<PAGE>
 
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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
 
                                   FORM 10-K
 
 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE
                                  ACT OF 1934
 
                    FOR THE FICAL YEAR ENDED JUNE 30, 1998
 
                                      OR
 
    [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
                             EXCHANGE ACT OF 1934
            FOR THE TRANSITION PERIOD FROM          TO            .
 
                       COMMISSION FILE NUMBER: 000-22059
 
                              QUALIX GROUP, INC.
              (EXACT NAME OF COMPANY AS SPECIFIED IN ITS CHARTER)
 
               DELAWARE                              77-0261239
    (STATE OR OTHER JURISDICTION OF               (I.R.S. EMPLOYER
    INCORPORATION OR ORGANIZATION)             IDENTIFICATION NUMBER)
                                      
                                      
                           177 BOVET ROAD, 2ND FLOOR
                              SAN MATEO, CA 94402
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
 
                               ----------------
 
                                (650) 572-0200
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
                               ----------------
 
       SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                    COMMON STOCK, $.001 PAR VALUE PER SHARE
                               (TITLE OF CLASS)
 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X]  No [_]
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
 
  As of August 31, 1998 there were 10,601,284 shares of the Company's Common
Stock outstanding, and the aggregate market value of such shares held by non-
affiliates of the Company (based upon the closing sale price of such shares on
the Nasdaq National Market on August 31, 1998) was $15,909,675. Shares of
Common Stock held by each executive officer and director and by each entity
affiliated with such persons have been excluded from such calculation in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Certain sections of the Company's definitive Proxy Statement for the 1998
Annual Meeting of Stockholders to be held on November 16, 1998 are
incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
 
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<PAGE>
 
                               TABLE OF CONTENTS
 
PART I
<TABLE>
 <C>      <S>                                                                <C>
 Item 1.   Business......................................................      3
 Item 2.   Properties....................................................     22
 Item 3.   Legal Proceedings.............................................     22
 Item 4.   Submission of Matters to a Vote of Security Holders...........     23
 
PART II
 Item 5.   Market for Registrant's Common Equity and Related Stockholder
           Matters.......................................................     25
 Item 6.   Selected Financial Data.......................................     26
 Item 7.   Management's Discussion and Analysis of Financial Condition
           and Results of Operations.....................................     27
 Item 7a.  Quantitative and Qualitative Disclosures about Market Risk
           Disclosure....................................................     34
 Item 8.   Consolidated Financial Statements and Supplementary Data......     34
 Item 9.   Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure......................................     48
 
PART III
 Item 10.  Directors and Executive Officers of the Registrant............     49
 Item 11.  Executive Compensation........................................     49
 Item 12.  Security Ownership of Certain Beneficial Owners and
           Management....................................................     49
 Item 13.  Certain Relationships and Related Transactions................     49
 
PART IV
 Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 
           8-K...........................................................     50
           Signatures....................................................     51
</TABLE>
 
                                       2
<PAGE>
 
                                    PART I
 
  The discussion in this report on Form 10-K contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this item under the
heading "Management's Discussion and Analysis of Financial Conditions and
Results of Operations--Risk Factors."
 
  The Company has used various sentences within this Form 10-K which contain
such forward-looking statements, and words such as "believes", "anticipates",
"expects", "intends", and similar expressions are intended to identify
forward-looking statements, but are not the exclusive means of denoting the
same. The Company undertakes no obligation to revise any forward-looking
statements in order to reflect events or circumstances that may arise after
the date of this report. Readers are urged to carefully review and consider
various disclosures made by the Company in this report and in the Company's
other reports filed with the SEC that attempt to advise interested parties of
the risks and factors that may affect the Company's business.
 
ITEM 1. BUSINESS
 
OVERVIEW
 
  Qualix Group, Inc. ("Qualix Group" or the "Company") is a leading provider
of proactive service level availability management software for UNIX and
Windows NT-based applications and information, operating in distributed
computing environments. Its service level availability solutions are designed
to minimize the impact of planned and unplanned computing events on business-
critical applications. The Company offers software products for managing the
service level availability of both packaged and proprietary applications, as
well as the data associated with these applications. In July 1998, subsequent
to the end of the Company's fiscal year, Qualix Group commenced doing business
as FullTime Software, Inc. In order to change its legal name, the Company
intends to amend its Certificate of Incorporation which requires stockholder
approval. The Company has begun the legal steps necessary to obtain such
stockholder approval.
 
  The Company was incorporated under the laws of Delaware on September 21,
1990. The Company began operating primarily as a distributor, value-added
reseller ("VAR") and publisher of licensed third party client/server software
products. In 1993, the Company focused on the reliability market by
introducing QualixHA, its first high availability product for the UNIX
operating environment. QualixHA was based on a licensed core software engine.
In May 1996, the Company acquired substantially all of the assets and assumed
certain liabilities of Anthill Incorporated ("Anthill"), including technology
relating to a hierarchical storage management product under development. In
August 1996, the Company merged with Octopus Technologies, Inc. ("Octopus
Technologies") which had developed high availability and remote data mirroring
products for the Windows NT operating environment. In October 1996, the
Company introduced QualixHA+, currently known as HA+, which is based on an
internally-developed core software engine. A key element of the Company's
strategy is to increase the percentage of revenues derived from internally
developed or acquired products that typically have higher gross margins than
Licensed Products. Pursuant to this strategy, the Company ceased marketing
QualixHA in February 1997. The Company completed its initial public offering
in February 1997, receiving net proceeds of $14,950,000.
 
  In July 1998, the Company introduced FullTime software solutions. These
solutions are designed to maintain service level availability during a variety
of planned and unplanned computing events that can dramatically impact the
availability of services and information. The Company believes that its
FullTime products and solutions redefine high availability to solve a much
broader market problem, offering a potential opportunity for the Company to
dramatically expand the size of its potential market and to target enterprise-
wide customers, as well as individual departmental customers. A key element of
the Company's strategy is to sell FullTime products and solutions to strategic
buyers such as chief information officers ("CIO"), heads of information
technology ("IT") and others responsible for maintaining service level
agreements ("SLAs")
 
                                       3
<PAGE>
 
between IT and line-of-business organizations. Increasingly, SLAs are becoming
the basis on which lines-of-business organizations measure corporate IT
performance concerning the required availability of business-critical
applications and information.
 
  The Company's service level availability products and services are based on
internally-developed technology including (i) network data application
monitoring, (ii) system hardware/software monitoring and (iii) support for
managing and monitoring disk volumes and volume managers, and externally-
developed technology acquired in April, 1998 representing a messaging system
with a distributed persistent database, event management, rule engine and
application management.
 
  The variety of computing events known as planned downtime, and their
relationship to unplanned downtime events, are illustrated below.

                    REDEFINING SERVICE LEVEL AVAILABILITY
 
                            [PICTURE APPEARS HERE]
 
  Consistent with its strategy to market technology-leading products and
solutions, the Company plans to continue to develop additional software
products that will extend and enhance its service level availability
management capabilities. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations "--Risk Factors--"Recent
Transition to New Business Model," "--Uncertainty of Success of Recently
Introduced and Planned Products" and "--Dependence on Licensed Products."
 
INDUSTRY BACKGROUND
 
  Historically, large organizations depended on host-based computing utilizing
mainframes and mini computers for most business applications and for
centralized data storage. Given the importance of these applications, systems
management software evolved to ensure the availability, performance and
integrity of host-based computing systems. Functions addressed by systems
management software include reducing downtime in the event of system failure,
ensuring that the system is secure and protecting against data loss.
 
  In recent years, distributed computing, also known as client/server
computing, has been increasingly adopted by many businesses for their
enterprise computing needs. Distributed computing solutions, based primarily
on UNIX and increasingly on Windows NT, are being used for a growing number of
business-critical
 
                                       4
<PAGE>
 
applications. These include financial reporting, inventory control, sales
order processing, transaction processing, customer support, intranet
applications such as e-commerce, extranet applications and Internet access.
 
  The increasing deployment of distributed computing environments, combined
with the globalization of business, has dramatically changed the face of
computing in recent years. There are no "off-hours" in today's global economy.
The Internet has provided the first-ever ubiquitous, 24-hour, 7 day-a-week
("24 x 7") information delivery system. Today, companies can electronically
and immediately deliver information and products to internal users, business
partners, customers and prospects as never before. 24x7 system availability
has become an imperative for global businesses. Consequently, the availability
of services and information from applications has become the focus of SLAs
between users and IT departments. IT executives are actively seeking tools
which can enable the proactive enforcement of these SLAs, ensuring that
critical information is available when and where users require it. The
practice of taking systems off-line for maintenance, tuning, upgrades and
changes is no longer acceptable to many companies who must support global
extranet or e-commerce sites. Addressing the requirements of maintaining
service level availability during planned downtime is a more challenging
technical problem than recovery from system failure. During planned downtime a
variety of computing events and more flexible responses need to be anticipated
and the entirety of the system environment needs to be managed and controlled.
The Company's FullTime products, designed to ensure service level availability
during planned and unplanned computing events, expands the definition of high
availability to meet the needs of global organizations. This requires an
innovative architectural approach and the Company believes the FullTime
Adaptive Architecture (as described below), based on a reliable messaging
system and a powerful rules and event engine, represents the class of solution
required to successfully deliver system level availability.
 
  The Company divides systems management software for distributed computing
systems into three categories: operations management, resource and
applications management and reliability management. Operations management
software automates the day-to-day operating tasks previously performed by
system administrators. Resource and applications management software addresses
management of critical software and user resources. Reliability management
software addresses the system's need to ensure that servers, data and
applications are consistently available and secure. Traditional reliability
software solutions have focused specifically on reactively managing unplanned
downtime events. However, in today's global market the requirements for
reliability of services are rapidly expanding. "Service level availability"
extends the definition of reliability to include software that addresses the
need to ensure that servers, data and applications are available during the
variety of planned as well as unplanned computing events. These categories are
illustrated below:
 
                          Systems Management Software
 
 
              --------------------------------------------------
 
 
<TABLE>
<CAPTION>
     Operations Management          Resource / Applications       Reliability Management
                                          Management              (Becoming Service Level
                                                                       Availability)
--------------------------------------------------------------------------------------------
  <S>                            <C>                           <C>
   . Monitor system components    . Manage critical resources   . Enforce SLAs
   . Event management             . Database administration     . Eliminate requirements for 
                                  . User administration           planned downtime events
                                                                . Proactive protection from
                                                                  unplanned downtime
                                                                . Traditional re-active high
                                                                  availability for unplanned
                                                                  downtime events
</TABLE>
 
                                       5
<PAGE>
 
  The Company believes that companies are increasingly focused on the need for
service level availability software as more and more business-critical
applications are deployed in distributed computing environments. By ensuring
that systems are meeting or exceeding SLAs, FullTime software provides users
with access to the computer power, data and applications they need, when and
where they need them. FullTime software solutions simultaneously enable IT to
perform critical tuning to applications and systems in a non-interruptive and
continuous fashion, ensuring that IT resources are optimized at all times to
meet the needs of the business, without requiring traditional planned
downtime. The Company's foundation solutions for high availability provide the
solution needed for systems requiring traditional levels of protection from
unplanned failures.
 
  Service Level Availability. As organizations migrate or consider migrating
business-critical applications to distributed computing environments, they
frequently need to ensure that such applications are fully operational around
the clock. Protection from system failures does not address planned downtime
that consumes more customer time, effort and expense than unplanned downtime.
Examples of planned downtime are systems maintenance, hardware and software
upgrades, changes to network or server configurations, performance tuning and
tuning applications to reflect changes in business process. Service level
availability concerns impact both applications, hardware resources and data,
requiring a variety of solutions to meet the specific needs of each of these
overall service components.
 
  Traditional High Availability. System failures can result in lost revenues
or damaged customer relations when these applications are not available.
Although large-scale, fault-tolerant hardware systems can be used to ensure
systems operate continuously, such solutions are expensive and are not
designed to work with heterogeneous hardware and software components. As a
result, there is a significant need for high availability software that works
with existing systems to prevent systems and applications from going down due
to malfunction, human error, sabotage or natural disasters.
 
  Given these trends, the Company believes that the need for service level
availability software will grow as more business-critical applications are
deployed on distributed systems and as applications typically found on UNIX
and Windows NT servers, such as e-mail, intranet applications and Internet
access, are increasingly considered business-critical. In particular, the
Company believes the need for a service level availability solution will be an
important stimulus to market growth.
 
THE COMPANY'S STRATEGY
 
  The Company's objective is to be the leading provider of enterprise-wide
service level availability management solutions for large and medium sized
organizations with distributed computing systems. To achieve this objective,
the Company's strategy includes the following key elements:
 
  Focus on Enterprise-Class Service Level Availability Solutions. The Company
plans to focus on providing enterprise-level service level availability
management solutions for distributed computing systems. In July 1998, the
Company introduced FullTime Cluster, FullTime Enterprise and FullTime
Department, based on internally-developed proprietary technology and
proprietary technology acquired and integrated by the Company. These products
support heterogeneous clusters of up to one hundred NT and UNIX servers.
Because these products are critical in supporting business-critical
applications, the Company believes users will buy these solutions from vendors
with proven high availability expertise, who understand the complex, cross-
platform nature of enterprise environments. Accordingly, the Company believes
that leveraging its existing market position within the high availability
arena is critical for achieving broad customer acceptance of its products.
 
  In particular, the Company believes that service level availability is an
enterprise-level concern and that an enterprise-class sales organization is a
requirement to success in this market.
 
  Maintain Market Leadership Position with Foundation High Availability
Solutions. Based on the breadth and functionality of its product line, the
size and diversity of its customer base and its name recognition within the
reliability software market, the Company believes that its baseline
reliability products for the Unix and NT
 
                                       6
<PAGE>
 
markets have achieved leading market positions which are critical for
promoting brand awareness and customer acceptance of its products. For high
availability software solutions, the Company plans to continue to actively
market and sell these baseline products to solve traditional availability
issues, resulting in a continuing revenue stream from both new product sales
and ongoing maintenance and support. HA+, the UNIX product, will continue to
be sold directly by the field sales organization, while Octopus, the NT
offering, will be sold primarily as an indirect distribution product.
 
  Maintain and Enhance Direct Customer Relationships. Through its field sales
force, the Company has established a large customer base that includes a
number of important reference accounts. The Company's strategy is to be
market-oriented and to cultivate long-term customer relationships that foster
ongoing and additive purchases of its service level availability products. A
key element of this strategy is to focus on satisfying customer needs. For
example, its products are designed to work alone or with other products, to
work with multiple hardware and software platforms, and to be scalable, easy
to install and non-intrusive. In addition, the Company offers comprehensive
maintenance, support, consulting, integration and training services. Moreover,
the Company believes that its customers have great insight into future market
needs and product direction which it will continue to draw on in enhancing and
expanding its product line.
 
  Develop New Products. The Company's FullTime products and solutions
introduced in July 1998 are based on the FullTime Adaptive Architecture (as
described below). The Company plans to continue to leverage its expertise in
reliability technology and its knowledge of user requirements. The Company has
invested substantial resources in its internal development efforts. In
addition to developing and/or enhancing software products internally, the
Company will continue to evaluate acquiring or licensing products and
technologies that support and expand its product offerings. A key element of
the Company's strategy is to increase the percentage of revenues derived from
internally developed or acquired products that typically have higher gross
margins than Licensed Products.
 
  Expand Worldwide Distribution Capability. The Company has devoted and
intends to continue to devote significant resources to expanding and upgrading
its sales force, which currently consists of sales offices staffed by field
sales representatives, engineers and telesales representatives. The Company
also intends to expand its international sales and marketing programs, which
generated 22% of total revenue for fiscal 1998 and 17% in 1997 and 1996. In
addition, the Company plans to expand sales of its products through indirect
distribution channels, including distributors, system integrators and VARs.
Toward this objective, the Company has recently signed a comprehensive
distribution agreement with General Electric Information Technology
Distribution, a major global distributor of cross-platform enterprise systems
and software.
 
  Maintain and Enhance Strategic Relationships. A key objective of the Company
is to expand joint development and marketing relationships with systems
management software vendors to provide complementary solutions and to
establish relationships with hardware and software original equipment
manufacturers ("OEMs") to incorporate reliability/service level availability
solutions in their products. The Company believes that it is essential to form
strategic relationships with other networked computing vendors to effectively
market and sell reliability products. The Company works with hardware
providers such as Hewlett-Packard, IBM and Sun Microsystems to ensure that its
products are fully integrated into their hardware environments, and major
software vendors such as Oracle, Sybase, Informix, Legato Systems, Microsoft
and Tivoli to provide complementary solutions.
 
                                       7
<PAGE>
 
FULLTIME TECHNOLOGIES AND PRODUCTS
 
  The Company's solutions generally have a number of key attributes. They are
based on leading-edge technologies that are designed to be used separately or
integrated with other products developed by the Company or its strategic
partners, thereby allowing users to easily deploy fully integrated solutions.
They are designed to work with multiple hardware and software platforms and
related industry standards, to be adaptable as these platforms change and to
be scalable by providing the same functionality across a broad range of
network sizes. In addition, they are designed to be installed quickly and
easily without affecting the operation of business-critical applications.
 
 FullTime Adaptive Architecture
 
  The "FullTime Adaptive Architecture" provides an event and rules engine that
senses computing events in applications, data, systems and networks and
triggers the appropriate response to ensure optimum service level
availability, proactively managing service levels across applications. The
FullTime Adaptive Architecture allows the implementation of system and
software upgrades without traditional downtime. Resources can be transparently
relocated to continue to provide services to users while system changes are
applied. Time-of-day events, such as tape backups or data replication
activities are also automated. The FullTime Adaptive Architecture provides
open application programming interfaces so that other applications can share
data and it layers over an existing computing environment, including data,
systems, standard TCP/IP networks and applications, with no programming or
changes to the existing applications required. The FullTime Adaptive
Architecture is based on a reliable messaging infrastructure which allows
peer-to-peer capabilities supporting up to one hundred nodes in a
heterogeneous cluster of NT and UNIX and ensures real-time synchronization of
cluster-wide resources. The cluster monitors and automatically migrates, or
adapts, applications and information resources to any other node in the
cluster. Multi-tiered applications, such as web-based extranet or e-commerce
services, can be easily managed to meet SLAs since dependent resources can be
treated as a single entity to ensure continuity even across a highly complex
environment. The FullTime Adaptive Architecture's object -orientation enables
flexible definition of resource groups through a graphical user interface.
 

                        FULLTIME ADAPTIVE ARCHITECTURE

                            [PICTURE APPEARS HERE]
 
                                       8
<PAGE>
 
 Service Level Availability Software Products and Solutions
 
  In July 1998, the Company introduced a comprehensive set of products and
solutions, based on the FullTime Adaptive Architecture, focused on the service
level availability opportunity in network computing environments. The
Company's services, including support, consulting and training, are generally
priced separately. Prices vary according to number and type of servers as well
as other factors and exclude support and consulting services. The Company's
current or planned service level availability products and solutions can be
categorized as follows:
 
<TABLE>
<CAPTION>
                                                                    DATE OF FIRST
       PRODUCT                DESCRIPTION            PLATFORM     OR PLANNED RELEASE
                               FULLTIME PRODUCTS
 <C>                   <S>                        <C>             <C>
  FullTime Cluster     Service level              NT, Sun Solaris   July 1998
                       availability software      HP-UX and         through
                       for NT and UNIX            IBM AIX           December 1998
                       environments. Clustering
                       technology provides
                       scalability for up to
                       one hundred servers.
------------------------------------------------------------------------------------
  FullTime Data        Efficient real-time data   NT, Sun Solaris   July 1998
                       replication                HP-UX and         through
                                                  IBM AIX           December 1998
 
                              FULLTIME SOLUTIONS
 
  FullTime Enterprise  FullTime Cluster and       NT, Sun Solaris   July 1998
                       FullTime Data and          HP-UX and         through
                       software developers kit    IBM AIX           December 1998
                       for customization of
                       rules and events
------------------------------------------------------------------------------------
  FullTime Department  FullTime Cluster and       NT, Sun Solaris   July 1998
                       FullTime Data pre-         HP-UX and         through
                       packaged to work with      IBM AIX           December 1998
                       popular workgroup
                       applications
</TABLE>
 
  FullTime Cluster. FullTime Cluster creates collaborative clusters of server
resources across platforms, networks and applications to ensure resource
availability. It supports up to one hundred nodes in a cluster and unites
application servers into cooperative processing groups, eliminating the need
for expensive extra capacity or dedicated alternate processors. FullTime
Cluster supports cross-platform clusters, grouping and managing Windows NT and
UNIX nodes in the same cluster from one central console. It enables easy
management of multi-tier applications by creating application domains and then
coordinating their activities across platforms. FullTime Cluster supports
dynamic load balancing to proactively maintain service level performance at
optimum thresholds while optimizing computing resources.
 
  FullTime Data. FullTime Data provides real-time data replication for data
exchange and synchronization for local applications, data exchange among
remote sites and disaster recovery. It supports synchronous and asynchronous
replication and one-to-one, one-to-many and many-to-many configurations for
flexibility to replicate data among the required nodes.
 
  FullTime Enterprise. FullTime Enterprise is a highly scalable, enterprise-
ready adaptive computing environment that can be customized to fit individual
IT requirements. It is designed to offer maximum flexibility to tailor service
level availability solutions to a large enterprise environment. FullTime
Enterprise includes FullTime Cluster, FullTime Data and a software developers
kit.
 
                                       9
<PAGE>
 
  FullTime Department. FullTime Department is a turnkey adaptive computing
environment, tailored specifically to fit departmental computing needs that
combine high availability with real-time data protection. Designed for
business users with easy-to-use graphical wizards, FullTime Department is also
designed to collaborate from department to department as well as with FullTime
Enterprise solution deployments.
 
 Baseline Products for High Availability
 
  The Company plans to continue to market and sell its baseline line of
products that focus on traditional high availability management of unplanned
system failures. The Company's services for these products, including support,
consulting and training, are generally priced separately. Prices vary
according to number and type of servers as well as other factors and exclude
support and consulting services. The Company's baseline products and solutions
can be categorized as follows:
 
 
<TABLE>
<CAPTION>
 PRODUCT             DESCRIPTION              PLATFORM   DATE OF FIRST RELEASE
------------------------------------------------------------------------------
 <C>       <S>                               <C>         <C>
  HA+      High availability software for    Sun Solaris     October 1996
           UNIX environments. Clustering     HP-UX 10.0
           technology provides scalability   IBM AIX
           for up to sixteen servers.
------------------------------------------------------------------------------
  Octopus  Automatic switch-over for         Windows NT      October 1995
           Windows NT servers.
</TABLE>
 
 
  HA+. HA+ is a failover and recovery management product for UNIX designed to
minimize the impact of failures caused by system malfunction, human error,
sabotage or natural disasters. HA+ is designed to monitor and support a
variety of UNIX-based operating systems, hardware platforms, disk
configurations, networks, applications and databases. HA+ includes the
Company's proprietary clustering technology.
 
  The clustering technology that HA+ uses is based on a peer-to-peer
architecture that allows multiple servers to work together to provide
applications-oriented monitoring and recovery in the event of a system
failure. If a server goes down, or for any reason stops providing service to
an application, HA+ uses an intelligent decision-making process to promptly
"elect" another server to carry on service. Using this transparent election
process, HA+ can determine which server has the highest priority and should
therefore begin providing the service in place of the primary server. In
addition, HA+ can provide load balancing which ensures that no server is
overused in the cluster.
 
  HA+ can be configured to provide the degree of availability that best suits
a user's enterprise needs. The software is easily installed and does not
modify the existing core operating system. System administrators simply map
out possible failure scenarios and establish the desired failover paths for
individual services prior to configuration. This process creates a form of
pre-defined balancing that ensures only a single active server provides
specific services to the network at any one time.
 
  HA+ consists of three components:
 
    HA+ Cluster Management Software provides services for maintaining
  communications between servers as well as monitoring system resources and
  application services. This clustering technology is scalable, providing the
  enterprise the ability to start small and add on components or servers as
  needs increase, without changing the core product.
 
    HA+ Environment is designed to facilitate easy installation, flexible
  integration as well as monitoring for critical system-level resources to
  assure "end-to-end" availability of all business-critical components.
 
    HA+ modules allow HA+ to provide monitoring and recovery management for
  individual applications, such as databases, systems management applications
  and business function applications, in addition to
 
                                      10
<PAGE>
 
  protecting the entire server. HA+ modules allow the Company to tailor its
  solutions for specific applications and engage in co-marketing programs
  with strategic partners. The Company currently ships modules for databases
  from Oracle, Sybase, Informix and CA-Ingres. The Company also ships modules
  that support Tivoli's SNMP and Netscape's server software and has developed
  a module that supports Tivoli's TME software. The Company is currently
  working with other companies and products to create additional modules that
  allow HA+ to be tailored to vertical market needs.
 
  Octopus. The Octopus software solution is a real-time data protection and a
high availability switchover package. This product, which was awarded Byte
Magazine's Best Utility award at Comdex 1996, provides high availability for
Windows NT servers. If a failure occurs at the source system, the target
system can automatically assume the role of the failed systems, so users can
seamlessly continue to access their data and applications. Similar to HA+ for
UNIX, the goal of HA+ is to provide continuous up-time for Windows NT servers
and data. HA+ supports multiple configurations, including many-to-one.
 
THE COMPANY'S ORGANIZATION IN SUPPORT OF REVENUE
 
 Customer Support
 
  The Company believes that a high level of customer service is required to
successfully sell reliability products for distributed computing systems.
Accordingly, an essential part of the Company's business is providing
comprehensive maintenance, technical support, consulting and training services
for its customers. Most of the Company's customers have support and
maintenance agreements with the Company that are typically for 12 month
increments.
 
  The Technical Services Group ("TSG") consists of 28 people which the Company
supplements with outside consultants for some support requirements. These
consultants are on-site and provide service at comparable levels to a Company
employee. TSG provides the following services:
 
  Maintenance and Technical Support. The Company offers two levels of support
packages: (i) support during normal business hours and (ii) 24 x 7 support.
Both levels include e-mail and fax customer support and new software releases.
Prices for maintenance and technical support, which is mandatory for the first
year for most of the Company's products, typically range from 15% to 30% of
the price of the product.
 
  Consulting. TSG includes the Company's Professional Services Group, which is
responsible for on-site consulting as well as development work done for
specific customers. Consulting services include implementation planning,
project management, project customization and upgrade management. Consulting
services are generally performed on a fee-basis by day or by project. These
consulting services are used to leverage the Company's products so they can be
better implemented at a customer site. A majority of the Company's new high
availability customers purchase the Company's consulting services. The Company
believes that market acceptance of its FullTime products and solutions will
increase consulting activity.
 
  Training. The Company offers comprehensive training classes to its
customers, distributors, systems integrators and VARs both on-site and at the
Company's headquarters. The training program includes instruction in the
installation, customization and optimization of the Company's products on
their specific environment.
 
 Sales and Marketing
 
  The Company is targeting customers within both public and private sector
organizations that have deployed or are deploying distributed computing
systems. Typical target customers are large and medium sized companies who
have their business-critical applications running on UNIX or Windows NT
servers. The Company's customers are in a variety of industries, including
telecommunications, finance, manufacturing and energy. The Company markets its
software and services to Fortune 2000 accounts primarily through its field
sales organization complemented by other sales channels, including systems
integrators, OEMs, VARs and international distributors.
 
                                      11
<PAGE>
 
  Field Sales. As of June 30, 1998, the Company's field sales force consisted
of 71 personnel, including 39 sales representatives and 32 sales engineers
that provide technical sales assistance. At June 30, 1997 the Company's field
sales force was comprised of 48 personnel, including 37 sales representatives
and 11 sales engineers. The Company increased its staffing levels to provide
an infrastructure to support a global presence and to expand its distribution
capabilities. The Company currently has 22 sales offices, most of which are
staffed with both sales and technical pre-sales personnel. The Company uses a
consultative sales approach for selling to major accounts. This model entails
the collaboration of technical and sales personnel to formulate proposals that
address the specific requirements of the customer. The Company focuses its
initial sales efforts on CIO level and IT executive level management, working
with system and network administrators for evaluation and deployment purposes.
 
  Inside Sales. The Company's telesales organization is located in San Mateo,
California and is aligned with the field sales force, providing support for
field sales representatives and their resellers. Inside sales is also focused
on sales to middle-tier account targets.
 
  Indirect Distribution Channels. As of June 30, 1998, the Company had over
200 VARs, resellers and systems integrators of its reliability products.
During August 1998, the Company entered into a comprehensive master
distribution agreement with GE Information Technology Distribution ("GEITD"),
a major global distributor. The GEITD relationship is expected to enhance the
support of current resellers, while also extending the reach of Fulltime
products into a broader reseller base. These resellers are generally
responsible for managing the sales and installation process in each customer
situation. In selected opportunities, the Company's support personnel often
work with the reseller to provide technical support. This approach enables the
Company to cost effectively achieve broader market coverage, while maintaining
close contact with customers in order to gauge product direction and to
monitor customer satisfaction.
 
  International. As of June 30, 1998, the Company had approximately 67
distributors in Europe, Asia, Africa and South America. Revenue from sales
outside the United States accounted for 22% of total revenue in fiscal 1998
and 17% in fiscal years 1997 and 1996. The Company's sales and marketing
strategy includes expanding its international sales and marketing
infrastructure to generate an increasing percentage of revenue through
international sales. As a result, the Company plans to hire both sales and
technical personnel for Europe and Asia.
 
  Strategic Alliances and OEMs. A key objective of the Company is to expand
its joint development and marketing relationships with systems management
software vendors to provide complementary solutions and to establish
relationships with hardware and software OEMs to incorporate reliability
solutions in their products. The Company works with hardware providers such as
Hewlett-Packard, IBM and Sun Microsystems and software vendors such as Oracle,
Sybase, Informix, Legato Systems, Microsoft and Tivoli. In addition, the
Company is currently in active discussions with several systems management
software vendors and software OEMs to form additional strategic relationships
in which the Company's reliability products would be marketed and sold as an
added feature to these client/server packages. There can be no assurance that
the Company will successfully consummate any of these arrangements.
 
  Marketing Programs. In support of its domestic sales force and international
distributors, the Company conducts comprehensive marketing programs intended
to position, promote and market its family of service level availability
products. Marketing personnel engage in a variety of activities in support of
the sales force and resellers, including public relations and product
seminars, trade shows, direct mailings, preparing marketing materials and
coordinating the Company's participation in industry programs and forums. In
addition to setting up and managing distribution channels, recently introduced
programs have positioned the marketing staff to provide better support for key
vertical markets, such as financial and telecommunications.
 
 Product Development
 
  The Company has historically derived a substantial majority of its revenues
from the sale of products that are licensed or incorporate technology that is
licensed from third parties. The Company has increased its
 
                                      12
<PAGE>
 
commitment to product development and anticipates that it will incur
substantially higher product development expenses in absolute dollars and as a
percentage of total revenue in the future. In fiscal years 1998, 1997 and
1996, the Company's product development expenses were $3,823,000, $2,272,000
and $620,000, respectively.
 
  The Company believes that small, focused product development teams are the
most efficient method of developing new products, enhancing existing products
and supporting them. These teams are able to provide more focus on customer
requirements and work together with outside industry experts when necessary to
release timely, quality products and enhancements. As of June 30, 1998, the
Company had 22 employees and consultants working on product development and
engineering.
 
  The Company currently has four internal development teams:
 
  FullTime products. The FullTime development teams are located in
Northborough, Massachusetts and Boulder, Colorado. These teams have been
responsible for FullTime Cluster and FullTime Data. These teams rely primarily
on the Company's employees, supplemented with consultants for specific
application, or operating system expertise. The emphasis has been on
developing the initial release of the FullTime products and making those
products available across the key UNIX platforms and NT.
 
  HA+. The HA+ development team is based in San Mateo, California and focuses
on developing and enhancing UNIX-based high availability products. The team
relies primarily on the Company's employees for core development. It is
currently focused on enhancing the Company's proprietary HA+ clustering
technology and developing additional modules to support application-specific
failover and recovery management.
 
  Octopus. The Octopus development team is based in Langhorne, Pennsylvania
and is responsible for the Octopus family of NT reliability products. They
have significant expertise in remote data mirroring and failover in the
Windows NT operating environment. They are currently focused on adding
features to Octopus and key usability issues. These features include support
for Microsoft Cluster Server.
 
  The Company believes that its future success will depend in large part on
its ability to enhance its current product line, develop new products,
maintain technological leadership and satisfy an evolving range of customer
requirements for reliability applications. The Company is continuing to
increase the size and depth of its own internal development organizations as
well as look for strategic acquisitions of technology.
 
QUALIX DIRECT
 
  Through its Qualix Direct indirect sales organization, the Company provides
an incremental product line of add-on hardware, software and accessories for
distributed computing systems. Qualix Direct uses direct mailings, catalogs
and Web promotions to market its products. As of June 30, 1998, Qualix Direct
had four sales and marketing personnel focused on selling third party
products. Qualix Direct has historically sold third party products that
require a less consultative sales approach and are sold in smaller
transactions that typically generate lower gross margins. As part of the
Company's strategy of broadening distribution channels for its reliability
markets, Qualix Direct has successfully transitioned into selling the
Company's high availability products for Windows NT, the Octopus product line.
See "Management's Discussion and Analysis of Financial Conditions and Results
of Operations--Risk Factors," "--Dependence on Qualix Direct" and "--Sales and
Marketing--Qualix Direct."
 
COMPETITION
 
  The market for reliability software for distributed computing environments
is intensely competitive, fragmented and characterized by rapid technological
developments, evolving standards and rapid changes in customer requirements.
However, today there are few direct competitors to the Company within the
service level availability management arena. Although the Company believes
that the service level availability management
 
                                      13
<PAGE>
 
segment of the market is in the early stages of development as the market
matures the Company expects competition from four types of vendors:
 
  Independent Vendors that Provide Reliability Products. These companies offer
standalone products that provide specific service level availability
solutions. The Company believes that the majority of vendors currently in this
arena are focused on traditional high availability solutions which react to
unplanned failures, and do not currently have the technology required to
address the proactive requirements of the service level management
marketplace.
 
  Host-Based Systems Management Software Companies Migrating Their Products to
the Distributed Computing Market. These vendors, such as BMC and Computer
Associates, have built large businesses based upon selling systems management
tools primarily into the mainframe market, and are currently expanding into
the distributed computing arena. These vendors today provide event monitoring
technology which can be complementary to the Company's adaptive architecture,
and may license or create alternative solutions in the future.
 
  Distributed Computing Systems Management Software Companies That Incorporate
Reliability Products as a Part of Integrated System Management Solutions. A
number of companies have introduced products addressing various segments of
the distributed computing systems management market. For example, Legato
Systems offers storage management products and may develop or acquire products
that enable it to move into the reliability area.
 
  Hardware and Operating Systems Vendors That Incorporate Reliability
Solutions Into Their Products. Companies such as Sun Microsystems and
Microsoft continue to add features to their operating systems and thereby
reduce the need for their customers to purchase products providing these
features from independent vendors for homogeneous environments. For example,
Sun Microsystems has introduced a version of its database clustering product
that includes high availability features and Microsoft introduced Microsoft
Cluster Server as a built-in feature of Microsoft Windows NT Server,
Enterprise Edition. A key element of the Company's strategy is to provide
enterprise-level solutions for heterogeneous networked computing environments,
where these alternatives fail.
 
  The Company believes that the principal competitive factors affecting its
market include brand name recognition, product performance and functionality
(such as service level availability features, heterogeneity, scalability,
performance and ease of installation and use), quality, price, customer
service and support and the effectiveness of sales and marketing efforts.
Although the Company believes that its products currently compete favorably
with respect to all of these factors, there can be no assurance that the
Company can maintain its competitive position against current and potential
competitors, especially those with significantly greater financial, marketing,
service, support, technical and other resources than the Company. The
Company's future success will depend significantly on its ability to continue
to enhance its existing products and introduce new products more rapidly and
less expensively than its existing and potential competitors and to persuade
hardware and software vendors to license the Company's products rather than to
develop their own reliability products.
 
  Many of the Company's competitors have longer operating histories and have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base,
than the Company. The Company's current and future competitors could introduce
products with more features, higher scalability, greater functionality and
lower prices than the Company's products. These competitors could also bundle
existing or new products with other, more established products in order to
compete with the Company. The Company's focus on reliability software may be a
disadvantage in competing with vendors that offer a broader range of products.
Moreover, as the distributed systems management software market develops, a
number of companies with significantly greater resources than those of the
Company could attempt to increase their presence in this market by acquiring
or forming strategic alliances with competitors or business partners of the
Company. Because there are relatively low barriers to entry for the software
market, the Company expects additional competition from other established and
emerging companies. Increased competition is likely to result
 
                                      14
<PAGE>
 
in price reductions, reduced gross margins and loss of market share, any of
which could materially and adversely affect the Company's business, operating
results and financial condition. Any material reduction in the price of the
Company's products would negatively affect gross margins and would require the
Company to increase software unit sales in order to maintain gross profits.
 
  In addition, the distributed computing market is characterized by rapid
technological advances, changes in customer requirements, frequent new product
introductions and enhancements and evolving industry standards in computer
hardware and software technology. The introduction of products embodying new
technologies and the emergence of new industry standards may render the
Company's existing or planned products obsolete or unmarketable, particularly
because the market for reliability products is at an early state of
development. There can be no assurance that the Company will be able to
compete successfully against current and future competitors, and the failure
to do so would have a material adverse effect upon the Company's business,
financial condition and results of operations.
 
PROPRIETARY RIGHTS
 
  The Company's success depends in part upon its proprietary technology.
Although the Company has recently been issued a United States patent covering
certain aspects of the technology included in its Octopus data mirroring
product there can be no assurance that any issued patent will provide
meaningful protection for the Company's technology, that any issued patent
will provide the Company with any competitive advantages or will not be
challenged by third parties. Moreover, there can be no assurance that the
Company will develop additional proprietary products or technologies that are
patentable or that the patents of others will not have an adverse effect on
the Company's ability to do business. Furthermore, there can be no assurance
that others will not independently develop similar products, duplicate the
Company's products or design around the patents issued to the Company. As part
of its confidentiality procedures, the Company generally enters into non-
disclosure agreements with its employees, consultants, distributors and
corporate partners, and license agreements with respect to its software,
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization, or to develop similar
technology independently. Policing unauthorized use of the Company's products
is difficult and, although the Company is unable to determine the extent to
which piracy of its software products exists, software piracy can be expected
to be a persistent problem. In selling its products, the Company relies on
"shrink wrap" licenses for sales of certain products that are not signed by
licensees and, therefore, may be unenforceable under the laws of certain
jurisdictions. In addition, effective protection of intellectual property
rights is unavailable or limited in certain foreign countries.
 
  Additionally, the Company relies on a combination of copyright, trademark
and trade secret laws, confidentiality procedures and licensing arrangements
to establish and protect its proprietary rights relating to its licensed and
internally developed products. The Company's rights to market and sell
products that are licensed or incorporate a significant amount of technology
that is licensed from third parties (collectively "Licensed Products") are
generally governed by license agreements of specified duration. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations--Risk Factors" "--Dependence on Qualix Direct" and "--Dependence on
Licensed Products." There can be no assurance that the Company's protection of
its proprietary rights will be adequate or that the Company's competitors will
not independently develop similar technology, duplicate the Company's products
or design around any patents issued to the Company or other intellectual
property rights.
 
EMPLOYEES
 
  As of June 30, 1998, the Company had 164 employees. Of the total, 95 were
engaged in sales and marketing (including the Qualix Direct telesales
organization), 22 in product development and engineering, 23 in customer
service and support and 24 in administration and finance. The Company's future
success depends in significant part upon the continued service of its key
technical and senior management personnel and its continuing ability to
attract and retain highly qualified technical and managerial personnel.
Competition for such personnel is
 
                                      15
<PAGE>
 
intense and there can be no assurance that the Company can retain its key
managerial and technical employees or that it can attract, assimilate or
retain other highly qualified technical and managerial personnel in the
future. None of the Company's employees are represented by a labor union. The
Company has not experienced any work stoppages and considers its relations
with its employees to be good. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations--Risk Factors" --Dependence
Upon Key Personnel; "Management of Growth" and "--Need to Expand Product
Development and Engineering Capability."
 
RISK FACTORS
 
  Risk of Significant Fluctuations in Quarterly Operating Results. The Company
has experienced, and expects to continue to experience, significant
fluctuations in operating results, on an annual and a quarterly basis, as a
result of a number of factors, many of which are outside the Company's
control, including the size and timing of orders; lengthy sales cycles;
customer budget changes; introduction or enhancement of products by the
Company or its competitors; changes in pricing policy of the Company or its
competitors; the mix of products sold, including particularly the mix of
owned, licensed and resold products; increased competition; technological
changes in computer systems and environments; the ability of the Company to
timely develop or acquire, introduce and market new products; quality control
of products sold; market readiness to deploy reliability products for
distributed computing environments; market acceptance of new products and
product enhancements; seasonality of revenue; customer order deferrals in
anticipation of new products and product enhancements; the Company's success
in expanding its sales and marketing programs; personnel changes; foreign
currency exchange rates; mix of sales channels; acquisition costs or other
nonrecurring charges in connection with the acquisition of companies, products
or technologies; and general economic conditions. The Company's operating
results have historically fluctuated significantly as a result of nonrecurring
items, including a $740,000 writeoff of purchased in-process technology and a
$763,000 gain on sale of stock during fiscal 1996 and $595,000 of merger
expenses relating to the Octopus Technologies merger and a $528,000 gain on
sale of stock in fiscal 1997.
 
  The Company believes that operating results in the near-term will be
particularly dependent upon the success or failure of its new enterprise-level
sales approach, achieving significant market acceptance of its FullTime
products and solutions and continued market acceptance of its high
availability products, as well as the timing and size or orders received. The
Company's gross margin will be affected by a number of factors, including the
mix of owned, licensed and resold products, the percentage of total revenue
from service contracts, product pricing, the percentage of total revenue from
direct sales and indirect distribution channels and the percentage of sales by
the Qualix Direct telesales organization. Internally developed or acquired
products generally have higher gross margins than Licensed Products because
lower or no royalties must be paid. Service revenues generally have lower
margins than revenues from sales of owned products because of the costs
incurred to generate service revenues. Revenues from products resold by the
Qualix Direct telesales organization generally have lower gross margins than
revenues from owned and Licensed Products sold by the Company's other direct
and indirect distribution channels.
 
  Large sales of certain reliability products, including the FullTime products
and solutions and HA+ often have long cycles and are subject to a number of
significant risks over which the Company has little or no control. The timing
of large sales can cause significant fluctuations in the Company's operating
results, and delivery schedules may be canceled or delayed. Because sales
orders are typically shipped shortly after receipt, order backlog as of any
particular date is not necessarily indicative of the Company's future
revenues. Accordingly, total revenues in any quarter are substantially
dependent on orders booked and shipped during that quarter. Historically, the
Company has often recognized a significant portion of its revenues in the last
weeks, or even days, of a quarter. As a result, the magnitude of quarterly
fluctuations may not become evident until late in, or after the close of, a
particular quarter. Further, to the extent that the Company is successful in
licensing its FullTime products and solutions (particularly to large
enterprise and national accounts), the size of its orders and the length of
its sales cycle are likely to increase. In addition, the Company's expense
levels are based in significant part on expectations as to future revenues and
as a result are relatively fixed in the short run. If
 
                                      16
<PAGE>
 
revenues are below expectations in any given quarter, net income is likely to
be disproportionately affected, particularly because the Company relies
heavily on a relatively high cost direct sales channel.
 
  Based upon all of the foregoing, the Company believes that the Company's
annual and quarterly revenues, expenses and operating results are likely to
vary significantly in the future, that period-to-period comparisons of its
results of operations are not necessarily meaningful and that, in any event,
such comparisons should not be relied upon as indications of future
performance. In addition, it is likely that in future quarters the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock could be
materially and adversely affected. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
 
  Recent Transition to New Business Model. The Company believes that the
strategic nature of its new products and solutions for maintaining service
level availability requires a new enterprise-level sales approach. During
fiscal year 1998, in conjunction with its FullTime product development
activities, the Company changed its sales and marketing management and plans
to upgrade its direct sales force with a focus on enterprise-level sales. The
Company's future profitability, if any, will be heavily dependent on the
successful implementation of its enterprise sales and marketing strategy and
the market acceptance of the FullTime products and solutions. There can be no
assurance that the Company will successfully implement this strategy. See "--
Uncertainty of Success of Recently Introduced and Planned Products", "--
Dependence on Qualix Direct" and "Need to Develop Enterprise Sales Force."
 
  Intense Competition. The market for reliability software for distributed
computing environments is intensely competitive, fragmented and characterized
by rapid technological developments, evolving standards and rapid changes in
customer requirements. To maintain and improve its position in this market,
the Company must continue to enhance current products and develop new products
in a timely fashion. Although the Company believes that the reliability
segment of the market is in the early stages of development, the Company
competes, or may compete, with four types of vendors: (i) independent vendors
that provide reliability products; (ii) host-based systems management software
companies migrating their products to the distributed computing market; (iii)
distributed computing systems management software companies that incorporate
reliability products as a part of integrated systems management solutions; and
(iv) hardware and operating system vendors that incorporate reliability
solutions into their products.
 
  Many of the Company's competitors have longer operating histories and have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base,
than the Company. The Company's current and future competitors could introduce
products with more features, higher scalability, greater functionality and
lower prices than the Company's products. These competitors could also bundle
existing or new products with other, more established products in order to
compete with the Company. The Company's focus on reliability software may be a
disadvantage in competing with vendors that offer a broader range of products.
Moreover, as the distributed systems management software market develops, a
number of companies with significantly greater resources than those of the
Company could attempt to increase their presence in this market by acquiring
or forming strategic alliances with competitors or business partners of the
Company. Because there are relatively low barriers to entry for the software
market, the Company expects additional competition from other established and
emerging companies. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
materially and adversely affect the Company's business, operating results and
financial condition. Any material reduction in the price of the Company's
products would negatively affect gross margins and would require the Company
to increase software unit sales in order to maintain gross profits.
 
  In addition, the distributed computing market is characterized by rapid
technological advances, changes in customer requirements, frequent new product
introductions and enhancements and evolving industry standards in computer
hardware and software technology. The introduction of products embodying new
technologies and the emergence of new industry standards may render the
Company's existing or planned products obsolete or unmarketable, particularly
because the market for reliability products is in an early stage of
development. There
 
                                      17
<PAGE>
 
can be no assurance that the Company will be able to compete successfully
against current and future competitors, especially those with significantly
greater financial, marketing, service, support, technical and other resources
than the Company, and the failure to do so would have a material adverse
effect upon the Company's business, financial condition and results of
operations.
 
  Need to Develop Enterprise Sales Force. As part of the Company's evolving
strategy of offering enterprise level software products and solutions, the
Company has recently reorganized its sales force. The Company historically has
not had a separate large enterprise or national accounts sales force and only
recently developed a direct sales group focused on these larger accounts. To
succeed in the national accounts market, the Company will be required to
transition its existing sales force into the enterprise level sales group, and
attract and retain qualified personnel, which personnel will require training
about, and knowledge of, product attributes for the Company's FullTime suite
of products. There can be no assurance that the Company will be successful in
creating the necessary sales organization or in attracting, retaining or
training these individuals. Historically, the Company has sold its products at
the departmental level. To succeed in the enterprise and national accounts
market will require, among other things, establishing relationships and
contacts with senior technology officers at these accounts. There can be no
assurance that the Company or its sales force will be successful in these
efforts.
 
  Dependence on Qualix Direct. Through its Qualix Direct telesales
organization, the Company has historically derived and expects to continue to
derive a significant portion of its total revenue from reselling ancillary
software and hardware products for distributed computing systems. Qualix
Direct accounted for 27%, 32% and 32% of total revenue in fiscal 1998, 1997
and 1996, respectively. The Company's reliance on Qualix Direct entails a
number of risks. Qualix Direct's product line is updated frequently in
response to changes in vendor offerings. Qualix Direct has no long-term supply
contracts with its vendors and many resold products are acquired pursuant to
purchase orders or contracts that can be terminated with little or no notice.
In addition, Qualix Direct generally has little or no control over the
marketing, support and enhancement of its resold products by its vendors and
faces significant competition from distributors and other distribution
channels. Moreover, gross margins on products resold by Qualix Direct are
generally lower than gross margins on owned and Licensed Products sold by the
Company's field sales organization. In addition, the Company's net revenues
may be adversely impacted if sales by Qualix Direct decline or do not grow at
anticipated rates, even though the Company's gross margins may be less
significantly impacted. Although the Company has recently begun to sell its
lower priced reliability products through Qualix Direct, there can be no
assurance that it will be successful or that such activities will not create
conflicts with the Company's other direct or indirect distribution channels.
Any adverse development at Qualix Direct could have a material adverse impact
on the Company's business, financial condition and results of operations.
 
  Uncertainty of Success of Recently Introduced and Planned Products. A key
element of the Company's strategy is to increase substantially market
awareness and acceptance of The Company's's recently introduced products and
solutions for service level availability. There are a number of risks
associated with the successful development or acquisition and introduction of
the Company's existing and planned products. There can be no assurance that
the Company can successfully market, sell or support any such products or
enhancements or that they will achieve significant market acceptance. Failure
of the Company to successfully develop, market, sell or support existing and
planned products or enhancements would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
needs to continue to expand and enhance its product development and
engineering resources in order to successfully implement its product
development program. See "--Need to Expand Product Development and Engineering
Capability." The Company has in the past experienced delays in the development
of new products and enhancements to existing products. There can be no
assurance that the Company can successfully develop any additional products or
enhance existing products. Even if developed or acquired, such products or
enhancements may contain undetected difficulties or defects that are not
discovered before they are released. See "--Risk of Software Defects."
 
  Dependence on Licensed Products. The Company has historically derived a
substantial majority, and expects to continue to derive a portion, of its
total revenue from the sale of Licensed Products. There are a
 
                                      18
<PAGE>
 
number of disadvantages and risks associated with the sale of Licensed
Products. The Company is frequently unable to obtain exclusive rights to sell
a licensed product, in which case the Company competes against the licensor
and potentially other third party licensees. The licenses are typically for a
specified period. For example, the Company's right to sell FireWall-1 (and
HA/HA+ for Firewalls, which incorporates FireWall-1) is subject to annual
renewal. The Company must typically pay a significant per-copy royalty that
reduces gross margins realized by the Company from the sale of Licensed
Products and may put the Company at a competitive disadvantage against the
licensor or other third parties licensees paying lower royalty rates. In
addition, the Company may have little or no control over the timing,
functionality and quality of enhancements and upgrades to the product and may
be restricted in the method and manner, including distribution channels, by
which the Company may sell the product. The Company may from time to time need
to enforce its rights under licenses. See "--Legal Proceedings."
Notwithstanding these factors, the Company anticipates it will derive a
significant percentage of its revenues from Licensed Products for the
foreseeable future. Any loss in the right to sell Licensed Products or any
adverse change in the terms upon which it sells Licensed Products could have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
  Dependence on Reliability Products. The Company currently derives the
majority of its revenues from the sale of reliability products and related
services for distributing computing environments. Notwithstanding the
introduction of the FullTime products, continued market acceptance of the
Company's reliability products is critical to the Company's revenue in the
near-and long-term. Demand for the Company's reliability products will depend
in large part on increasing market acceptance of distributed computing
systems, particularly for business-critical applications, and the need for
reliability systems management software products and services for these
computing systems. There can be no assurance that market acceptance of
distributed computing systems will increase for business-critical applications
or that market acceptance of reliability products and services will increase.
If reliability products fail to achieve broad market acceptance in distributed
computing environments, the Company's business, operating results and
financial condition would be materially and adversely affected. During recent
years, segments of the computer industry have experienced significant economic
downturns characterized by decreased product demand, production overcapacity,
price erosion, work slowdowns and layoffs. The Company's financial performance
may in the future experience substantial fluctuations as a consequence of such
industry patterns. There can be no assurance that such factors will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
  Need to Expand Product Development and Engineering Capability. The Company's
future success is critically dependent on expanding and integrating its
product development and engineering capability. In order to maintain its
market and technological leadership, the Company must maintain and upgrade its
products, develop new products and attract and retain development engineers
with the necessary expertise. There can be no assurance that the Company's
product development efforts will be successful or that future products will be
available on a timely basis or at all or achieve market acceptance. Moreover,
expansion of the Company's product development program will increase the
Company's operating expenses, and there can be no assurance that actual
spending increases will not exceed anticipated amounts or that such increases
will result in sufficient revenues to justify such increases. Failure to
successfully implement the Company's product development program could have a
material adverse effect on its business, financial condition and results of
operations.
 
  Dependence on Indirect Distribution Channels. An important element of the
Company's sales and marketing strategy is to continue to sell its products and
services through indirect distribution channels, including distributors,
system integrators, VARs, systems management software vendors and OEMs.
Selling through indirect channels may limit the Company's contacts with its
customers. As a result, the Company's ability to accurately forecast sales,
evaluate customer satisfaction and recognize emerging customer requirements
may be hindered. Marketing products through the Company's field sales force
and through indirect distribution channels may result in distribution channel
conflicts. There can be no assurance that channel conflicts will not
materially adversely affect its field sales efforts as well as its
relationships with existing or future distributors, system integrators, VARs,
systems management software vendors and OEMs. The Company's reliance on
indirect distribution increases the risks associated with the introduction of
new products, including risks of delays in
 
                                      19
<PAGE>
 
adoption and the risk that resellers will evaluate and potentially adopt
competitive products. There can be no assurance that the Company's current
resellers will adopt or successfully market any of the Company's new products.
In addition, these distribution relationships are frequently terminable at any
time without cause. Therefore, there can be no assurance that any such party
will continue to represent the Company's products, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
  Integration of Acquisitions. The Company may make acquisitions in the
future. Acquisitions of companies, products or technologies entail numerous
risks, including an inability to successfully assimilate acquired operations
and products, diversion of management's attention, loss of key employees of
acquired companies and substantial transaction costs. Some of the products
acquired may require significant additional development before they can be
marketed and may not generate revenue at levels anticipated by the Company.
There can be no assurance that the Company will not incur these problems in
the future. Moreover, future acquisitions by the Company may result in
dilutive issuances of equity securities, the incurrence of additional debt,
large one-time write-offs and the creation of goodwill or other intangible
assets that could result in significant amortization expense. Any such
problems or factors could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
  Dependence on Key Personnel; Management of Growth. The Company's future
operating results depend significantly on the continued service of its key
technical and senior management personnel. The Company's future success also
depends on its continuing ability to attract and retain highly qualified
technical and managerial personnel. The Company's future success is
particularly dependent on increasing its product development personnel. See
"--Need to Expand Product Development and Engineering Capability." The Company
has relied in the past on consultants as well as employees for its product
development programs. Competition for such personnel is intense, and there can
be no assurance that the Company will retain its key managerial and technical
employees or that it will be successful in attracting or retaining other
highly qualified technical and managerial employees and consultants in the
future. The Company has at times experienced difficulty in recruiting
qualified personnel, and there can be no assurance that the Company will not
experience such difficulties in the future. If the Company were to experience
such difficulties in the future, it may have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, the growth in the Company's business has placed, and is expected to
continue to place, a significant strain on the Company's management and
operations. To manage its future growth, if any, effectively, the Company must
continue to strengthen its operational, financial and management information
systems and expand, train and manage its employee work force. Failure to do so
effectively and on a timely basis could have a material adverse effect upon
the Company's business, financial condition and results of operations.
 
  Dependence on Proprietary Technology; Risks of Infringement. The Company's
success depends in part upon its proprietary technology. Although the Company
has recently been issued a United States patent covering certain aspects of
the technology included in its Octopus Technologies data mirroring product
there can be no assurance that any issued patent will provide meaningful
protection for the Company's technology, that any issued patent will provide
the Company with any competitive advantages or will not be challenged by third
parties. Moreover, there can be no assurance that the Company will develop
additional proprietary products or technologies that are patentable or that
the patents of others will not have an adverse effect on the Company's ability
to do business. Furthermore, there can be no assurance that others will not
independently develop similar products, duplicate the Company's products or
design around the patents issued to the Company. As part of its
confidentiality procedures, the Company generally enters into non-disclosure
agreements with its employees, distributors and corporate partners, and
license agreements with respect to its software, documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use the Company's products or
technology without authorization, or to develop similar technology
independently. Policing unauthorized use of the Company's products is
difficult and, although the Company is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be
a persistent problem. In selling its products, the Company relies on "shrink
wrap" licenses for sales of certain products that are not signed by licensees
and, therefore, may be unenforceable under the laws of certain
 
                                      20
<PAGE>
 
jurisdictions. In addition, effective protection of intellectual property
rights is unavailable or limited in certain foreign countries.
 
  Additionally, the Company relies on a combination of copyright, trademark
and trade secret laws, confidentiality procedures and licensing arrangements
to establish and protect its proprietary rights relating to its licensed and
internally developed products. The Company's rights to market and sell
Licensed Products are generally governed by license agreements of specified
duration. See "Management's Discussion and Analysis of Financial Conditions
and Results of Operations -- Dependence on Qualix Direct" and "-- Dependence
on Licensed Products." There can be no assurance that the Company's protection
of its proprietary rights will be adequate or that the Company's competitors
will not independently develop similar technology, duplicate the Company's
products or design around any patents issued to the Company or other
intellectual property rights.
 
  International Sales. International revenue from sales outside the United
States accounted for 22% of total revenue in fiscal 1998 and 17% for fiscal
years 1997 and 1996. The Company intends to continue to expand its operations
outside of the United States and enter additional international markets, which
will require significant management attention and financial resources. There
can be no assurance, however, that the Company will be able to maintain or
increase international market demand for the Company's products. The Company's
international revenues are currently denominated in U.S. dollars. An increase
in the value of the U.S. dollar relative to foreign currencies could make the
Company's products more expensive and, therefore, potentially less competitive
in foreign markets. Additional risks inherent in the Company's international
business activities generally include unexpected changes in regulatory
requirements, tariffs and other trade barriers, costs and risks of localizing
products for foreign countries, adverse tax consequences, restrictions on
repatriating earnings and the burdens of complying with a wide variety of
foreign laws. These risks, and in particular risks related to the recent
global economic turbulence and adverse economic circumstances in Asia, could
have a material adverse effect on the Company's business, operating results
and financial condition. There can be no assurance that such factors will not
have a material adverse effect upon the Company's future export revenues and,
consequently, the Company's business, financial condition and results of
operations.
 
  Risk of Software Defects. Software products as complex as those offered by
the Company frequently contain errors or defects, especially when first
introduced or when new versions or enhancements are released. Despite testing
by the Company and by current and potential customers, there can be no
assurance that defects and errors will not be found in existing products or in
new products, versions or enhancements after commencement of commercial
shipments. Any such defects and errors could result in adverse customer
reactions, particularly because the Company focuses on selling reliability
products, delays in market acceptance, expensive product changes or loss of
revenue, any of which could have a material adverse effect upon the Company's
business, financial condition and results of operations.
 
  Product Liability. The Company's license agreements with customers typically
contain provisions designed to limit the Company's exposure to potential
product liability claims. A significant portion of the Company's products are
licensed pursuant to "shrink wrap" licenses. To the extent the Company relies
on "shrink wrap" licenses that are not signed by licensees and, therefore, may
be unenforceable under the laws of certain jurisdictions, the limitation of
liability provisions contained in such license agreements may not be
effective. The Company's products generally provide systems management
software that is used for business-critical applications, and, as a result,
the sale and support of products by the Company may entail the risk of product
liability claims. Although the Company maintains errors and omissions product
liability insurance, a successful liability claim brought against the Company
could have a material adverse effect upon the Company's business, financial
condition and results of operations.
 
  Year 2000 Compliance Issues. Many currently installed computer systems and
software products are coded to accept only two digit entries in date code
fields. These date code fields will need to accept four digit entries to
distinguish twenty-first century dates from twentieth century dates. As a
result, many companies' software and computer systems may need to be upgraded
or replaced in order to comply with such "Year 2000" requirements.
 
                                      21
<PAGE>
 
  The Company has tested its current products for Year 2000 compliance and
believes that its current products are Year 2000 compliant. However, the
failure of the Company's current or prior products to operate properly with
regard to the Year 2000 requirements could cause the Company to incur
unanticipated expenses to remedy any problems, could cause a reduction in
sales and could expose the Company to related litigation by its customers,
each of which could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, the Company and third
parties with whom it conducts business may utilize equipment or software that
may not be Year 2000 compliant. Failure of the Company's or any such third
party's equipment or software to operate properly with regard to the Year 2000
requirements could cause, among other things, the Company or any such third
party to incur unanticipated expenses or efforts to remedy any problems, which
could have a material adverse effect on its or their respective business,
operating results and financial condition. Furthermore, the purchasing
patterns of customers or potential customers may be affected by Year 2000
issues as companies expend significant resources to evaluate and to correct
their equipment or software for Year 2000 compliance and as they
simultaneously evaluate the preparedness of the third parties with whom they
deal. These expenditures may result in reduced funds available to purchase
products and services such as those offered by the Company, which could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
 
  Potential Volatility of Stock Price. The market price for the Company's
stock has been subject to significant fluctuations and may be volatile in the
future. The Company believes that factors such as actual or anticipated
fluctuations in the Company's results of operations, announcements of
technological innovations, new products by the Company or its competitors,
developments with respect to patents, copyrights or proprietary rights,
conditions and trends in the distributed computing environment and other
technology industries, general market conditions and other factors. In
addition, the stock market has from time to time experienced significant price
and volume fluctuations that have particularly affected the market prices for
the common stock of technology companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock. In the past,
following periods of volatility in the market price of a particular company's
securities, securities class action litigation has often been brought against
that company. There can be no assurance that such litigation will not occur in
the future with respect to the Company. Such litigation could result in
substantial costs and a diversion of management's attention and resources,
which could have a material adverse effect upon the Company's business,
financial condition and results of operations.
 
  Control by Directors, Executive Officers and Principal Stockholders. The
present directors, executive officers and principal stockholders, and their
affiliates and related persons, beneficially own approximately 20% of the
outstanding shares of the Company's Common Stock. These stockholders are able
to elect all of the Company's directors, have the voting power to approve all
matters requiring stockholder approval, and continue to exert significant
influence over the affairs of the Company. Such concentration of ownership may
have the effect of delaying, deferring or preventing a change in control of
the Company.
 
ITEM 2. PROPERTIES
 
  The Company's principal administrative sales, marketing and development
facility is located in a building providing approximately 18,886 square feet
of available space in San Mateo, California. This facility is leased through
May 31, 2003. The Company occupies 14 other domestic regional sales offices
throughout the United States as well as international offices in Canada, the
United Kingdom, Singapore, France and Holland.
 
ITEM 3. LEGAL PROCEEDINGS
 
  Pursuant to an acquisition agreement between Anthill Incorporated (Anthill)
and the Company, the Company purchased certain software and other assets of
Anthill in May 1996. The purchase price totaled approximately $675,000, of
which $175,000 was paid at the closing of the transaction with the remaining
purchase price to be paid in four annual installments of $125,000 each. At
June 30, 1998, the Company has a
 
                                      22
<PAGE>
 
remaining obligation to pay three annual installments of $125,000 each. The
Company has granted a security interest in the software technology acquired
from Anthill in order to secure the obligation.
 
  The Company filed a lawsuit against Anthill in May 1998; in the suit the
Company contends that the software did not function as had been represented by
Anthill, and it seeks a declaration that it need not make any more payments to
Anthill under the Agreement, rescission of the Agreement and damages of
$300,000 or more based upon payments already made to Anthill.
 
  On August 12, 1998, Anthill commenced arbitration proceedings against the
Company alleging that the Company breached its agreement with Anthill by not
making the annual installment payment due in May 1998. Anthill seeks damages
of $375,000, plus interest, for the three remaining payments allegedly due
under the agreement.
 
  The Company has denied the claims made by Anthill in the arbitration and
intends to vigorously defend those claims. The Company has also submitted a
counterclaim in the arbitration, in which it seeks the same relief it is
demanding in its lawsuit. Management does not believe that the disposition of
these actions will have a material adverse effect on the Company's business,
financial condition or results of operations.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  None.
 
                                      23
<PAGE>
 
EXECUTIVE OFFICERS OF THE COMPANY
 
  Set forth below are biographical summaries of the current executive officers
of the Company as of June 30, 1998:
 
  Richard G. Thau, 51, Chairman of the Board, President and Chief Executive
Officer, co-founded the Company in September 1990. From September 1985 to
January 1990, he was employed at MicroMRP, a company that develops
microcomputer-based manufacturing, planning and control software, where he
served as President and Chief Executive Officer from November 1985 to January
1990 and as Vice President, Sales and Marketing from September 1985 to
November 1985. From January 1984 to July 1985, he served as Vice President,
Sales and Marketing for General Parametrics, a hardware and software-based
business presentation systems company. Mr. Thau received a B.S. in Engineering
Sciences from State University of New York at Stony Brook in 1968 and attended
the M.B.A. program at the University of Santa Clara.
 
  Bruce C. Felt, 40, Vice President Finance and Chief Financial Officer,
joined the Company in March 1994. From July 1992 to March 1994, he was an
independent consultant. From June 1989 to July 1992, Mr. Felt was Chief
Financial Officer at Renaissance Software Inc., a trading systems software
company that he co-founded. Mr. Felt received a B.S. in accounting from the
University of South Carolina in 1980 and an M.B.A. from Stanford University,
Graduate School of Business in 1989. Mr. Felt is a Certified Public
Accountant.
 
  David Malmstedt, 42, Senior Vice President of Field Sales Operations, joined
the Company in January 1998. From August 1995 to January 1998 Mr. Malmstedt
was Vice President, Americas, for Candle Corporation, a systems management
software company. From November 1989 to August 1995 Dave served as Vice
President, Central Area, for Legent Corporation. From 1984 to 1989 he was
Regional Director for Business Software Technology, a company which he
founded. From 1980 to 1984 he was a Regional Manager for Cullinet Software,
Inc. From 1976 to 1980 Mr. Malmstedt held various positions within Pansophic
Systems, Inc.
 
  Dan Kingman, 44, Vice President of Human Resources, joined the Company in
January, 1998. From June 1992 to January 1998, Mr. Kingman was Vice President
of Human Resources at MDL Information Systems. From July 1987 to October 1991
he was employed at Appian Technology Inc. as Vice President of Corporate
Resources. From November 1978 to July 1987 Mr. Kingman served in various
management positions at Signetics Corporation. He received a B.S. in Commerce
from Santa Clara University in 1976.
 
  Rebel Brown, 40, Vice President of Strategic Marketing joined the Company in
July, 1998. Ms. Brown began working with the Company in January 1998 to assist
in the development and implementation of a renewed corporate and product
marketing strategy. She has over 18 years of experience in the computing
arena, focused on the sales and marketing of technologies and application
products for NT, UNIX and the World Wide Web. For the past five years, Rebel
has been president of Cognoscenti, a Silicon-Valley based consulting firm,
where she has successfully positioned and launched new products for vendors in
the Internet and client/server marketplace, including Avalon Software, Data
Mind, Inc., EnterpriseLink Technologies, ILOG, Inc., NeXT Software, Novita
Corporation, OpenVision Technologies and Verity. She had been named one of the
Top 100 Women in Computing by Software Magazine and advises a number of US and
European-based venture capital and investment banking firms concerning markets
trends and technology investments, identifying areas of high growth
opportunity.
 
  George J. Symons, 38, Vice President of Engineering and Technical Services,
joined the Company in April 1996. From May 1995 to April 1996, Mr. Symons was
an independent consultant. From April 1993 to April 1995, he was Vice
President of Marketing at Software Research, Inc., a software testing tools
company. From January 1993 to March 1993 he served as an independent
consultant. From September 1990 to December 1992, he was Vice President,
Marketing at PROCASE Corp., a development software manufacturer. Mr. Symons
received a B.A. in Management Science and a B.A. in Computer Science in 1981
from the University of California, San Diego and an M.B.A. in 1983 from the
University of California, Los Angeles.
 
                                      24
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
  The Company made its initial public offering on February 12, 1997 at a price
of $8.00 per share. The Company's stock is traded on the over-the-counter
market and is quoted on the Nasdaq National Market under the symbol FTSW.
Prior to July 7, 1998 the Company had traded under the symbol QLIX.
 
  The following table sets forth, for the periods indicated, the range of high
and low sales prices per share of common stock of the Company as reported on
the NASDAQ Market System:
 
<TABLE>
<CAPTION>
                                                                   HIGH   LOW
                        NASDAQ NATIONAL MARKET                    ------ ------
      <S>                                                         <C>    <C>
      Fiscal 1997
        Third Quarter (From February 12, 1997)................... $9.250 $5.250
        Fourth Quarter........................................... $9.000 $5.375
      Fiscal 1998
        First Quarter............................................ $6.500 $4.125
        Second Quarter........................................... $5.438 $2.875
        Third Quarter............................................ $3.750 $2.750
        Fourth Quarter........................................... $4.000 $1.250
      Fiscal 1999
        First Quarter (through September 4 , 1998)............... $2.469 $1.281
</TABLE>
 
  As of September 4, 1998, there were 121 stockholders of record. The Company
has never declared or paid any cash dividends on its Common Stock and does not
expect to pay cash dividends in the foreseeable future. In addition, the
Company anticipates entering into a bank credit agreement that will prohibit
it from paying cash dividends without the bank's consent.
 
                                      25
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA
 
  The consolidated statements of operations data for the fiscal years ended
June 30, 1998, 1997 and 1996 and the consolidated balance sheet data as of
June 30, 1998 and 1997 are derived from the audited consolidated financial
statements of the Company that are included elsewhere in this Report on Form
10-K. The consolidated statements of operations data for the fiscal years
ended June 30, 1995 and 1994 and the consolidated balance sheet data as of
June 30, 1996, 1995, and 1994 are derived from audited consolidated financial
statements included within the Company's other reports filed with the
Securities and Exchange Commission ("SEC"). The selected consolidated
financial data should be read in conjunction with the Company's Consolidated
Financial Statements and related Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Report on Form 10-K.
 
FIVE YEAR FINANCIAL SUMMARY
 
<TABLE>
<CAPTION>
                                               YEARS ENDED JUNE 30,
                                      ------------------------------------------
                                       1998    1997(1) 1996(2)   1995     1994
                                      -------  ------- -------  -------  -------
                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                   <C>      <C>     <C>      <C>      <C>
CONSOLIDATED STATEMENT OF OPERATIONS
 DATA:
  Revenue:
    Reliability software............  $16,034  $16,868 $8,965   $ 3,573  $   536
    Other products..................    8,027   10,336  5,360     4,723    4,868
    Support, maintenance and
     consulting.....................    5,954    4,942  2,210     1,107      649
                                      -------  ------- ------   -------  -------
      Total revenue.................   30,015   32,146 16,535     9,403    6,053
                                      -------  ------- ------   -------  -------
  Cost of revenue:
    Cost of reliability software....      976    3,738  3,640     1,619      291
    Cost of other products..........    5,758    7,289  3,781     3,332    3,396
    Cost of support, maintenance and
     consulting.....................    2,103    1,871  1,021       610      475
                                      -------  ------- ------   -------  -------
      Total cost of revenue.........    8,837   12,898  8,442     5,561    4,162
                                      -------  ------- ------   -------  -------
  Gross profit......................   21,178   19,248  8,093     3,842    1,891
  Operating expenses:
    Sales and marketing.............   19,878   11,280  5,101     3,463    2,490
    General and administrative......    4,724    2,878  1,920     1,239    1,528
    Research and development........    3,823    2,272    620       257      419
    Merger expenses.................      --       595    --        --       --
    Purchased in-process technology.      --       --     740       --       --
                                      -------  ------- ------   -------  -------
      Total operating expenses......   28,425   17,025  8,381     4,959    4,437
                                      -------  ------- ------   -------  -------
  Income (loss) from operations.....   (7,247)   2,223   (288)   (1,117)  (2,546)
    Gain on sale of investments.....        2      528    763        --       --
    Other income (expense), net.....      801      362     83       (63)     (16)
                                      -------  ------- ------   -------  -------
      Income (loss) before income
       taxes........................   (6,444)   3,113    558    (1,180)  (2,562)
      Provision for income taxes....      --       406    --        --       --
                                      -------  ------- ------   -------  -------
      Net income (loss).............  $(6,444) $ 2,707 $  558   $(1,180) $(2,562)
                                      =======  ======= ======   =======  =======
      Earnings per share:
      Basic.........................  $ (0.62) $  0.41 $ 0.21
                                      =======  ======= ======
      Diluted.......................  $ (0.62) $  0.29 $ 0.07
                                      =======  ======= ======
      Shares used in per share
       computation(3):
      Basic.........................   10,336    6,620  2,665
                                      =======  ======= ======
      Diluted.......................   10,336    9,312  8,177
                                      =======  ======= ======
</TABLE>
 
                                                       (continued on next page)
 
                                      26
<PAGE>
 
<TABLE>
<CAPTION>
                                                   AS OF JUNE 30,
                                         ---------------------------------------
                                          1998    1997(1)   1996(2)  1995  1994
                                         ------- -------   ------   ------ -----
                                                   (IN THOUSANDS)
<S>                                      <C>     <C>       <C>      <C>    <C>
CONSOLIDATED BALANCE SHEET DATA:
 Cash, cash equivalents and temporary
  investments........................... $11,874 $19,158   $3,587   $2,629 $ 331
 Total assets...........................  20,934  26,334    6,903    4,455 1,851
 Long-term obligations, less current
  portion...............................      87     191      290      153    10
 Stockholders' equity...................  14,139  20,103    2,846    2,479   100
</TABLE>
--------
(1) Excluding $595,000 for merger expenses relating to the Octopus
    Technologies merger and the $528,000 gain on sale of investments, net
    income would have been $2,774,000.
(2) Excluding the $740,000 write-off for purchased in-process technology and
    the $763,000 gain on sale of investments, net income would have been
    $535,000.
(3) See Note 1 to Consolidated Financial Statements for an explanation of the
    number of shares used in computing net income per share.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS
 
  The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and the accompanying notes.
 
  This Form 10-K contains forward-looking statements written in the meaning of
section 21E of the Securities Exchange Act of 1934, as amended. These forward-
looking statements involve a number of risks and uncertainties. Such risks and
uncertainties include, but are not limited to, those discussed in this Form
10-K. The actual results that the Company achieves may differ materially from
any anticipated results described in the forward-looking statements due to
such risks and uncertainties. See "Business--Risk Factors."
 
OVERVIEW
 
  The Company began operating primarily as a distributor, value-added reseller
(VAR) and publisher of licensed third party client/server software products.
In 1993, the Company focused on the reliability market by introducing
QualixHA, its first high availability product for the UNIX operating
environment. QualixHA was based on a licensed core software engine. In May
1996, the Company acquired substantially all of the assets and assumed certain
liabilities of Anthill Incorporated ("Anthill"), including technology relating
to a hierarchical storage management product under development. In August
1996, the Company merged with Octopus Technologies, Inc. ("Octopus
Technologies") which had developed high availability and remote data mirroring
products for the Windows NT operating environment. In October 1996, the
Company introduced QualixHA+, currently known as HA+, which is based on an
internally-developed core software engine. A key element of the Company's
strategy is to increase substantially the percentage of revenues derived from
internally developed or acquired products that typically have higher gross
margins than Licensed Products. Pursuant to this strategy, the Company ceased
selling Qualix HA in February 1997. The Company completed its initial public
offering in February 1997, receiving net proceeds of $14,950,000.
 
  In July 1998, the Company introduced FullTime software solutions. These
solutions are designed to maintain service level availability during a variety
of planned and unplanned computing events that can dramatically impact the
availability of services and information. The Company believes that its
FullTime products and solutions redefine high availability to solve a much
broader market problem, offering a potential opportunity for the Company to
dramatically expand the size of its potential market and to target enterprise-
wide customers, as well as individual departmental customers. A key element of
the Company's strategy is to sell FullTime products and solutions to strategic
buyers such as CIOs, heads of IT and others responsible for maintaining SLAs
between IT and line-of-business organizations. Increasingly, SLAs are becoming
the basis on
 
                                      27
<PAGE>
 
which lines-of-business organizations measure corporate IT performance
concerning the required availability of business-critical applications and
information.
 
  The Company's service level availability products and services are based on
internally-developed technology including (i) network data application
monitoring, (ii) system hardware/software monitoring and (iii) support for
managing and monitoring disk volumes and volume managers, and externally-
developed technology acquired in January, 1998 representing a messaging system
with a distributed persistent database, event management, rule engine and
application management.
 
  Prior to the Octopus Technologies merger, and prior to developing QualixHA+,
the Company had minimal research and development expenditures and a
correspondingly high cost of reliability software revenue. The Company expects
its research and development expenditures to increase substantially in the
future as a result of its increasing focus on internal development of
products. See "Risk Factors--Need to Expand Product Development and
Engineering Capability."
 
  The Company markets and sells reliability software through a combination of
its field sales organization and indirect distribution channels. In addition,
the Company sells other third party software and hardware products through its
Qualix Direct telesales organization, which has recently transitioned into
selling the Company's reliability products for Windows NT, the Octopus product
line.
 
  The Company generally recognizes revenue from software license agreements
upon shipment of the software if no significant future contractual obligations
remain and collection of the resulting receivable is probable. Maintenance and
technical support revenue is recognized over the term of the agreement,
typically 12 months. Consulting and training revenue is recognized as services
are provided. See Note 1 of Notes to Consolidated Financial Statements.
 
  Octopus Technologies Merger. In August 1996, Qualix merged with Octopus
Technologies, whose product line consisted of remote data mirroring and high
availability products for Windows NT. The merger was accounted for as a
pooling-of-interests. Approximately $595,000 of costs directly attributable to
the business combination, primarily professional fees associated with
investment bankers, attorneys and accountants, were incurred by the Company
during the first quarter of fiscal 1997. All financial statements contained
herein have been restated to reflect the Octopus Technologies transaction.
 
  Anthill Acquisition. In May 1996, the Company acquired substantially all the
assets and assumed certain of the liabilities of Anthill, including its data
access management product. The Company acquired Anthill's technology in order
to develop Qualix DataStar remote mirroring software. The Anthill acquisition
resulted in a $740,000 writeoff of in-process technology in the fourth quarter
of fiscal 1996.
 
  The Company filed a lawsuit against Anthill in May 1998; in the suit the
Company contends that the software did not function as had been represented by
Anthill, and it seeks a declaration that it need not make any more payments to
Anthill under the Agreement, rescission of the Agreement and damages of
$300,000 or more based upon payments already made to Anthill.
 
  On August 12, 1998, Anthill commenced arbitration proceedings against the
Company alleging that the Company breached its agreement with Anthill by not
making the annual installment payment due in May 1998. Anthill seeks damages
of $375,000, plus interest, for the three remaining payments allegedly due
under the agreement.
 
 
                                      28
<PAGE>
 
  The Company has denied the claims made by Anthill in the arbitration and
intends to vigorously defend those claims. The Company has also submitted a
counterclaim in the arbitration, in which it seeks the same relief it is
demanding in its lawsuit. Management does not believe that the disposition of
these actions will have a material adverse effect on the Company's business,
financial condition or results of operations.
 
  Year 2000 Compliance Issues. Many currently installed computer systems and
software products are coded to accept only two digit entries in date code
fields. These date code fields will need to accept four digit entries to
distinguish twenty-first century dates from twentieth century dates. As a
result, many companies' software and computer systems may need to be upgraded
or replaced in order to comply with such "Year 2000" requirements. The Company
has tested its current products for Year 2000 compliance and believes that its
current products are Year 2000 compliant. However, the failure of the
Company's current or prior products to operate properly with regard to the
Year 2000 requirements could cause the Company to incur unanticipated expenses
to remedy any problems, could cause a reduction in sales and could expose the
Company to related litigation by its customers, each of which could have a
material adverse effect on the Company's business, operating results and
financial condition.
 
  The Company utilizes third party equipment and software that may not be Year
2000 compliant. Except for suppliers of the desktop software, operating
systems and the Company's proposed new financial system (as discussed in the
following paragraph), the Company has made inquiries of all its material
equipment and software suppliers as to the Year 2000 compliance of their
products. Each such supplier has indicated that its equipment and/or software
either is, or will be by December 31, 1999, Year 2000 compliant. The Company
plans to conduct a Year 2000 compliance inquiry of the Company's suppliers of
desktop software and operating systems in the first half of fiscal 1999 and to
take such actions as are appropriate under the circumstances.
 
  The supplier of the Company's current financial information system has been
unable to assure the Company that its software will be Year 2000 compliant.
The Company has determined that minor modifications to the current financial
information system would be required to make it Year 2000 compliant. The
estimated cost of such modifications is expected to approximate $50,000.
Nonetheless, while the Company would be affected by any such failure, the
Company believes that it could continue to operate despite any such failure of
its financial information system to be Year 2000 compliant.
 
  The Company also has material relationships with third party suppliers and
service providers who may utilize equipment or software that may not be Year
2000 compliant, such as financial institutions, shipping companies and payroll
services. The Company has not inquired of any such material party as to their
Year 2000 status, but the Company plans to conduct a Year 2000 compliance
inquiry of such third parties in the first half of fiscal 1999. Based upon the
results of such inquiry, the Company intends to take appropriate action.
Nonetheless, while the Company would be affected by any such failure, the
Company believes that it could continue to operate despite any such failure of
a material party to be Year 2000 compliant. Failure of any third-party's
equipment or software to operate properly with regard to the Year 2000
requirements could cause the Company to incur unanticipated expenses to remedy
any problems and could cause a reduction in sales, each of which could have a
material adverse effect on the Company's business, operating results and
financial condition.
 
  The business, operating results and financial condition of the Company's
customers could also be adversely affected to the extent that they utilize
equipment or software that is not Year 2000 compliant. Furthermore, the
purchasing patterns of customers or potential customers may be affected by
Year 2000 issues as companies expend significant resources to evaluate and
correct their equipment or software for Year 2000 compliance and as they
evaluate the Year 2000 compliance of like third parties with whom they deal.
These expenditures may result in reduced funds available to purchase products
and services such as those offered by the Company, which could have a material
adverse effect on the Company's business, operating results and financial
condition.
 
 
                                      29
<PAGE>
 
  The Company has not established a formal contingency plan for any potential
failure of any of the Company's or any third party's equipment or software,
but the Company plans to create such a formal contingency plan prior to June
30, 1999.
 
  The Company has, and will continue to make, certain investments in its
equipment, software systems and applications to ensure that the Company is
Year 2000 compliant and to evaluate the Year 2000 preparedness of the material
third parties with whom it deals. To date, the Company has primarily used
existing personnel and spent approximately $1,000 in order to evaluate the
Year 2000 exposure and expects to spend an additional $25,000 in the next
twelve months. As a result, the financial impact to the Company for Year 2000
compliance has not been and is not anticipated to be material to its financial
position, results of operations or cash flows in any given year.
 
RESULTS OF OPERATIONS
 
  Selected elements of the Company's Consolidated Statements of Operations are
shown below for the last three fiscal years as a percentage of total revenues
and as a percentage change from year to year.
 
<TABLE>
<CAPTION>
                                    YEAR ENDED JUNE 30,        % FLUCTUATION
                                    -----------------------  ------------------
                                                               1998      1997
                                                             COMPARED  COMPARED
                                     1998     1997    1996   TO 1997   TO 1996
                                    ------   ------  ------  --------  --------
<S>                                 <C>      <C>     <C>     <C>       <C>
Revenue:
  Reliability software.............   53.4%    52.5%   54.2%    (4.9)%    88.2%
  Other products...................   26.7     32.2    32.4    (22.3)     92.8
  Support, maintenance and
   consulting......................   19.9     15.3    13.4     20.5     123.6
                                    ------   ------  ------   ------    ------
    Total revenue..................  100.0    100.0   100.0     (6.6)     94.4
Cost of revenue:
  Cost of reliability software.....    3.2     11.6    22.0    (73.9)      2.7
  Cost of other products...........   19.2     22.7    22.9    (21.0)     92.8
  Cost of support, maintenance and
   consulting......................    7.0      5.8     6.2     12.4      83.3
                                    ------   ------  ------   ------    ------
    Total cost of revenue..........   29.4     40.1    51.1    (31.5)     52.8
                                    ------   ------  ------   ------    ------
Gross profit.......................   70.6     59.9    48.9     10.0     137.8
Operating expenses:
  Sales and marketing..............   66.2     35.1    30.8     76.2     121.1
  General and administrative.......   15.7      9.0    11.6     64.1      49.9
  Research and development.........   12.8      7.1     3.7     68.3     266.5
  Merger expenses..................    --       1.8     --    (100.0)      --
  Purchased in-process technology..    --       --      4.5      --     (100.0)
                                    ------   ------  ------   ------    ------
    Total operating expenses.......   94.7       53    50.6     67.0     103.1
                                    ------   ------  ------   ------    ------
Income (loss) from operations......  (24.1)     6.9    (1.7)  (426.0)   (871.9)
  Gain on sale of investments......    --       1.7     4.6    (99.6)    (30.8)
  Other income (expense), net......    2.7      1.1     0.5    121.3     336.1
                                    ------   ------  ------   ------    ------
Income (loss) before income taxes..  (21.4)     9.7     3.4   (338.0)    457.9
Provision for income taxes.........    --       1.3     --       --        --
                                    ------   ------  ------   ------    ------
Net income (loss)..................  (21.4)%    8.4%    3.4%  (338.0)%   385.1%
                                    ======   ======  ======   ======    ======
</TABLE>
 
REVENUE
 
  Reliability Software. Revenue from the sale of reliability software
decreased 5% to $16.0 million in fiscal 1998 from $16.9 million in fiscal 1997
and increased 88% in fiscal 1997 from $9.0 million in fiscal 1996. The
decrease in fiscal 1998 is primarily attributable to a decline in sales force
productivity during the year. Sales
 
                                      30
<PAGE>
 
productivity levels declined in fiscal 1998 as a result of adding new sales
personnel without a corresponding increase in revenue. The increase from
fiscal 1996 to fiscal 1997 was primarily attributable to the broad market
acceptance of high availability products for the UNIX and Windows NT operating
environments, the increase in field sales offices and personnel and the
expansion of the telesales and telemarketing organization. The Company's
ability to increase revenues and improve operating results in future periods
depends significantly on improving sales productivity levels.
 
  Other Products. Revenue from the sale of other products, which consist
primarily of ancillary hardware and software products that are resold by
Qualix Direct, decreased 22% to $8.0 million in fiscal 1998 from $10.3 million
in fiscal 1997 and increased 93% in fiscal 1997 from $5.4 million in fiscal
1996. The decrease in fiscal 1998 is attributable to Qualix's continued focus
on the sales of internally developed higher margin reliability products as
compared to third party products. Prior growth rates in the Company's other
product revenues are not indicative of future growth rates of revenue from
other products and may not be sustainable in the future.
 
  Support, Maintenance and Consulting. Support, maintenance and consulting
revenue increased 20% to $6.0 million in fiscal 1998 from $4.9 million in
fiscal 1997 and increased 124% in fiscal 1997 from $2.2 million in fiscal
1996. The growth in support, maintenance and consulting revenue has been
primarily attributable to increased sales of services and support contracts on
new license sales and, to a lesser extent, on increasing renewals of these
contracts as the Company's installed base of licenses has increased. The
percentage increases in support, maintenance and consulting were higher than
the percentage increases in reliability product revenue in fiscal 1997 because
of support contract renewals from the Company's installed base and because the
Octopus installed base historically had purchased minimal amounts of support.
Prior growth rates in the Company's support, maintenance and consulting
revenues are not indicative of future support, maintenance and consulting
revenue growth rates and may not be sustainable in the future.
 
  International Revenue. Revenue generated from sales to customers outside the
United States increased 23% to $6.6 million in fiscal 1998 from $5.4 million
in fiscal 1997 and increased 88% from $2.9 million in fiscal 1996. The growth
in international revenue has been attributable primarily to the increasing
market acceptance of high availability products for the UNIX and Windows NT
operating environments, the increase in field sales offices and increases in
the number of international employees. At June 30, 1998 the Company had 23
foreign employees in 8 offices compared to 2 foreign employees in 2 offices at
June 30, 1997 and no foreign employees at June 30, 1996.
 
COST OF REVENUE
 
  Cost of Reliability Software. Cost of revenue from the sale of reliability
software decreased 74% to $1.0 million in fiscal 1998 from $3.7 million in
fiscal 1997 and increased 3% in fiscal 1997 from $3.6 million in fiscal 1996.
Gross margin on reliability software was 94% in fiscal 1998, 78% in fiscal
1997 and 59% in fiscal 1996. The increase in gross margin on reliability
software in fiscal 1998 is due to increased sales volumes of higher margin
internally developed reliability products, primarily HA+ that have little or
no royalty or licensing components. The increase in gross margin in fiscal
1997 primarily resulted from increasing percentages of revenue from higher
margin reliability software, including both QualixHA and OctopusHA+.
 
  Cost of Other Products. Cost of revenue from the sale of other products
decreased to $5.8 million in fiscal 1998 from $7.3 million in fiscal 1997 and
$3.8 million in fiscal 1996. Gross margin on the products declined to 28% in
fiscal 1998 from 29% in fiscal 1997 and 1996. In general, margins for resold
products are decreasing, however these decreases were partially offset by the
refocused efforts of the Qualix Direct telesales organization on internally
developed higher margin products.
 
  Cost of Support, Maintenance and Consulting. Cost of support, maintenance
and consulting revenue increased 12% to $2.1 million in fiscal 1998 from $1.9
million in fiscal 1997 and $1.0 million in fiscal 1996. This is a result of
increased personnel-related costs as the Company continues to build its
customer support and training organizations. Gross margin on support,
maintenance and consulting revenue was 65% in fiscal 1998,
 
                                      31
<PAGE>
 
62% in fiscal 1997 and 54% in fiscal 1996. The increasing margin in both
fiscal 1998 and fiscal 1997 was due to the higher average selling prices,
increases in the Company's support staff and a corresponding reduction in the
use of outside consultants.
 
OPERATING EXPENSES
 
  Sales and Marketing. Sales and marketing expenses increased to $19.9 million
in fiscal 1998 from $11.3 million in fiscal 1997 and $5.1 million in fiscal
1996. Sales and marketing expenses increased as a percentage of revenue to
66.2% in fiscal 1998 from 35.1% in fiscal 1997 and increased in fiscal 1997
from 30.8% in fiscal 1996. The increases on both an absolute and a percentage
basis from fiscal 1997 to fiscal 1998 were primarily a result of the expanded
infrastructure to support the Company's growing global presence, principally
in the second half of the year, including the opening of nine new sales
offices worldwide, and the added personnel to expand the Company's marketing
and distribution capabilities. The increase in absolute dollars from fiscal
1996 to fiscal 1997 is primarily related to growth in the Company's domestic
sales and marketing infrastructure through the increase in the number of
employees and the opening of eleven sales offices throughout the United
States. The Company believes that sales and marketing expenses will increase
in absolute dollars as the Company continues to expand its sales and marketing
staff and its marketing and distribution capabilities.
 
  General and Administrative. General and administrative expenses increased to
$4.7 million in fiscal 1998 from $2.9 million in fiscal 1997 and $1.9 million
in fiscal 1996. General and administrative expenses as a percentage of revenue
were 15.7%, 9.0% and 11.6% in fiscal 1998, 1997 and 1996, respectively. These
increases in absolute dollars are attributable to the costs associated with
increased staffing and the related costs required to manage and support the
Company's operations. Increases in 1997 and 1998 expenses also reflect
additional costs associated with being a public company. The Company expects
that general and administrative expenses will increase in absolute dollars as
the Company expands its support staff.
 
  Research and Development. Research and development increased to $3.8 million
in fiscal 1998 from $2.3 in fiscal 1997 and $620,000 in fiscal 1996. Research
and development expenses increased as a percentage of total revenue to 12.8%
in fiscal 1998 from 7.1% in fiscal 1997 and 3.7% in fiscal 1996. These
increases were primarily attributable to increased staffing and related
expenses required to support product development activities, including
development of the FullTime service level availability products introduced in
July 1998, development and enhancement of HA+, the Company's UNIX-based high
availability products, and adding features to the Company's Octopus family of
reliability products including application failover and support for Microsoft
Cluster Server. The Company believes that research and development expenses
will continue to increase in absolute dollars and as a percentage of revenues
from the levels experienced in fiscal 1998 as the Company continues to invest
in developing new products, applications and product enhancements.
 
  Merger Expenses. Merger expenses of $595,000 were incurred in connection
with the acquisition of Octopus Technologies in the first quarter of fiscal
1997. Merger expenses consisted primarily of investment banking, legal and
accounting fees.
 
  Purchased In-Process Technology. Approximately $740,000 of the purchase
price of Anthill represented the value of in-process technology which was
charged to the Company's operations in the fourth quarter of fiscal 1996.
 
NON-OPERATING ITEMS
 
  Gain on Sale of Investments. In May 1995, the Company received shares of
Veritas common stock pursuant to a merger agreement between Veritas and
Tidalwave Technologies, Inc. In September 1995, the Company sold 75% of the
shares and realized a gain of $763,000. In June, 1997 the Company sold the
remaining 25% of the shares and realized a gain of $528,000.
 
  Other Income, (Expense), net. Other Income, (Expense), net increased
$439,000 or 121% to $801,000 for fiscal 1998 from $362,000 for fiscal 1997and
increased $279,000 or 336% year over year from $83,000 in fiscal
 
                                      32
<PAGE>
 
1996. This increase reflects higher average investment balances for during the
year, largely attributable to the Company's initial public offering in
February 1997.
 
  Provision for Income Taxes. The Company recorded no provision for income
taxes in fiscal 1998 as the Company incurred losses during the period. The
Company had an effective tax rate of 13% for fiscal 1997 due primarily to
Alternative Minimum Tax imposed by the Internal Revenue Service and state
income taxes. Due to the Company's utilization of net operating loss
carryforwards, the effective tax rate for fiscal 1997 was lower than the
statutory rate. There was no provision for income taxes in fiscal 1996 which
reflects the reversal of the valuation reserve against deferred income taxes
to the extent of current period earnings. See Income Taxes footnote within the
Consolidated Financial Statements.
 
BUSINESS ENVIRONMENT
 
  The Company has incurred significant net losses since its inception and had
an accumulated deficit of approximately $11.0 million as of June 30, 1998. The
Company is subject to the risks inherent in the operation of a new business
enterprise, and there can be no assurance that the Company will be able to
successfully address these risks. See "Business-Risk Factors".
 
LIQUIDITY AND CAPITAL RESOURCES
 
  At June 30, 1998, the Company had $11.9 million in cash, cash equivalents
and temporary investments, compared to $19.2 million at June 30, 1997, a
decrease of $7.3 million. At June 30, 1998, the Company had working capital of
$10.4 million compared to $18.7 million at June 30, 1997.
 
  Cash Flows From Operating Activities. Net Cash used in operations was $4.5
million in fiscal 1998 which was a $6.6 million increase from the prior year.
This increase is attributed primarily to the loss from operations plus
increases in prepaid expenses and decreases in accounts payable and accrued
expenses offset by increases in depreciation and amortization and deferred
revenue and advances and a decrease in accounts receivable. During fiscal
1997, cash provided by operating activities was attributable to income from
operations plus increases in accrued liabilities, deferred revenue and
advances and accounts payable offset by increases in accounts receivable and
other current assets. The increases in deferred revenue and advances are
attributable to payments under support, maintenance and consulting contracts
for which revenue had not yet been recognized.
 
  Cash Flows From Investing Activities and Financing Activities. Net cash
provided by investing activities of $1.3 million for fiscal 1998 consisted of
$3.3 million in purchases of property and equipment and $12.8 million in net
purchases of temporary investments offset by proceeds from maturity or sale of
temporary investments of $17.4 million. Purchases of property and equipment
were related to the relocation to the Company's new corporate headquarters in
the fourth quarter of fiscal 1998. Net cash used by investing activities in
fiscal 1997 was $10.6 million consisting of $21.2 million in purchases of
temporary investments and $1.5 million in purchases of property and equipment
offset by proceeds from maturity or sale of temporary investments of $12.2
million. Net cash provided by financing activities in fiscal 1997 was $15.0
million representing $15.1 million in proceeds from the sale or maturity of
common stock offset by repayment of long-term obligations.
 
  The Company believes that cash, cash equivalents and temporary investments
and cash flows from operations will be sufficient to fund operations,
purchases of capital equipment and research and development programs currently
planned at least through fiscal 1999.
 
                                      33
<PAGE>
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
  The Company is exposed to market risk related to changes in interest rates.
The Company does not use derivative financial instruments for hedging,
speculative or trading purposes.
 
  The Company maintains a portfolio of cash equivalents and temporary
investments consisting mainly of securities with an average maturity of 3.6
years. These available for sale securities are subject to interest rate risk
and will fall in value if market interest rates increase. The Company has the
ability to hold its fixed income investments until maturity and therefore
would not expect its operating results or cash flows to be affected to any
significant degree by the effect of a sudden change in market interest rates
on its portfolio.
 
<TABLE>
<CAPTION>
   AMOUNTS BY MATURITY:                          FY 1999  FY 2000 FY 2008  FY 2030
   --------------------                          -------  ------- -------  -------
   <S>                                           <C>      <C>     <C>      <C>
   Cash Equivalents............................. $4,367    $ --   $  --     $ --
     Average interest rate......................   5.69%
   Temporary investments........................ $3,264    $ 441  $1,100    $ 200
     Average interest rate......................   6.36%    6.69%   5.74%    5.65%
   Total Portfolio.............................. $7,631    $ 441  $1,100    $ 200
     Average interest rate......................   6.02%    6.69%   5.74%    5.65%
</TABLE>
 
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
<TABLE>
<CAPTION>
INDEX                                                                       PAGE
-----                                                                       ----
<S>                                                                         <C>
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report...............................................  35
Consolidated Balance Sheets at June 30, 1998 and 1997......................  36
Consolidated Statements of Operations for Years Ended June 30, 1998, 1997
 and 1996..................................................................  37
Consolidated Statements of Stockholders' Equity for Years Ended June 30,
 1998, 1997 and 1996.......................................................  38
Consolidated Statements of Cash Flows for Years Ended June 30, 1998, 1997
 and 1996..................................................................  39
Notes to Consolidated Financial Statements.................................  40
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
  Schedule II--Valuation and Qualifying Accounts...........................  52
</TABLE>
 
                                      34
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors and Stockholders of
Qualix Group, Inc.:
 
  We have audited the accompanying consolidated balance sheets of Qualix
Group, Inc. and subsidiaries ("the Company") as of June 30, 1998 and 1997 and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended June 30, 1998. Our
audits also included the consolidated financial statement schedule listed in
the Index at Item 8. These consolidated financial statements and consolidated
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and consolidated financial statement schedule based on
our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Qualix Group, Inc. and
subsidiaries as of June 30, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1998 in conformity with generally accepted accounting principles. Also, in our
opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
 
Deloitte & Touche LLP
 
San Jose, California
July 23, 1998
 
                                      35
<PAGE>
 
                               QUALIX GROUP, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                   JUNE 30,
                                                                ----------------
                                                                 1998     1997
                                                                -------  -------
                            ASSETS
                            ------
<S>                                                             <C>      <C>
Current Assets:
  Cash and cash equivalents.................................... $ 6,869  $ 9,617
  Temporary investments........................................   5,005    9,541
  Accounts receivable, less allowance for doubtful accounts
  ($537 in 1998 and $386 in 1997)..............................   4,236    5,147
  Inventories..................................................     142      194
  Prepaid expenses.............................................     910      276
                                                                -------  -------
     Total current assets......................................  17,162   24,775
Property and equipment, net....................................   3,772    1,559
                                                                -------  -------
     Total Assets.............................................. $20,934  $26,334
                                                                =======  =======
<CAPTION>
             LIABILITIES AND STOCKHOLDERS' EQUITY
             ------------------------------------
<S>                                                             <C>      <C>
Current Liabilities:
  Accounts payable.............................................     851    1,280
  Accrued liabilities..........................................   2,743    2,748
  Deferred revenue and advances................................   2,856    1,795
  Income taxes payable.........................................     --        91
  Current portion of long-term obligations.....................     258      126
                                                                -------  -------
     Total current liabilities.................................   6,708    6,040
                                                                -------  -------
Long-term obligations (Note 7).................................      87      191
Commitments and contingencies (Note 7)
Stockholders' Equity:
  Convertible preferred stock--par value $0.001; 5,000,000
   shares authorized; shares outstanding: none in 1998 or 1997.     --       --
  Common stock--par value $0.001; 20,000,000 shares authorized;
   shares outstanding: 10,635,456 shares in 1998 and 10,305,605
   shares in 1997..............................................  25,469   24,862
  Notes receivable from sale of stock..........................    (345)    (175)
  Net unrealized loss on available-for-sale securities.........     --       (43)
  Accumulated deficit.......................................... (10,985)  (4,541)
                                                                -------  -------
     Total stockholders' equity................................  14,139   20,103
                                                                -------  -------
     Total liabilities and stockholders' equity................ $20,934  $26,334
                                                                =======  =======
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       36
<PAGE>
 
                               QUALIX GROUP, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                       YEARS ENDED JUNE 30,
                                                      -------------------------
                                                       1998     1997     1996
                                                      -------  -------  -------
<S>                                                   <C>      <C>      <C>
Revenue:
  Reliability software............................... $16,034  $16,868  $ 8,965
  Other products.....................................   8,027   10,336    5,360
  Support, maintenance and consulting................   5,954    4,942    2,210
                                                      -------  -------  -------
    Total revenue....................................  30,015   32,146   16,535
                                                      -------  -------  -------
Cost of revenue:
  Cost of reliability software.......................     976    3,738    3,640
  Cost of other products.............................   5,758    7,289    3,781
  Cost of support, maintenance and consulting........   2,103    1,871    1,021
                                                      -------  -------  -------
    Total cost of revenue............................   8,837   12,898    8,442
                                                      -------  -------  -------
Gross profit.........................................  21,178   19,248    8,093
Operating expenses:
  Sales and marketing................................  19,878   11,280    5,101
  General and administrative.........................   4,724    2,878    1,920
  Research and development...........................   3,823    2,272      620
  Merger expenses....................................      --      595       --
  Purchased in-process technology....................      --       --      740
                                                      -------  -------  -------
    Total operating expenses.........................  28,425   17,025    8,381
                                                      -------  -------  -------
Income (loss) from operations........................  (7,247)   2,223     (288)
Other income (expense):
  Gain on sale of investments........................       2      528      763
  Interest income....................................     830      403       88
  Interest expense...................................     (29)     (41)      (5)
                                                      -------  -------  -------
    Total other income...............................     803      890      846
                                                      -------  -------  -------
Income (loss) before income taxes....................  (6,444)   3,113      558
Provision for income taxes...........................      --      406       --
                                                      -------  -------  -------
    Net income (loss)................................ $(6,444) $ 2,707  $   558
                                                      =======  =======  =======
Earnings (loss) per share:
  Basic.............................................. $ (0.62) $  0.41  $  0.21
                                                      =======  =======  =======
  Diluted............................................ $ (0.62) $  0.29  $  0.07
                                                      =======  =======  =======
Shares used in per share computation:
  Basic..............................................  10,336    6,620    2,665
                                                      =======  =======  =======
  Diluted............................................  10,336    9,312    8,177
                                                      =======  =======  =======
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       37
<PAGE>
 
                               QUALIX GROUP, INC.
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                    NET
                                                                                UNREALIZED
                              CONVERTIBLE                             NOTES     GAIN (LOSS)
                            PREFERRED STOCK         COMMON STOCK    RECEIVABLE ON AVAILABLE-
                          ---------------------  ------------------ FROM SALE    FOR-SALE    ACCUMULATED
                            SHARES     AMOUNT      SHARES   AMOUNT   OF STOCK   SECURITIES     DEFICIT    TOTAL
                          ----------  ---------  ---------- ------- ---------- ------------- ----------- -------
<S>                       <C>         <C>        <C>        <C>     <C>        <C>           <C>         <C>
Balance July 1, 1995....   3,915,660      7,879   2,324,324   1,396      (8)        1,018       (7,806)    2,479
 Exercise of Series C
  preferred stock op-
  tions.................      23,333         56         --      --      (56)          --           --        --
 Exercise of Series D
  preferred stock op-
  tions.................      40,000         96         --      --      (96)          --           --        --
 Conversion of short-
  term notes for common
  stock, net of issuance
  costs of $11..........         --         --      457,246     319     --            --           --        319
 Exercise of stock op-
  tions.................         --         --       99,172      20      (9)          --           --         11
 Issuance of common
  stock for services
  rendered..............         --         --       62,760      12     --            --           --         12
 Net unrealized gain
  (loss) on available-
  for-sale securities...         --         --          --      --      --           (533)         --       (533)
 Net income.............         --         --          --      --      --            --           558       558
                          ----------  ---------  ---------- -------   -----       -------     --------   -------
Balances, June 30, 1996.   3,978,993      8,031   2,943,502   1,747    (169)          485       (7,248)    2,846
 Conversion of preferred
  stock.................  (3,978,993)    (8,031)  4,774,791   8,031     --            --           --        --
 Initial public offer-
  ing, net of issuances
  costs of $1,433.......         --         --    2,201,981  14,950     --            --           --     14,950
 Exercise of stock op-
  tions.................         --         --      112,419      26      (6)          --           --         20
 Exercise of stock war-
  rants.................         --         --      272,912     108     --            --           --        108
 Net unrealized gain
  (loss) on available-
  for-sale securities...         --         --          --      --      --           (528)         --       (528)
 Net income.............         --         --          --      --      --            --         2,707     2,707
                          ----------  ---------  ---------- -------   -----       -------     --------   -------
Balances, June 30, 1997.         --   $     --   10,305,605 $24,862   $(175)         $(43)      (4,541)  $20,103
 Exercise of stock op-
  tions.................         --         --      212,530     200    (170)          --           --         30
 Employee stock purchase
  plan..................         --         --      117,321     407     --            --           --        407
 Net unrealized gain
  (loss) on available-
  for-sale securities...         --         --          --      --      --             43          --         43
 Net loss...............         --         --          --      --      --            --        (6,444)   (6,444)
                          ----------  ---------  ---------- -------   -----       -------     --------   -------
Balances, June 30, 1998.         --   $     --   10,635,456 $25,469   $(345)      $   --      $(10,985)  $14,139
                          ==========  =========  ========== =======   =====       =======     ========   =======
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       38
<PAGE>
 
                               QUALIX GROUP, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                      YEARS ENDED JUNE 30,
                                                    ---------------------------
                                                      1998      1997     1996
                                                    --------  --------  -------
<S>                                                 <C>       <C>       <C>
Cash flows from operating activities:
 Net income (loss)................................  $ (6,444) $  2,707  $   558
 Adjustments to reconcile net income (loss) to net
  cash provided by (used in) operating activities:
  Depreciation and amortization...................       932       323       87
  Amortization of discount on long-term
   obligations....................................        28        36      --
  (Gain) loss on disposal of fixed assets.........       164       --       --
  Gain on sale of available-for-sale securities...       --       (528)    (763)
  Purchased in-process technology.................       --        --       740
  Changes in:
  Accounts receivable.............................       911    (2,342)  (1,300)
  Inventories.....................................        52       (86)      (5)
  Prepaid expenses................................      (634)     (216)     (14)
  Accounts payable................................      (429)      283      250
  Accrued liabilities.............................        (5)    1,333      572
  Income taxes payable............................       (91)       91      --
  Deferred revenue and advances...................     1,061       708      735
  Liability under employment termination
   agreement......................................       --       (151)     (72)
                                                    --------  --------  -------
  Net cash provided by (used in) operating
   activities.....................................    (4,455)    2,158      788
                                                    --------  --------  -------
Cash flows from investing activities:
 Purchases of property and equipment, net.........    (3,309)   (1,539)    (267)
 Purchase of temporary investments................   (12,819)  (21,240)     847
 Proceeds from maturity or sale of temporary
  investments.....................................    17,398    12,185      --
 Business acquisition.............................       --         --     (617)
                                                    --------  --------  -------
  Net cash provided by (used in) investing
   activities.....................................     1,270   (10,594)     (37)
                                                    --------  --------  -------
Cash flows from financing activities:
 Issuance of convertible promissory notes.........       --        --       315
 Repayments of capital lease obligations, net.....       --         (1)      (7)
 Issuance of long-term obligations................       --        --       405
 Repayment of long-term obligations...............       --       (125)     --
 Proceeds from issuance of preferred and common
  stock, net......................................       437    15,077       27
                                                    --------  --------  -------
  Net cash provided by financing activities.......       437    14,951      740
                                                    --------  --------  -------
Net increase (decrease) in cash and cash
 equivalents......................................    (2,748)    6,515    1,491
Cash and cash equivalents, beginning of year......     9,617     3,102    1,611
                                                    --------  --------  -------
Cash and cash equivalents, end of year............  $  6,869  $  9,617  $ 3,102
                                                    ========  ========  =======
Noncash investing and financing activities:
 Conversion of preferred shares to common stock...       --   $  8,031      --
                                                    ========  ========  =======
 Exercise of options for stockholder notes
  receivable......................................  $    170  $     10  $   161
                                                    ========  ========  =======
 Conversion of promissory notes for stock, net of
  issuance costs..................................  $    --   $    --   $   315
                                                    ========  ========  =======
 Issuance of common stock for services rendered...  $    --   $    --   $    13
                                                    ========  ========  =======
Supplemental disclosure of cash flow information:
 Cash paid during the year for interest...........  $    --   $     41  $    28
                                                    ========  ========  =======
 Cash paid during the year for income taxes.......  $    --   $    314  $   --
                                                    ========  ========  =======
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       39
<PAGE>
 
                              QUALIX GROUP, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                   YEARS ENDED JUNE 30, 1998, 1997 AND 1996
 
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
 
  Nature of Operations. Qualix Group, Inc. ("the Company") was incorporated in
Delaware in September 1990. The Company develops or acquires, markets and
supports reliability software for distributed computing systems based on Unix
and Windows NT operating systems. The Company's customers are in a variety of
industries, including telecommunications, finance, manufacturing and energy.
The Company markets its software and services to Fortune 2000 accounts
primarily through its field sales organization located in the United States,
Europe and the Pacific Rim complemented by other sales channels, including
systems integrators, OEMs, VARs and international distributors.
 
  Basis of Presentation. The Company acquired Octopus Technologies, Inc.
("Octopus") in August 1996. The acquisition was accounted for as a pooling-of-
interests. All financial data of the Company has been restated to include the
historical financial information of Octopus.
 
  Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation. Accounts
denominated in foreign currencies have been remeasured into the functional
currency , using the U.S. dollar as the functional currency. Foreign currency
gains and losses from remeasurement, which have been insignificant, are
included in the consolidated statements of income.
 
  Cash Equivalents. Cash equivalents include highly liquid investments with
original maturities of 90 days or less at the time of acquisition. The
recorded carrying amounts of cash equivalents approximate their fair market
value.
 
  Temporary Investments. Temporary investments consist of highly liquid
investments acquired with maturities exceeding three months and are classified
as "available-for-sale securities". The investments are reported at fair value
with unrealized gains or losses excluded from earnings and reported as a
separate component of stockholders' equity, net of taxes. Any gains or losses
on sales of investments are computed on a specific identification basis.
 
  Inventories. Inventories are stated at the lower of cost (first-in, first-
out method) or market and consist primarily of computer products, software and
component parts purchased for resale.
 
  Property and Equipment. Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method over
the shorter of the estimated useful lives, generally three to seven years, or
the lease term, as appropriate.
 
  Financial Statement Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Such management estimates include the
allowance for potentially uncollectible accounts receivable, the valuation
allowance on deferred tax assets and certain reserves and accruals. Actual
results could differ materially from those estimates.
 
  Software Development Costs. Costs for the development of new software
products and substantial enhancements to existing software products are
expensed as incurred until technological feasibility has been established, at
which time any additional costs are capitalized. The costs to develop such
software have not been capitalized as the Company believes its current
software development process is essentially complete concurrent with the
establishment of technological feasibility.
 
 
                                      40
<PAGE>
 
  Revenue Recognition Policy. Software license revenue is recognized when
either a noncancelable license agreement or purchase order has been executed,
the product has been shipped, all significant contractual obligations have
been satisfied and collection of the resulting receivable is probable.
Maintenance revenue is recognized ratably over the maintenance period,
generally one year, and revenue from consulting and training services is
recognized as services are performed.
 
  Warranty. The Company generally warrants its products for 90 days or less.
The Company has no provision for warranty costs at June 30, 1998 as
historically costs have not been significant.
 
  Income Taxes. Income taxes are provided under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." This
statement requires an asset and liability approach to account for income taxes
and requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities.
 
  Stock-Based Compensation. The Company accounts for employee stock-based
compensation using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25) and, accordingly, does not generally recognize compensation cost in
connection with its stock option and purchase plans.
 
  Earnings (Loss) Per Share. During the second quarter of fiscal 1998, the
Company adopted Statement of Financial Accounting Standards No. 128, Earnings
Per Share. All prior periods have been restated to conform with this
Statement. Net income (loss) per basic share is computed using the weighted
average number of common shares outstanding during the periods presented, as
adjusted for contingently issuable shares.
 
  For diluted net income (loss) per share, shares used in the per share
computation include weighted average common and potentially dilutive common
shares outstanding. Potentially dilutive common shares consist of shares
issuable upon the assumed exercise of dilutive stock options. Pursuant to the
Securities and Exchange Commission's Staff Accounting Bulletins and staff
policy, all outstanding preferred stock and warrants that were converted into
common stock in the initial public offering are included in the computation as
potentially dilutive shares when the effect is dilutive. Prior to the
Company's initial public offering in February 1997, potentially dilutive
shares include preferred stock and certain warrants (using the "if converted"
method) as well as common and potentially dilutive shares issued within 12
months preceding the initial filing date.
 
  Options to purchase 200,000 shares of common stock were outstanding during
fiscal 1998 but were not included in the computation of diluted EPS as the
effect was anti-dilutive.
 
  Certain Significant Risks and Uncertainties. Financial instruments which
potentially subject the Company to concentrations of credit risk consist
primarily of cash and cash equivalents, temporary cash investments and
accounts receivable. The Company invests in a variety of financial instruments
with an investment credit rating of AA and better. The Company, by policy,
limits the amount of credit exposure with any one financial instrument or
commercial issuer. The Company also places its cash, cash equivalents and
investments for safekeeping with high-credit-quality financial institutions.
The Company sells its products primarily to companies in diversified
industries in North America, Europe and the Pacific Rim, and generally does
not require its customers to provide collateral or other security to support
accounts receivable. To reduce credit risk, management performs ongoing credit
evaluations of its customers' financial condition. While the Company maintains
allowances for potential bad debt losses, actual losses to date have not been
material. No customer accounted for more than 10% of total revenue in 1998,
1997 and 1996; one customer accounted for 11% of accounts receivable in fiscal
1998. Export sales from the United States represented 22%, 17% and 17% of
total revenue in fiscal 1998, 1997 and 1996 respectively.
 
  The Company participates in a dynamic high technology industry and believes
that changes in any of the following areas could have a material adverse
effect on the Company's future financial position or results of
 
                                      41
<PAGE>
 
operations: advances and trends in new technologies; competitive pressures in
the form of new products or price reductions on current products; changes in
product mix; changes in the overall demand for products and services offered
by the Company; changes in certain strategic partnerships or customer
relationships; litigation or claims against the Company based on intellectual
property, patent, product, regulatory or other issues or factors; risks
associated with changes in domestic and international economic and/or
political conditions or regulations; availability of necessary components;
performance of third-party suppliers and vendors; year 2000 compliance issues;
and the Company's ability to attract and retain employees necessary to support
its growth.
 
  Recently Issued Accounting Standards. In June 1997, the Financial Accounting
Standards Board adopted Statement of Financial Accounting Standards (SFAS)
No.130, "Reporting Comprehensive Income", which requires that an enterprise
report, by major components and as a single total, the change in its net
assets during the period from nonowner sources; and SFAS No.131, " Disclosures
about Segments of an Enterprise and Related Information", which establishes
annual and interim reporting standards for a company's business segments and
related disclosures about its products, services, geographic areas and major
customers. The Company has not yet identified its SFAS 131 reporting segments.
Adoption of these statements will not impact the Company's consolidated
financial position, results of operations or cash flows. Both statements are
effective for the Company beginning July 1, 1998, with earlier application
permitted.
 
2. BUSINESS COMBINATIONS
 
  Merger with Octopus Technologies, Inc. In August 1996, the Company acquired
Octopus by issuing 1,597,173 shares of its common stock and 280,673 shares of
Series E preferred stock in exchange for all of the outstanding common stock
and preferred stock of Octopus. The Company also assumed and exchanged all
options to purchase Octopus stock for options to purchase an aggregate of
149,590 shares of the Company's common stock with an average exercise price of
$2.60 per share. The merger was accounted for as a pooling-of-interests.
Octopus develops, markets and supports real time data protection software
throughout the United States and internationally. Approximately $595,000 of
costs directly attributable to the business combination, primarily
professional fees associated with investment bankers, attorneys and
accountants, were incurred by the Company.
 
  Purchase of Anthill Incorporated. In May 1996, the Company acquired
substantially all of the assets and assumed certain of the liabilities of
Anthill Incorporated ("Anthill"). The purchase price totaled approximately
$675,000, of which $175,000 was paid at the closing of the transaction with
the remaining purchase price to be paid in four annual installments of
$125,000 each (see Note 7). Anthill was engaged in the development of a
hierarchical storage management product.
 
  The acquisition was accounted for as a purchase, and, accordingly, the
acquired assets and liabilities were recorded at their estimated fair market
values at the date of acquisition. The aggregate purchase of $675,000, plus
$116,000 of costs directly attributable to the completion of the acquisition,
has been allocated to the assets and liabilities acquired. Approximately
$740,000 of the total purchase price represented the value of in-process
technology which had no future alternative use and was charged to the
Company's operations in the fourth quarter of fiscal 1996.
 
3. TEMPORARY INVESTMENTS
 
  Available-for-sale securities at June 30, 1998 consist of (in thousands):
 
<TABLE>
<CAPTION>
                                                   GROSS      GROSS    ESTIMATED
                                       AMORTIZED UNREALIZED UNREALIZED  MARKET
     (DOLLARS IN THOUSANDS)              COST      GAINS      LOSSES     VALUE
     ----------------------            --------- ---------- ---------- ---------
     <S>                               <C>       <C>        <C>        <C>
     Municipal bonds..................  $ 1,300                         $1,300
     Corporate bonds..................  $ 1,955     $ 1        $(1)     $1,955
     Certificates of deposit..........  $ 1,750                         $1,750
                                        -------     ---        ---      ------
                                        $ 5,005     $ 1        $(1)     $5,005
                                        =======     ===        ===      ======
</TABLE>
 
 
                                      42
<PAGE>
 
  Available-for-sale securities at June 30, 1997 consist of (in thousands):
 
<TABLE>
<CAPTION>
                                                   GROSS      GROSS    ESTIMATED
                                       AMORTIZED UNREALIZED UNREALIZED  MARKET
     (DOLLARS IN THOUSANDS)              COST      GAINS      LOSSES     VALUE
     ----------------------            --------- ---------- ---------- ---------
     <S>                               <C>       <C>        <C>        <C>
     Commercial paper.................  $ 3,935                         $3,935
     Municipal bonds..................  $ 3,605                $ (5)    $3,600
     Corporate bonds..................  $ 1,015                $(18)    $  997
     Agency securities................  $ 1,029                $(20)    $1,009
                                        -------     ----       ----     ------
                                        $ 9,584     $--        $(43)    $9,541
                                        -------     ----       ----     ------
</TABLE>
 
  At June 30, 1998, the municipal bonds had maturities greater than 10 years.
The estimated market value of corporate bonds with maturities between one and
five years was $949,000 with the remaining available-for-sale securities
maturing within one year. All certificates of deposit mature during fiscal
1999.
 
  At June 30, 1995, the Company held 46,121 shares of common stock of a public
company which were subject to certain holding restrictions. During 1996, the
Company sold 34,590 shares and realized a gain of $763,000, net of legal costs
of $84,500. In June 1997, the Company sold the remaining shares and realized a
gain of $828,000. The gain on the sale of stock was recorded, net of legal
costs of $300,000. The Company realized an insignificant gain on the sale of
investments in fiscal 1998.
 
4. PROPERTY AND EQUIPMENT
 
  Property and equipment at June 30 consist of (in thousands):
 
<TABLE>
<CAPTION>
                                                                  1998    1997
                                                                 ------  ------
     <S>                                                         <C>     <C>
     Computer equipment and software............................ $4,041  $2,250
     Furniture and fixtures.....................................    554      67
     Office equipment...........................................    176      14
     Leasehold improvements.....................................    697      39
                                                                 ------  ------
                                                                  5,468   2,370
     Less accumulated depreciation and amortization............. (1,696)   (811)
                                                                 ------  ------
     Property and equipment--net................................ $3,772  $1,559
                                                                 ======  ======
</TABLE>
 
5. ACCRUED LIABILITIES
 
  Accrued liabilities at June 30 consist of (in thousands):
 
<TABLE>
<CAPTION>
                                                                   1998   1997
                                                                  ------ ------
     <S>                                                          <C>    <C>
     Compensation, bonuses and related benefits.................. $1,143 $  988
     Royalties payable and costs associated with product
      acquisition................................................    130    666
     Other accrued liabilities...................................  1,470  1,094
                                                                  ------ ------
       Total..................................................... $2,743 $2,748
                                                                  ====== ======
</TABLE>
 
                                      43
<PAGE>
 
6. INCOME TAXES
 
  The provision for income taxes consists of the following:
 
<TABLE>
<CAPTION>
                                                                 1998 1997  1996
                                                                 ---- ----  ----
     <S>                                                         <C>  <C>   <C>
     Current:
       Federal.................................................. $--  $ 83  $--
       State....................................................  --   367   --
                                                                 ---- ----  ----
                                                                  --   450   --
                                                                 ---- ----  ----
     Deferred:
       Federal..................................................  --   --    --
       State....................................................  --   (44)  --
                                                                 ---- ----  ----
                                                                  --   (44)  --
                                                                 ---- ----  ----
                                                                 $--  $406  $--
                                                                 ==== ====  ====
</TABLE>
 
  The provision for income taxes differs from the amount computed by applying
the statutory U.S. Federal rate to the income (loss) before income taxes as
follows:
 
<TABLE>
<CAPTION>
                                                           1998    1997   1996
                                                           -----   -----  -----
     <S>                                                   <C>     <C>    <C>
     Taxes computed at federal statutory rate............. (35.0)%  35.0%  35.0%
     State taxes net of federal income tax benefit........   --      6.0    6.1
     Nondeductible merger and other costs.................  (2.6)    6.7    6.6
     Change in valuation allowance........................  36.6   (36.2) (50.0)
     Other................................................   1.0     1.5    2.3
                                                           -----   -----  -----
       Total provision....................................   -- %   13.0%   -- %
                                                           =====   =====  =====
</TABLE>
 
  The tax effects of temporary differences that give rise to deferred taxes
are as follows at June 30 (in thousands):
 
<TABLE>
<CAPTION>
                                                                  1998    1997
                                                                 -------  -----
     <S>                                                         <C>      <C>
     Deferred tax assets:
       Deferred revenue......................................... $   299  $ --
       Expenses not currently deductible for tax purposes.......     557    144
       Tax net operating loss carryforwards.....................   2,168    292
       Tax credit carryforwards.................................     416     87
       Purchased in-process technology..........................     260    278
                                                                 -------  -----
         Total deferred tax assets..............................   3,700    801
       Valuation allowance......................................  (3,656)  (757)
                                                                 -------  -----
         Net deferred tax assets................................ $    44  $  44
                                                                 =======  =====
</TABLE>
 
  Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as net
operating loss and tax credit carryforwards. The deferred tax assets at June
30, 1998 and 1997 are $3,700,000 and $801,000, respectively, and have been
substantially reserved as the Company believes that, due to its history of
operating losses and the expiration dates of the carryforwards, it is more
likely than not that the majority of such benefits will not be realized.
Deferred tax assets are presented within prepaid expenses on the Consolidated
Balance Sheet as of June 30, 1998.
 
  At June 30, 1998, the Company had federal and state net operating loss
carryforwards of approximately $6,000,000 and 1,400,000 available to reduce
future federal and state taxable income, respectively. The federal
 
                                      44
<PAGE>
 
and state carryforwards begin to expire in 2011 and 2003, respectively. The
Company has federal research and experimental credit carryforwards of
$377,000, which expire beginning in 2018, and minimum tax credit carryforwards
of $39,000 which do not expire. The extent to which the loss and credit
carryforwards can be used to offset future taxable income or taxes may be
limited, depending on the extent of ownership changes within any three-year
period as provided by Section 382 of the Internal Revenue Code and applicable
California state tax law.
 
7. COMMITMENTS AND CONTINGENCIES
 
  Operating Leases. The Company leases certain office facilities under
noncancellable operating leases which expire through May 31, 2003. Under the
terms of the facility leases, the Company is responsible for its proportionate
share of maintenance, property tax and insurance expenses. The corporate
headquarters lease provides an option to extend the lease for five years. The
future minimum annual rental payments under these leases are as follows (in
thousands):
 
<TABLE>
             <S>                                <C>
             Year Ended June 30,
               1999............................ $  959
               2000............................    893
               2001............................    681
               2002............................    591
               2003............................    500
                                                ------
                                                $3,624
                                                ======
</TABLE>
 
  Facilities rent expense under operating leases was approximately $812,000,
$441,000, and $243,000 for fiscal years 1998, 1997 and 1996, respectively.
 
  Anthill Acquisition. In connection with the Anthill acquisition, the Company
has a remaining obligation to pay three annual installments of $125,000 each
(see Note 2). The present value of the obligation is discounted at 9% and
aggregates approximately $345,000. The Company has granted a security interest
in the software technology acquired from Anthill in order to secure the
obligation.
 
  Software License Agreement. In April 1998, the Company entered into a
Development and License Agreement (the "Agreement") which provides the Company
an exclusive, perpetual worldwide right to license certain of the Licensor's
product, as well as a non-exclusive, perpetual, worldwide right to license
related support software tools. Under the terms of the agreement, the Company
is required to pay a specified royalty based on a percentage of revenue
generated from products sold with technology therein up to a maximum of
$3,000,000, at which time all technology rights will transfer to the Company.
At June 30, 1998, the Company had prepaid $500,000 under the Agreement. If and
when the Company develops the existing object code to run on other software
platforms, the Licensor will have the right to sublicense such software and
will pay a specified royalty based on a percentage of revenue generated from
products sublicensed with the related technology therein.
 
  Contingency. The industry in which the Company operates is characterized by
frequent litigation. The Company filed a lawsuit against Anthill in May, 1998;
in the suit the Company contends that the software did not function as had
been represented by Anthill, and it seeks a declaration that it need not the
remaining payments to Anthill under the Agreement, rescission of the Agreement
and damages of $300,000 or more based upon payments already made to Anthill.
 
  On August 12, 1998, Anthill commenced arbitration proceedings against the
Company alleging that the Company breached its agreement with Anthill by not
making the annual installment payment due in May 1998 (See Note 2). Anthill
seeks damages of $375,000, plus interest, for the three remaining payments
allegedly due under the agreement.
 
                                      45
<PAGE>
 
  The Company has denied the claims made by Anthill in the arbitration and
intends to vigorously defend those claims. The Company has also submitted a
counterclaim in the arbitration, in which it seeks the same relief it is
demanding in its lawsuit. Management does not believe that the disposition of
these actions will have a material adverse effect on the Company's business,
financial condition or results of operations.
 
8. STOCKHOLDERS' EQUITY
 
  Initial Public Offering. In February 1997, the Company completed its initial
public offering and issued 2,201,981 shares of common stock to the public at a
price of $8.00 per share. As a result of this offering, the Company received
$14,950,000, net of underwriting discounts, commissions, offering costs and
expenses payable by the Company. Simultaneously, all outstanding preferred
shares were automatically converted into common stock.
 
  Shareholder Rights Plan. In July 1997, the Company's Board of Directors
approved a stock purchase rights plan which provides a dividend distribution
of one common stock purchase right for each outstanding share of its common
stock. The rights become exercisable based on certain limited conditions
related to acquisitions of stock, tender offers and certain business
combination transactions of the Company. In the event one of the limited
conditions is triggered, each right entitles the registered holder to purchase
for $60 per one-thousandth of a Preferred Share of Qualix Series A Junior
Participating Preferred Stock with a par value of $.001 per share. The rights
are redeemable at the Company's option for $0.01 per right and expire on July
30, 2007.
 
  Employee Stock Purchase Plan. The Company has an employee stock purchase
plan, under which employees may, subject to certain restrictions, purchase
shares of common stock at six month intervals at a price not less than 85
percent of the lower of the fair market value as of the beginning or the end
of the two year offering period. 117,321 shares have been issued under this
Plan to date as of June 30, 1998. At June 30, 1998, 232,679 shares were
reserved for future issuance.
 
  Restricted Stock. During 1994, an officer of the Company was granted
nonstatutory stock options to purchase 48,000 shares of common stock at $.20
per share and 40,000 shares of Series D preferred stock at $2.40 per share. In
May 1996, the holder exercised the options in exchange for a full recourse
promissory note, bearing interest at 6.83% per annum, due May 2006 and secured
by the underlying stock. The preferred shares subsequently were converted to
common shares in connection with the Company's initial public offering in
February 1997. The related shares of common stock are subject to repurchase by
the Company at the original purchase price per share upon termination of
employment prior to vesting of such shares. These restricted shares vest over
four years in accordance with the terms of the original stock options.
 
  During 1996, an officer of the Company was granted a nonstatutory stock
option to purchase 23,333 shares of Series C preferred stock at $2.40 per
share. The option was exercised in exchange for a full recourse promissory
note which bears interest at 7.04% per annum, is due May 2006 and is secured
by the underlying stock. The preferred shares subsequently were converted to
common shares in connection with the Company's initial public offering in
February 1997. The related shares of common stock are subject to repurchase by
the Company at the original purchase price per share upon termination of
employment prior to vesting of such shares. These restricted shares vest over
four years in accordance with the terms of the original stock options.
 
  In July 1996, two officers exercised unvested stock options to purchase
50,266 shares of common stock at $0.20 per share. The options were exercised
in exchange for full recourse promissory notes which bear interest at 6.74%
per annum, are due July 2001 and are secured by the underlying stock. The
related shares of common stock are subject to repurchase by the Company at the
original purchase price per share upon termination of employment prior to
vesting of such shares. These restricted shares vest over four years in
accordance with the terms of the original stock options.
 
  In January 1998, an officer exercised unvested stock options to purchase
60,000 shares of common stock at $2.75 per share with a full recourse
promissory note which bears interest at 6.13% per annum. The note is due
 
                                      46
<PAGE>
 
January 2008 and is secured by the underlying stock. The related shares of
common stock are subject to repurchase by the Company at the original purchase
price per share upon termination of employment prior to vesting of such
shares. These restricted shares vest over four years in accordance with the
terms of the original stock options.
 
  At June 30, 1998, 91,751 outstanding shares of such common stock were
subject to repurchase.
 
  In January 1998 an officer exercised vested stock options to purchase 10,000
shares of common stock at $0.20 per share with a full recourse promissory note
which bears interest at 5.83% per annum. The note is due January 2003 and is
secured by the underlying stock.
 
  Stock Option Plans. The Company has stock option plans (the "Plans") under
which shares are reserved for issuance to employees, consultants and
directors. The Plans authorize the direct award or sale of common stock or the
grant of incentive and nonstatutory stock options. Incentive stock options are
granted at fair market value (as determined by the Board of Directors) at the
date of grant; nonstatutory options and stock sales may be offered at not less
than 85% of fair market value. Options become exercisable over four years and
expire ten years after the date of grant.
 
  A summary of option transactions under the plans are summarized as follows:
 
<TABLE>
<CAPTION>
                                                       OUTSTANDING OPTIONS
                                                    ---------------------------
                                                               WEIGHTED AVERAGE
                                                     SHARES     EXERCISE PRICE
                                                    ---------  ----------------
     <S>                                            <C>        <C>
     Balance, July 1, 1995.........................   232,840       $0.47
       Granted (weighted average fair value of
        $0.08).....................................   478,078        0.59
       Exercised...................................   (51,172)       0.20
       Cancelled...................................   (56,151)       0.20
                                                    ---------       -----
     Balance, June 30, 1996........................   603,595        0.61
       Granted (weighted average fair value of
        $3.23).....................................   500,400        5.92
       Exercised...................................  (112,419)       0.23
       Cancelled...................................   (56,983)       2.66
                                                    ---------       -----
     Balance, June 30, 1997........................   934,593        3.38
       Granted (weighted average fair value of
        $1.99)..................................... 1,660,381        3.50
       Exercised...................................  (212,530)       0.95
       Cancelled...................................  (913,358)       4.99
                                                    ---------       -----
     Balance, June 30, 1998........................ 1,469,086       $2.85
                                                    =========       =====
</TABLE>
 
  At June 30, 1998, options for 768,483 shares were exercisable under the
Plans and 288,980 shares were available for future grant.
 
  The following table summarizes information concerning options outstanding
and exercisable as of June 30, 1998:
 
<TABLE>
<CAPTION>
                             OPTIONS OUTSTANDING                OPTIONS EXERCISABLE
                 ------------------------------------------- --------------------------
                             WEIGHTED AVERAGE    WEIGHTED                   WEIGHTED
   RANGE OF        NUMBER       REMAINING        AVERAGE       NUMBER       AVERAGE
EXERCISE PRICES  OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
---------------  ----------- ---------------- -------------- ----------- --------------
<S>              <C>         <C>              <C>            <C>         <C>
$0.08--$0.73        168,247        7.69           $ 0.35       161,804       $ 0.36
$1.60--$2.50        108,372        8.19             2.12        48,996         2.12
$2.75--$3.03        863,443        9.35             2.79       384,483         2.75
$3.06--$8.50        327,340        8.71             6.75       171,516         6.74
   $21.65             1,684        5.44            21.65         1,684        21.65
                  ---------        ----           ------       -------       ------
                  1,469,086        8.94           $ 2.85       768,483       $ 2.65
                  =========                                    =======
</TABLE>
 
                                      47
<PAGE>
 
  Stock Option Repricing. During the third quarter of fiscal 1998, the Company
approved a cancellation and regrant of outstanding stock options for all
holders of outstanding options with exercise prices in excess of the closing
selling price per share on January 23, 1998. 434,378 options were repriced at
an exercise price of $2.75 per share, the fair market value of the stock on
January 23, 1998, the regrant date. The repriced options become exercisable in
accordance with the same exercise schedule in effect under the higher priced
option to which such new option relates except that no portion of the option
may be exercised prior to one year from the regrant date. The regrant applied
to all employees and consultants of the Company; officers of the Company were
excluded from the repricing arrangement.
 
  Stock Based Compensation. The Company uses the intrinsic value method
specified by Accounting Principles Board Opinion No. 25 in accounting for its
employee stock options and, accordingly, has recorded no compensation expense
through June 30, 1998, as such issuances have been at the fair value of the
Company's common stock at the date of grant.
 
  Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, (SFAS 123) requires the disclosure of pro forma net income
and earnings per share had the Company adopted the fair value method as of the
beginning of the year ended June 30, 1996. Under SFAS 123, the fair value of
stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the minimum
value method prior to the initial public offering and the Black-Scholes option
pricing model thereafter, with the following weighted average assumptions for
fiscal 1998, 1997 and 1996, respectively: expected option life of six months
following vesting; 89% and 80% stock price volatility for 1998 and 1997
respectively; risk-free interest rates of 5.6% for options granted during the
year ended June 30, 1998, 6.1% for options granted during the year ended June
30, 1997 and 5.9% for options granted during the year ended June 30, 1996; and
no dividends during the expected term. The Company's calculations are based on
a multiple option valuation approach and recognition of forfeitures as they
occur. The fair value of the employee purchase rights under the Employee Stock
Purchase Plan was estimated using the same model, but with the following
weighted average assumptions for fiscal 1998 and 1997, respectively: risk-free
interest rates of 5.6% and 5.7% and stock volatility of 89% and 80%. The
weighted average fair value of purchase rights granted in fiscal 1998 and 1997
was $2.54 and $3.55, respectively. If the computed fair values of the fiscal
1998, 1997 and 1996 awards had been amortized to expense, pro forma net income
(loss) and earnings (loss) per share would have been ($8,205,000), ($0.79 per
share, basic and diluted) in fiscal 1998, $2,302,000 ($0.35 per share, basic
and $0.25 per share, diluted) in fiscal 1997 and $554,000 ($0.21 per share,
basic and $0.07 per share, diluted) in fiscal 1996. The impact of outstanding
non-vested stock options granted prior to fiscal 1996 has been excluded from
the pro forma calculations; as such, the pro forma adjustments may not be
indicative of future period pro forma adjustments, which will include expenses
for more than three years of awards.
 
9. EMPLOYEE BENEFIT PLAN
 
  The Company sponsors a 401(k) Profit-Sharing Plan (the Plan) for all
employees. Participants may contribute between 1% and 15% of their annual
compensation on a before-tax basis, but not to exceed the amount allowable as
a deduction for federal income tax purposes. Participants vest immediately in
their contributions. The Company was not required to contribute, nor has it
contributed, to the Plan for the fiscal years ended June 30, 1997 and 1996 and
through March 31, 1998. Commencing April 1, 1998, the Company instituted a
matching program with a maximum annual Company contribution of $500 per
employee. For the fiscal year ended June 30, 1998, the Company contributed
approximately $58,000 to the Plan.
 
 
                                      48
<PAGE>
 
                                   PART III
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
        AND FINANCIAL DISCLOSURE
 
  Not applicable.
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  The information regarding directors is incorporated by reference from the
section entitled "Election of Directors" of the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A of the Securities Exchange
Act of 1934, as amended, for the Company's Annual Meeting of Stockholders to
be held on November 16, 1998 (the "Proxy Statement"). The Proxy Statement is
anticipated to be filed within 120 days after the end of the Company's fiscal
year ended June 30, 1998.
 
  For information regarding Executive Officers of the Company, see the
information appearing under the caption "Executive Officers of the Company" in
Part I, Item 4a of this Form 10-K.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  Information regarding compensation of the Company's Executive Officers is
incorporated herein by reference from the section entitled "Executive
Compensation" of the Proxy Statement.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference from the section entitled
"Stock Ownership of Certain Beneficial Owners and Management" of the Proxy
Statement.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  Information regarding certain relationships and related transactions is
incorporated herein by reference from the section entitled "Certain
Relationships and Related Transactions" of the Proxy Statement.
 
                                      49
<PAGE>
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS
 
  The consolidated financial statements of the Company as set forth under Item
8 are filed as part of this Annual Report on Form10-K.
 
(a)(2) FINANCIAL STATEMENT SCHEDULE
 
  Schedule II--Valuation and Qualifying Accounts is filed on page 51 of this
Form 10-K.
 
  All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or the accompanying notes.
 
(a)(3) EXHIBITS
 
  See exhibit index at page of this Report on Form 10-K.
 
(b) REPORTS ON FORM 8-K
 
  None.
 
                                      50
<PAGE>
 
                                  SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT ON FORM 10-K
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED ON
THIS DAY OF SEPTEMBER 1998.
 
                                          Qualix Group, Inc.
 
                                          By:        /s/ Richard G. Thau
                                            -----------------------------------
                                            RICHARD G. THAU
                                            CHAIRMAN, PRESIDENT AND CHIEF
                                            EXECUTIVE OFFICER
                                            (DULY AUTHORIZED OFFICER AND
                                            PRINCIPAL EXECUTIVE OFFICER)
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON SEPTEMBER 25TH, 1998
ON BEHALF OF THE COMPANY AND IN THE CAPACITIES INDICATED.
 
<TABLE> 
<CAPTION> 
             SIGNATURES                                TITLE
 
<S>                                    <C> 
         /s/ Richard G. Thau           Chairman, President and Chief
_____________________________________   Executive Officer (principal
           RICHARD G. THAU              executive officer)
 
          /s/ Bruce C. Felt            Vice President, Finance and Chief
_____________________________________   Financial Officer
            BRUCE C. FELT
 
       /s/ Francis L. Serafin          Controller (principal
_____________________________________   accounting officer)
         FRANCIS L. SERAFIN
 
          /s/ William Hart             Director
_____________________________________
            WILLIAM HART
 
         /s/ William D. Jobe           Director
_____________________________________
           WILLIAM D. JOBE
 
       /s/ Kenneth A. Goldman          Director
_____________________________________
         KENNETH A. GOLDMAN
 
          /s/ Louis C. Cole            Director
_____________________________________
            LOUIS C. COLE
 
         /s/ Peter L. Wolken           Director
_____________________________________
           PETER L. WOLKEN

</TABLE> 
 
                                      51
<PAGE>
 
                               QUALIX GROUP, INC.
 
                                  SCHEDULE II
 
                       VALUATION AND QUALIFYING ACCOUNTS
                         ACCOUNTS RECEIVABLE ALLOWANCES
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                  BALANCE AT                          BALANCE AT
                                  BEGINNING  COSTS AND                  END OF
FISCAL YEAR ENDED                 OF PERIOD  EXPENSES  DEDUCTIONS (A)   PERIOD
-----------------                 ---------- --------- -------------- ----------
<S>                               <C>        <C>       <C>            <C>
June 30, 1998....................    $386      $240         $89          $537
June 30, 1997....................     256       239         109           386
June 30, 1996....................      87       216          47           256
</TABLE>
--------
(a) Amounts determined not to be collectible, net of recoveries.
 
                                       52
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
  EXHIBIT
    NO.    DESCRIPTION
  -------  -----------
 <C>       <S>
  2.1*     --Agreement and Plan of Reorganization among the Company, Qualix
            Subsidiary, Inc. and Octopus Technologies, Inc. dated July 14,
            1996.
  2.2*     --Articles of Merger between and among the Company, Qualix
            Subsidiary, Inc. and Octopus Technologies, Inc. filed August 30,
            1996.
  3.1*     --Amended and Restated Certificate of Incorporation of the Company,
            as currently in effect.
  3.4*     --Bylaws of the Company, as currently in effect.
  4.1*     --Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
  4.2*     --Specimen Common Stock certificate.
  4.3*     --Series D Preferred Stock and Warrant Purchase Agreement dated
            April 11, 1995.
 10.1*     --Form of Indemnification Agreement.
 10.2*     --1995 Stock Option Plan.
 10.3*     --1997 Stock Option Plan.
 10.4*     --Employee Stock Purchase Plan.
 10.5*     --Senior Managers Bonus Plan.
 10.6*     --Series A Preferred Stock Purchase Agreement dated November 15,
            1990.
 10.7*     --Series B Preferred Stock Purchase Agreement dated December 27,
            1991.
 10.8*     --Series C Preferred Stock Purchase Agreement dated October 20,
            1992.
 10.9*     --Series C Preferred Stock Purchase Agreement dated November 16,
            1993.
 10.10*    --Note and Warrant Purchase Agreement dated August 26, 1994.
 10.11*    --Asset Purchase Agreement between Anthill Incorporated and the
            Company dated May 1, 1996.
 10.12*    --Employment Agreement between the Company and Richard G. Thau dated
            November 15, 1990.
 10.13*    --Employment Agreement between the Company and Jean A. Kovacs dated
            November 15, 1990.
 10.14*    --Employment Agreement between the Company and Bruce C. Felt dated
            March 25, 1994.
 10.15*    --Promissory Notes of Bruce A. Felt dated May 17, 1996 and May 17,
            1996 in the principal amounts of $96,000 and $9,600, respectively.
 10.16*+   --Distributor Agreement between the Company and StereoGraphics
            Corporation dated March 27, 1996.
 10.17*+   --Letter Agreement between the Company and Silicon Graphics, Inc.
            dated June 6, 1994.
 10.18*    --[This item intentionally left blank.]
 10.19*+   --Master Agreement between the Company and Veritas Software
            Corporation dated April 10, 1995.
 10.20*    --Reseller Agreement between the Company and Check Point Software
            Technologies Ltd. dated June 3, 1994.
 10.21*    --Lease Agreement between the Company and Norfolk Atrium, a
            California Limited Partnership dated April 1, 1995.
 10.22***  --Lease Agreement between the Company and Cassiopea Venture
            Corporation dated June 13, 1997.
 10.23*    --OEM License Agreement between the Company and Intergraph
            Corporation dated July 31, 1996.
 10.24***  --Amendment to OEM License Agreement between the Company and
            Intergraph Corporation dated May 21, 1997.
 10.25***+ --Mutual Settlement Agreement and Release of Claims between the
            Company and Veritas Software Corporation dated August 11, 1997.
 10.26**   --Letter employment agreement between Registrant and David Malmstedt
            dated December 23, 1997.
 10.27**   --Letter employment agreement between Registrant and Dan Kingman
            dated December 24, 1997.
 10.28**+  --Enterprise License Agreement between the Company and Federal
            Express Corporation dated December 10, 1997.
 21.1      --Wholly-owned subsidiaries of the Company.
 23.1      --Independent Auditors' Consent.
 24.1*     --Power of Attorney (see page II-4).
 27.0      --Financial Data Schedule.
</TABLE>
 
                                       53
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT
   NO.   DESCRIPTION
 ------- -----------
 <C>     <S>
   27.01 --Restated Financial Data Schedule for the nine months ended March 31,
           1997.
   27.02 --Restated Financial Data Schedule for the year ended June 30, 1997.
   27.03 --Restated Financial Data Schedule for the three months ended
           September 30, 1997.
</TABLE>
--------
*    Incorporated by reference from an exhibit to the Company's Registration
     Statement on Form S-1, as amended, (File No. 333-17529) declared effective
     by the Commission on February 12, 1997.
**   Incorporated by reference from an Exhibit to the Company's Form 10-Q, filed
     with the Commission on February 13, 1998.
***  Incorporated by reference from an Exhibit to the Company's Form 10-K,
     filed with the Commission on September 19, 1997.
+    Confidential treatment requested.
 
                                      54