstanding as of December 31, 1999 |  |         | 3,977,404 |          |  |          | 2.14  | 
|Granted                             |  |         | 1,764,207 |          |  |          | 17.59 | 
|Exercised                           |  |         | (634,857  | )        |  |          | 1.78  | 
|Forfeited                           |  |         | (386,586  | )        |  |          | 12.03 | 
|                                    |  |         |           |          |  |          |       | 
|Outstanding as of December 31, 2000 |  |         | 4,720,168 |          |  |          | 7.16  | 
|Granted                             |  |         | 2,828,263 |          |  |          | 6.06  | 
|Exercised                           |  |         | (917,793  | )        |  |          | 1.59  | 
|Forfeited                           |  |         | (648,736  | )        |  |          | 11.71 | 
|                                    |  |         |           |          |  |          |       | 
|Outstanding as of December 31, 2001 |  |         | 5,981,902 |          |  |          | 7.00  | 
|                                    |  |         |           |          |  |          |       | 

83



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|                |  |                           |           |                           |  |          |     |             |  |          |       |         |  |          |           |  |  |   |       | 
|--------------- |  | ------------------------- | --------- | ------------------------- |  | -------- | --- | ----------- |  | -------- | ----- | ------- |  | -------- | --------- |  |  | - | ----- | 
|                |  | Stock options outstanding |           | Stock options exercisable
|                |  |                           |           |                          
|                |  |                           |           |                           |  | Average  |     | Weighted    |  |          |       |         |  | Weighted
|                |  | Number                    |           | remaining                 |  | average  |     |             |  |          |       | average
|Range of        |  | outstanding               |           | contractual               |  | exercise |     | Number      |  | exercise
|exercise prices |  | as of 12/31/01            |           | life (years)              |  | price    |     | exercisable |  | price   
|                |  |                           |           |                           |  |          |     |             |  |         
|$0.00 - $5.00   |  |                           | 2,201,485 |                           |  |          | 6.8 |             |  | $        | 2.11  |         |  |          | 1,690,271 |  |  | $ | 1.92  | 
|$5.01 - $15.00  |  |                           | 2,970,110 |                           |  |          | 9.3 |             |  |          | 6.56  |         |  |          | 283,566   |  |  |   | 7.92  | 
|$15.01 - $25.00 |  |                           | 654,920   |                           |  |          | 8.3 |             |  |          | 19.63 |         |  |          | 306,796   |  |  |   | 19.46 | 
|$25.01 - $35.00 |  |                           | 139,287   |                           |  |          | 8.6 |             |  |          | 30.42 |         |  |          | 46,079    |  |  |   | 30.26 | 
|$35.01 - $40.00 |  |                           | 16,100    |                           |  |          | 8.5 |             |  |          | 39.08 |         |  |          | 5,684     |  |  |   | 39.17 | 
|                |  |                           |           |                           |  |          |     |             |  |          |       |         |  |          |           |  |  |   |       | 
|                |  |                           | 5,981,902 |                           |  |          | 8.2 |             |  |          | 7.00  |         |  |          | 2,332,396 |  |  |   | 5.61  | 
|                |  |                           |           |                           |  |          |     |             |  |          |       |         |  |          |           |  |  |   |       | 



| |  | At our annual shareholders meeting on May 31, 2001 the shareholders
approved an additional increase of 1,500,000 in the number of shares of
common stock available for awards under the 2000 SIP. As of December 31,
2001 there were five shares available for award under the Companys 2000
SIP. In January 2002, the number of shares available for award under the
Companys 2000 SIP was increased to 997,499 under the evergreen provisions
of the 2000 SIP.                                                                                                                                                                                                                                                                   
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock options. The Company recorded deferred
compensation expense of approximately $2.9 million relating to stock options
to purchase 1,024,900 shares of common stock granted in 1999 equal to the
difference between the fair market value of the Companys common stock on
the grant date and the exercise price of the options. The deferred
compensation is being amortized to expense ratably over the vesting period
of the stock options, which is generally four years. In 2001, 2000 and 1999,
the Company recognized expense of $631,000, $676,000 and $329,000,
respectively, related to the amortization of deferred compensation.
|
| |  | SFAS No. 123 requires pro forma net income (loss) per common share
disclosures as if the Company had accounted for its stock options granted
under the fair value method prescribed by that statement. Had it used this
methodology for determining compensation expense, the Companys net results
and net income (loss) per common share would have been reduced as indicated
in the table below.                                                                                                                                                                                                                                                                                                                                     
|
| |  | In order to calculate the pro forma net income (loss) information presented
below, the Company used the Black-Scholes stock option-pricing model with
the following weighted-average assumptions for 2001, 2000 and 1999,
respectively: stock volatility of 95%, 80% and 0%; risk-free interest rate
of 4.40%, 6.48% and 5.17%; expected stock life of 4 years for each year,
and; no dividend yield in each year. The per share weighed average fair
value of the stock options granted in 2001, 2000 and 1999 was $4.16, $10.98
and $0.58, respectively.                                                                                                                                                                              

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##### 



|                            |  |             |  |   |         |                               |  |      |       |      |  |   |        |   |  | 
|--------------------------- |  | ----------- |  | - | ------- | ----------------------------- |  | ---- | ----- | ---- |  | - | ------ | - |  | 
|                            |  |             |  |   |         | Years ended December 31,     
|                            |  |             |  |   |         |                              
|                            |  |             |  |   |         | 2001                          |  | 2000 |       | 1999
|                            |  |             |  |   |         |                               |  |      |       |     
|                            |  |             |  |   |         | (in thousands, except for per
|                            |  |             |  |   |         | share amounts) (unaudited)   
|                            |  |             |  |   |        
|Pro forma net income (loss) |  | As reported |  | $ | (7,550  | )                             |  | $    | 3,523 |      |  | $ | (693   | )
|                            |  | As adjusted |  | $ | (13,123 | )                             |  | $    | 655   |      |  | $ | (1,059 | )
|                           
|Pro forma EPS-Basic         |  | As reported |  | $ | (0.24   | )                             |  | $    | 0.13  |      |  | $ | (0.04  | )
|                            |  | As adjusted |  | $ | (0.41   | )                             |  | $    | 0.02  |      |  | $ | (0.06  | )
|                           
|Pro forma EPS-Diluted       |  | As reported |  | $ | (0.24   | )                             |  | $    | 0.12  |      |  | $ | (0.04  | )
|                            |  | As adjusted |  | $ | (0.41   | )                             |  | $    | 0.02  |      |  | $ | (0.06  | )

The information presented above is based on the Company being treated as an
entity subject to income taxes as a regular corporation. See Note 2(m) and Note
9 for related information.

14.     Net income (loss) per common share

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

The table below presents the computation of Basic and Diluted EPS (the amounts
presented in the table are in thousands, except per share amounts). For all
periods presented prior to conversion into common stock in March 2000, the
assumed conversion of the Companys convertible notes into common stock has an
anti-dilutive effect on Diluted EPS and, therefore, assumed conversion is
excluded from the Diluted EPS calculations. In addition, for 2001 and 1999, the
assumed conversion of stock options and warrants into common stock has an
anti-dilutive effect on Diluted EPS and, therefore, the assumed conversion of
these financial instruments is excluded from the Diluted EPS calculation for
these periods.

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|                                                                         |                                                             |   |                           |        |      |   |        |        |  |   |        |        |  
|------------------------------------------------------------------------ | ----------------------------------------------------------- | - | ------------------------- | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | -
|                                                                         |                                                             |   | Years ended December 31, 
|                                                                         |                                                             |   |                          
|                                                                         |                                                             |   | 2001                      |        | 2000 |   | 1999  
|                                                                         |                                                             |   |                           |        |      |   |       
|                                                                         |                                                             |   | (in thousands, except per
|                                                                         |                                                             |   | share amounts)           
|                                                                         |                                                             |  
|Net loss:                                                                |                                                             |   |                           |        |      |   |        |        |  |   |        |       
|                                                                         | Basic and Diluted                                           |   | $                         | (7,550 | )    |   |        |        |  |   |        |        |  
|                                                                         |                                                             |   |                           |        |      |   |        |        |  |   |        |       
|Pro forma net income (loss) (unaudited):                                 |                                                             |   |                           |        |      |   |        |        |  |   |        |       
|                                                                         | Basic and Diluted                                           |   |                           |        |      |   | $      | 3,523  |  |   | $      | (693   | )
|                                                                         |                                                             |   |                           |        |      |   |        |        |  |   |        |       
|Shares of common stock:                                                  |                                                             |   |                           |        |      |   |        |        |  |   |        |       
|                                                                         | Weighted average shares of common
stock outstanding (Basic) |   |                           | 32,053 |      |   |        | 27,260 |  |   |        | 19,232 |  
|                                                                         |                                                             |   |                           |        |      |   |        |        |  |   |        |       
|Incremental shares related to:                                           |                                                             |   |                           |        |      |   |        |        |  |   |        |       
|                                                                         | Outstanding stock options                                   |   |                           |       |      |   |        | 3,216  |  |   |        |       |  
|                                                                         | Outstanding warrants                                        |   |                           |       |      |   |        | 17     |  |   |        |       |  
|                                                                         |                                                             |   |                           |        |      |   |        |        |  |   |        |       
|Weighted average equivalent shares of
common stock outstanding (Diluted) |                                                             |   | 32,053                    |        |      |   | 30,493 |        |  |   | 19,232 |       
|                                                                         |                                                             |   |                           |        |      |   |        |        |  |   |        |       
|EPS-Basic                                                                |                                                             | $ | (0.24                     | )      |      |   |        |        |  |   |        |       
|                                                                         |                                                             |   |                           |        |      |   |        |        |  |   |        |       
|EPS-Diluted                                                              |                                                             | $ | (0.24                     | )      |      |   |        |        |  |   |        |       
|                                                                         |                                                             |   |                           |        |      |   |        |        |  |   |        |       
|Pro forma EPS-Basic (unaudited)                                          |                                                             |   |                           |        |      | $ | 0.13   |        |  | $ | (0.04  | )     
|                                                                         |                                                             |   |                           |        |      |   |        |        |  |   |        |       
|Pro forma EPS-Diluted (unaudited)                                        |                                                             |   |                           |        |      | $ | 0.12   |        |  | $ | (0.04  | )     
|                                                                         |                                                             |   |                           |        |      |   |        |        |  |   |        |       

15.     Accrued Expenses

As of December 31, 2001 and 2000, accrued expenses consist of the following:

|                                           |  |                |       |      |  |   |       | 
|------------------------------------------ |  | -------------- | ----- | ---- |  | - | ----- | 
|                                           |  | December 31,  
|                                           |  |               
|                                           |  | 2001           |       | 2000
|                                           |  |                |       |     
|                                           |  | (in thousands)
|Accrued compensation and employee benefits |  | $              | 4,225 |      |  | $ | 3,421 | 
|Accrued royalties                          |  |                | 2,140 |      |  |   | 1,174 | 
|Other accrued expenses                     |  |                | 3,418 |      |  |   | 2,977 | 
|                                           |  |                |       |      |  |   |       | 
|Total Accrued Expenses                     |  | $              | 9,783 |      |  | $ | 7,572 | 
|                                           |  |                |       |      |  |   |       | 

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16.     Segment Information and Related Disclosures

Our operations consist of one business segment providing on-line data storage
and data access software solutions for business applications, e-mail management
and related services. Our sales to customers in foreign countries primarily include those located in Europe and Asia.
No foreign country accounts for more than 10% of our revenue. For
2001, 2000 and 1999, our revenues from foreign countries represented 13%, 16%
and 14%, respectively, of our total revenues. Long-lived assets held in any foreign country are not material to the consolidated financial statements.

17.     Related Party Transactions

In October 1999 the principal stockholder of the Company sold 40,000 shares of
the Companys common stock to an employee of the Company for $2.75 per share.
The Company recognized compensation expense of approximately $330,000 related
to the transaction, reflecting the difference between the purchase price and
the estimated fair value of the common stock at the time of the purchase.

In January 1996, the Company entered into a note payable to a stockholder for
$144,671, bearing 10% interest. The balance of the note payable, including
accrued interest, was paid in full in October 2001.

In March 2000 subsequent to the IPO, the Company made payments totaling $1.2
million to certain current and former stockholders representing reimbursement
of income taxes paid by these stockholders when the Company was treated as a
Subchapter S entity for income tax purposes.

Following its IPO in March 2000 the Company retired all of its outstanding
senior subordinated notes held by certain stockholders, repaid certain
promissory notes with its principal stockholder and retired a note payable with
a former employee. These transactions are discussed in Note 10. See also Note
13(a) related to the conversion of all of the Companys outstanding convertible
notes held by certain stockholders into shares of the Companys common stock.
Prior to their retirement in the first quarter of 2000, the Company recorded
interest expense on the notes payable to its principal stockholder of $82,000
and $158,000 for 2000 and 1999, respectively.

In March 2000 the Company made a bonus compensation payment to a former
employee of $0.3 million. The payment was contingent on the Company
consummating the IPO.

In December 2000 the Company sold software licenses
for approximately $112,000 to a company that is wholly-owned by
OTGs chief executive officer.

In 2001 the Company paid $400,000 in fees to an investment banking firm for
advisory services in connection with our acquisition of Smart Storage in March
2001. A member of our board of directors is a principal in the investment
banking firm to which these fees were paid.

In connection with the acquisition of UniTree in July 2001, the Company issued
$4.8 million in promissory notes bearing interest at 7% per annum, payable over
eighteen months, subject to the continued employment of certain UniTree
employees. See Note 4(c). For the year ended December 31, 2001 the Company
recorded interest expense on the notes payable totaling $140,000.

87



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##### 



18.     Selected Quarterly Financial Data

|                             |                              |  |                                          |        |         |  |         |        |         |  |   |        |   |  |   |        |  
|---------------------------- | ---------------------------- |  | ---------------------------------------- | ------ | ------- |  | ------- | ------ | ------- |  | - | ------ | - |  | - | ------ | -
|                             |                              |  | First                                    |        | Second  |  | Third   |        | Fourth 
|                             |                              |  | Quarter                                  |        | Quarter |  | Quarter |        | Quarter
|                             |                              |  |                                          |        |         |  |         |        |        
|                             |                              |  | (in thousands, except per share amounts)
|                             |                              |  | (unaudited)                             
|                             |                              | 
|Year ended December 31, 2001 |                              |  |                                          |        |         |  |         |        |         |  |   |        |   |  |   |       
|                             | Operating revenues           |  | $                                        | 13,923 |         |  | $       | 15,926 |         |  | $ | 16,569 |   |  | $ | 18,506 |  
|                             | Gross profit                 |  | $                                        | 11,440 |         |  | $       | 13,040 |         |  | $ | 12,597 |   |  | $ | 14,681 |  
|                             | Operating loss               |  | $                                        | (3,210 | )       |  | $       | (1,753 | )       |  | $ | (2,470 | ) |  | $ | (5,147 | )
|                             | Net loss                     |  | $                                        | (1,359 | )       |  | $       | (71    | )       |  | $ | (2,383 | ) |  | $ | (3,737 | )
|                             | Earnings per share (Basic)   |  | $                                        | (0.04  | )       |  | $       | (0.00  | )       |  | $ | (0.07  | ) |  | $ | (0.11  | )
|                             | Earnings per share (Diluted) |  | $                                        | (0.04  | )       |  | $       | (0.00  | )       |  | $ | (0.07  | ) |  | $ | (0.11  | )
|                             |                              |  |                                          |        |         |  |         |        |         |  |   |        |   |  |   |       
|Year ended December 31, 2000 |                              |  |                                          |        |         |  |         |        |         |  |   |        |   |  |   |       
|                             | Operating revenues           |  | $                                        | 10,683 |         |  | $       | 12,070 |         |  | $ | 14,435 |   |  | $ | 15,170 |  
|                             | Gross profit                 |  | $                                        | 9,132  |         |  | $       | 10,136 |         |  | $ | 12,423 |   |  | $ | 12,419 |  
|                             | Operating income (loss)      |  | $                                        | 224    |         |  | $       | (601   | )       |  | $ | 1,368  |   |  | $ | (960   | )
|                             | Net income (loss)            |  | $                                        | (134   | )       |  | $       | 365    |         |  | $ | 2,103  |   |  | $ | 834    |  
|                             | Earnings per share (Basic)   |  | $                                        | (0.01  | )       |  | $       | 0.01   |         |  | $ | 0.07   |   |  | $ | 0.03   |  
|                             | Earnings per share (Diluted) |  | $                                        | (0.01  | )       |  | $       | 0.01   |         |  | $ | 0.07   |   |  | $ | 0.03   |  

Note: See Notes 3, 4 and 9 for information related to certain ownership
changes, purchase accounting adjustments, including write-offs of acquired
research and development, and a change in the Companys status regarding income
taxes, respectively. The Companys operating results for interim periods may
not be indicative of the results of operations for a full fiscal year. The
earnings per share calculation for the year is a separate annual calculation.
Accordingly, the sum of the quarterly earnings per share amounts does not
necessarily equal the earnings per share for the year.

88



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19.     Supplemental information  Allowance for Uncollectible Accounts Receivable

|                                    |  |                |       |  
|----------------------------------- |  | -------------- | ----- | -
|                                    |  | (in thousands)
|Balance as of December 31, 1998     |  | $              | 731   |  
|Additions charged to expense        |  |                | 322   |  
|Additions charged to other accounts |  |                | 46    |  
|Amounts charged to allowance        |  |                | (155  | )
|                                    |  |                |       |  
|Balance as of December 31, 1999     |  |                | 944   |  
|Additions charged to expense        |  |                | 1,041 |  
|Additions charged to other accounts |  |                | 206   |  
|Amounts charged to allowance        |  |                | (650  | )
|                                    |  |                |       |  
|Balance as of December 31, 2000     |  |                | 1,541 |  
|Additions charged to expense        |  |                | 1,974 |  
|Additions charged to other accounts |  |                | 255   |  
|Amounts charged to allowance        |  |                | (894  | )
|                                    |  |                |       |  
|Balance as of December 31, 2001     |  | $              | 2,876 |  
|                                    |  |                |       |  

20.     Supplemental information  Consolidated Statements of Cash Flows

|                                 |                                                                                                                                                               |  |   |                         |  |      |   |       |  |  |   |       |  | 
|-------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ----------------------- |  | ---- | - | ----- |  |  | - | ----- |  | 
|                                 |                                                                                                                                                               |  |   | Year ended December 31,
|                                 |                                                                                                                                                               |  |   |                        
|                                 |                                                                                                                                                               |  |   | 2001                    |  | 2000 |   | 1999 
|                                 |                                                                                                                                                               |  |   |                         |  |      |   |      
|                                 |                                                                                                                                                               |  |   | (in thousands)         
|Cash paid during the period for: |                                                                                                                                                               |  |   |                         |  |      |   |       |  |  |   |      
|                                 | Income taxes                                                                                                                                                  |  | $ | 1,025                   |  |      | $ | 155   |  |  | $ | 1     | 
|                                 | Interest                                                                                                                                                      |  | $ | 44                      |  |      | $ | 700   |  |  | $ | 1,140 | 
|Material non-cash transactions:  |                                                                                                                                                               |  |   |                         |  |      |   |       |  |  |   |      
|                                 | Issuance of common stock related to the
July 2001 acquisition of UniTree                                                                                      |  | $ | 9,216                   |  |      | $ |      |  |  | $ |      | 
|                                 | Issuance of notes payable related to the
July 2001 acquisition of UniTree                                                                                     |  | $ | 2,627                   |  |      | $ |      |  |  | $ |      | 
|                                 | Issuance of common stock related to the
April 2000 acquisition of xVault                                                                                      |  | $ |                        |  |      | $ | 2,173 |  |  | $ |      | 
|                                 | Conversion of all outstanding convertible
subordinated notes payable (including
related accrued interest) into 4,161,506
shares of common stock in March 2000 |  | $ |                        |  |      | $ | 8,833 |  |  | $ |      | 
|                                 | Issuance of note payable related to
acquisition of intangible assets                                                                                          |  | $ |                        |  |      | $ | 450   |  |  | $ |      | 
|                                 | Acquisition of property and equipment
resulting from lease incentives                                                                                         |  | $ | 2,813                   |  |      | $ |      |  |  | $ |      | 

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21.     Subsequent Event

On February 20, 2002, OTG entered into an Agreement and Plan of Merger with
Legato Systems, Inc., whereby OTG will merge with and into a wholly-owned
subsidiary of Legato, and become a wholly-owned subsidiary of Legato (the
Merger). In the Merger, OTG public stockholders will receive merger
consideration of 0.6876 shares of Legato common stock, plus $2.50 in cash for
each share of OTG common stock.

The closing of the Merger is subject to customary conditions, including
shareholder approval by both companies and regulatory approval of the
transaction.

Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure

None.

Part III

Item 10. Directors and Executive Officers

Information regarding this item appears in our definitive Proxy Statement to be
filed pursuant to Regulation 14A relating to our 2002 Annual Meeting of
Stockholders, or will be included in a subsequent amendment to the
Form 10-K and is incorporated herein by reference. Information concerning
our executive officers is set forth in Part I, Item 1 of this report under the
caption Executive Officers in reliance on General Instruction G to Form 10-K.

Item 11. Executive Compensation

Information regarding this item appears in our definitive Proxy Statement to be
filed pursuant to Regulation 14A relating to our 2002 Annual Meeting of
Stockholders, or will be included in a subsequent amendment to the
Form 10-K and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Information regarding this item appears in our definitive Proxy Statement to be
filed pursuant to Regulation 14A relating to our 2002 Annual Meeting of
Stockholders, or will be included in a subsequent amendment to the Form 10-K and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

Information regarding this item appears in our definitive Proxy Statement to be
filed pursuant to Regulation 14A relating to our 2002 Annual Meeting of
Stockholders, or will be included in a subsequent amendment to the Form 10-K and is incorporated herein by reference.

90



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Part IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

The following documents are filed as part of this report:

Consolidated Financial Statements

The following consolidated financial statements of OTG Software, Inc. are
included in Part II, Item 8 of this report:



| |  |  | Consolidated Balance Sheets as of December 31, 2001 and 2000                                                             
| | - |  | -------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Consolidated Statements of Operations for the years ended
December 31, 2001, 2000, and 1999                              
|
| |  |  | Consolidated Statements of Changes in Stockholders Equity
(Deficit) for the years ended December 31, 2001, 2000 and 1999
|
| |  |  | Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999                               
|
| |  |  | Notes to Consolidated Financial Statements                                                                               

Consolidated Financial Statements

All financial statement schedules have been omitted because they are not
applicable or not required, or because the required information is either
incorporated herein by reference or included in the consolidated financial
statement or notes thereto included in this report.

|         |  |                                                                                                                                                                                           
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |  |                                                                                                                                                                                           
|         |  |                                                                                                                                                                                           
|3.1      |  | Amended Restated Certificate of Incorporation of the Company
(incorporated herein by reference to Exhibit 3.1 to the Companys
Registration Statement on Form S-1; SEC file No. 333-93581)
|        
|3.2      |  | Restated By Laws of the Company (incorporated herein by
reference to Exhibit 3.4 to the Companys Registration Statement on
Form S-1; SEC file No. 333-93581)                             
|        
|4.1      |  | Refer to Exhibits 3.1 and 3.2                                                                                                                                                             
|        
|10.1     |  | 1998 Stock Incentive Plan, as amended (incorporated herein by
reference to Exhibit 10.1 to the Companys Registration Statement on
Form S-1; SEC file No. 333-93581)                      

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|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |  |                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.2     |  | Amended and Restated 2000 Stock Incentive Plan (incorporated
herein by reference to Exhibit 10.3 to the Companys Quarterly
Report on Form 10-Q for the Three Month Period Ended June 30, 2001)                                                                                                                                                                                                                                          
|        
|10.3     |  | Amended and Restated 2000 Employee Stock Purchase Plan
(incorporated herein by reference to Exhibit 10.3 to the Companys
Annual Report on Form 10-K for the Year Ended December 31, 2000)                                                                                                                                                                                                                                               
|        
|10.4     |  | Employment Agreement with Richard A. Kay, our chairman,
president and chief executive officer, as amended (incorporated
herein by reference to Exhibit 10.7 to the Companys Registration
Statement on Form S-1; SEC file No. 333-93581)                                                                                                                                                                                                 
|        
|10.5     |  | Employment agreement with F. William Caple, our executive
vice president and secretary, dated as of January 1, 2002                                                                                                                                                                                                                                                                                                                      
|        
|10.6     |  | Employment agreement with Ronald W. Kaiser, our chief
financial officer and treasurer, dated December 20, 2001                                                                                                                                                                                                                                                                                                                           
|        
|10.7     |  | Form of Subchapter S Tax Indemnification Agreement executed with certain stockholders (incorporated herein by reference
to Exhibit 10.10 to the Companys Registration Statement on Form
S-1; SEC file No. 333-93581)                                                                                                                                                                                                                    
|        
|10.8     |  | Form of Indemnification Agreement executed with
directors and executive officers (incorporated herein by reference
to Exhibit 10.6 to the Companys Registration Statement on Form S-1;
SEC file No. 333-93581)                                                                                                                                                                                                                          
|        
|10.9     |  | Agreement and Plan of Merger by and among OTG Software, Inc.,
OTG Merger Corp. and xVault, Inc., dated April 17, 2000
(incorporated herein by reference to Exhibit 2.1 filed with our
Current Report on Form 8-K, dated May 9, 2000 (No. 000-29809)                                                                                                                                                                                      
|        
|10.10    |  | Lease for facilities at 2600 Tower Oaks Boulevard in
Rockville, Maryland (incorporated herein by reference to Exhibit
10.6 to the Companys Quarterly Report on Form 10-Q for the Three
Month Period Ended June 30, 2000)                                                                                                                                                                                                                
|        
|10.11    |  | Security Agreement dated as of July 22, 1999 by and among
Online Technology Group, Inc., OTG Software, Inc. and PNC Bank,
National Association as amended by the Affirmation and Partial
Release dated as of October 30, 2000, by and between OTG Software,
Inc. and PNC Bank, National Association 48516 (incorporated herein by
reference to Exhibit 10.14 to the Companys Registration Statement
on Form S-1; SEC file No. 333-48516)
|        
|10.12    |  | Amended and Restated Loan Agreement dated as of October 30,
2000 by and between OTG Software, Inc. and PNC Bank, National
Association and a related Amended and Restated Revolving Credit Note
(incorporated herein by reference                                                                                                                                                                                                         

92



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##### 



|         |  |                                                                                                                                                                                                                                                                                                              
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |  |                                                                                                                                                                                                                                                                                                              
|         |  |                                                                                                                                                                                                                                                                                                              
|         |  | to Exhibit 10.15 to the Companys Registration Statement on Form
S-1; SEC file No. 333-48516)                                                                                                                                                                                                                
|        
|10.13    |  | Agreement and Plan of Merger by and among OTG Software,
Inc., OTG Acquisition Corp., Smart Storage, Inc., and the Principal
Shareholders Named Therein, dated March 22, 2001 (incorporated
herein by reference to Exhibit 2.1 filed with our Current Report on
Form 8-K, dated April 12, 2001 (No. 000-29809)
|        
|10.14    |  | Agreement and Plan of Merger by and among Legato Systems,
Inc., Orion Acquisitions Sub Corp., and OTG Software, Inc., dated
February 20, 2002 (incorporated herein by reference to Exhibit 2.1
filed with our Current Report on Form 8-K, dated February 22, 2002
(No. 000-29809)                            
|        
|21       |  | Subsidiaries of OTG Software, Inc.                                                                                                                                                                                                                                                                           
|        
|23       |  | Consent of KPMG LLP                                                                                                                                                                                                                                                                                          

Reports on Form 8-K

On March 28, 2001, we filed a Current Report on Form 8-K.
The report was filed pursuant to Items 5 and 7 of Form 8-K related to our
announcement of the acquisition of Smart Storage.

On April 12,
2001, we filed a Current Report on Form 8-K. The report was
filed pursuant to Items 2 and 7 of Form 8-K related to our
acquisition of Smart Storage.

On April 25, 2001, we filed
a Current Report on Form 8-K. The report was filed pursuant to Items 5 and 7 of
Form 8-K related to our earnings release for the three months ended March 31, 2001.

On April 25, 2001, we filed
a Current Report on Form 8-K/A. The report was filed pursuant to Item 7 of
Form 8-K/A related to our acquisition  of Smart Storage.

On July 30, 2001, we filed
a Current Report on Form 8-K. The report was filed pursuant to Items 5 and 7 of
Form 8-K related to our earnings release for the three and six months ended June 30, 2001
and announcement that we were acquiring UniTree Software, Inc.

On July 31, 2001, we filed
a Current Report on Form 8-K/A. The report was filed pursuant to Item 7 of
Form 8-K/A related to the earnings release for the three and six months ended June 30, 2001.

On October 22, 2001, we filed
a Current Report on Form 8-K. The report was filed pursuant to Items 5 and 7 of
Form 8-K related to our conference call for the three months ended September 30, 2001.

On February 22,
2002, we filed a Current Report on Form 8-K. The report was
filed pursuant to Items 5 and 7 of Form 8-K related to an
Agreement and Plan of Merger with Legato Systems Inc.

93



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##### 



Signatures

Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.

|    |  |                                                                                   |  |                    
|--- |  | --------------------------------------------------------------------------------- |  | -------------------
|By: |  | /s/  Richard A. KayRichard A. Kay
President, Chairman and Chief Executive Officer |  | Date: March 8, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on our behalf and in the
capacities and on the dates indicated.

|    |  |                                                                                                             |  |                    
|--- |  | ----------------------------------------------------------------------------------------------------------- |  | -------------------
|By: |  | /s/  Ronald W. KaiserRonald W. Kaiser
Chief Financial Officer and Treasurer
(Principal Financial Officer)   |  | Date: March 8, 2002
|   
|By: |  | /s/  Hunter J. LouisHunter J. Louis
Vice President of Finance and Accounting
(Principal Accounting Officer) |  | Date: March 8, 2002
|   
|By: |  | /s/  Gabriel A. BattistaGabriel A. Battista, Director                                                       |  | Date: March 8, 2002
|   
|By: |  | /s/   John BurtonJohn Burton, Director                                                                      |  | Date: March 8, 2002
|   
|By: |  | /s/  F. William CapleF. William Caple, Director                                                             |  | Date: March 8, 2002
|   
|By: |  | /s/  Joseph R. ChinniciJoseph R. Chinnici, Director                                                         |  | Date: March 8, 2002
|   
|By: |  | /s/  Geaton A. DeCesaris, Jr.Geaton A. DeCesaris, Jr., Director                                             |  | Date: March 8, 2002
|   
|By: |  | /s/  Donald B. Hebb, Jr.Donald B. Hebb, Jr., Director                                                       |  | Date: March 8, 2002

94