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 fiscal year ended December 31, 1996


     [ ]  TRANSITION  REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES
          EXCHANGE ACT OF 1934 For the transition period from _____ to _____ .


                         Commission File Number: 0-26130

                              LEGATO SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)
Delaware                                                              94-3077394
(State of incorporation)                                        (I.R.S. Employer
                                                             Identification No.)
                                3210 Porter Drive
                           Palo Alto, California 94304
                    (Address of principal executive offices)

                                 (415) 812-6000
              (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, $.0001 par value

                             (Title of each 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 ]

     The aggregate  market value of the voting stock held by  non-affiliates  of
the registrant as of February 28, 1997 was approximately $327,697,326. Shares of
Common Stock held by each officer and director  have been  excluded in that such
persons may be deemed to be affiliates.  This  determination of affiliate status
is not necessarily a conclusive determination for other purposes.

     The number of shares  outstanding  of the  registrant's  common stock as of
February 28, 1997 was 17,161,152.


                       DOCUMENTS INCORPORATED BY REFERENCE

Part III - Portions of the registrant's  definitive Proxy Statement to be issued
in conjunction with the  registrant's  Annual Meeting of Stockholders to be held
on May 15, 1997.
<PAGE>
                              LEGATO SYSTEMS, INC.
                             FORM 10-K ANNUAL REPORT
                            FOR THE FISCAL YEAR ENDED
                                DECEMBER 31, 1996


                                Table of Contents

PART I

Item 1   Business ........................................................    1

Item 2   Properties ......................................................   13

Item 3   Legal Proceedings ...............................................   13

Item 4   Submission of Matters to a Vote of Security Holders .............   14

Item 4a  Officers of the registrant ......................................   14

PART II

Item 5   Market for Registrant's Common Equity and Related
         Stockholder Matters .............................................   15

Item 6   Selected Consolidated Financial Data ............................   16

Item 7   Management's Discussion and Analysis of Financial Condition and
         Results of Operations ...........................................   16

Item 8   Consolidated Financial Statements and Supplementary Data ........   21

Item 9   Changes in and Disagreements with Accountants on Accounting
         and Financial Disclosure.........................................   38

PART III

Item 10  Directors and Executive Officers of the Registrant ..............   38

Item 11  Executive Compensation ..........................................   38

Item 12  Security Ownership of Certain Beneficial Owners and Management ..   38

Item 13  Certain Relationships and Related Transactions ..................   38

PART IV

Item 14  Exhibits, Financial Statement Schedule and Reports on Form 8-K ..   39

Signatures ...............................................................   43
<PAGE>
                                     PART I


ITEM 1.  BUSINESS

     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  "Risk
Factors."

     Legato  Systems,  Inc.  ("Legato" or the  "Company")  was  incorporated  in
Delaware in September 1988. The Company  develops,  markets and supports network
storage management software products for heterogeneous  client/server  computing
environments.  The Company  believes it is currently a technology  leader in the
network  storage  management  software  market  because  of  the  heterogeneity,
scalability, performance and ease of use of its software products. The Company's
NetWorker  software  supports many storage  management  server platforms and can
accommodate  a variety of clients,  servers and storage  devices.  The Company's
long term strategy is to create an integrated set of solutions  centered  around
storage management that enhance and simplify network computing as a whole.

     The Company utilizes multiple distribution  channels,  including resellers,
OEMs  and  direct  sales,  as a  part  of  the  Company's  strategy  to  achieve
comprehensive  coverage in the market.  The Company  licenses its source code to
leading computer system and software suppliers,  including Amdahl,  Banyan, Data
General,  Digital,  ICL,  Siemens  Nixdorf,  Silicon  Graphics,  Sony,  SunSoft,
Nihon-Unisys and Unisys, which port the products to their proprietary platforms,
sell the products  through their direct and indirect  distribution  channels and
provide primary support for the products after installation. These relationships
enable the Company to reach a broad customer base,  while reducing  development,
support and product costs.


Background

     The Company's  NetWorker software has been designed to address the emerging
requirements  of storage  management in  client/server  computing  environments.
NetWorker  employs a client/server  architecture  in which a server  centralizes
storage management services for a wide variety of clients, including servers and
desktop  computers.  NetWorker  provides  a  cost-effective  storage  management
solution  that  scales  to  support  large  networks,   supports   heterogeneous
client/server  computing  environments,  accomplishes  storage  management tasks
within stringent time  constraints,  reduces the cost of network  administration
and employs an easy-to-use  graphical user  interface.  The core elements of the
Legato solution include:

     Scalability.  The Company's storage management  architecture is designed to
be  scaleable so that it can grow with an expanding  network and  accommodate  a
wide range of storage  management needs. The Company's storage server family can
be  configured or expanded to meet the storage  requirement  needs of a changing
and dynamic network.  The Company's storage management  architecture is modular,
so that  clients,  servers and storage  devices can be upgraded or added without
requiring  redesign  of the entire  system.  An  existing  server can be quickly
upgraded to a more powerful server with minimal modification.  Furthermore,  the
Company's storage management architecture can adapt to growing networks with its
ability to easily add clients to a given storage management server. For example,
a single NetWorker  storage  management  server has been employed to manage data
located on hundreds of clients  ranging  from  desktop  computers  to large file
servers.

     Heterogeneity.  The Company's storage management  solutions are designed to
support a wide range of  servers,  clients and storage  devices.  The  Company's
family of storage  management server products  operates on NetWare,  Windows NT,
and UNIX systems (Solaris,  AIX, HP-UX and SCO UNIX), as well as on UNIX systems
offered by the Company's  OEMs such as Amdahl,  Banyan,  Data General,  Digital,
ICL, Siemens Nixdorf, Silicon Graphics, Sony, SunSoft,  Nihon-Unisys and Unisys.
Server and desktop computer clients supported  include DOS, NetWare,  Macintosh,
OS/2, UNIX, Vines, Windows and Windows NT. Storage devices supported include all
popular tape drives, and optical and tape robotic storage devices. All NetWorker
server  platforms  inter-operate  with  all  supported  clients.  As  a  result,
customers  can mix and match  clients  and  servers as  necessary  to meet their
specific requirements.

     Performance.  Organizations need to accomplish storage management functions
(which  tend  to  consume  network  bandwidth  as  large  amounts  of  data  are
transferred  over the network) during a network's  off-peak hours. The Company's
NetWorker  storage  management  server  can  process  data from many  clients in
parallel,  allowing high volumes of network data to be managed within  stringent
time constraints. NetWorker is designed to take advantage of improvements in the
physical   environment  to  deliver  higher  performance.   As  networks  employ
higher-speed computers, faster and increased capacity storage devices and higher
bandwidth networking  technologies,  NetWorker can exploit these capabilities to
move data quickly. The Company recently introduced a series of optimized storage
servers,  Power Edition, which is based upon its core technology and is targeted
for very large databases or data centers that further  increases the performance
and scalability of the Company's products.

     Ease of Use. The Company's storage management  solutions have been designed
to be easy to use for both network  administrators  and end users. The Company's
storage management  architecture permits a network  administrator to perform the
storage  management  function  for the entire  network  either  from the storage
server or a client. The network  administrator can access the Company's products
through a number of graphical user interfaces, including Windows, Windows NT and
Motif.  Network  administrators  can also automate  their storage  operations by
adding  robotic  storage   libraries,   further  reducing  the  need  for  human
intervention.  Finally, the Company's storage management architecture supports a
simple user  interface  that  permits  end users to access or recover  copies of
their files without the need for intervention by the network administrator.

Architecture

     The most basic function of a storage  management system is data protection.
The process of data  protection  involves making backup copies of data stored on
hard  disks  onto  low-cost,  high  capacity  removable  media such as tapes and
optical disks.

     The Company's extensible storage management  architecture provides reliable
data protection services.  Data may be managed according to the application that
produces it. For example, a relational  database may be frequently  updated.  To
back up this kind of database efficiently, it is necessary to understand how the
database is  constructed,  so that a consistent copy of the database can be made
while it is undergoing change and while the database is "on-line." The Company's
storage  management  architecture can accommodate the data produced by different
applications because of its Application Specific Module ("ASM") technology. Each
ASM can be tailored to the  specific  storage  management  needs of a particular
kind of  application  data,  and  all  ASMs  are  implemented  using  a  modular
architecture  designed  to  permit  new ASMs to be  easily  integrated  into the
Company's storage offerings.

     Once data is read from the  client  hard  disk,  it is  transmitted  to the
storage   management   software  that  resides  on  the  storage   server  using
industry-standard  communications  protocols  such  as  TCP/IP  and  SPX/IPX.  A
high-performance,  integrated  database is fundamental to the storage management
server engine.  This database has two roles:  to keep track of where the storage
management server has stored the data, and to keep track of what data is stored.
The Company's storage  management  architecture makes it possible for clients to
query the database as to what data is under  management  and to access this data
themselves.  This enables  novice users to directly  access the system,  thereby
reducing the burden on network administrators.

     One of the most critical ways the Company's storage management architecture
achieves  its  ability to  accommodate  an  increasing  number of clients  while
retaining high  performance is by implementing  parallel data transfers from the
clients  to the  storage  management  server  in the same way that  adding  more
tellers to serve  customers  allows a bank to process more  transactions  in the
same amount of time.  When an  additional  client's  data is managed,  it may be
scheduled for  processing by the storage  management  server at the same time as
the data from other clients. Thus, one slow client need not slow down the entire
storage  management  process.  The  Company's  storage  management  architecture
achieves this  parallelism by writing  multiple  client data streams to the tape
simultaneously.  This allows the full  bandwidth of the tape drive to be used as
the data from many clients can be delivered to the tape drive in the same amount
of time as the data from one client. As a result,  one high-capacity  tape drive
can be shared effectively by more than one client on the network, and therefore,
it may not be  necessary  to purchase  several  tape drives to  accomplish  data
protection in the required amount of time.

     An increasingly  important function of the storage management  architecture
to some end users is to  facilitate  the  management  of data  according  to its
criticality.  As an example,  a set of quarterly reports may be grouped together
and filed away.  This data may not need to be accessed on a regular  basis,  but
may need to be retrievable  for a period of years because of certain  regulatory
requirements.  This class of data is termed  "archive"  data,  because it may be
filed away for future reference and need not be kept on-line. When archived data
is needed, it must be explicitly  retrieved,  typically from offsite storage. It
is also  possible  to archive  data in such a way that it appears to be on-line,
when  it in  reality  is  stored  elsewhere.  This  process  is  referred  to as
"hierarchical  storage  management." The indexing technology embedded within the
Company's  storage  products is designed to support the management of protected,
archived, and hierarchically managed data.

     To reduce the  burden on  expensive  administrative  staff,  the  Company's
storage  management  architecture  allows the  storage  management  server to be
managed remotely, from an easy-to-use,  graphical user interface familiar to the
administrator.  The use of a common  administrative  protocol  developed  by the
Company  greatly  facilitates  the  development of diverse user  interfaces that
support  remote  administration.  The  Company's  family of  storage  management
products can also automate a wide range of storage management  functions and can
employ  robotic  storage  devices to remove the need for human  intervention  to
retrieve a particular piece of removable storage media.

Products

     The Company's  family of storage  management  server software - NetWorker -
provides  network storage  management  services for a wide variety of platforms.
NetWorker  consists of two basic  components:  a client module that accesses the
data being managed, and a server module that performs the protection, management
and control of network data. Typically,  the server module is selected to run on
the platform most familiar to the administrative  staff in an organization;  the
client modules are selected according to the type of computers  installed on the
network.  Server software is available from the Company for NetWare,  Windows NT
and several UNIX platforms, including IBM, HP and Sun versions of UNIX. A number
of applications and enhancements options are available for the storage server.

     The base NetWorker  server product  provides data  protection  services for
clients and  includes  client  software for the same  platform as the  NetWorker
server, as well as support for a set of popular  non-robotic storage devices. In
multiple platform environments, client software for dissimilar platforms must be
purchased.  The following client packages are currently available: (i) ClientPak
for UNIX,  which  supports a diverse set of UNIX clients;  (ii) ClientPak for PC
Desktops,  which supports DOS, OS/2, Windows and Windows NT; (iii) ClientPak for
Windows NT; (iv) ClientPak for NetWare and (v) ClientPak for Macintosh.

     NetWorker for UNIX is licensed by the number of clients to be supported and
has the  following  storage  management  server  options  available:  (i) Client
Connections  - the  ability to  increase  the  number of clients of the  storage
management  server beyond the ten supported by the base product;  (ii) Archive -
the ability to archive data; (iii)  Autochanger - the ability to employ tape and
optical jukeboxes of varying capacities;  (iv) StorSuite - the ability to manage
migrated  files to less  costly  media;  (v)  BusinesSuite  - a family of add-on
modules  tailored for databases and business  applications;  (vi) SNMP Modules -
the ability to integrate with leading network management frameworks;  (vii) Silo
Support - the ability to leverage mainframe-class storage silos; and (viii) High
Speed Device Support - the ability to utilize high speed devices.

     NetWorker for Windows NT is Microsoft  BackOffice certified and licensed by
the number of clients to be supported and has the following  storage  management
server options  available:  (i) Client Connections - the ability to increase the
number of clients of the storage  management  server beyond the ten supported by
the base product;  (ii) Archive - the ability to archive data; (iii) Autochanger
- the ability to employ tape and optical jukeboxes of varying  capacities;  (iv)
BusinesSuite  - a family of add-on  modules  tailored for databases and business
applications  such as SQL  Server and  Exchange  Server;  (v) SNMP  Module - the
ability to integrate with leading network management  frameworks;  and (vi) Open
File Manager - the ability to protect open files.

     NetWorker  for NetWare is licensed by the number of clients to be supported
and has the following storage  management server options  available:  (i) Client
Connections  - the  ability to  increase  the  number of clients of the  storage
management  server beyond the ten supported by the base product;  (ii) Archive -
the ability to archive data; (iii)  Autochanger - the ability to employ tape and
optical jukeboxes of varying capacities; (iv) Mainframe Module -- the ability to
store data on storage devices attached to a mainframe; and (v) Open File Manager
- the ability to protect open files.

     To address customers with requirements limited to backing up a single UNIX,
Windows NT or NetWare  server to a single  tape drive,  the  Company  introduced
Legato  Data  Backup  Utility  ("LDBU").  LDBU is an  effective  and easy to use
entry-level  solution  that  allows  administrators  to take  advantage  of high
functionality  storage  management  software.  LDBU  therefore  provides a clear
migration path to Legato's NetWorker products as customers' requirements grow.

     NetWorker  for  NetWare,  Network  Edition  has an end user  list  price of
$2,000, while a fully configured NetWare product can have an end user list price
of over $10,000.  NetWorker for UNIX, Server Edition, has an end user list price
of $3,000, and the Network Edition has an end user list price of $6,000. A fully
configured  UNIX  product  can have an end  user  list  price  of over  $50,000,
depending upon the number of licensed client connections.  NetWorker for Windows
NT,  Network  Edition  has an end  user  list  price  of  $2,000,  while a fully
configured  Windows NT product can have an end user list price of over  $30,000.
The LDBU product can be obtained for a nominal shipping and handling charge.

Sales and Marketing

     The Company's  strategy is to deploy a comprehensive  sales,  marketing and
support  infrastructure to meet the storage management needs of users of complex
client/server  networks,  both in North America and  overseas.  The Company uses
multiple distribution channels to reach end user customers,  which range in size
from individual corporate departments or small businesses to large multinational
corporations.  Network  storage  management  software may be utilized in a broad
range of industries.  The range of channels includes resellers,  OEMs and direct
sales.  The Company  has  established  regional  sales  offices to increase  the
effectiveness of and support to the Company's channel partners.

Resellers

     Domestic Premier Reseller Program.  The Company's Domestic Premier Reseller
program  is a  significant  source of  revenue  in North  America.  The  Premier
Reseller  program  enables  third-party  integrators   specializing  in  storage
management  and  client/server  network  solutions to provide end user customers
with complete solutions,  including systems and storage hardware,  complementary
software and the Company's  software.  The reseller is responsible  for managing
the sales and installation process in each customer situation. In large, complex
opportunities, the Company's support personnel 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 end user customers
in  order  to  obtain  input  on  product  direction  and  to  monitor  customer
satisfaction.  The Company  provides  sales and  pre-sale  technical  support to
business partners and end user customers from the Company's headquarters in Palo
Alto and from regional offices in the Boston, Chicago, Houston, Los Angeles, New
York, Seattle, Toronto, and Washington, D.C. metropolitan areas.

     Domestic   Distributor   Program.   To  further  expand   coverage  in  the
marketplace,  the Company  sells its  products to large  regional  and  national
distributors  who sell the  Company's  products to resellers  with  expertise in
integrating  network  solutions for end users.  The Company  provides support to
these network solutions resellers in the form of an Authorized Reseller program.
The  Company  currently  has  relationships  with  various  major  distributors,
including Access Graphics,  Anthem  Electronics,  Gates/Arrow,  Ingram Micro and
TechData.

     International   Reseller  and   Distributor   Programs.   The  Company  has
implemented  similar  reseller and  distributor  programs  internationally.  The
Company's  international  sales and support  headquarters in Amsterdam currently
operates regional offices for Northern Europe (London),  Central Europe (Munich)
and Southern  Europe (Paris) to support  resellers and  distributors  throughout
Europe.  The Company has also opened a sales office in  Australia  for sales and
support to South Asia.  Sales and support to Northern  Asia and Latin America is
headquartered out of Palo Alto.

     International  product  sales were $10.7  million,  $4.7  million  and $2.4
million, representing 20 percent, 16 percent and 15 percent of total revenues in
1996, 1995 and 1994,  respectively.  The majority of international  sales during
these  periods  were made in Europe.  The Company  believes  that  international
markets present an attractive  growth  opportunity and is expanding the scope of
its  international  operations.  The  Company has  engaged,  and intends to add,
international  distributors  in  targeted  countries  and  is  developing  joint
marketing  programs  with certain  distributors.  To facilitate  penetration  in
certain  markets,  the  Company,  on its own  and in  cooperation  with  certain
international  distributors,  is in the  process  of  localizing  certain of its
products to targeted languages.

     The Company also relies  significantly  on its  resellers for the marketing
and  distribution of its products.  The Company's  agreements with resellers are
generally  not  exclusive  and in many cases may be  terminated  by either party
without  cause.  Many of the  Company's  resellers  carry product lines that are
competitive  with those of the  Company.  There can be no  assurance  that these
resellers  will give a high priority to the marketing of the Company's  products
or  that  they  will  continue  to  carry  the  Company's  products.  Events  or
occurrences  of this nature  could  materially  adversely  affect the  Company's
business, operating results and financial condition.

OEMs

     Source Code OEM Program. The source code OEM program generates  significant
royalty revenues for the Company.  Under this program,  the Company licenses its
software products,  in source code form, to leading computer system and software
suppliers  from which the Company  receives  an initial  license fee and ongoing
royalty  revenue.  The OEM partner is then responsible for porting the Company's
software to its unique  operating  system  environment,  testing it,  selling it
through the OEM  partner's  direct  sales force and  distribution  channels  and
providing  the primary  customer  support after  installation.  The OEM partners
generally have exclusive rights to the products on their  proprietary  platforms
(subject to certain minimum  royalty  obligations),  but in certain cases,  work
cooperatively  to  incorporate  their  enhancements  into the Company's  storage
products on an ongoing basis. The benefit of this approach for end users is that
they can acquire the Company's family of storage management  products as part of
a complete systems  solution from a single vendor,  with such vendor providing a
single  point of contact for  customer  support.  The benefit to the Company has
been  access to its OEM  partners'  customer  bases,  both in North  America and
overseas,  without a  commensurate  investment  in fixed  expense.  The  Company
currently has source code OEM agreements in place with several  computer  system
and software suppliers,  including Amdahl,  Banyan, Data General,  Digital, ICL,
Siemens Nixdorf, Silicon Graphics, Sony, SunSoft, Nihon-Unisys and Unisys.

     Strategic Partner Program.  The Strategic Partner program is an alternative
to the source code OEM program for major system  providers who wish to offer the
Company's  products  along with theirs,  but prefer not to make an investment in
enhancing  the base  Legato  product.  For  example,  SunSoft,  a private  label
reseller,  licenses the object code for the standard  Legato  products and sells
and  supports the  products  under the SunSoft  logo as described  above for the
source  code  OEM  program.   The  Company  also  has  established  a  strategic
partnership with Hewlett-Packard.

     The  source  code  OEMs  and  strategic  partner  programs   accounted  for
approximately  24 percent and 28 percent of the Company's total revenues in 1996
and 1995, respectively.  SunSoft accounted for approximately 11 percent of total
revenues for each of the years ended December 31, 1996 and 1995. There can be no
assurance  that such  customers  will  continue  to  account  for a  significant
percentage  of the  Company's  revenues in the future.  The Company is currently
investing,  and intends to continue to invest,  significant resources to develop
this channel,  which could materially  adversely affect the Company's  operating
margins.  There can be no assurance  that the Company will be  successful in its
efforts to increase the revenues  represented  by this  channel.  The Company is
dependent  upon its OEMs'  ability to develop  new  products,  applications  and
product  enhancements  on a timely  and  cost-effective  basis  that  will  meet
changing  customer  needs and respond to emerging  industry  standards and other
technological  changes.  There is no  assurance  that the  Company's  OEMs  will
effectively meet these technological  challenges.  These OEMs are not within the
control of the Company,  may incorporate into their products the technologies of
other  companies  in addition to those of the Company and are not  obligated  to
purchase products from the Company.  There can be no assurance that any OEM will
continue to carry the Company's  products,  and the inability to recruit, or the
loss  of,  important  OEMs  could  materially  adversely  affect  the  Company's
business,  operating results and financial condition. See "Risk Factors -- Risks
Associated with Strategy of Expanding OEM Channel; Reliance on Resellers."

Direct Sales and Marketing

     Direct Sales Program. As network storage management  applications  increase
in strategic  importance to major  enterprises,  the Company has  recognized the
need to establish even closer  relationships with its largest corporate clients.
Customers  participating  in the Company's direct sales program have an assigned
salesperson  and  Company  executive  contact,   participate  in  the  Company's
technical  exchange program and work closely with the Company to develop project
plans for installations over a period of time. The direct sales  representatives
coordinate  business  partner  activity  across the  customer's  enterprise  and
closely monitors customer satisfaction.

     Corporate  Marketing.  The Company  supports  its  resellers  and OEMs with
extensive  marketing  programs  designed to establish the Company's image in key
markets and to generate end user demand. The Company participates in trade shows
and advertises in key network  systems  publications  and on the World Wide Web.
Leads are  qualified  by the  Company's  inside  sales staff and provided to its
channel  partners.  Additionally,  resellers and  distributors are provided with
promotional  and  educational  materials and can qualify for market  development
funding for specific  promotional  activities  tailored for their  solutions and
geography.

Customer Service and Support

     The Company employs  systems  engineers who work closely with the Company's
direct sales  personnel to assist  resellers  and end users with  pre-sales  and
post-sales support matters.  In addition,  Legato employs a centralized  support
organization  which  provides  customers  with  technical  support,   education,
training and consulting  services.  The organization  consists of an experienced
staff of technical support engineers  providing telephone and electronic support
via electronic mail, facsimile and CompuServe from the Company's offices in Palo
Alto,   California  and  Toronto,   Canada.   The  sales  and  customer  support
organizations  at the Company work closely  together to ensure overall  customer
satisfaction.

     Technical  Support.  The Company  offers  software  updates,  telephone and
electronic support and on-site reviews to its customers.  Customers who register
the Company's  products receive  software updates and technical  support free of
charge  for one month  after  initial  purchase.  Beyond the  initial  one month
period,  customers may purchase remote technical support and software updates as
needed. Customers also have the option to purchase annual Software Subscriptions
that  extend the  covered  support  period for an  additional  12 month  period.
Software  Subscription  customers  receive  software  updates and  telephone  or
electronic  support from 6 a.m. to 6 p.m.  Pacific time.  Software  Subscription
annual fees are generally  equivalent to 18 percent of the current list price of
the products  under license to such  customers.  The Company also offers premium
technical support, which includes a one year contract covering five-day, 24-hour
technical phone support, one annual on-site review, and a monthly teleconference
with a  designated  Senior  Legato  Technical  Engineer  and Problem  Escalation
Manager.  Premium  technical  support  pricing  begins at $20,000  per year,  in
addition to the basic  software  subscription  fee.  Premium  technical  support
customers have the option to purchase seven-day, 24-hour technical phone support
for an incremental cost of $10,000 per year.

     In  recent   years,   the  Company's   installed   base  of  customers  has
significantly  increased,  as have the number of customers  purchasing  software
subscription  contracts.  From  time to  time,  the  Company  receives  customer
complaints about the timeliness and accuracy of customer  support.  Although the
Company  plans to add customer  support  personnel  in order to address  current
customer  support  needs and intends to closely  monitor  progress in this area,
there can be no assurance that these efforts will be successful.

     Education and Training.  The Company  offers  education and training to end
users and resellers. Training classes are offered through in-house facilities at
the  Company's  offices  in Palo Alto,  as well as at  off-site  locations.  The
Company also provides on-site training services upon request by customers.  Fees
for education and training  services are charged  separately  from the Company's
software products.

     Consulting.  The Company's  consultants  are available to work closely with
customers'   information  systems   organizations.   These  consulting  services
generally   consist  of   assisting   customers   in  setting  up  more  complex
installations  or tailoring the Company's  software  products to achieve  higher
performance or a higher degree of automation.  Fees for consulting  services are
charged separately from the Company's software products.

Research and Development

     Since its  inception,  the  Company  has made  substantial  investments  in
product  development.   In  addition,  the  Company  receives  the  benefits  of
additional  testing  and  product  enhancements  from  each  source  code  OEM's
development  group. The Company's future success will depend upon its ability to
develop  and  introduce   new  software   products   (including   new  releases,
applications   and   enhancements)  on  a  timely  basis  that  keep  pace  with
technological  developments  and  emerging  industry  standards  and address the
increasingly  sophisticated needs of its customers. In particular, the Company's
strategy is to continue to leverage the  NetWorker  architecture  to enhance the
functionality  of the product  through new  releases,  applications  and product
enhancements  to  meet  the  ongoing  storage  management  requirements  of  its
customers,  including: (i) increased scalability and performance of its products
to keep pace with the growth of large networks, (ii) management of data produced
by an increasing range of  applications,  including  databases,  (iii) increased
levels of automation and ease of use of its products  aimed at further  reducing
administrative   costs,    including   integration   with   network   management
applications,  (iv)  management of an increasing  range of platforms and storage
devices and (v) development of storage management applications that can classify
data according to the timeliness with which an organization needs to access such
data.  There  can be no  assurance  that  the  Company  will  be  successful  in
developing  and marketing new products that respond to  technological  change or
evolving industry standards,  that the Company will not experience  difficulties
that  could  delay or  prevent  the  successful  development,  introduction  and
marketing of these new products,  or that its new products will  adequately meet
the  requirements  of the  marketplace  and achieve  market  acceptance.  If the
Company is unable, for technological or other reasons,  to develop and introduce
new products in a timely  manner in response to changing  market  conditions  or
customer requirements,  the Company's business,  operating results and financial
condition will be materially adversely affected.

     As part of the Company's ongoing development  process, the Company released
several new versions of NetWorker during 1996, and intends to release additional
versions of NetWorker,  generally on an annual basis.  In addition,  the Company
released several new products,  including new high  performance  database backup
modules,  called BusinesSuite,  for Oracle, Informix and SQL, as well as modules
for backup of SAP R/3  applications  and Microsoft  Exchange.  In addition,  the
Company released an expanded set of autoloader support including mainframe silos
and high speed devices aimed at enterprise  installations.  Finally, the Company
released  a new  optimized  server  platform,  Power  Edition,  for  very  large
databases.  Some of the Company's  competitors  currently offer certain of these
potential new products.  Due to the complexity of client/server software and the
difficulty in gauging the engineering effort required to produce these potential
new products,  such potential new products are subject to significant  technical
risks.  There can be no  assurance  that such  potential  new  products  will be
introduced  on a timely basis or at all. See "Risk  Factors--  Dependence on New
Software Products; Rapid Technological Change."

     The  Company's  total  expenses  for  research  and  development  were $9.2
million,  $4.5 million and $2.9 million, for 1996, 1995 and 1994,  respectively.
The Company anticipates that it will continue to commit substantial resources to
research and  development  in the future.  To date,  the  Company's  development
efforts have not resulted in any capitalized software development costs.

Competition

     The network  storage  management  market is intensely  competitive,  highly
fragmented  and  characterized  by  rapidly  changing  technology  and  evolving
standards. Competitors vary in size and in the scope and breadth of the products
and services offered.  The Company's major competitors on the Novell NetWare and
Windows NT platforms include Computer Associates (Cheyenne Software) and Seagate
(Palindrome and Arcada);  on the Sun Solaris/SunOS  platform include OpenVision,
Peripheral Devices (Delta Microsystems),  Software Moguls, EMC2 (Epoch), Spectra
Logic and Computer Associates (Legent/Lachman); on the AIX platform include IBM;
and on the HP-UX platform include Hewlett Packard. In the future, as the Company
enters new markets,  the Company expects that such markets will have additional,
market-specific  competitors.  In  addition,  many  of  the  Company's  existing
competitors  are broadening  their platform  coverage.  The Company also expects
increased competition from systems and network management companies,  especially
those that have historically  focused on the mainframe market and are broadening
their focus to include the client/server market. In addition,  because there are
relatively  low barriers to entry in 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  adversely  affect  the
Company's business, operating results and financial condition.

     The Company believes that the principal  competitive  factors affecting its
market include product features (such as heterogeneity, scalability, performance
and ease of use), brand name recognition,  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
certain  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.

     Many of the Company's current and potential  competitors have significantly
greater financial, technical, marketing and other resources than the Company. As
a  result,  they  may be  able  to  respond  more  quickly  to  new or  emerging
technologies  and  changes  in  customer  requirements,  or  to  devote  greater
resources to the development, promotion, sale and support of their products than
the Company. The Company also expects that competition will increase as a result
of future software industry  consolidations,  which have occurred in the network
storage  management  market in the past.  In  addition,  current  and  potential
competitors have established or may establish  cooperative  relationships  among
themselves  or  with  third  parties.  Accordingly,  it  is  possible  that  new
competitors  or  alliances  among  competitors  may emerge and  rapidly  acquire
significant  market share. In addition,  network  operating system vendors could
introduce new or upgrade existing operating systems or environments that include
storage management  functionality offered by the Company's products, which could
render  the  Company's  products  obsolete  and  unmarketable.  There  can be no
assurance that the Company will be able to compete  successfully against current
or future  competitors or that  competitive  pressures faced by the Company will
not materially  adversely affect its business,  operating  results and financial
condition.

Employees

     As of December 31, 1996, the Company had a total of 303  employees.  Of the
total, 85 were in sales and marketing,  68 in customer service and support,  102
in  research  and  development,  45  in  finance  and  administration  and  3 in
operations.  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 intense, and there can
be no assurance  that the Company can retain its key  technical  and  managerial
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.

Risk Factors

     In  addition  to the other  information  in this  Report on Form 10-K,  the
following risk factors should be considered  carefully in evaluating the Company
and its business:

Fluctuations in Quarterly Operating Results; Future Operating Results Uncertain

     The Company's  quarterly  operating results have in the past varied and may
in the future vary significantly depending on a number of factors, including the
size and timing of significant orders; increased competition;  market acceptance
of new  products,  applications  and  product  enhancements;  changes in pricing
policies  by the  Company  and its  competitors;  the  ability of the Company to
timely  develop,  introduce  and market new products,  applications  and product
enhancements and to control costs; the Company's  success in expanding its sales
and marketing programs;  technological changes in the network storage management
market;  the mix of sales among the  Company's  channels;  deferrals of customer
orders in  anticipation of new products,  applications or product  enhancements;
changes in Company strategy; personnel changes; and general economic factors.

     The  Company's  future  revenues  are  difficult  to  predict.  The Company
operates with virtually no order backlog because its software products typically
are shipped shortly after orders are received. In addition, the Company does not
recognize revenues on sales to domestic distributors until the products are sold
through  to  end  users.  As a  result,  product  revenues  in any  quarter  are
substantially  dependent on orders booked and shipped and on sell-through to end
users in that quarter.  Revenues for any future quarter are not predictable with
any significant degree of certainty.  Product and software subscription revenues
are also difficult to forecast because the network storage  management market is
rapidly  evolving  and the  Company's  sales  cycle  varies  substantially  from
customer to customer.  Royalty and license revenues are substantially  dependent
upon sales by OEMs of their products that  incorporate  the Company's  software.
Accordingly,  royalty and license  revenues are subject to OEMs' product cycles,
which are also  difficult to predict.  Royalty and license  revenues are further
impacted by fluctuations in licensing activity from quarter-to-quarter,  because
initial license fees generally are non-recurring and recognized upon the signing
of the license  agreement.  The Company's  expense levels are based, in part, on
its   expectations  as  to  future   revenues.   If  revenue  levels  are  below
expectations,  operating results are likely to be adversely affected. Net income
may  be  disproportionately  affected  by a  reduction  in  revenues  because  a
proportionately  smaller  amount  of the  Company's  expenses  varies  with  its
revenues. As a result, the Company believes that period-to-period comparisons of
its  results of  operations  are not  necessarily  meaningful  and should not be
relied upon as  indications of future  performance.  Due to all of the foregoing
factors,  it is possible  that in some future  quarter the  Company's  operating
results may be below the  expectations  of public market analysts and investors.
In such  event,  the  price  of the  Company's  Common  Stock  would  likely  be
materially adversely affected.

Product Concentration

     The Company currently  derives a substantial  majority of its revenues from
its NetWorker  software products and related  services,  and the Company expects
that  revenues  from  NetWorker  will  continue to account for a majority of the
Company's  revenues  for the  foreseeable  future.  Broad market  acceptance  of
NetWorker is, therefore,  critical to the Company's future success. As a result,
a decline in unit prices of or demand for NetWorker, or failure to achieve broad
market acceptance of NetWorker, as a result of competition, technological change
or otherwise,  would have a material  adverse effect on the business,  operating
results and financial  condition of the Company.  The life cycle of NetWorker is
difficult  to  estimate  due in large  measure  to the recent  emergence  of the
Company's  market,   the  effect  of  new  products,   applications  or  product
enhancements,   technological   changes  in  the  network   storage   management
environment in which NetWorker  operates and future  competition.  The Company's
future financial performance will depend in part on the successful  development,
introduction  and market  acceptance of new products,  applications  and product
enhancements.  There can be no assurance  that the Company  will  continue to be
successful in marketing  NetWorker or any new products,  applications or product
enhancements.

Competition

     The network  storage  management  market is intensely  competitive,  highly
fragmented  and  characterized  by  rapidly  changing  technology  and  evolving
standards. Competitors vary in size and in the scope and breadth of the products
and  services  offered.  Increased  competition  is  likely  to  result in price
reductions,  reduced gross margins and loss of market share,  any of which could
materially  adversely  affect the  Company's  business,  operating  results  and
financial  condition.  Many of the Company's  current and potential  competitors
have significantly greater financial,  technical,  marketing and other resources
than the Company.  As a result,  they may be able to respond more quickly to new
or emerging  technologies  and changes in  customer  requirements,  or to devote
greater  resources  to the  development,  promotion,  sale and  support of their
products  than the  Company.  The Company also  expects  that  competition  will
increase  as a result of future  software  industry  consolidations,  which have
occurred in the network  storage  management  market in the past.  In  addition,
current and potential  competitors have established or may establish cooperative
relationships  among  themselves  or  with  third  parties.  Accordingly,  it is
possible that new  competitors  or alliances  among  competitors  may emerge and
rapidly acquire significant market share. In addition,  network operating system
vendors  could  introduce  new  or  upgrade   existing   operating   systems  or
environments  that  include  storage  management  functionality  offered  by the
Company's  products,  which could  render the  Company's  products  obsolete and
unmarketable. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competitive pressures
faced  by the  Company  will  not  materially  adversely  affect  its  business,
operating results and financial condition. See "Business -- Competition."

Dependence on New Software Products; Rapid Technological Change

     The  network  storage   management   market  is   characterized   by  rapid
technological  change,  changing  customer needs,  frequent new software product
introductions  and evolving  industry  standards.  The  introduction of products
embodying new  technologies  and the emergence of new industry  standards  could
render the Company's existing products obsolete and unmarketable.  The Company's
future  success  will  depend  upon its  ability to develop  and  introduce  new
software products  (including new releases,  applications and enhancements) on a
timely  basis  that keep  pace  with  technological  developments  and  emerging
industry  standards  and address  the  increasingly  sophisticated  needs of its
customers.  There can be no  assurance  that the Company will be  successful  in
developing and marketing new products that respond to  technological  changes or
evolving industry standards,  that the Company will not experience  difficulties
that  could  delay or  prevent  the  successful  development,  introduction  and
marketing of these new products,  or that its new products will  adequately meet
the  requirements  of the  marketplace  and achieve  market  acceptance.  If the
Company is unable, for technological or other reasons,  to develop and introduce
new products in a timely  manner in response to changing  market  conditions  or
customer requirements,  the Company's business,  operating results and financial
condition will be materially adversely affected. The Company currently has plans
to  introduce  and market  several  potential  new  products  in the next twelve
months.  Some of the  Company's  competitors  currently  offer  certain of these
potential new products.  Due to the complexity of client/server software and the
difficulty in gauging the engineering effort required to produce these potential
new products,  such potential new products are subject to significant  technical
risks.  There can be no  assurance  that such  potential  new  products  will be
introduced on a timely basis or at all. In the past, the Company has experienced
delays  in  the  commencement  of  commercial  shipments  of its  new  products,
resulting in customer  frustrations  and delay or loss of product  revenues.  If
potential  new products  are delayed or do not achieve  market  acceptance,  the
Company's business, operating results and financial condition will be materially
adversely  affected.  The Company has also, in the past,  experienced  delays in
purchases of its products by customers  anticipating  the launch of new products
by the  Company.  There can be no assurance  that  material  order  deferrals in
anticipation of new product introductions will not occur.

     Software  products  as complex as those  offered by the Company may contain
undetected  errors or failures  when first  introduced  or as new  versions  are
released.  The Company has in the past discovered  software errors in certain of
its new products after their  introduction  and has  experienced  delays or lost
revenues  during the period  required  to correct  these  errors.  Although  the
Company has not experienced  material  adverse  effects  resulting from any such
errors to date,  there can be no assurance that,  despite testing by the Company
and by current and potential customers, errors will not be found in new products
after  commencement  of commercial  shipments,  resulting in loss of or delay in
market acceptance, which could have a material adverse effect upon the Company's
business, operating results and financial condition.

Risks Associated with Strategy of Expanding OEM Channel; Reliance on Resellers

     An integral part of the Company's strategy is to increase the proportion of
the Company's  customers  licensed  through OEMs. There can be no assurance that
such  customers  will  continue to account for a  significant  percentage of the
Company's  revenues  in the  future.  The Company is  currently  investing,  and
intends to continue to invest,  significant  resources to develop this  channel,
which could materially  adversely affect the Company's operating margins.  There
can be no  assurance  that the  Company  will be  successful  in its  efforts to
increase the revenues represented by this channel. The Company is dependent upon
its OEMs' ability to develop new products, applications and product enhancements
on a timely and cost-effective  basis that will meet changing customer needs and
respond to emerging industry standards and other technological changes. There is
no assurance that the Company's OEMs will effectively  meet these  technological
challenges.  These  OEMs  are  not  within  the  control  of  the  Company,  may
incorporate  into their products the technologies of other companies in addition
to those of the Company and are not  obligated  to  purchase  products  from the
Company. In addition,  the Company's OEMs generally have exclusive rights to the
Company's technology on their respective  platforms,  subject to certain minimum
royalty  obligations.  There can be no assurance  that any OEM will  continue to
carry the  Company's  products,  and the  inability to recruit,  or the loss of,
important  OEMs  could  materially  adversely  affect  the  Company's  business,
operating results and financial condition.

     The  Company  also  relies  significantly  on  its  distributors,   systems
integrators  and  value  added  resellers  (collectively,  "resellers")  for the
marketing and  distribution  of its  products.  The  Company's  agreements  with
resellers  are  generally  not  exclusive and in many cases may be terminated by
either party without cause. Many of the Company's  resellers carry product lines
that are competitive  with those of the Company.  There can be no assurance that
these  resellers  will give a high  priority to the  marketing of the  Company's
products (they may, in fact, give a higher priority to other products, including
the products of  competitors)  or that they will continue to carry the Company's
products. Events or occurrences of this nature could materially adversely affect
the Company's business, operating results and financial condition. The Company's
results of operations could also be materially  adversely affected by changes in
reseller inventory strategies, which could occur rapidly, and in many cases, may
not be related to end user demand.  There can be no  assurance  that the Company
will retain any of its current  resellers,  nor can there be any assurance that,
in such event,  the Company will be successful in recruiting  replacement or new
organizations  to represent it. Any such changes in the  Company's  distribution
channels could  materially  adversely affect the Company's  business,  operating
results and financial condition.

International Operations; Risks Associated with International Sales

     The Company  believes  that its  continued  growth and  profitability  will
require  further  expansion  of  its  international   operations.  In  order  to
successfully expand  international  sales, the Company must establish additional
foreign   operations,   hire   additional   personnel  and  recruit   additional
international resellers.  This will require significant management attention and
financial  resources  and  could  materially   adversely  affect  the  Company's
operating  margins.  To the extent  that the  Company is unable to effect  these
additions in a timely manner,  the Company's  growth,  if any, in  international
sales  will be  limited,  and the  Company's  business,  operating  results  and
financial condition could be materially adversely affected.  In addition,  there
can be no  assurance  that the  Company  will be able to  maintain  or  increase
international   market  demand  for  the  Company's   products.   The  Company's
international  sales 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 those markets.  In some markets,  localization  of the Company's  products is
essential to achieve market penetration. The Company may incur substantial costs
and experience delays in localizing its products,  and there can be no assurance
that any localized product will ever generate significant revenues. In addition,
the Company relies  significantly  on its  distributors  and other  resellers in
international  sales efforts.  Since these  distributors and other resellers are
not employees of the Company and  typically do not offer the Company's  products
exclusively,  there can be no  assurance  that they will  continue to market the
Company's  products.  Additional  risks inherent in the Company's  international
business   activities   generally  include   unexpected  changes  in  regulatory
requirements,  tariffs and other trade barriers, lack of acceptance of localized
products,  if any, in foreign  countries,  longer  accounts  receivable  payment
cycles,  difficulties in managing international operations,  potentially adverse
tax consequences including restrictions on the repatriation of earnings, and the
burdens  of  complying  with a wide  variety of  foreign  laws.  There can be no
assurance  that such  factors  will not have a  material  adverse  effect on the
Company's future international sales and, consequently,  the Company's business,
operating results and financial condition.

Management of Expanding Operations

     The Company has recently  experienced a period of significant  expansion of
its operations that has placed a significant  strain upon its management systems
and resources.  In addition, the Company has recently hired a significant number
of employees,  and plans to further  increase its total  headcount.  The Company
also plans to expand the geographic  scope of its customer base and  operations.
This expansion has resulted and will continue to result in  substantial  demands
on the Company's management  resources.  From time to time, the Company receives
customer  complaints  about the  timeliness  and  accuracy of customer  support.
Although the Company plans to add customer support personnel in order to address
current  customer  support needs and intends to closely monitor progress in this
area,  there can be no assurance that these efforts will be  successful.  If the
Company's efforts are not successful, the Company's business,  operating results
and financial condition could be materially  adversely  affected.  The Company's
ability to compete effectively and to manage future expansion of its operations,
if any,  will  require the Company to  continue  to improve  its  financial  and
management  controls,  reporting  systems and  procedures  on a timely basis and
expand, train and manage its employee work force. There can be no assurance that
the Company will be able to do so successfully.  The Company's  failure to do so
could have a material  adverse  effect upon the  Company's  business,  operating
results and financial condition.

Dependence Upon Key Personnel

     The Company's future  performance also depends in significant part upon the
continued service of its key technical and senior management personnel,  none of
whom is bound by an  employment  agreement.  The loss of the  services of one or
more of the  Company's  officers  or other key  employees  could have a material
adverse  effect on the  Company's  business,  operating  results  and  financial
condition.  The Company's future success also depends on its continuing  ability
to attract and retain  highly  qualified  technical  and  managerial  personnel.
Competition  for such  personnel is intense,  and there can be no assurance that
the Company can retain its key technical and managerial employees or that it can
attract,  assimilate or retain other highly  qualified  technical and managerial
personnel in the future.

Dependence on Growth in the Network Storage Management Market; General Economic
  and Market Conditions

     All of the Company's  business is in the network storage management market,
which is still an emerging market.  The Company's  future financial  performance
will  depend in large part on  continued  growth in the number of  organizations
adopting network storage management solutions for their client/server  computing
environments.  There can be no  assurance  that the market for  network  storage
management will continue to grow. If the network storage management market fails
to grow or  grows  more  slowly  than the  Company  currently  anticipates,  the
Company's   business,   operating  results  and  financial  condition  would  be
materially  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  operations may in the future experience  substantial
fluctuations from  period-to-period  as a consequence of such industry patterns,
general economic conditions affecting the timing of orders from major customers,
and other factors  affecting  capital  spending.  There can be no assurance that
such factors will not have a material adverse effect on the Company's  business,
operating results or financial condition.

Dependence on Proprietary Technology; Risks of Infringement

     The Company depends significantly upon proprietary technology.  The Company
relies  on a  combination  of  copyright  and  trademark  laws,  trade  secrets,
confidentiality procedures and contractual provisions to protect its proprietary
rights.  The Company  seeks to protect  its  software,  documentation  and other
written  materials  under trade  secret and  copyright  laws,  which afford only
limited  protection.  There can be no  assurance  that the Company  will develop
proprietary products or technologies that are patentable, that any issued patent
will  provide  the  Company  with  any  competitive  advantages  or will  not be
challenged  by third  parties,  or that the  patents  of others  will not have a
material  adverse  effect on the Company's  ability to do business.  Despite the
Company's efforts to protect its proprietary  rights,  unauthorized  parties may
attempt  to  copy  aspects  of the  Company's  products  or to  obtain  and  use
information that the Company regards as proprietary.  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  primarily  on  "shrink  wrap"  licenses  that are not signed by
licensees,  and, therefore, such licenses may be unenforceable under the laws of
certain  jurisdictions.  In addition,  the laws of some foreign countries do not
protect the Company's proprietary rights to as great an extent as do the laws of
the  United  States.  There  can be no  assurance  that the  Company's  means of
protecting  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  patents  issued to the  Company or other
intellectual property rights of the Company.

     There has also been  substantial  amounts  of  litigation  in the  software
industry  regarding  intellectual  property rights. The Company has from time to
time received claims that it is infringing third parties'  intellectual property
rights,  and there can be no assurance that third parties will not in the future
claim  infringement  by the Company with respect to current or future  products,
trademarks  or other  proprietary  rights.  The Company  expects  that  software
product  developers will  increasingly be subject to infringement  claims as the
number of products and competitors in the Company's  industry  segment grows and
the functionality of products in different industry segments overlaps.  Any such
claims,  with or  without  merit,  could be  time-consuming,  result  in  costly
litigation,  cause product  shipment delays or require the Company to enter into
royalty or  licensing  agreements.  Such  royalty or  licensing  agreements,  if
required,  may not be  available on terms  acceptable  to the Company or at all,
which  could  have a  material  adverse  effect  upon  the  Company's  business,
operating results and financial condition.

Product Liability

     The  Company's  license  agreements  with its customers  typically  contain
provisions  designed  to limit  the  Company's  exposure  to  potential  product
liability  claims.  In selling its  products,  the Company  relies  primarily on
"shrink wrap" licenses that are not signed by licensees,  and,  therefore,  such
licenses  may be  unenforceable  under the laws of certain  jurisdictions.  As a
result  of these and other  factors,  the  limitation  of  liability  provisions
contained  in  the  Company's  license  agreements  may  not be  effective.  The
Company's products can be used to manage data critical to organizations, and, as
a result, the sale and support of products by the Company may entail the risk of
product liability  claims. A successful  product liability claim brought against
the Company could have a material  adverse  effect upon the Company's  business,
operating results and financial condition.

Possible Volatility of Stock Price

     The trading  price of the  Company's  Common Stock has been subject to wide
fluctuations  in 1996. The trading price of the Company's  Common Stock could be
subject to wide  fluctuations in the future in response to quarterly  variations
in  operating  results,   announcements  of  technological  innovations  or  new
products,   applications   or  product   enhancements  by  the  Company  or  its
competitors,  changes in financial  estimates by  securities  analysts and other
events or factors. In addition, the stock market has experienced volatility that
has  particularly  affected the market prices of equity  securities of many high
technology  companies  and  that  often  has  been  unrelated  to the  operating
performance of such  companies.  These broad market  fluctuations  may adversely
affect the market price of the Company's Common Stock.

ITEM 2.  PROPERTIES

     The Company's  principal  administrative,  sales,  marketing,  research and
development  facility is located in approximately 96,000 square feet of space in
Palo Alto, California.  This facility is leased through August 2006. The Company
currently leases other domestic sales offices  throughout the United States,  as
well as international offices in Canada, England,  Germany, France, Holland, and
Australia.

ITEM 3. LEGAL PROCEEDINGS

     Not applicable.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     The Company did not submit any matters to a vote of security holders during
the fourth quarter of the fiscal year ended December 31, 1996.

ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT

     Set  forth  below  are  biographical  summaries  of the  current  executive
officers of the Company, as of December 31, 1996:

     Louis C. Cole, 53, joined the Company as President, Chief Executive Officer
and a Director  in June 1989.  Since  April  1995,  Mr.  Cole has also served as
Chairman of the Board.  Before  joining the Company,  from March 1987 until July
1988, Mr. Cole served as Executive Vice President  responsible for all operating
divisions of Novell,  Inc., a publicly held manufacturer of computer  networking
and software  products.  Mr. Cole holds a B.S. in mathematics and education from
Pennsylvania State University at Edinboro.

     Kent D.  Smith,  47,  has  served as  Executive  Vice  President  and Chief
Operating  Officer of the Company  since May 1996.  He served as Executive  Vice
President of Customer Operations from March 1995 to May 1996. Before joining the
Company, from March 1994 until March 1995, Mr. Smith served as Vice President of
Emerging  Markets at VeriFone,  Inc.  ("VeriFone"),  a publicly held transaction
automation company.  Prior to joining VeriFone,  Mr. Smith held a range of sales
and marketing  positions in the United States and overseas with IBM Corporation,
a publicly held  manufacturer  of computers and related  products,  from 1974 to
1994.  Mr.  Smith holds a B.A. in German from  California  State  University  at
Fullerton and an M.B.A. from the University of Southern California.

     Stephen C. Wise,  42,  joined the Company in September  1996 as Senior Vice
President of Finance and  Administration  and Chief  Financial  Officer.  Before
joining  the  Company,  Mr. Wise  served as Senior  Vice  President,  Finance at
Novell,  Inc.  ("Novell")  from  December  1993 to September  1996.  He was Vice
President and Corporate  Controller of Novell from January 1991 to December 1993
and was Vice  President,  Accounting  and Planning  from January 1990 to January
1991. Mr. Wise holds a B.S. in Accounting from San Jose State  University and an
M.B.A. from Santa Clara University.

     Gilbert C. Wai,  43,  joined the  Company  in October  1994 as Senior  Vice
President of Product Development.  Before joining the Company, Mr. Wai served as
Vice President and General Manager of Product  Development at Informix Software,
Inc. ("Informix"), a publicly held database software company, from November 1991
until  September  1994. From October 1987 to November 1991, Mr. Wai was employed
in various marketing capacities at Informix,  most recently as Vice President of
Product Marketing.  Mr. Wai holds a B.S. in electrical  engineering and computer
science from the University of California at Berkeley.

<PAGE>
                                     PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The common  stock of the  Company is traded on the Nasdaq  National  Market
under the symbol LGTO.  The Company  completed its initial  public  offering and
commenced  trading of its common stock on July 6, 1995. The following table sets
forth the high and low closing sales prices of the  Company's  common stock from
July 6, 1995 through  December 31, 1996.  Such prices  represent  prices between
dealers,  do not include retail mark-ups,  mark-downs or commissions and may not
represent actual transactions.

     Share  prices have been  adjusted to reflect the  two-for-one  split of the
Company's common stock which was effected July 5, 1996.

                                           High                Low
        Fiscal 1995
        Third Quarter*                    $14.75              $11.50
        Fourth Quarter                    $19.88              $11.50
        Fiscal 1996

        First Quarter                     $21.50              $11.63
        Second Quarter                    $27.50              $17.50
        Third Quarter                     $48.00              $18.25
        Fourth Quarter                    $47.00              $26.75


        *Commencing July 6, 1995


     As of February 28, 1997,  there were  approximately 94 holders of record of
the Company's common stock.  The Company  believes that a significant  number of
beneficial owners of its Common Stock hold shares in street name.


     The Company has never paid a cash dividend on its common stock and does not
intend to pay cash dividends on its common stock in the foreseeable future.
<PAGE>

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
Five Year Summary

<CAPTION>
                                                                   December 31,
                                                1996      1995      1994      1993      1992
                                            -------------------------------------------------
                                                    (in thousands, except per share amounts)

<S>                                         <C>       <C>       <C>       <C>       <C>

Revenues ................................   $54,249   $29,777   $ 6,405   $12,152   $ 5,749
Gross profit ............................    49,132    26,734    14,403     9,796     4,374
Income (loss) from operations ...........    13,334     7,382     1,574       268    (1,311)
Net income (loss) .......................     8,620     5,831     1,773       176    (1,306)
Net income (loss) per share (1) .........      0.46      0.37      0.14      0.01     (0.26)
Shares used in per share calculations (1)    18,771    15,749    13,116    13,144     5,044
Cash, cash equivalents and investments ..    57,081    49,526     4,031     1,173       134
Working capital .........................    51,925    38,896     3,113     1,409       475
Total assets ............................    83,142    59,150     8,274     4,883     2,355
Long-term debt, less current portion ....      --        --        --        --          57
Retained earnings (accumulated deficit) .    11,808     3,188    (2,643    (4,416    (4,592)
Total stockholders' equity ..............    68,388    50,542     4,145     2,347       921


----------
<FN>
(1) See Note 1 of Notes to Consolidated Financial Statements
</FN>
</TABLE>


ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS


     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 Item 1 under the  heading  "Risk
Factors."


Results of Operations

Overview

     The Company  develops,  markets and  supports  network  storage  management
software products for heterogeneous  client/server computing  environments.  The
Company's NetWorker family of software products,  from which the Company derives
a substantial majority of its revenues,  supports many storage management server
platforms and can accommodate a variety of clients, servers and storage devices.
The Company licenses its product through  resellers and directly to end users in
North  America,  Europe and Asia  Pacific.  The Company also licenses its source
code in exchange for initial licensing fees to original equipment  manufacturers
("OEMs")  and  receives   ongoing   royalties   from  the  OEMs  product  sales.
Substantially  all of the OEMs are large computer system and software  suppliers
located in the United States, Europe and Asia Pacific.
<PAGE>


     Selected elements of the Company's  consolidated  financial  statements are
shown below for the last three years as a percentage of total  revenues and as a
percentage change from year to year.

<TABLE>
<CAPTION>
                                                                             % Increase
                                                 % of Total Revenues        1996      1995
                                               Years Ended December 31,   Compared  Compared
                                               1996      1995      1994    to 1995   to 1994

<S>                                         <C>       <C>       <C>       <C>       <C>
Revenues:
    Product and other ...................      59.3%     57.0%     71.4%       89%       45%
    Royalty and license .................      23.7      28.4      16.4        52       214
    Software subscription ...............      17.0      14.6      12.2       112       117
                                            -------   -------   -------   -------   -------
       Total revenues ...................     100.0     100.0     100.0        82        82

Cost of revenues:
    Product and other ...................       3.8       4.7       5.3        49        60
    Software subscription ...............       5.6       5.5       6.9        84        46
                                            -------   -------   -------   -------   -------

Gross profit ............................      90.6      89.8      87.8        84        86

Operating expenses:

    Research and development ............      17.0      15.0      17.7       106        54
    Sales and marketing .................      31.7      36.4      43.7        59        51
    General and administrative ..........      11.9      13.6      16.8        59        47
    Amortization of intangibles .........       2.0      --        --        --        --
    In-process research and development .       3.4      --        --        --        --
                                            -------   -------   -------   -------   -------

       Total operating expenses .........      66.0      65.0      78.2        85        51
                                            -------   -------   -------   -------   -------

Income from operations ..................      24.6      24.8       9.6        81       369


Interest income, net ....................       3.3       4.0       0.2        52     3,581


Provision for (benefit from) income taxes      12.0       9.2      (1.0)      138      --
                                            -------   -------   -------   -------   -------

Net income ..............................      15.9%     19.6%     10.8%       48%      229%
                                            =======   =======   =======   =======   =======
</TABLE>



<PAGE>

Revenues

     Total revenues were $54.2 million, $29.8 million and $16.4 million in 1996,
1995 and 1994, respectively, representing increases of 82 percent both from 1995
to 1996 and from 1994 to 1995. The increases  principally reflect an increase in
the number of units sold, and to a lesser extent, an overall average increase in
the unit prices of products sold by the Company.

     Product and Other Revenues.  Product and other revenues were $32.1 million,
$17.0  million  and  $11.7  million  in  1996,  1995  and  1994,   respectively,
representing  increases of 89 percent from 1995 to 1996 and 45 percent from 1994
to 1995.  The increases in product and other revenues from 1995 to 1996 and from
1994 to 1995  primarily  represent  the  continued  acceptance  of the Company's
products.  Other revenues were less than 5 percent of product and other revenues
in 1996, 1995 and 1994. Product revenues are generally  recognized upon shipment
of the product, unless the Company has significant future obligations,  in which
case revenues are  recognized  when such  obligations  are  satisfied.  Sales to
domestic  distributors  are recognized  upon sale by the  distributors  to their
customers.  Other revenues are generally recognized when services are performed.
Prior  growth  rates  of the  Company's  product  and  other  revenues  are  not
indicative of future software  subscription  revenue growth rates and may not be
sustainable in the future.


     Royalty and License  Revenues.  Royalty  and  license  revenues  were $12.9
million,  $8.4  million and $2.7 million in 1996,  1995 and 1994,  respectively,
representing increases of 52 percent from 1995 to 1996 and 214 percent from 1994
to 1995.  License fee revenue was $1.7  million,  $850,000 and $378,000 in 1996,
1995 and 1994,  respectively,  and royalty fees were $11.2 million, $7.6 million
and $2.3 million in 1996, 1995 and 1994,  respectively.  The increase in royalty
and license  revenues from 1995 to 1996 is attributable  to increased  royalties
from product sales by SunSoft and increased  licenses from new OEMs and licenses
from existing OEMs adding NetWorker for the Windows NT platform to their product
offerings.  The  increases  in royalty  and license  revenues  from 1994 to 1995
primarily relate to increased  royalties from product sales by SunSoft and other
OEMs.  Generally,  the  Company's  license  agreements  provide  for an  initial
non-recurring  license fee, with subsequent  royalty  payments based upon future
sales  of the  licensees'  product.  There  is  typically  a time  lag  from the
consummation of the license  arrangement  until the receipt of royalty payments,
due to the OEMs' product development cycles.  Initial license fees are generally
recognized  upon  shipment of the  product,  unless the Company has  significant
future obligations,  in which case revenues are recognized when such obligations
are satisfied. Royalty revenues are recognized upon receipt of quarterly royalty
reports  from  source  code OEMs with  respect  to their  product  sales for the
previous  quarter.  Prior  growth  rates of the  Company's  royalty  and license
revenues are not indicative of future software subscription revenue growth rates
and may not be sustainable in the future.

     Software  Subscriptions.  Software subscription revenues were $9.2 million,
$4.4 million and $2.0 million in 1996, 1995 and 1994, respectively, representing
increases  of 112 percent  from 1995 to 1996 and 117 percent  from 1994 to 1995.
This  growth was  primarily  due to the  increase  in the  number of  registered
customers for the Company's  products  electing to subscribe to maintenance  and
support  contracts  as well as the renewal of software  subscriptions  after the
initial one-year term and, for 1996,  increased  internal  staffing for software
subscription sales.  Software subscription fees for ongoing customer support and
product  updates are  collected in advance and are  recognized  ratably over the
period  of  the  contract.   Prior  growth  rates  of  the  Company's   software
subscription revenues are not indicative of future software subscription revenue
growth rates and may not be sustainable in the future.

     International  product sales  accounted  for 20 percent,  16 percent and 15
percent of total revenues in 1996, 1995 and 1994,  respectively.  The increasing
volume of international  sales was primarily  attributable to an increase in the
market acceptance of the Company's products overseas,  an increase in the number
of  international  sales offices and an increase in the number of  international
distributors  and resellers  marketing the Company's  products.  The majority of
international  sales  during  these  periods  were made in Europe.  The  Company
established a sales office in Germany  during 1994, and sales offices in France,
England,  and  Australia  during 1995.  The Company  believes that its continued
growth and  profitability  will require further  expansion of its  international
operations.  In order to  successfully  expand  international  sales in 1997 and
subsequent  periods,  the Company must establish  additional foreign operations,
hire additional personnel and recruit additional international  resellers.  This
will require significant  management attention and financial resources and could
materially  adversely affect the Company's operating results. To the extent that
the  Company  is  unable to  effect  these  additions  in a timely  manner,  the
Company's  growth,  if any,  in  international  sales will be  limited,  and the
Company's   business,   operating  results  and  financial  condition  could  be
materially adversely affected.  In addition,  there can be no assurance that the
Company will be able to maintain or increase international market demand for the
Company's products. The Company's  international sales 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 those markets. In some markets,  localization of
the Company's products is essential to achieve market  penetration.  The Company
may incur  substantial  costs and experience  delays in localizing its products,
and there can be no assurance  that any  localized  product  will ever  generate
significant revenues.

Gross Profit

     Gross  profit  was  $49.1   million,   $26.7  million  and  $14.4  million,
representing  90.6 percent,  89.8 percent and 87.8 percent of total  revenues in
1996,  1995 and 1994,  respectively.  The  increases  in total gross profit were
attributable  to the  higher  levels of  revenues  from all  sources,  including
royalties and licenses, which do not generate any material cost of revenues.

     Gross  profit from  product and other  revenues  was $30.1  million,  $15.6
million and $10.8  million,  representing  93.5  percent,  91.8 percent and 92.5
percent of product  and other  revenues  in 1996,  1995 and 1994,  respectively.
Gross  profit  from  product  and other  revenues  consists of product and other
revenues  less the related  cost,  which  consists  primarily of product  media,
documentation and packaging costs. In the first three quarters of 1996,  product
costs include clinical research  expenses,  reflecting the principal activity of
Innovus,  Inc.,  which was  acquired  along with Innovus  Technologies,  Inc. in
January  1996.  Substantially  all of the  net  assets  of  Innovus,  Inc.,  the
Company's  clinical  research  business,  were  sold in  September  1996 and the
Company has discontinued  all clinical  research  activities.  The effect of the
discontinuance did not have a significant effect on the operating results of the
Company.

     Gross profit from software  subscription  revenues was $6.2  million,  $2.7
million and $882,000 in 1996,  1995 and 1994,  representing  67.2 percent,  62.3
percent  and  43.9  percent  of the  related  revenue  in 1996,  1995 and  1994,
respectively.  Gross  profit from  software  subscription  revenues  consists of
software  subscription  revenues less the related cost, which consists primarily
of personnel-related costs incurred in providing telephone support and the costs
of  providing  software  updates.  The  increase in gross  profit from  software
subscriptions as a percentage of the related revenue was primarily  attributable
to the Company's leveraging of its installed base through subscription renewals,
as well as more efficient utilization of resources devoted to this activity.

Operating Expenses

     Research  and  Development.   Research  and  development  expenses  consist
primarily of  personnel-related  costs.  Research and development  expenses were
$9.2 million,  $4.5 million and $2.9 million,  representing  17.0 percent,  15.0
percent and 17.7 percent of total revenues in 1996, 1995 and 1994, respectively.
Research and development expenses increased 106 percent from 1995 to 1996 and 54
percent from 1994 to 1995,  reflecting increased staffing and associated support
for  engineers  required to expand and enhance the Company's  product line.  The
Company  believes  that  research  and  development  expenses  will  continue to
increase in dollar  amounts from the levels  experienced  in 1996 as the Company
continues  to  invest in  developing  new  products,  applications  and  product
enhancements.

     Sales and  Marketing.  Sales and marketing  expenses  consist  primarily of
salaries and  commissions  for sales and  marketing  personnel  and  promotional
expenses.  Sales and marketing  expenses were $17.2  million,  $10.8 million and
$7.2 million,  representing 31.7 percent, 36.4 percent and 43.7 percent of total
revenues in 1996, 1995 and 1994,  respectively.  The increases in dollar amounts
of sales and marketing expenses were primarily attributable to the growth of the
Company's sales force and associated support personnel,  increased marketing and
promotional  activities and increased commission expenses. The decrease in 1996,
as a percentage  of total  revenues,  is primarily due to  promotional  expenses
increasing less than 20 percent in absolute  spending,  significantly  less than
the increase in total  revenues.  The decrease in 1995, as a percentage of total
revenues,  is a result  of the  significant  increase  in  royalty  and  license
revenues,  which do not  generate  any material  selling  expenses.  The Company
believes  that sales and marketing  expenses will increase in dollar  amounts as
the Company continues to expand its sales and marketing staff.

     General and Administrative. General and administrative expenses include the
personnel and other costs of the finance,  human resources,  information systems
and  administrative  departments  of the  Company.  General  and  administrative
expenses were $6.4 million,  $4.0 million and $2.8  million,  representing  11.9
percent, 13.6 percent and 16.8 percent of total revenues in 1996, 1995 and 1994,
respectively.  The  increases  in dollar  amounts were  primarily  the result of
increased  staffing  and  related  costs  required  to manage  and  support  the
Company's  expansion.  In addition,  1995 includes  litigation  related costs in
connection  with a lawsuit  settled in November 1995.  The Company  expects that
general  and  administrative  expenses  will  increase  in dollar  amount as the
Company expands its staffing.

Net Interest Income

     Net interest income was $1.8 million,  $1.2 million,  and $32,000 for 1996,
1995 and 1994,  respectively.  The  significant  increases in interest income in
1996 and 1995  primarily  relate  to the  investment  of the  proceeds  from the
Company's initial public offering in July 1995 and cash flows from operations.

Provision for (Benefit from) Income Taxes

     The  provisions  for income  taxes for 1996 and 1995 were $6.5  million and
$2.7  million,  respectively.  The  effective tax rates in 1996 and 1995 were 43
percent and 32 percent,  respectively.  The  effective  tax rate for 1996 was 38
percent,  excluding the effect of a non-tax  deductible  write-off of in-process
research and development. The effective tax rate increased from 1995 as a result
of the complete  utilization  of  operating  loss and credit  carryforwards  and
reversal of the remaining valuation allowance against the Company's deferred tax
asset in 1995,  partially  offset by an increased  amount of tax exempt interest
income in 1996. The Company  recorded an income tax benefit of $167,000 in 1994,
reflecting  utilization of operating loss and credit  carryforwards  and partial
reversal of the valuation  allowance  against the Company's  deferred tax asset.
The Company anticipates that its effective tax will decrease from the 43 percent
in 1996 to between 38 percent and 40 percent for 1997.

Liquidity and Capital Resources

     The Company's cash,  cash  equivalents  and marketable  securities  totaled
$57.1 million at December 31, 1996 and  represented  69 percent of total assets.
Cash and cash equivalents are highly liquid investments with original maturities
of ninety  days or less.  Marketable  securities  consist  mainly  of  municipal
securities.  At  December  31,  1996,  the  Company  had no  long-term  debt and
stockholders' equity was $68.4 million.

     Cash  generated  from  operations  and  sales  of  common  stock  has  been
sufficient to finance the  Company's  operations.  Cash,  cash  equivalents  and
marketable  securities  increased $7.6 million during 1996, primarily reflecting
net cash provided by operating activities of $17.1 million and proceeds from the
issuance of common stock under the Company's stock plans of $1.9 million.  These
amounts were  partially  offset by  purchases of property and  equipment of $5.4
million and subsidiary acquisition costs of $5.9 million.

     The  Company  believes  its  current  cash  balances  and  cash  flow  from
operations,  if any, will be sufficient to meet its working  capital and capital
expenditure requirements for at least the next twelve months.
<PAGE>


ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   Index to Consolidated Financial Statements

Consolidated Balance Sheets at December 31, 1996 and 1995 .................  22

Consolidated  Statements  of Income  for each of the three  years
in the  period ended December 31, 1996 ....................................  23

Consolidated Statements of Stockholders' Equity for each of the three years
     in the period ended December 31, 1996 ................................  24

Consolidated Statements of Cash Flows for each of the three years
     in the period ended December 31, 1996 ................................  25

Notes to the Consolidated Financial Statements ............................  26

Report of Independent Accountants .........................................  37



<PAGE>
<TABLE>
                              LEGATO SYSTEMS, INC.

                           CONSOLIDATED BALANCE SHEETS

                    (in thousands, except per share amounts)

<CAPTION>
                                                                 December 31,
                                                               1996        1995
                                                             --------    --------

                             ASSETS

Current assets:

<S>                                                           <C>       <C>
     Cash and cash equivalents ............................   $ 27,673  $ 29,832
     Short-term investments ...............................     22,391     9,609
     Accounts receivable, net .............................      9,839     5,143
     Other current assets .................................      2,870       939
     Deferred tax asset ...................................      2,652     1,658
                                                              --------  --------
         Total current assets .............................     65,425    47,181
Long-term investments .....................................      7,017    10,085
Property and equipment, net ...............................      6,029     1,533
Intangible assets, net ....................................      4,470      --
Other assets ..............................................        201        28
                                                              --------  --------
              Total assets ................................   $ 83,142  $ 58,827
                                                              ========  ========


                  LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

     Accounts payable ....................................   $  1,205  $    657
     Accrued compensation and benefits ...................      2,394     1,292
     Accrued liabilities .................................      2,320       809
     Income taxes payable ................................       --         998
     Deferred revenues ...................................      7,581     4,529
                                                             --------  --------
         Total current liabilities .......................     13,500     8,285
Commitments (Note 4)
Deferred tax liability ...................................      1,254      --
Common stock, $.0001 par value: 50,000 and 20,000 shares
    authorized and 16,938 and 16,066 shares issued and
    outstanding at December 31, 1996 and 1995, respectively         2         2
Additional paid-in capital ...............................     56,592    47,383
Retained earnings ........................................     11,808     3,188
Deferred stock compensation ..............................        (40)      (58)
Unrealized gain on investments, net ......................         26        27
                                                             --------  --------
         Total stockholders' equity ......................     68,388    50,542
                                                             --------  --------
              Total liabilities and stockholders' equity .   $ 83,142  $ 58,827
                                                             ========  ========
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.
<PAGE>


<TABLE>
                              LEGATO SYSTEMS, INC.

                        CONSOLIDATED STATEMENTS OF INCOME

                      (in thousands, except per share data)


<CAPTION>
                                                                        Year Ended December 31,
                                                                 1996            1995          1994
                                                               ---------      ---------      --------

<S>                                                            <C>            <C>            <C>
Revenues:
    Product and other......................................    $  32,138      $  16,972      $ 11,706
    Royalty and license....................................       12,872          8,443         2,689
    Software subscription..................................        9,239          4,362         2,010
                                                               ---------      ---------      --------
       Total revenues......................................       54,249         29,777        16,405
Cost of revenues:
    Product and other......................................        2,087          1,398           874
    Software subscription..................................        3,030          1,645         1,128
                                                               ---------      ---------      --------
       Total cost of revenues..............................        5,117          3,043         2,002
                                                               ---------      ---------      --------
Gross profit...............................................       49,132         26,734        14,403
Operating expenses:
    Research and development...............................        9,199          4,464         2,903
    Sales and marketing....................................       17,210         10,839         7,176
    General and administrative.............................        6,443          4,049         2,750
    Amortization of intangibles............................        1,097             --            --
    In-process research and development....................        1,849             --            --
                                                               ---------      ---------      --------
       Total operating expenses............................       35,798         19,352        12,829
                                                               ---------      ---------      --------
Income from operations.....................................       13,334          7,382         1,574
Interest income, net.......................................        1,790          1,178            32
                                                               ---------      ---------      --------
Income before provision for (benefit from) income taxes....       15,124          8,560         1,606
Provision for (benefit from) income taxes..................        6,504          2,729          (167)
                                                               ---------      ---------      --------
Net income.................................................    $   8,620      $   5,831      $  1,773
                                                               =========      =========      ========
Net income per share.......................................    $    0.46      $    0.37      $  $0.14
                                                               =========      =========      ========
Shares used in per share calculations......................       18,771         15,749        13,116
                                                               =========      =========      ========
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.


<PAGE>

<TABLE>
                              LEGATO SYSTEMS, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                 (in thousands)

<CAPTION>
                                                                                Retained  Deferred
                                        Convertible-                Additional  Earnings/   Stock      Unrealized
                                       Preferred Stock  Common Stock  Paid-in (Accumulated Compen-   Gain on Invest-
                                       Shares  Amount   Shares Amount  Capital    Deficit)  sation   ments, Net Total


<S>                                    <C>    <C>      <C>      <C>   <C>       <C>        <C>        <C>     <C>
Balances, December 31, 1993........     3,600  $ --     3,826   $ --   $ 6,763  $ (4,416)  $    --       --   $ 2,347
Stock issued under option plans....        --    --        58     --        25        --        --       --        25
Net income.........................        --    --        --     --        --     1,773        --       --     1,773
                                       ------  ----    ------   ----  --------  --------   -------    -----   -------
Balances, December 31, 1994........     3,600    --     3,884     --     6,788    (2,643)       --       --     4,145

Stock issued under option plans....        --    --       382     --       147        --        --       --       147
Stock issued in IPO, net of
   issuance costs of $3,883........        --    --     4,600      1    39,814        --        --       --    39,815
Conversion of preferred stock
   to common stock.................    (3,600)   --     7,200      1        --        --        --       --         1
Tax benefit related to stock options       --    --        --     --       560        --        --       --       560
Deferred stock compensation........        --    --        --     --        74        --       (58)      --        16
Unrealized gain on investments.....        --    --        --     --        --        --        --       27        27
Net income.........................        --    --        --     --        --     5,831        --       --     5,831
                                       ------  ----    ------   ----  --------  --------   -------    -----   -------
Balances, December 31, 1995........        --    --    16,066      2    47,383     3,188       (58)      27    50,542

Stock issued under option plan.....        --    --       767     --     1,044        --        --       --     1,044
Stock issued under employee
   stock purchase plan.............        --    --       105     --       887        --        --       --       887
Tax benefit related to stock options       --    --        --     --     7,115        --        --       --     7,115

Deferred stock compensation........        --    --        --     --       163        --        18       --       181
Unrealized loss on investments.....        --    --        --     --        --        --        --       (1)       (1)
Net income.........................        --    --        --     --        --     8,620        --       --     8,620
                                       ------  ----    ------   ----  --------  --------   -------    -----   -------
Balances, December 31, 1996........        --  $ --    16,938   $  2  $ 56,592  $ 11,808  $    (40) $    26   $68,388
                                       ======  ====    ======   ====  ========  ========   =======   ======   =======
</TABLE>






        The accompanying notes are an integral part of these consolidated
                             financial statements.


<PAGE>
<TABLE>
                              LEGATO SYSTEMS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (in thousands)


<CAPTION>
                                                                             Year Ended December 31,
                                                                         1996          1995        1994
                                                                       ---------    ---------    ------

<S>                                                                    <C>          <C>          <C>
Cash flows from operating activities:
     Net income....................................................    $   8,620    $   5,831    $  1,773
     Adjustments to reconcile net income to net cash provided by
         operating activities:
         Deferred tax asset........................................         (994)      (1,169)       (500)
         Depreciation and amortization.............................        1,816          677         505
         Write-off of in-process research and development..........        1,849           --          --
         Provision for doubtful accounts...........................          197          440         460
         Other.....................................................          163           --          --
         Changes in operating assets and liabilities:
              Accounts receivable..................................       (3,725)      (3,359)       (641)
              Other current assets.................................         (640)        (775)        242
              Accounts payable.....................................          354          376        (288)
              Income taxes payable.................................        4,726        1,267         291
              Accrued expenses and deferred revenues...............        4,750        3,396       1,590
                                                                       ---------    ---------    --------
              Net cash provided by operating activities............       17,116        6,684       3,432
Cash flows from investing activities:

     Purchase of available-for-sale securities.....................      (47,943)    (163,570)         --
     Maturities and sales of available-for-sale securities.........       38,228      143,914          --
     Acquisition of property and equipment.........................       (5,412)      (1,260)       (669)
     Payment for purchase of subsidiaries, net of cash acquired....       (5,924)          --          --
     Other.........................................................         (173)          54          --
                                                                       ---------    ---------    --------
              Net cash used in investing activities................      (21,224)     (20,862)       (669)

Cash flows from financing activities:

     Proceeds from issuance of common stock........................        1,931       39,963          25
     Other.........................................................           18           16          70
                                                                       ---------    ---------    --------
              Net cash provided by financing activities............        1,949       39,979          95
                                                                       ---------    ---------    --------
              Net increase (decrease) in cash and cash equivalents.       (2,159)      25,801       2,858
Cash and cash equivalents at beginning of period...................       29,832        4,031       1,173
                                                                       ---------    ---------    --------
Cash and cash equivalents at end of period.........................    $  27,673    $  29,832    $  4,031
                                                                       =========    =========    ========
</TABLE>
        The accompanying notes are an integral part of these consolidated
                             financial statements.
<PAGE>
                              LEGATO SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  Summary of Significant Accounting Policies

Nature of Operations


     The Company  develops,  markets and  supports  network  storage  management
software for heterogeneous  client/server computing environments.  The Company's
NetWorker  family of  software,  from which the  Company  derives a  substantial
majority of its revenues,  supports many storage management server platforms and
can accommodate a variety of clients,  servers and storage devices.  The Company
licenses  its  products  through  resellers  and  directly to end users in North
America,  Europe and Asia Pacific.  The Company also licenses its source code in
exchange for initial licensing fees to original equipment manufacturers ("OEMs")
and  receives  ongoing  royalties  from  product  sales  by  source  code  OEMs.
Substantially  all of the OEMs are large computer system and software  suppliers
located in the United States, Europe and Asia Pacific.

Basis of Presentation

     The consolidated  financial  statements include the accounts of the Company
and  its  wholly  owned   subsidiaries  and  branch  offices.   All  significant
intercompany   balances  and  transactions   have  been   eliminated.   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 remeasurment,  which have been insignificant, are included
in the consolidated statements of income.

Use of 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,  the
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. Actual results could differ from those estimates.

Financial Instruments

     Cash  equivalents are highly liquid  investments with original or remaining
maturities of three months or less as of the date of purchase.  Cash equivalents
present insignificant risk of changes in value because of interest rate changes.
The Company  maintains its cash balances at a variety of financial  institutions
and  has  not  experienced  any  material  losses  relating  to  any  investment
instruments.

     Available-for-sale  securities  are classified on the balance sheet and are
carried at fair value, with the unrealized gains or losses, net of tax, reported
in stockholders'  equity.  The amortized cost of debt securities is adjusted for
amortization  of premiums and accretion of discounts to maturity,  both of which
are included in interest  income.  Realized gains and losses are recorded on the
specific identification method.

     The amounts reported for cash equivalents,  receivables and other financial
instruments  are  considered to  approximate  fair values based upon  comparable
market information  available at the respective  balance sheet dates.  Financial
instruments that  potentially  subject the Company to  concentrations  of credit
risks comprise,  principally,  cash,  investments and trade accounts receivable.
The Company  invests its excess cash in accordance  with its  investment  policy
which is  approved  by the  Board of  Directors  and  reviewed  periodically  to
minimize  credit risk.  The policy  authorizes  the investment of excess cash in
government  securities,  tax exempt municipal  securities,  Eurodollar notes and
bonds,  time deposits,  certificates  of deposit,  commercial  paper rated Aa or
better and other  specific  money market and  corporate  instruments  of similar
liquidity and credit quality.

Property and Equipment

     Property and equipment are stated at cost.  Depreciation  is provided using
the  straight-line  method over the  estimated  useful  lives of the  respective
assets, which is generally three years.

Intangible Assets

     Intangible  assets include goodwill and purchased  technology,  recorded in
connection with the acquisition of Innovus, Inc., Innovus Technologies, Inc. and
815598 Ontario, Inc.  (collectively  "Innovus"),  which are being amortized on a
straight-line  basis over five years.  The  Company  periodically  assesses  the
recoverability of intangible  assets by determining  whether the amortization of
the asset balance over its remaining life can be recovered through  undiscounted
future operating cash flows of the acquired operation. The amount of impairment,
if any, is measured based on projected  discounted  future  operating cash flows
and is recognized as a write down of the asset to a net realizable value.

Revenue Recognition

     The  Company's  revenues  are  derived  from  three  sources,  across  many
industries: product and other revenues, which are derived primarily from product
sales to resellers and end users,  as well as from services such as  consulting;
royalty and license  revenues,  which are derived primarily from initial license
fees and ongoing  royalties from product sales by source code OEMs; and software
subscription revenues,  which are derived primarily from contracts providing for
software  updates,  maintenance  and  support to end users and which are charged
separately from the Company's software products.

     The  Company  recognizes  product  revenues  and  license  fees,  including
advanced  royalty   payments,   upon  shipment  if  remaining   obligations  are
insignificant,  collection of the resulting receivables is probable, and product
returns are  reasonably  estimable,  except for sales to domestic  distributors,
which are recognized upon sale by the distributors to their customers. Estimated
sales returns are recorded upon  recognition of revenues from  customers  having
rights of return,  including  exchange  rights for unsold  products  and product
upgrades.   Provisions  for  estimated  warranty  costs,   insignificant  vendor
obligations and anticipated  retroactive  price  adjustments are recorded at the
time products are shipped.

     Royalty  revenues that are contingent  upon sale to an end user by OEMs are
recognized upon receipt of a report of sale by the Company from the OEM.

     Customer maintenance fees for ongoing customer support and product updates,
including such fees bundled with the initial license fee, are recognized ratably
over the period of the  contract.  Payments for  maintenance  fees are generally
made in advance and are  non-refundable.  Other service revenue is recognized as
the related service is performed.

     The Company performs ongoing credit evaluations of its customers' financial
condition and does not require collateral.  The Company maintains allowances for
potential   credit  losses  and  such  losses  have  been  within   management's
expectations.

Research and Development Costs

     Costs incurred in the research and development of new software products are
expensed as incurred until  technological  feasibility is established.  To date,
the  establishment  of technological  feasibility of the Company's  products and
general  release  substantially  coincide.  As a  result,  the  Company  has not
capitalized  any  software  development  costs  since  such  costs have not been
significant.

Income Taxes

     The  Company's  provision  for income taxes is comprised of its current tax
liability  and the change in deferred tax assets and  liabilities.  Deferred tax
assets and liabilities  are determined  based on differences  between  financial
reporting  and tax bases of assets and  liabilities  and are measured  using the
enacted  tax rates and laws that  will be in  effect  when the  differences  are
expected to reverse.

Advertising

     The Company expenses  advertising  costs as they are incurred.  Advertising
expense  for  1996,  1995 and  1994 was  $1,749,000,  $1,475,000  and  $856,000,
respectively.

Computation of Net Income Per Share

     Net income per share is based upon the  weighted  average  number of common
and common equivalent shares outstanding.  Common equivalent shares are included
in the per share  calculations  where the  effect  of their  inclusion  would be
dilutive.  Dilutive common equivalent  shares consist of the incremental  common
shares  issuable upon  conversion of convertible  preferred stock (using the "if
converted"  method) and stock  options and warrants  (using the  treasury  stock
method).  Pursuant  to  Securities  and  Exchange  Commission  Staff  Accounting
Bulletin  No. 83,  common and common  equivalent  shares  issued by the  Company
during the twelve months preceding the initial filing date of the IPO, using the
treasury  stock  method  and the  public  offering  price per  share,  have been
included in the  calculation  of net income per share for 1994 and the first two
quarters of 1995.

     The Financial  Accounting  Standards  Board  recently  issued  Statement of
Financial  Accounting  Standards No. 128 "Earnings  Per Share".  This  statement
replaces the  presentation of primary  earnings per share with a presentation of
basic  earnings  per share.  It also  requires  dual  presentation  of basic and
diluted  earnings per share on the face of the income statement for all entities
with complex capital  structures and requires a reconciliation  of the numerator
and denominator of the basic earnings per share computation to the numerator and
denominator  of the diluted  earnings per share  computation.  This statement is
effective for periods ending after December 15, 1997, including interim periods.

Reclassifications

     Certain  reclassifications  were  made to the 1994  and  1995  consolidated
financial statements to conform to the 1996 presentation.  The reclassifications
have no  significant  effect on  previously  reported  net income,  stockholders
equity, total assets or total liabilities.

2.  Consolidated Balance Sheet Detail
<TABLE>
                                                                December 31,
                                                           1996              1995
                                                        ----------        -------
                                                              (in thousands)

<S>                                                     <C>               <C>
Accounts receivable:
     Trade accounts receivable.......................   $   10,651        $   5,810
     Allowance for doubtful accounts.................         (812)            (667)
                                                        ----------        ---------
                                                        $    9,839        $   5,143
                                                        ==========        =========


Property and equipment:

     Computer equipment..............................   $    5,670        $   3,317
     Furniture and fixtures..........................        1,663              274
     Office equipment................................        1,040               59
     Leasehold improvements..........................          936               --
                                                        ----------        ---------

                                                             9,309            3,650
     Accumulated depreciation........................       (3,280)          (2,117)
                                                        ----------        ---------
                                                        $    6,029        $   1,533
                                                        ==========        =========
</TABLE>


3.  Investments


     The following  table  summarizes  the fair value and  unrealized  gains and
losses of debt  securities  at December 31, 1996 and 1995.  All debt  securities
have been classified as available-for-sale:


<TABLE>
                                                   Gross           Gross
                                                Unrealized     Unrealized     Estimated
                                      Cost         Gains          Losses      Fair Value
                                                        (in thousands)

December 31, 1996:

<S>                                <C>           <C>            <C>           <C>
    Municipal securities.......    $  26,570     $       41     $       (3)   $   26,608
    Auction rate receipts......        2,800             --             --         2,800
                                   ---------     ----------     ----------    ----------

                                   $  29,370     $       41     $       (3)   $   29,408
                                   =========     ==========     ==========    ==========


December 31, 1995:

    Municipal securities.......    $  19,656     $       42     $       (4)   $   19,694
                                   =========     ==========     ==========    ==========
</TABLE>



     The  amortized  cost  and  estimated  fair  value  of  investments  in debt
securities  at  December  31, 1996 and 1995,  by  contractual  maturity,  are as
follows:
<TABLE>
                                                                     Estimated
                                                      Cost          Fair Value
                                                         (in thousands)

December 31, 1996:

<S>                                               <C>              <C>
    Due in 1 year or less....................     $     22,362     $     22,391
    Due in 1 - 3 years.......................            7,008            7,017
                                                  ------------     ------------
    Total investment in debt securities......     $     29,370     $     29,408
                                                  ============     ============

December 31, 1995:

    Due in 1 year or less....................     $      9,588     $      9,609
    Due in 1 - 3 years.......................           10,068           10,085
                                                  ------------     ------------
    Total investment in debt securities......     $     19,656     $     19,694
                                                  ============     ============
</TABLE>

4.  Commitments

     The Company leases its operating facilities under non-cancelable  operating
leases  that  expire  at  various  dates  through  August  2006.  Minimum  lease
commitments at December 31, 1996 were as follows: $2,053,000 in 1997, $2,056,000
in 1998, $2,115,000 in 1999, $2,175,000 in 2000 and $12,952,000 thereafter. Rent
expense  for  1996,  1995 and  1994 was  $1,852,000,  $1,200,000  and  $982,000,
respectively.

5.  Acquisition of Innovus

     On January 5, 1996, the Company completed its acquisition of Innovus, Inc.,
Innovus Technologies,  Inc. and 815598 Ontario, Inc.  (collectively  "Innovus"),
each based in Canada, for approximately $6,687,000, including acquisition costs.
Prior to the acquisition,  Innovus (except for 815598 Ontario,  Inc.) was in the
business of (i) the porting of licensed software for Hewlett-Packard  HP9000 and
HP3000 series  computers and the sale and  distribution of such ported software,
and (ii)  supplying  clinical  trials and  research  services on contract in the
Canadian pharmaceutical industry. Prior to the acquisition, 815598 Ontario, Inc.
did not conduct  any  business  other than  holding  shares of capital  stock of
Innovus,  Inc. The  acquisition was accounted for using the purchase method and,
on that basis,  resulted in a one-time  write-off of  $1,849,000  for  purchased
in-process  research and development  for which there was no alternative  future
use and  technological  feasibility  was not  established.  The  balance  of the
purchase  price in excess of net assets  acquired  was  allocated  to  purchased
technology and goodwill totaling  $4,060,000.  Additional goodwill of $1,568,000
arises as a result of  recording  a  deferred  tax  liability  related to timing
differences  in the  amortization  of  purchased  technology  for  book  and tax
purposes.  The Company is  amortizing  purchased  technology  and  goodwill on a
straight-line  basis over five years. The operating results of Innovus have been
consolidated   with  the  Company's   operating  results  beginning  as  of  the
acquisition  date.  Substantially  all of the net assets of Innovus,  Inc.,  the
Company's  clinical  research   business,   were  sold  in  September  1996  for
approximately  $150,000,  which  approximated  the carrying  amount of those net
assets.  The Company has  discontinued  all clinical  research  activities.  The
effect of the  discontinuance did not have a significant effect on the operating
results of the Company.  At December 31, 1996,  intangible assets are stated net
of accumulated depreciation of $1,067,000.

     Pro forma results of operations of the Company for the year ended  December
31, 1995,  assuming the  acquisition of Innovus had occurred at the beginning of
that period,  include revenues of $33.2 million,  net income of $3.5 million and
net income per share of $0.45.

6.  Stockholders' Equity

Preferred Stock

     The Company is authorized  to issue  5,000,000  shares of preferred  stock,
none of  which  are  issued  or  outstanding.  The  Board of  Directors  has the
authority to issue the preferred  stock in one or more series and to fix rights,
preferences,  privileges and restrictions, and the number of shares constituting
any series and the  designation  of such  series,  without any  further  vote or
action by the stockholders.

Stock Split

     The Company effected a two-for-one  stock split on July 5, 1996. This stock
split  has  been  retroactively  reflected  in  the  accompanying   Consolidated
Financial Statements.

Stock Option/Stock Issuance Plan

     The Company's  1995 Stock  Option/Stock  Issuance Plan (the "1995 Plan") is
the successor  equity  incentive  program to the Company's 1989 Stock Option and
Restricted  Stock Plan (the "1989  Plan") and became  effective on July 5, 1995.
Approximately 4,184,116 shares of Common Stock have been authorized for issuance
under the 1995 Plan at December 31, 1996.  The share reserve will  automatically
increase on the first trading day in each calendar year, beginning with the 1997
calendar  year,  by the  number of shares  equal to three  percent  of the total
number of shares of the Company's Common Stock outstanding on December 31 of the
immediately  preceding  calendar year. Options to purchase shares may be granted
and shares may be issued  directly  under the 1995  Plan.  Options  must have an
exercise  price not less than 100% and 85% of fair  market  value of the  Common
Stock on the date of grant for incentive stock options and  non-statutory  stock
options,  respectively. The purchase price for shares issued directly may not be
less than 85% of fair market value on the date of grant.  Options generally vest
over four years and terminate ten years after their original grant dates.

     The  1995  Plan  is  divided  into  three  separate  components:   (i)  the
Discretionary  Option Grant Program under which  employees,  non-employee  Board
members  who  are  not  serving  on the  Company's  Compensation  Committee  and
consultants  may, at the discretion of the  Compensation  Committee,  be granted
options to purchase  shares of Common  Stock,  (ii) the Stock  Issuance  Program
under which such persons may, in the  Compensation  Committee's  discretion,  be
issued shares of Common Stock  directly,  through the purchase of such shares or
in consideration  of the past  performance of services,  and (iii) the Automatic
Option Grant  Program under which option  grants will  automatically  be made at
periodic intervals to eligible  non-employee Board members to purchase shares of
Common  Stock at an  exercise  price  equal to 100  percent of their fair market
value on the  grant  date.  Under  the  Automatic  Option  Grant  Program,  each
non-employee  Board member received an option grant to purchase 24,000 shares on
the effective date of the initial public  offering  (IPO).  Each  individual who
first becomes a non-employee Board member thereafter will receive a 24,000 share
option  grant on the  date  such  individual  joins  the  Board,  provided  such
individual has not been in the prior employ of the Company. In addition, at each
Annual  Stockholders  Meeting,  each individual who has served as a non-employee
Board member for at least six months prior to such Annual  Meeting and who is to
continue to serve as a non-employee  Board member after the meeting will receive
an additional option grant to purchase 6,000 shares of Common Stock,  whether or
not such individual has been in the prior employ of the Company.

     Options  granted under the 1995 plan generally  become  exercisable  over a
four year period,  whereby 25 percent of the shares become  exercisable one year
after the grant date and  ratably  thereafter  over 36 months.  Options  granted
prior to July 5, 1995 contain provisions allowing for early exercise of unvested
options.  Shares  issued  upon such early  exercise  are  subject to vesting and
repurchase  rights by the  Company.  At December  31,  1996,  none of the shares
outstanding were subject to repurchase by the Company.  Approximately  1,013,000
option  shares under grant were subject to repurchase by the Company at December
31, 1996.

<PAGE>

     The following is a summary of option activity for both stock option plans:

<TABLE>
                                                      Weighted
                                           Number     Average         Options
                                             of         Price          Price
                                           Shares     Per Share      Per Share
                                          (in thousands except per share amounts)

<S>                                        <C>         <C>        <C>       <C>
    Outstanding at December 31, 1993         1,470     $ 0.55     $  0.05 - $ 2.50

       Options granted                       1,278     $ 1.75     $  1.75 - $ 2.50
       Options exercised                       (58)    $ 0.43     $  0.13 - $ 1.13
       Options canceled                       (750)    $ 2.12     $  0.10 - $ 2.50
                                           --------
    Outstanding at December 31, 1994         1,940     $ 0.74     $  0.05 - $ 1.75
       Options granted                       1,392     $ 4.64     $  1.75 - $18.75
       Options exercised                      (383)    $ 0.39     $  0.05 - $ l.75
       Options canceled                       (148)    $ 2.25     $  0.13 - $18.75
                                          --------
    Outstanding at December 31, 1995         2,801     $ 2.84     $  0.05 - $18.75
       Options granted                         695     $21.12     $ 11.84 - $44.50
       Options exercised                      (766)    $ 1.36     $  0.05 - $18.75
       Options canceled                       (147)    $ 8.99     $  0.75 - $44.50
                                          --------
    Outstanding at December 31, 1996         2,583     $ 7.85     $  0.10 - $44.50
                                          ========
</TABLE>


     At December 31, 1996, approximately 658,000 shares of common stock remained
available  for grant under the 1995 Plan.  At December 31,  1996,  approximately
813,000 options were  exercisable and  approximately  3,241,000 shares of common
stock were reserved for future issuance.

     During 1994, the Company canceled options to purchase 514,000 shares of the
Company's  common stock at $2.50 per share and issued an equal number of options
to purchase the Company's common stock at $1.75 per share.

     The Company has elected to continue to follow the provisions of APB No. 25,
"Accounting for Stock Issued to Employees", for financial reporting purposes and
has adopted the disclosure-only  provisions of Statement of Financial Accounting
Standards No. 123,  "Accounting for Stock-Based  Compensation" ("SFAS No. 123").
Accordingly,  no  compensation  cost has been  recognized for the 1995 Plan. Had
compensation  cost for the 1995 Plan been determined  based on the fair value at
the grant date for awards in 1996 and 1995  consistent  with the  provisions  of
SFAS No. 123, the  Company's  net income and net income per share for the twelve
months ended December 31, 1996 and 1995 would have been reduced to the pro forma
amounts indicated below:


<TABLE>
                                                              Years Ended
                                                             December 31,
                                                        1996              1995
                                                     ----------        -------
                                                           (in thousands)

<S>                                                  <C>               <C>
     Net income--as reported......................   $    8,620        $   5,831
                                                     ==========        =========
     Net income--pro forma........................   $    6,798        $   5,261
                                                     ==========        =========
     Net income per share--as reported............   $     0.46        $    0.37
                                                     ==========        =========
     Net income per share--pro forma..............   $     0.36        $    0.33
                                                     ==========        =========
</TABLE>


     The aggregate fair value and weighted average fair value of options granted
in  1996  and  1995  were  $7,283,000  and  $3,296,000  and  $10.47  and  $2.37,
respectively.  The fair value of each option  grant is  estimated on the date of
grant  using the  minimum  value  method  with the  following  weighted  average
assumptions:


<TABLE>
                                                        1996              1995
                                                     ----------        -------
<S>                                                       <C>               <C>
     Expected volatility..........................        0.645             .645
     Weighted-average risk-free interest rate.....         6.12%            6.61%
     Expected life................................          1.0              1.0
     Expected dividends...........................   $       --        $      --
</TABLE>

     The options  outstanding  and currently  exercisable  by exercise  price at
December 31, 1996 are as follows:


<TABLE>
<CAPTION>
                             Options Outstanding                              Options Exercisable
                                           Weighted
                                            Average       Weighted                          Weighted
                                           Remaining      Average                            Average
         Exercise        Number of        Contractual     Exercise           Number         Exercise
          Prices        Outstanding          Life          Price           Exercisable        Price
    ----------------  --------------     -----------    -------------     -------------      ------
<S> <C>       <C>     <C>                        <C>      <C>           <C>                <C>
    $ 0.10  - $ 0.75         316                 5.49     $   0.42           292           $    0.40
    $ 1.13  - $ 1.75         482                 7.74     $   1.72           249           $    1.69
    $ 2.25  - $ 3.13         871                 8.15     $   3.11           189           $    3.10
    $ 5.63  - $11.84         455                 8.79     $  10.11            55           $    7.86
    $12.63  - $21.88         277                 9.04     $  16.64            28           $   14.58
    $24.00  - $39.00          54                 9.72     $  31.35             0           $    0.00
    $40.75  - $44.50         128                 9.74     $  44.43             0           $    0.00
                      ----------                                        --------
                           2,583                                             813
                      ==========                                        ========
</TABLE>

Employee Stock Purchase Plan

     During  1995,  the Company  adopted an Employee  Stock  Purchase  Plan (the
"Purchase  Plan")  under which  800,000  shares of common stock are reserved for
future issuance.  The Purchase Plan is administered  over offering periods of 24
months each, with each offering period divided into four  consecutive  six-month
purchase  periods  beginning  August 1 and  February  1 of each  year.  Eligible
employees may designate not more than 10 percent of their cash  compensation  to
be deducted  each pay period for the purchase of common stock under the Purchase
Plan, and  participants  may not purchase more than 1,000 shares of stock in any
one six-month purchase period. On the last business day of each purchase period,
shares of common stock are  purchased  with the  employee's  payroll  deductions
accumulated during the six months,  generally at a price per share of 85 percent
of the market  price of the  common  stock on the  employee's  entry date of the
applicable  offering period or the last day of the applicable  purchase  period,
whichever is lower.  For the year ended  December 31, 1996,  105,000 shares were
issued under the plan.  At December 31, 1996,  695,000  shares were reserved for
future issuance under the plan.

     Under SFAS No. 123,  compensation  cost is recognized for the fair value of
employee's  purchase  rights under the Employee Stock  Purchase Plan,  which was
estimated  using the following  assumptions for 1996 and 1995,  respectively:  a
weighted-average  expected life of 0.9 years and 1.3 years;  expected volatility
of 0.645  and  0.645;  and  weighted-average  risk-free  interest  rates of 5.86
percent and 5.85 percent.  The fair value of those  purchase  rights  granted in
1996 and 1995 was $298,000 and $839,000, respectively


7.  Employee Benefit Plans

Profit Sharing Plan

     The Company has a 401(k) Profit Sharing Plan covering all of its employees.
Under  this  plan,  participating  employees  may elect to  contribute  up to 15
percent of their cash compensation,  subject to certain limitations. The Company
may make  contributions to the plan at the discretion of the Board of Directors.
No  contributions  have been made by the Company as of December  31,  1996.  All
employee contributions are 100 percent vested.

8.  Income Taxes

     The provision for (benefit from) income taxes consists of the following:

<TABLE>
                                       1996            1995           1994
                                     ---------      ---------       ------
                                                  (in thousands)
Current:
<S>                                  <C>            <C>             <C>
     Federal.....................    $   5,855      $   2,935       $    190
     State.......................        1,514            878            110
     Foreign.....................          443             74             33
                                     ---------      ---------       --------
                                         7,812          3,887            333
Deferred:
     Federal.....................         (937)        (1,114)          (433)
     State.......................          (57)           (44)           (67)
     Foreign.....................         (314)            --             --
                                     ---------      ---------       --------
                                        (1,308)        (1,158)          (500)
                                     ---------      ---------       --------

                                     $   6,504      $   2,729       $   (167)
                                     =========      =========       ========
</TABLE>


     Substantially  all of the Company's  income  before  provision for (benefit
from) income taxes in the years ended  December 31, 1994 and 1995 was  generated
by domestic  operations.  In 1996,  income  before  provision  for income  taxes
consisted of $17,321,000 of income from U.S. operations and $2,197,000 of losses
from foreign  operations.  The tax benefit  associated  with  dispositions  from
employee  stock  plans  reduced  taxes  currently  payable  for 1996 and 1995 by
$7,115,000 and $560,000,  respectively.  Such benefit was recorded to additional
paid-in capital.


     The Company's  effective tax rate differs from the statutory federal income
tax rate as follows:

<TABLE>
                                                                     1996          1995         1994
                                                                   ---------    ---------     -------

<S>                                                                <C>          <C>           <C>
     Income tax provision at statutory rate....................       35.0%         34.0%        34.0%
     State income taxes, net of federal benefit................        5.4           5.7          7.4
     Tax exempt interest income................................       (3.4)         (1.1)        --
     Research and experimental credit..........................       (0.8)         (1.0)        --
     Benefit of operating loss and tax credit carryforwards....       --            (7.2)       (34.0)
     Change in valuation allowance.............................       --            (1.7)       (22.1)
     Other.....................................................        2.1           3.2          4.3
                                                                   -------      --------      -------

         Subtotal..............................................       38.3%         31.9%       (10.4)%
                                                                   -------      --------      -------
     In-process research and development.......................        4.7            --           --
                                                                   -------      --------      -------
         Effective tax rate....................................       43.0%         31.9%       (10.4)%
                                                                   =======      ========      =======
</TABLE>

     Significant components of the Company's deferred tax assets and liabilities
are as follows:

<TABLE>
<CAPTION>
                                                                          December 31,
                                                                     1996              1995
                                                                  ----------        -------
                                                                         (in thousands)
     Deferred tax assets:
<S>                                                               <C>               <C>
         Allowances, accrued liabilities and other.............   $    1,247        $     564
         Accrued compensation and benefits.....................          394              203
         State taxes...........................................          461              239
         Deferred revenue......................................          550              652
                                                                  ----------        ---------
                                                                       2,652            1,658
     Deferred tax liabilities:
         Intangible asset - purchased technology...............       (1,254)              --
                                                                  ----------        ---------


     Net deferred tax asset....................................   $    1,398        $   1,658
                                                                  ==========        =========
</TABLE>


9.  Industry and Geographic Segment Information

     The Company operates in a single industry  segment,  developing,  marketing
and supporting  network storage  management  software products for heterogeneous
client/server  computing  environments.  The  Company  has  had  no  significant
operations outside the United States through December 31, 1996.

     The Company  markets its  products  and services to customers in the United
States,  Canada,  Europe  and Asia  Pacific.  Net  revenues  from  export  sales
accounted for 20 percent, 16 percent,  and 15 percent of total revenues in 1996,
1995 and 1994, respectively. The majority of export sales were made to Europe.

     One customer  accounted  for 11 percent of total  revenues in both 1995 and
1996.  In 1994, no single  customer  accounted for more than 10 percent of total
revenues.


10.  Supplemental Cash Flow Information

<TABLE>
<CAPTION>
                                                      1996            1995           1994
                                                    ---------      ---------       ------
                                                                 (in thousands)
Cash Transaction:
<S>                                                 <C>            <C>             <C>
     Cash Paid for income taxes.................    $   3,080      $   1,017       $     17
Non-cash transactions
     Conversion of preferred stock..............           --          6,785             --
     Tax benefit related to stock options.......        7,115            560             --
     Deferred tax liability.....................        1,568             --             --
</TABLE>


11.  Selected Quarterly Financial Data (unaudited)

<TABLE>
<CAPTION>
                                      First       Second            Third       Fourth
                                     Quarter         Quarter          Quarter   Quarter
                                          (in thousands, except per share data)

1996:

<S>                                 <C>          <C>            <C>           <C>
Total revenues.................     $ 10,925     $   12,573     $   14,549    $   16,202
Gross profit...................        9,749         11,393         13,132        14,858
Net income.....................         (127)         2,343          2,961         3,443
Net income per share...........     $  (0.02)    $    0.13      $     0.16    $     0.18

1995:

Total revenues.................     $  5,828     $    6,845     $    8,000    $    9,104
Gross profit...................        5,272          6,149          7,161         8,152
Net income.....................          995          1,148          1,697         1,991
Net income per share...........     $   0.08     $    0.09      $     0.09    $     0.11
</TABLE>


<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
Legato Systems, Inc.:

     We have audited the consolidated balance sheets of Legato Systems, Inc. and
subsidiaries  as of  December  31,  1996 and 1995 and the  related  consolidated
statements of income,  stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
Legato Systems,  Inc. and subsidiaries as of December 31, 1996 and 1995, and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended  December 31, 1996 in conformity  with generally
accepted accounting principles.




                                                     COOPERS & LYBRAND L.L.P.






San Jose, California
January 20, 1997

<PAGE>

     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  herein 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  registrant's  Annual  Meeting  of
Stockholders  to be held on May 15,  1997  (the  "Proxy  Statement").  The Proxy
Statement  is  anticipated  to be filed  within  120 days  after  the end of the
registrant's  fiscal year ended  December 31, 1996.  For  information  regarding
executive  officers of the  Company,  see the  information  appearing  under the
caption "Executive Officers of the Registrant" in Part I, Item 4a of this Report
on Form 10-K.


ITEM 11.  EXECUTIVE COMPENSATION

     Information  regarding  executive  compensation 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.

<PAGE>

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

(a) (1)  Financial Statements

     The consolidated  financial statements of the registrant as set forth under
Item 8 are filed as part of this Annual Report on Form 10-K.

(a) (2)  Financial Statement Schedule

     Schedule II - Valuation and Qualifying Accounts is filed on page 42 of this
Report on Form 10-K.

     All  other  schedules  for  which  provision  is  made  in  the  applicable
accounting  regulations of the  Securities  and Exchange  Commission are omitted
because  they  are  not  required   under  the  related   instructions   or  are
inapplicable.

     The  independent  accountant's  report  with  respect  to the above  listed
financial statements and financial statement schedule listed in Items 14 (a) (1)
and 14 (a) (2), respectively, is filed on page 37 of this Report on Form 10-K.

(a) (3)  Exhibits

2.1    (3)      Stock Purchase Agreement, dated as of January 5, 1996, among the
                Registrant,  Innovus,  Inc.,  815598  Ontario,  Inc.,  the
                stockholders  of Innovus, Inc., and the  stockholders of  815598
                Ontario, Inc.

2.2    (3)      Stock Purchase Agreement,  dated as of  January 5, 1996,  among
                the Registrant, Innovus Technologies, Inc., and the stockholders
                of Innovus Technologies, Inc.

3.1    (6)      Amended  and  Restated  Certificate  of  Incorporation of  the
                Registrant, as amended to date

3.2    (1)      Amended and Restated By-Laws of the Registrant

4.1    (1)      Reference is made to Exhibits 3.1 and 3.2

4.2    (1)      Specimen Common Stock certificate

4.3    (1)      Series E Preferred Stock Purchase Agreement, dated January 20,
                1993, among the Registrant and the purchasers named therein

4.4    (1)      Stock Purchase Agreement, dated June 27, 1993 between the
                Registrant and Eric Benhamou

4.5    (1)      Series F Preferred Stock Purchase Agreement, dated September 8,
                1993, among the Registrant and Banyan Systems Incorporated

4.6             (1) Restated Investor Rights Agreement, dated September 8, 1993,
                among the  Registrant  and the investors and the founders  named
                therein, as amended January 28, 1994 and February 13, 1995

10.1   (1)      Form of Indemnification Agreement entered into between the
                Registrant and it directors and officers

10.2   (1) (5)  The Registrant's 1989 Stock Option and Restricted Stock Plan

10.3   (1) (5)  The Registrant's 1995 Stock Option/Stock Issuance Plan

10.4   (1) (5)  The Registrant's Employee Stock Purchase Plan

10.5   (7)      Lease Agreement,  dated September 1994,  between the Registrant
                and The Board of Trustees of the Leland Stanford Junior
                University,  regarding the space located at 3145 Porter Drive,
                Palo Alto, California

10.6   (1)      Form of United States Reseller Terms and Conditions for Purchase
                of Legato Products

10.7   (1)      Form of International Authorized Systems Integrator Agreement

10.8   (1)      Form of Shrinkwrap License Agreement

10.9   (1) (2)  Technology License and Distribution agreement, dated January 20,
                1994, between the Registrant and SunSoft, Inc.

10.10  (1)      Master Software License and Support Agreement between the
                Registrant and Open Software Foundation

10.11  (1)      License Agreement, dated February 24, 1989, between the
                Registrant and The Regents of the University of California

10.12  (1)      Software Agreement, dated January 20, 1989, between the
                Registrant and AT&T Information Systems, Inc.

10.13  (4) (5)  The Registrant's International Employee Stock Purchase Plan

10.14  (6)      Lease  agreement, dated March 14, 1996, between the Registrant
                and Coherent, Inc., a Delaware corporation

11.1            Statement re: Computation of Per Share Earnings

21.1            Subsidiaries of the Registrant

23.1            Consent of Coopers and Lybrand L.L.P., Independent Accountants

27.1            Financial Data Schedule



(1)  Incorporated  by reference to the  registrant's  Registration  Statement on
     Form S-1, filed May 9, 1995 (File No. 33-92072).

(2)  Confidential treatment requested as to certain portions of this exhibit.

(3)  Incorporated by reference to the  registrant's  Current Report on Form 8-K,
     dated January 19, 1996.

(4)  Incorporated  by reference to the  registrant's  Registration  Statement on
     Form S-8, filed March 14, 1996 (File No. 333-2378).

(5)  Compensatory plan or arrangement.

(6)  Incorporated by reference to the  registrant's  definitive Proxy Statement
     for Special Meeting of Stockholders, dated May 31, 1996

(7)  Incorporated by reference to the registrant's Quarterly Report on Form 10-Q
     dated August 7, 1996



(b)      Reports on Form 8-K

No reports on Form 8-K were filed by the Registrant during the fourth quarter of
the fiscal year ended December 31, 1996.

(c)      Exhibits

See (a) (3) above.

(d)      Financial Statement Schedule

See (a) (2) above.

<PAGE>


                     REPORT ON FINANCIAL STATEMENT SCHEDULE

         Our report on the consolidated  financial statements of Legato Systems,
Inc. is included on page 37 of this Form 10-K. In connection  with our audits of
such  financial  statements,  we have  also  audited  the  related  consolidated
financial statement schedule listed in Item 14 (a) of this Form 10-K.

         In our opinion, the consolidated  financial statement schedule referred
to above,  when  considered  in  relation  to the basic  consolidated  financial
statements  taken as a whole,  present  fairly,  in all material  respects,  the
information required to be included therein.





                                                  /s/COOPERS & LYBRAND L.L.P.






San Jose, California
January 20, 1997





<PAGE>


<TABLE>
                                   SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS

                                 (in thousands)

<CAPTION>
                                       Balance at     Charged to                   Balance at
                                      Beginning of     Costs and                     End of
Description                              Period        Expenses      Deductions      Period

Allowance for Doubtful Accounts:

<S>                                      <C>             <C>            <C>          <C>
Year ended December 31, 1994             (356)           (460)          523          (293)

Year ended December 31, 1995             (293)           (440)           66          (667)

Year ended December 31, 1996             (667)           (197)           52          (812)
</TABLE>




<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 to be signed on
its behalf by the undersigned, thereunto duly authorized.

                              LEGATO SYSTEMS, INC.

                By:  /s/Louis C. Cole                              March 28,1997
                Louis C. Cole                                      Date
                Chairman of the Board, President
                 and Chief Executive Officer


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

<TABLE>

Signature                      Title                                              Date

<S>                            <C>                                                <C>
/s/ Louis C. Cole              Chairman of the Board, President and Chief         March 28, 1997
Louis C. Cole                  Executive Officer (Principal Executive Officer)



/s/ Stephen C. Wise            Chief Financial Officer (Principal Financial       March 28, 1997
-------------------
Stephen C. Wise                and Accounting Officer)



/s/ Eric A. Benhamou           Director                                           March 28, 1997
--------------------
Eric A. Benhamou



/s/ Kevin A. Fong              Director                                           March , 1997
-----------------
Kevin A. Fong



/s/ David N. Strohm            Director                                           March 28, 1997
-------------------
David N. Strohm



/s/ Phillip E. White           Director                                           March 28, 1997
--------------------
Phillip E. White
</TABLE>
<PAGE>
                                                                    EXHIBIT 11.1

<TABLE>
                              LEGATO SYSTEMS, INC.
                 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
                      (in thousands, except per share data)


<CAPTION>
                                                                        Year Ended December 31,
                                                                  1996            1995           1994
                                                                ---------      ---------       -------

Primary:
<S>                                                            <C>            <C>            <C>
Weighted average common shares outstanding .................      16,549          9,962          3,850
Weighted average common equivalent shares ..................       2,222          1,547            786
Shares issuable from assumed conversion of
    convertible preferred shares ...........................        --            3,600          7,200
Shares related to SAB Nos. 64 and 83 .......................        --              640          1,280
                                                               ---------      ---------      ---------

Total weighted average common and common equivalent shares .      18,771         15,749         13,116
                                                               =========      =========      =========

Net income .................................................   $   8,620      $   5,831      $   1,773
                                                               =========      =========      =========

Net income per share .......................................   $    0.46      $    0.37      $    0.14
                                                               =========      =========      =========


Fully Diluted:

Weighted average common shares outstanding .................      16,549          9,962          3,850
Weighted average common equivalent shares ..................       2,276          1,575            844

Shares issuable from assumed conversion of convertible
    preferred shares .......................................        --            3,600          7,200
Shares related to SAB Nos. 64 and 83 .......................        --              640          1,280
                                                               ---------      ---------      ---------


Total weighted average common and common equivalent shares .      18,825         15,777         13,174
                                                               =========      =========      =========

Net income .................................................   $   8,620      $   5,831      $   1,773
                                                               =========      =========      =========

Net income per share .......................................   $     .46      $    0.37      $    0.13
                                                               =========      =========      =========
</TABLE>
<PAGE>

                                                                    EXHIBIT 21.1

                              LEGATO SYSTEMS, INC.
                         SUBSIDIARIES OF THE REGISTRANT




              Legato Systems Deutschland GmbH

              LGTO S.A.R.L.

              Legato Systems Pty. Ltd.

              Legato Systems (Canada), Inc.

              Innovus, Inc.

              815598 Ontario, Inc.

              Legato Systems International, Inc.



<PAGE>

                                                                    EXHIBIT 23.1


                       CONSENT OF INDEPENDENT ACCOUNTANTS

     We consent to the incorporation by reference in the Registration  Statement
of Legato Systems,  Inc. on Form S-8 of our report dated January 20, 1997 on our
audit of the  consolidated  financial  statements  of Legato  Systems,  Inc. and
subsidiaries  as of December 31, 1996 and 1995,  and for each of the three years
in the period ended  December 31, 1996 and of our report dated  January 20, 1997
on our audit of the consolidated  financial  statement  schedule,  both of which
reports are included in this Annual Report on Form 10-K.



San Jose, California
January 20, 1997