UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
                                 Amendment No. 2

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 For the fiscal year ended December 31, 1998
[ ] 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)

                                 (650) 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:

                         PREFERRED SHARE PURCHASE RIGHTS
                         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. [ ]

     The aggregate market value of the voting stock held by non-affiliates of
the registrant as of January 22, 1999 was approximately $2,149,795,153. 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
January 22, 1999 was 75,323,682.

                       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 13, 1999.
<PAGE>
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                              LEGATO SYSTEMS, INC.
                             FORM 10-K ANNUAL REPORT
                                 AMENDMENT NO. 2

                            FOR THE FISCAL YEAR ENDED
                                DECEMBER 31, 1998


                                TABLE OF CONTENTS
<S>                                                                                                         <C>
PART I

Item 1.    Business.......................................................................................   3

Item 2.    Properties.....................................................................................  23

Item 3.    Legal Proceedings..............................................................................  23

Item 4.    Submission of Matters to a Vote of Security Holders............................................  23

Item 4a.   Executive Officers of the Registrant...........................................................  23

PART II

Item 5.    Market for  Registrant's Common Equity and Related Stockholder Matters.........................  25

Item 6.    Selected Consolidated Financial Data...........................................................  26

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations..........  27

Item 8.    Consolidated Financial Statements and Supplementary Data.......................................  36

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........  36

PART III

Item 10.   Directors and Executive Officers of the Registrant.............................................  59

Item 11.   Executive Compensation.........................................................................  59

Item 12.   Security Ownership of Certain Beneficial Owners and Management.................................  59

Item 13.   Certain Relationships and Related Transactions.................................................  59

PART IV

Item 14.   Exhibits, Financial Statement Schedule and Reports on Form 8-K.................................  60

SIGNATURES ...............................................................................................  64
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<PAGE>

                                     PART I


ITEM 1.  BUSINESS

     The discussion in this report on Form 10-K/A contains forward-looking
statements that involve risks and uncertainties. The statements contained in
this Report that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including
statements on our expectations, beliefs, intentions or strategies regarding the
future. All forward-looking statements included in this document are based on
information available to us on the date hereof. We assume no obligation to
update any such forward-looking statements. Our actual results could differ
materially from those indicated in such forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to
fluctuations in quarterly operating results, uncertainty in future operating
results, product concentration, competition, and other risks discussed in this
item under the heading "Risk Factors" and the risks discussed in our other
Securities and Exchange Commission filings.

     Legato Systems, Inc. was incorporated in Delaware in September 1988. We
develop, market and support network storage management software products for
heterogeneous client/server computing environments and large scale enterprises.
We believe we are currently a technology leader in the network storage
management software market because of the scalability, heterogeneity,
performance, ease of use, central administration and data availability of our
software products. Our data protection products, primarily the NetWorker family
of products, and our data availability products, primarily HA+, Octopus,
Replication and Cluster products, support many storage management server
platforms and accommodates a variety of clients, servers, applications,
databases and storage devices. Our long term strategy is to create an integrated
set of solutions centered around storage management that enhance and simplify
network computing as a whole.

     In the third quarter of 1998, we acquired Software Moguls, Inc, a developer
of advanced backup-retrieval products for Window NT and UNIX environments. In
the second quarter of 1999, we acquired Qualix Group, Inc. (dba FullTime
Software, Inc.) ("FullTime"), a developer of distributed, enterprise-wide,
cross-platform, adaptive computing solutions. We accounted for the acquisitions
as poolings-of-interests. Accordingly, this 10-K is being amended to reflect the
acquisition as if they had occurred as of the earliest period presented. These
acquisitions are intended to enable us to continue to provide customers with
storage management technologies to protect their data with ease and confidence.
The research and development resources and product lines from the acquisitions
of Software Moguls, Inc., and FullTime potentially provide us with opportunities
to enhance the core elements of our enterprise storage management solution. (See
Risk Factors also.)

     We utilize multiple distribution channels, including direct sales,
resellers and original equipment manufacturers ("OEMs"), as a part of our
strategy to achieve comprehensive coverage in the market. We license our source
code to leading computer system and software suppliers, including:

       - Amdahl;
       - Banyan;
       - Compaq (Digital);
       - Compaq (Tandem);
       - Data General;
       - NEC;
       - Siemens Nixdorf;
       - Silicon Graphics; and
       - Sun Microsystems.

These leading computer system and software suppliers 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

<PAGE>

installation. These relationships enable us to reach a broad customer base,
while reducing development, support and product costs. We have also established
strategic partnerships with Hewlett-Packard, Netscape and Oracle.

BACKGROUND

     Our data protection and data availability software products have been
designed to address the emerging requirements of storage management in
client/server computing environments. These products employ a client/server
architecture in which a server centralizes storage management services,
including failover and recovery management as well as replication capabilities,
for a wide variety of clients, including servers and desktop computers. We
believe our products provide 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 our solution
include:

       - Scalability;
       - Heterogeneity;
       - Performance;
       - Ease of use;
       - Central administration; and
       - Data availability.

     Scalability. Our storage management architecture, also referred to as
Enterprise Storage Management Architecture ("ESMA"), is designed to be scalable
so that it can grow with an expanding network and accommodate a wide range of
storage management needs. Our storage server family can be configured or
expanded to meet the storage requirement needs of a changing and dynamic
network. Our 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, our 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. Our storage management solutions are designed to support a
wide range of servers, clients, applications, databases and storage devices.
Servers, clients, applications, databases and storage devices supported by our
BusinesSuite products include:

       - DB2;
       - Informix;
       - Lotus Notes;
       - Microsoft Exchange;
       - Microsoft SQL;
       - Oracle;
       - SAP R/3; and
       - Sybase.

Our family of storage management server products operates on the following
platforms:

       - NetWare;
       - Windows NT;
       - UNIX systems (AIX, DEC, Dynix/ptx, HP-UX, Irix and Solaris); and
       - UNIX systems and Windows NT offered by our OEMs.
<PAGE>

Server and desktop computer clients supported include:

       - DOS;
       - Macintosh;
       - NetWare;
       - OS/2;
       - UNIX;
       - Vines;
       - Windows; and
       - Windows NT.

Storage devices supported include most 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. In addition, NetWorker's
interoperability enables the flexibility to change storage management server
platforms, without disrupting any client systems.

     Performance. Organizations usually 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. Our 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. Our data availability products, including Replication,
Cluster, HA+ and Octopus provide for real-time replication for data exchange and
synchronization for local applications, data exchange among remote sites and
disaster recovery without significant downtime and create collaborative clusters
of server resources across platforms, networks and applications to ensure
resource availability.

     Ease of Use. Our storage management solutions have been designed to be easy
to use for both network administrators and end users. Our 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 our 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, our 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.

     Central Administration. Our Global Enterprise Management Systems
("G.E.M.S.") product allows information system organizations the ability to
globally manage hundreds and even thousands of NetWorker storage servers.
G.E.M.S. provides services such as policy management, software distribution,
universal licensing and advanced media management and can be integrated with
management frameworks including CA Unicenter, HP Openview, Sun Enterprise
Manager and Tivoli TME.

     Data Availability. Our data availability products, including HA+, Octupus,
Replication and Cluster products help to minimize the impact of failures caused
by system malfunction, human error, sabotage or natural disasters. These data
availability products are designed to monitor, replicate and support a variety
of UNIX-based and Windows NT operating systems, hardware platforms, disk
configurations, networks, applications and databases. For example, if a server
goes down, or for any reason stops providing service to an application, HA+ can
promptly elect another server to carry on service and allow users to continually
access their data and applications.

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.
<PAGE>

     Our 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." Our 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 our storage offerings.

     Once data is read from the client's 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.
Our architecture makes it possible for clients to query the database as to what
data is under management and for clients 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 our 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. Our
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 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 our storage
products is designed to support the management of protected, archived, and
hierarchically managed data.

     In addition to data protection, an important function of the architecture
is data availability which provides end users access to the computing power,
data and applications they need, when and where they need them, including times
when data protection actually takes place. As organizations migrate or consider
migrating business-critical applications to distributed computing environments,
they frequently need to ensure that such applications are fully operational
around the clock. In order to facilitate data availability without significant
downtime, open application interfaces take place so that other applications can
share data and it layers over an existing computing environment, including data,
systems, standard TCP/IP networks and applications, with no programming or
changes to the existing applications required. Therefore, the data protection
process, as well as the implementation of system and software upgrades, can
occur without the traditional downtime.

     To reduce the burden on expensive administrative staff, our 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 us greatly facilitates the
development of diverse user interfaces that support remote administration. Our
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.
<PAGE>

PRODUCTS

     Our 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. Our server software is available for NetWare, Windows NT and several
UNIX platforms, including Compaq (Digital), HP, IBM, Silicon Graphics 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:

       - ClientPak for UNIX, which supports a diverse set of UNIX clients;
       - ClientPak for PC Desktops, which supports OS/2, Windows 95, Windows 98
         and Windows NT;
       - ClientPak for Windows NT, which supports Window NT workstation and
         Windows NT Server;
       - ClientPak for MPE/iX, which supports HP3000 MPE/iX systems;
       - ClientPak for NetWare, which supports NetWare; and
       - ClientPak for Macintosh, which supports MacOS.

     The base NetWorker server product for Windows NT, UNIX and NetWare is also
available through the following offerings, which support a variety of Networker
options:

       - Workgroup Edition - a storage management solution for small networks in
         corporate environments. Workgroup Edition provides support for up to
         four client connections and two storage devices;
       - Network Edition - an enterprise-strength storage management solution
         for distributed networks. Network Edition supports up to ten clients,
         as well as options that add client connections, expand client platform
         coverage, and deliver advanced data management services; and
       - Power Edition - a storage management solution for customers with very
         large servers, clusters, or the requirement to drive high-speed
         devices. Power Edition features enhanced architecture to increase
         throughput while minimizing use of system resources and supports all
         standard Networker options.

     NetWorker for UNIX is licensed by the number of clients to be supported and
has the following storage management server options available:

       - Archive - the ability to archive data;
       - Autochanger - the ability to employ tape and optical jukeboxes of
         varying capacities;
       - BusinesSuite - the ability to utilize a family of add-on modules
         tailored for databases and business applications;
       - Client Connections - the ability to increase the number of clients of
         the storage management server beyond the ten supported by the base
         product;
       - High Speed Device Support - the ability to utilize high speed devices;
       - Silo Support - the ability to leverage mainframe-class storage silos;
       - SNMP Modules - the ability to integrate with leading system management
         offerings; and
       - Storage Nodes - the ability to perform very high-speed backup locally
         which is managed centrally.
<PAGE>

     NetWorker for Windows NT is Microsoft BackOffice certified and licensed by
the number of clients to be supported and it has the following storage
management server options available:

       - Archive - the ability to archive data;
       - Autochanger - the ability to employ tape and optical jukeboxes of
         varying capacities;
       - BusinesSuite - the ability to utilize a family of add-on modules
         tailored for databases and business applications such as SQL Server and
         Exchange Server;
       - Client Connections - the ability to increase the number of clients of
         the storage management server beyond the ten supported by the base
         product;
       - Open File Manager - the ability to protect open files;
       - Silo Support - the ability to leverage mainframe-class storage silos;
       - SNMP Module - the ability to integrate with leading system management
         offerings; and
       - Storage Nodes - the ability to perform very high-speed backup locally
         which is managed centrally.

     NetWorker for NetWare is licensed by the number of clients to be supported
and has the following storage management server options available:

       - Archive - the ability to archive data;
       - Autochanger - the ability to employ tape and optical jukeboxes of
         varying capacities;  and
       - Client Connections - the ability to increase the number of clients of
         the storage management server beyond the ten supported by the base
         product.

     NetWorker server software has an entry end user list price from $1,000 to
$19,500, while a fully configured NetWorker system can have an end user list
price of over $100,000.

     Our G.E.M.S. product complements the NetWorker family of products by
providing an approach to managing enterprise-wide storage from Java-enabled Web
browsers via a central console. G.E.M.S allows systems administrators to
centrally configure, control, and manage storage in geographically dispersed
areas. The main features of G.E.M.S. include policy-based administration,
software management and flexible software licensing across the enterprise.
G.E.M.S. provides system administrators the ability to control multiple data
zones managed by NetWorker servers.

     Our data availability products, including HA+, Octopus, Replication and
Cluster products complement the NetWorker family of products by providing users
with continual real-time access to data and applications and allow systems to be
backed up without the traditional downtime. Resources can be transparently
relocated to continue to provide services to users while system changes are
applied.

SALES AND MARKETING

     Our strategy is to deploy a comprehensive sales, marketing and support
infrastructure to meet the storage management needs of users of complex
client/server networks worldwide. We use 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 distribution channels includes:

       - Direct sales;
       - Resellers; and
       - OEMs.
<PAGE>

Direct Sales

     We have established a dedicated sales force to penetrate large
enterprise-wide opportunities. As storage management applications increase in
strategic importance to major enterprises, we have recognized the need to
establish even closer relationships with our largest corporate clients.
Customers participating in our enterprise sales program have an assigned
salesperson and an executive contact, participate in our technical exchange
program and work closely with us to develop large projects for installations
over a period of time. An enterprise sales representative coordinates business
partner activities across the customer's enterprise and closely monitors
customer satisfaction.

Resellers

    We have established regional sales offices to increase the effectiveness of
and support to our channel partners.

     North America Enterprise Solution Partners. Our North America Enterprise
Solution Partners program provides a significant source of revenue in North
America. The Enterprise Solution Partners 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 our software. The
reseller is responsible for managing the sales and installation process in each
customer situation. In large, complex opportunities, our support personnel work
with the reseller to provide technical support. This approach enables us 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. We provide sales and pre-sale technical support
to business partners and end user customers from our headquarters in Palo Alto
and from regional offices in the following metropolitan areas:

       - Atlanta;
       - Boston;
       - Chicago;
       - Dallas;
       - Denver;
       - Los Angeles;
       - New York;
       - Seattle;
       - Toronto; and
       - Washington, D.C.

     North America Distributor Program. To further expand coverage in the
marketplace, we sell our products to large regional and national distributors
who sell the products to resellers with expertise in integrating network
solutions for end users. We provide support to these network solutions
resellers. We currently have relationships with various major distributors,
including Access Graphics, Gates/Arrow, Ingram Micro and TechData.

     International Reseller and Distributor Programs. We have similar reseller
and distributor programs internationally. We currently operate sales offices in
the following countries to support resellers and distributors throughout various
regions of the world:

       - Australia;
       - Belgium;
       - Canada;
       - China;
       - France;
       - Germany;
       - Italy;
       - Japan;
       - Netherlands;
       - Poland;
       - Singapore;

<PAGE>

       - South Africa;
       - Sweden;
       - Switzerland; and
       - United Kingdom.

     International product sales were $48.8 million in 1998, $27.7 million in
1997 and $17.0 million in 1996, representing 29 percent of total revenue in
1998, 23 percent in 1997 and 19 percent in 1996. The majority of international
sales during these periods were made in Europe and Canada. We believe that
international markets present an attractive growth opportunity and are expanding
the scope of our international operations. We have engaged, and intend to add
international resellers and distributors in targeted countries and are
developing joint marketing programs with certain resellers and distributors. In
order to facilitate penetration in certain markets, we, along with cooperation
from certain international distributors, are in the process of localizing
certain products to targeted languages.

     We also rely significantly on our resellers for the marketing and
distribution of our products. Our agreements with resellers are generally not
exclusive and in many cases may be terminated by either party without cause.
Many of our resellers carry our competitors' product lines. We cannot guarantee
that these resellers will give a high priority to the marketing of our products
or that they will continue to carry our products. Events or occurrences of this
nature could seriously harm our business, operating results and financial
condition.

OEMs

     Source Code OEM Program. Our source code OEM program generates significant
royalty revenue. Under this program, we license our software products, in source
code form, to leading computer system and software suppliers from which we
receive an initial license fee and ongoing royalty revenue. The OEM partner is
then responsible for porting our 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
our storage products on an ongoing basis. The benefit of this approach for end
users is that they can acquire our 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 us has been
access to our OEM partners' customer bases, both in North America and overseas,
without a commensurate investment in fixed expense. We currently have source
code OEM agreements in place with several computer system and software
suppliers, including:

       - Amdahl;
       - Banyan;
       - Compaq (Digital);
       - Compaq (Tandem);
       - Data General;
       - Fujitsu-ICL;
       - Nihon-Unisys;
       - NEC;
       - Siemens Nixdorf;
       - Silicon Graphics;
       - Sony;
       - Sun Microsystems; 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 our
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

<PAGE>

program. We also have established strategic partnerships with Hewlett-Packard,
Informix, Netscape and Oracle.

     The source code OEMs and strategic partner programs accounted for
approximately $19.2 million in 1998, $16.7 million in 1997 and $12.9 million in
1996. We are currently investing, and intend to continue to invest resources to
develop this channel, which could seriously harm our operating margins if such
efforts are not successful. We cannot guarantee that we will be successful in
our efforts to increase the revenue represented by this channel. We are
dependent upon our 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. We cannot guarantee that our OEMs will effectively meet
these technological challenges. These OEMs are not within our control, may
incorporate into their products the technologies of other companies in addition
to those of ours and are not obligated to purchase products from us. We cannot
guarantee that any OEM will continue to carry our products, and the inability to
recruit, or the loss of, important OEMs could seriously harm our business,
operating results and financial condition.

     No one customer accounted for more than 10 percent of our total revenue for
1998, 1997 and 1996.

Corporate Marketing

     We support our resellers and OEMs with extensive marketing programs
designed to establish our image in key markets and to generate end user demand.
We participate in trade shows and advertise in key network systems publications
and on the Internet. Leads are qualified by our inside sales staff and provided
to our 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

     We employ systems engineers who work closely with our direct sales
personnel to assist resellers and end users with pre-sales and post-sales
support matters. In addition, we employ a centralized support organization,
which provides customers with technical support, education, training and
consulting services.

     Technical Support. We offer product update services and help desk services.
Product updates services may be purchased pre-bundled with our software products
or separately once the products are registered. Customers may purchase
additional product update services and help desk service offerings on an as
needed basis or on an annual basis. Product update service customers receive
updates, enhancements and improvements to supported software, operating systems'
support, on-line support services and opportunities to participate in special
programs we offer. Annual fees for product update services are generally
equivalent to 15 percent of the price of the products under license paid by
customers.

     Generally, help desk service customers may receive telephone or electronic
support from 6 a.m. to 6 p.m. Pacific time, Monday through Friday. We also offer
premium help-desk service, which includes a one year contract covering
seven-day, 24-hour technical support, monthly telephone reviews of technical
issues with a designated backline engineer and a designated technical support
manager for escalation management. Depending on the type of help desk service
desired, the pricing ranges from $500 to $2,500 for per-incident help desk
service and from $1,000 to more than $30,000 for annual support agreements. The
customer service and support organization consists of an experienced staff of
technical support engineers providing telephone and electronic support via
electronic mail, facsimile and CompuServe from our offices in Palo Alto,
California and Toronto, Canada. Our sales and customer support organizations
work closely together to ensure overall customer satisfaction.

     In recent years, our installed base of customers has significantly
increased, as have the number of customers purchasing software support
contracts. From time to time, we receive customer complaints about the
timeliness and accuracy of customer support. Although we plan to add customer
support personnel in order to address current customer support needs and intend
to closely monitor progress in this area, we cannot guarantee that these efforts
will be successful.

     Education and Training. We offer education and training to end users and
resellers. Training classes are offered through in-house facilities at our
offices in Palo Alto, as well as at off-site locations. We also provide on-site

<PAGE>

training services upon request by customers. Fees for education and training
services are charged separately from our software products. Although we intend
to add education and training personnel in order to meet customer needs, we
cannot guarantee that these efforts will be successful. If our efforts are not
successful, it could seriously harm our business, operating results and
financial condition.

     Consulting. Our 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 our
software products to achieve higher performance or a higher degree of
automation. Fees for consulting services are charged separately from our
software products. While we continue to allocate resources in order to provide
customers with additional value-added services, we cannot guarantee that these
efforts will be successful. Although we intend to add consulting personnel in
order to meet customer needs, we cannot guarantee that these efforts will be
successful. If our efforts are not successful, it could seriously harm our
business, operating results and financial condition.

RESEARCH AND DEVELOPMENT

     Since our inception, we have made substantial investments in product
development. In addition, we receive the benefits of additional testing and
product enhancements from each source code OEM's development group. Our future
success will depend upon our 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 our customers. In
particular, our 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
our customers. We cannot guarantee that we will be successful in developing and
marketing new products that respond to technological change or evolving industry
standards, that we will not experience difficulties that could delay or prevent
the successful development, introduction and marketing of these new products, or
that our new products will adequately meet the requirements of the marketplace
and achieve market acceptance. If we are 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, our business, operating
results and financial condition will be seriously harmed.

     Also, some of our 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. We cannot guarantee that such potential new products will be introduced
on a timely basis or at all.

     As part of the our ongoing development process, we released several new
versions of NetWorker during 1998, and intend to release additional versions of
NetWorker. In addition, we released several new products that support the base
NetWorker software, including:

       - SmartMedia - an open media management application that provides
         standard interfaces for applications, robotic library control, drive
         control, and administration;
       - NetWorker Storage Node for MPE/iX - enables local data backup and
         restore capabilities;
       - NetWorker Remote - provides data protection and disaster recovery for
         Windows-based desktops and laptops; and
       - NetWorker Hierarchical Storage Manager Client - optimizes online disk
         requirements by allowing data to be migrated from the primary storage
         medium to other near-line storage.

We cannot guarantee that these and future new products will achieve market
acceptance. The lack of market acceptance for these and future new products will
seriously harm our business, operating results and financial condition.

     We have research and development centers in the following locations:

       - Palo Alto, California;
       - Seattle, Washington;

<PAGE>

       - Boulder, Colorado;
       - Langhorne, Pennsylvania;
       - Marborough, Massachusetts;
       - Eden Prairie, Minnesota; and
       - Burlington, Canada.

Total expenses for research and development were $25.6 million in 1998, $17.8
million in 1997 and $11.8 million in 1996. We anticipate that we will continue
to commit substantial resources to research and development in the future. To
date, our development efforts have not resulted in any capitalized software
development costs.

COMPETITION

     We operate in the enterprise storage management market, which 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. Our major competitors include:

     Novell NetWare and Windows NT platforms:
     ----------------------------------------
         Computer Associates (Cheyenne Software); and
         Seagate (Palindrome and Arcada).

     Sun Solaris/SunOS platform:
     ---------------------------
         Computer Associates (Legent/Lachman);
         EMC2 (Epoch);
         Peripheral Devices (Delta Microsystems);
         Spectra Logic; and
         Veritas.

     AIX platform and the HP-UX platform:
     ------------------------------------
         IBM; and
         Hewlett Packard.

     We expect to encounter new competitors as we enter new markets. In
addition, many of our existing competitors are broadening their platform
coverage. We also expect 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, since there are relatively low barriers to entry in the
software market, we expect additional competition from other established and
emerging companies. We also expect that competition will increase as a result of
future software industry consolidations. Increased competition could harm us by
causing, among other things:

       - Price reductions;
       - Reduced gross margins; and
       - Loss of market share.

     Many of our current and potential competitors have longer operating
histories and have substantially greater financial, technical, sales, marketing
and other resources, as well as greater name recognition and a larger customer
base, than we have. As a result, certain current and potential competitors can
respond more quickly to new or emerging technologies and changes in customer
requirements. They can also devote greater resources to the development,
promotion, sale and support of their products. In addition, current and
potential competitors may establish cooperative relationships among themselves
or with third parties. If so, new competitors or alliances among competitors may
emerge and rapidly acquire significant market share. In addition, network

<PAGE>

operating system vendors could introduce new or upgrade existing operating
systems or environments that include functionality offered by our products. If
so, our products could be rendered obsolete and unmarketable. For all the
foregoing reasons, we may not be able to compete successfully, which would
seriously harm our business, operating results and financial condition.

EMPLOYEES

     As of December 31, 1998, we had a total of 807 employees. Of the total, 324
were in sales and marketing, 217 in research and development, 113 in technical
support, 119 in finance, administration and operations and 34 in consulting and
education services. Our future success depends, in significant part, upon the
continued service of our key technical and senior management personnel and our
continuing ability to attract and retain highly qualified technical and
managerial personnel. Competition for such personnel is intense, and we cannot
guarantee that we can retain our key technical and managerial employees or that
we can attract, assimilate or retain other highly qualified technical and
managerial personnel in the future. None of our employees are represented by a
labor union. We have not experienced any work stoppages and consider our
relations with our employees to be good.


RISK FACTORS

     In addition to the other information in this Report, the following risk
factors should be considered carefully in evaluating our business and us:

     Our Quarterly Operating Results Are Volatile.

     Our quarterly operating results have varied in the past and may vary in the
future. Our quarterly operating results may vary depending on a number of
factors, many of which are outside of our control, including:

       - The size and timing of orders;
       - Increased competition;
       - Market acceptance of our new products, applications and product
         enhancements or our competitors;
       - Changes in pricing policies or those of our competitors;
       - Our ability to develop, introduce and market new products,
         applications and product enhancements;
       - Ability to integrate acquired businesses;
       - Our ability to control costs;
       - Quality control of products sold;
       - Lengthy sales cycles, particularly with enterprise license
         transactions;
       - Success in expanding sales and marketing programs;
       - Technological changes in our markets;
       - The mix of sales among our channels;
       - Deferrals of customer orders in anticipation of new products,
         applications or product enhancements;
       - Market readiness to deploy our products for distributed computing
         environments;
       - Changes in our strategy or that of our competitors;
       - Customer budget cycles and changes in these budget cycles;
       - Foreign currency and exchange rates;
       - Acquisition costs or other non-recurring charges in connection with
         the acquisition of companies, products or technologies;
       - Personnel changes; and
       - General economic factors.
<PAGE>

     Our Future Operating Results Are Uncertain.

     We cannot predict our future revenue with any significant degree of
certainty for several reasons including:

       - Product revenue in any quarter is substantially dependent on orders
         booked and shipped in that quarter, since we operate with virtually no
         order backlog;
       - We do not recognize revenue on sales to domestic distributors until
         the products are sold through to end-users;
       - The storage management market is rapidly evolving;
       - Our sales cycles vary substantially from customer to customer, in
         large part because we are becoming increasingly dependent upon larger
         company-wide enterprise license transactions to corporate customers.
         Such transactions include product license, service and support
         components and take a long time to complete;
       - The timing of large orders can significantly affect revenue within a
         quarter; and
       - License and royalty revenue are difficult to forecast. Our royalty
         revenue is dependent upon product license sales by OEMs of their
         products that incorporate our software. Accordingly, these royalty
         revenue is subject to OEMs' product cycles, which are also difficult to
         predict. Fluctuations in licensing activity from quarter to quarter
         further impact royalty revenue, because initial license fees generally
         are non-recurring and recognized upon the signing of a license
         agreement.

     Our expense levels are relatively fixed and are based, in part, on our
expectations of our future revenue. Consequently, if revenue levels fall below
our expectations, our net income will decrease because only a small portion of
our expenses varies with our revenue.

     We believe that period-to-period comparisons of our results of operations
are not meaningful and should not be relied upon as indications of future
performance. Our operating results will be below the expectations of public
market analysts and investors in some future quarter or quarters. Our failure to
meet such expectations would likely seriously harm the market price of our
common stock.

     Our Market is Highly Competitive.

     We operate in the enterprise storage management market, which 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. Our major competitors include:

     Novell NetWare and Windows NT platforms:
     ----------------------------------------
         Computer Associates (Cheyenne Software); and
         Seagate (Palindrome and Arcada).

     Sun Solaris/SunOS platform:
     ---------------------------
         Computer Associates (Legent/Lachman);
         EMC2 (Epoch);
         Peripheral Devices (Delta Microsystems);
         Spectra Logic; and
         Veritas.

     AIX platform and the HP-UX platform:
     ------------------------------------
         IBM; and
         Hewlett Packard.

     We expect to encounter new competitors as we enter new markets. In
addition, many of our existing competitors are broadening their platform
coverage. We also expect 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
computer- market. In addition, since there are relatively low barriers to entry

<PAGE>

in the software market, we expect additional competition from other established
and emerging companies. We also expect that competition will increase as a
result of future software industry consolidations. Increased competition could
harm us by causing, among other things:

       - Price reductions;
       - Reduced gross margins; and
       - Loss of market share.

     Many of our current and potential competitors have longer operating
histories and have substantially greater financial, technical, sales, marketing
and other resources, as well as greater name recognition and a larger customer
base, than we have. As a result, certain current and potential competitors can
respond more quickly to new or emerging technologies and changes in customer
requirements. They can also devote greater resources to the development,
promotion, sale and support of their products. In addition, current and
potential competitors may establish cooperative relationships among themselves
or with third parties. If so, 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 functionality offered by our products. If
so, our products could be rendered obsolete and unmarketable. For all the
foregoing reasons, we may not be able to compete successfully, which would
seriously harm our business, operating results and financial condition.

     We Depend on Our Networker Product Line.

     We currently derive, and expect to continue to derive, a substantial
majority of our revenue from our NetWorker software products and related
services. A decline in the price of or demand for NetWorker, or failure to
achieve broad market acceptance of NetWorker, would seriously harm our business,
operating results and financial condition. We cannot reasonably predict
NetWorker's remaining life for several reasons, including:

       - The recent emergence of our 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.

     We Must Respond to Rapid Technological Changes with New Product Offerings.

     The markets for our products are 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 our existing products obsolete and unmarketable.

     To be successful, we need to develop and introduce new software products on
a timely basis that:

       - Keep pace with technological developments and emerging industry
         standards; and
       - Address the increasingly sophisticated needs of our customers.
<PAGE>

We may:

       - Fail to develop and market new products that respond to technological
         changes or evolving industry standards;
       - Experience difficulties that could delay or prevent the successful
         development, introduction and marketing of these new products; or
       - Fail to develop new products that adequately meet the requirements of
         the marketplace or achieve market acceptance

If so, our business, operating results and financial condition would be
seriously harmed.

     We currently plan to introduce and market several potential new products in
the next twelve months. Some of our competitors currently offer certain of these
potential new products. Such potential new products are subject to significant
technical risks. We may fail to introduce such potential new products on a
timely basis or at all. In the past, we have experienced delays in the
commencement of commercial shipments of our new products. Such delays caused
customer frustrations and delay or loss of product revenue. If potential new
products are delayed or do not achieve market acceptance, our business,
operating results and financial condition would be seriously harmed. In the
past, we have also experienced delays in purchases of our products by customers
anticipating our launch of new products. Our business, operating results and
financial condition would be seriously harmed if customers defer material orders
in anticipation of new product introductions.

Software products as complex as those we offer may contain undetected
errors or failures when first introduced or as new versions are released. We
have in the past discovered software errors in certain of our new products after
their introduction. We experienced delays or lost revenue during the period
required to correct these shipments, despite testing by us and by our current
and potential customers. This may result in loss of or delay in market
acceptance of our products, which could seriously harm our business, operating
results and financial condition.

     We Rely on Enterprise License Transactions.

     In the past, we marketed our products at the department level of corporate
customers. Within the last two years, we developed strategies to pursue larger
enterprise license transactions with corporate customers. We may fail to
successfully market our products in larger enterprise license transactions. Such
failure would seriously harm our business, operating results and financial
condition. Our operating results are sensitive to the timing of such orders.
Such orders are difficult to manage and predict, because:

       - The sales cycle is typically lengthy, generally lasting three to six
         months, and varies substantially from transaction to transaction;
       - They often include product license, service and support components;
       - They typically involve significant technical evaluation and commitment
         of capital and other resources; and
       - Customers' internal procedures frequently cause delays in orders. Such
         internal procedures include approval of large capital expenditures,
         implementation of new technologies within their networks, and testing
         new technologies that affect key operations).

Due to the large size of enterprise transactions, if orders forecasted for a
specific transaction for a particular quarter are not realized in that quarter,
our operating results for that quarter may be seriously harmed.

     Historically, we have not had a separate large enterprise or national
accounts sales force and only within the last eighteen months have we begun to
develop direct sales groups focused on these larger accounts. To succeed in the
national accounts market, we will be required to continue to transition our
existing sales forces into enterprise level sales groups, and attract and retain
qualified personnel. New personnel will require training to obtain knowledge of
the attributes of our products. We may not be successful in creating the
necessary sales organization or in attracting, retaining or training these
individuals. To succeed in the enterprise and national accounts market will
require, among other things, establishing and continuing to develop
relationships and contacts with senior technology officers at these accounts.

<PAGE>

Our business, financial condition and results of operations would be seriously
harmed if our sales force is not successful in these efforts.

     We Rely on Indirect Sales Channels.

     We rely significantly on our distributors, systems integrators and value
added resellers (collectively, "resellers") for the marketing and distribution
of our products. Our agreements with resellers are generally not exclusive and
in many cases may be terminated by either party without cause. Many of our
resellers carry product lines that are competitive with ours. These resellers
may not give a high priority to the marketing of our products. Rather, they may
give a higher priority to other products, including the products of competitors,
or may not continue to carry our products. Events or occurrences of this nature
could seriously harm our business, operating results and financial condition. In
addition, we may not be able to retain any of our current resellers or
successfully recruit new resellers. Any such changes in our distribution
channels could seriously harm our business, operating results and financial
condition.

     Our strategy is also to increase the proportion of our customers licensed
through OEMs. We may fail to achieve this strategy. We are currently investing,
and intend to continue to invest resources to develop this channel. Such
investments could seriously harm our operating margins. We depend on our OEMs'
abilities 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. Our OEMs
may not effectively meet these technological challenges. These OEMs:

       - Are not within our control;
       - May incorporate the technologies of other companies in addition to, or
         to the exclusion of, our technologies, and
       - Are not obligated to purchase products from us. In addition, our OEMs
         generally have exclusive rights to our technology on their platforms,
         subject to certain minimum royalty obligations.

     Our OEMs may not continue to carry our products. The inability to recruit,
or the loss of, important OEMs could seriously harm our business, operating
results and financial condition.

     We Depend on International Revenue.

     Our continued growth and profitability will require further expansion of
our international operations. To successfully expand international operations,
we must:

       - Establish additional foreign operations;
       - Hire addition personnel; and
       - Recruit additional international resellers.

     This will require significant management attention and financial resources
and could seriously harm our operating margins. If we fail to further expand our
international operations in a timely manner, our business, operating results and
financial condition could be seriously harmed. In addition, we may fail to
maintain or increase international market demand for our products. Our
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 our
products more expensive and, therefore, potentially less competitive in those
markets. In some markets, localization of our products is essential to achieve
market penetration. We may incur substantial costs and experience delays in
localizing our products. We may fail to generate significant revenue from
localized products.

     Additional risks inherent in our international business activities
generally include:

       - Significant reliance on our distributors and other resellers who do
         not offer our products exclusively;
       - Unexpected changes in regulatory requirements;
       - Tariffs and other trade barriers;
       - Lack of acceptance of localized products, if any, in foreign countries;

<PAGE>

       - Longer accounts receivable payment cycles;
       - Difficulties in managing international operations;
       - Potentially adverse tax consequences, including restrictions on the
         repatriation of earnings;
       - The burdens of complying with a wide variety of foreign laws; and
       - The risks related to the recent global economic turbulence and adverse
         economic circumstances in Asia.

The occurrence of such factors could seriously harm our international sales and,
consequently, our business, operating results and financial condition.

     We Must Manage Our Growth and Expansion.

     We have recently experienced a period of significant expansion of our
operations that has placed a significant strain upon our management systems and
resources. In addition, we have recently hired a significant number of
employees, and plan to further increase our total headcount. We also plan to
expand the geographic scope of our customer base. This expansion has resulted
and will continue to result in substantial demands on our management resources.

     From time to time, we receive customer complaints about the timeliness and
accuracy of customer support. We plan to add customer support personnel in order
to address current customer support needs. If we are not successful hiring such
personnel, our business, operating results and financial condition could be
seriously harmed. Our ability to compete effectively and to manage future
expansion of our operations, if any, will require us to (a) continue to improve
our financial and management controls, reporting systems and procedures on a
timely basis, and (b) expand, train and manage our employees. Our failure to do
so would seriously harm our business, operating results and financial condition.

     We Must Integrate Recent Acquisitions.

     On August 6, 1998, we acquired Software Moguls, Inc. ("SMI"), a developer
of advanced backup-retrieval products for the Windows NT and UNIX environments.
On April 1, 1999, we acquired Intelliguard Software, Inc. ("Intelliguard"), a
developer of standards-based storage management solutions for storage area
networks. On April 19, 1999, we acquired FullTime, a developer of distributed,
enterprise-wide, cross-platform, adaptive computing solutions. On July 30, 1999,
we acquired Vinca Corporation ("Vinca"), a developer in high availability and
data protection software. We may make additional acquisitions in the future.
Acquisitions of companies, products or technologies entail numerous risks,
including:

       - An inability to successfully assimilate acquired operations and
         products;
       - Diversion of management's attention;
       - Loss of key employees of acquired companies;
       - Substantial transaction costs; and
       - Substantial additional costs charged to operations as a result of the
         failure to consummate acquisitions.

     Some of the products we acquired may require significant additional
development before they can be marketed and may not generate revenue at levels
we anticipate. Moreover, our future acquisitions may result in dilutive
issuances of our equity securities, the incurrence of debt, large one-time
write-offs and the creation of goodwill or other intangible assets that could
result in amortization expense. We cannot guarantee that our efforts to
consummate acquisitions or integrate acquisitions will be successful. If our
efforts are not successful, it could seriously harm our business, financial
condition and results of operations.

     We Rely on Our Key Personnel.

     Our future performance depends on the continued service of our key
technical and senior management personnel. None of the our key technical or
senior management personnel is bound by an employment agreement. The loss of the

<PAGE>

services of one or more of our officers or other key employees could seriously
harm our business, operating results and financial condition.

     Our future success also depends on our continuing ability to attract and
retain highly qualified technical and managerial personnel. Competition for such
personnel is intense, and we may fail to retain our key technical and managerial
employees or attract, assimilate or retain other highly qualified technical and
managerial personnel in the future.

     We Depend on Growth in the Enterprise Storage Management Market.

     All of our business is in the storage management market. The enterprise
storage management market is still an emerging market. Our future financial
performance will depend in large part on continued growth in the number of
organizations adopting company-wide storage and management solutions for their
client/server computing environments. The market for enterprise storage
management may not continue to grow. If this market fails to grow or grows more
slowly than we currently anticipate, our business, operating results and
financial condition would be seriously harmed.

     We Are Affected by General Economic and Market Conditions.

     During recent years, segments of the computer industry have experienced
significant economic downturns characterized by:

       - Decreased product demand;
       - Product overcapacity;
       - Price erosion;
       - Work slowdowns; and
       - Layoffs.

     Our operations may 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. The occurrence of such factors could
seriously harm our business, operating results or financial condition.

     Protection of Our Intellectual Property is Limited.

     Our success depends significantly upon proprietary technology. To protect
our proprietary rights, we rely on a combination of:

       - Patents;
       - Copyright and trademark laws;
       - Trade secrets;
       - Confidentiality procedures; and
       - Contractual provisions.

     We seek to protect our software, documentation and other written materials
under patent, trade secret and copyright laws, which afford only limited
protection. However,

       - We may not develop proprietary products or technologies that are
         patentable;
       - Any issued patent may not provide us with any competitive advantages
         or may be challenged by third parties; or
       - The patents of others may seriously impede our ability to do business.
<PAGE>

     Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and software piracy can be expected to be a persistent problem. In
licensing our products, other than in enterprise license transactions, we rely
on "shrink wrap" licenses that are not signed by licensees. Such licenses may be
unenforceable under the laws of certain jurisdictions. In addition, the laws of
some foreign countries do not protect our proprietary rights to as great an
extent as do the laws of the United States. Our means of protecting our
proprietary rights may not be adequate. Our competitors may independently
develop similar technology, duplicate our products or design around patents
issued to us or other intellectual property rights of ours.

     From time to time, we have received claims that we are infringing third
parties' intellectual property rights. In the future, we may be subject to
claims of infringement by third parties with respect to current or future
products, trademarks or other proprietary rights. We expect that software
product developers will increasingly be subject to infringement claims as the
number of products and competitors in our 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 us to enter into royalty or
licensing agreements with third parties. If such royalty or licensing
agreements, if required, are not available on terms acceptable to us, our
business, operating results and financial condition could be seriously harmed.

     Defects in Our Products Would Harm Our Business.

     Our products can be used to manage data critical to organizations. As a
result, the sale and support of products we offer may entail the risk of product
liability claims. A successful product liability claim brought against us could
seriously harm our business, operating results and financial condition.

     Year 2000 Issues Could Affect Our Business.

     Many currently installed computer systems and software products include
coding to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. Significant uncertainty
exists in the software industry concerning the potential effects associated with
such problems.

     We respond to customer concerns about our products on a case-by-case basis.
Although we have performed validation testing to ensure our products are Year
2000 compliant and believe our software products are Year 2000 compliant, our
software products may not contain all the necessary software routines and
programs for the accurate calculation, display, storage and manipulation of data
involving dates. Failures of our software products to contain all the necessary
software routines and programs for the accurate calculation, display, storage
and manipulation of data involving dates would seriously harm our business,
operating results and financial condition.

     We believe the software and hardware we use internally comply with Year
2000 requirements. During 1998, we replaced or upgraded much of our internal use
hardware and software. In addition, we are not aware of any material operational
issues or costs associated with preparing our internal use software and hardware
for the Year 2000. However, serious, unanticipated negative consequences,
including material costs caused by undetected errors or defects in the
technology used in our internal systems may occur. The occurrence of any of the
foregoing could seriously harm our business, operating results or financial
condition.

     Our Trading Price is Volatile.

     The market price of our common stock may decrease significantly. A number
of factors could significantly affect the market price of our common stock
including:

       - Quarterly fluctuations in financial results or results of other
         software companies;
       - Changes in our revenue growth rates or our competitors' growth rates;
       - Announcements that our revenue or income are below analysts'
         expectations;
       - Changes in analysts' estimates of our performance or industry
         performance;

<PAGE>

       - Announcements of new products by our competitors or by us;
       - Developments with respect to our patents, copyrights, or proprietary
         rights or those of our competitors;
       - Sales of large blocks of our common stock;
       - Conditions in the financial markets in general;
       - General business conditions and trends in the distributed computing
         environment and software industry;
       - Deferred purchases of our products as a result of customers needs to
         expend available resources to become Year 2000 compliant; and
       - Costs and resources required to address potential Year 2000 problems
         relating to our products or our internal use software and hardware.

     In addition, the stock market may experience extreme price and volume
fluctuations, which may affect the market price for the securities of technology
companies without regard to their operating performance or any of the factors
listed above. These broad market fluctuations may seriously harm the market
price of our common stock. In the past, securities class action litigation has
often been brought against a company following periods of volatility in the
market price of such company's securities. Such litigation may occur in the
future with respect to us and could result in substantial costs and diversion of
management's attention and resources, which could seriously harm our business,
financial condition and results of operations.
<PAGE>

ITEM 2.  PROPERTIES

     Our principal administrative, marketing and research and development
facility is located in approximately 96,000 square feet of space in Palo Alto,
California. This facility is leased through September 2006. Our principal sales
office is located in approximately 52,500 square feet of space in Sunnyvale,
California. This office is leased through February 2007. We also currently lease
other domestic offices throughout the United States, as well as international
offices in Australia, Belgium, Canada, China, France, Germany, Netherlands,
Italy, Hong Kong, Japan, Poland, Singapore, South Africa, Switzerland, Sweden
and the United Kingdon.

ITEM 3. LEGAL PROCEEDINGS

     We are engaged in certain legal and administrative proceedings incidental
to our business, the outcome of which, individually or in the aggregate, are not
expected to seriously harm our business, results of operations or financial
condition.

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

     We did not submit any matters to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1998.

ITEM 4A.  EXECUTIVE OFFICERS OF THE REGISTRANT

     Set forth below are biographical summaries of our executive officers as of
December 31, 1998:

     Louis C. Cole, 55, joined Legato Systems, 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 Legato, from March 1987 until July
1988, Mr. Cole served as Executive Vice President responsible for all operating
divisions of Novell, Inc. ("Novell"), a manufacturer of computer networking and
software products. Mr. Cole serves as a director of Inference Corp., Qualix
Group, Inc. (doing business as Fulltime Software, Inc.) and Rogue Wave Software,
all publicly held software companies. Mr. Cole holds a B.S. in mathematics and
education from Pennsylvania State University at Edinboro.

     Kent D. Smith, 49, has served as Executive Vice President and Chief
Operating Officer of Legato Systems, since May 1996. He served as Executive Vice
President of Customer Operations from March 1995 to May 1996. Before joining
Legato, from March 1994 until March 1995, Mr. Smith served as Vice President of
Emerging Markets at VeriFone, Inc. ("VeriFone"), a 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
("IBM"), 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, 44, joined Legato Systems, Inc., in September 1996 as
Senior Vice President of Finance and Administration and Chief Financial Officer.
Before joining Legato, Mr. Wise served as Senior Vice President, Finance of
Novell from December 1994 to September 1997. He was Vice President and Corporate
Controller of Novell from January 1991 to December 1994 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.

     Nora M. Denzel, 36, joined Legato Systems, in January 1997 as Senior Vice
President of Product Operations. Before joining Legato, Ms. Denzel served as the
director of IBM's storage management software products and held a range of
operations, development and marketing positions with IBM from 1984 to 1996. Ms.
Denzel holds a B.S. in Computer Science from the State University of New York
and an M.B.A. from Santa Clara University.

     John Ferraro, 37, joined Legato Systems, in December 1997 as Senior Vice
President of Worldwide Sales Operations. Before joining Legato, Mr. Ferraro held
the position of Vice President of Sales for Unison Software, a network
management software company, where he was responsible for developing the North
America sales organization on both a direct and channel basis from December 1994
to December 1997. Prior to that, Mr. Ferraro's experience includes seven years
in sales and management at Computer Associates, as Vice President of the Systems
Management division. Mr. Ferraro holds a B.S. in Accounting from the University
of Colorado.
<PAGE>

     James Chappell, 38, joined Legato Systems, in June 1992. Since August 1998,
he has served as our Vice President of Business Development. From June 1992 to
July 1998, Mr. Chappell held various sales and marketing management positions
with Legato, including general manager, manager of strategic businesses and
director of worldwide channel marketing. Prior to joining Legato, Mr. Chappell
served as President of The Connectivity Lab, a data communications consulting
firm, from March 1989 to March 1991. Mr. Chappell holds a B.S. in Computer
Science from Cal Poly University, San Luis Obispo, California.
<PAGE>

                                     PART II

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

     Our common stock is traded on the Nasdaq National Market under the symbol
LGTO. The following table sets forth the high and low closing sales prices of
our common stock from January 1, 1996 through December 31, 1998. 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 splits of our
common stock, which were effected July 5, 1996, April 17, 1998 and August 13,
1999.
                                               HIGH                LOW
                                               ----                ---
        Fiscal 1996
        ---------------
        First Quarter                         $ 5.38              $ 2.91
        Second Quarter                        $ 6.88              $ 4.38
        Third Quarter                         $12.00              $ 4.57
        Fourth Quarter                        $11.75              $ 6.69

        Fiscal 1997
        ---------------
        First Quarter                        $  8.22              $ 4.04
        Second Quarter                       $  6.22              $ 2.75
        Third Quarter                        $  8.94              $ 4.35
        Fourth Quarter                        $11.66              $ 8.07

        Fiscal 1998
        ----------------
        First Quarter                         $14.97              $10.03
        Second Quarter                        $19.75              $12.88
        Third Quarter                         $27.37              $17.57
        Fourth Quarter                        $32.97              $15.13


     As of January 22, 1999, there were 91 holders of record of our common
stock. We believe that a significant number of beneficial owners of our common
stock hold shares in street name.

     We have never paid a cash dividend on our common stock and do not intend to
pay cash dividends on our common stock in the foreseeable future.
<PAGE>

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>

FIVE YEAR SUMMARY

                                                                           DECEMBER 31,
                                                 ------------------------------------------------------------------
                                                   1998(3)       1997(3)      1996(2)        1995(2)        1994(2)
                                                 ---------    ----------      -------        -------       --------
                                                                                                         (UNAUDITED)
                                                                (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<S>                                             <C>           <C>            <C>            <C>          <C>
Revenue........................................ $  167,907    $  118,499     $  88,920      $ 49,066     $   28,357
Gross profit....................................   143,114        97,812        70,457        36,591         20,756
Income from operations..........................    27,815        21,589        15,747         7,288            831
Net income......................................    19,869        15,066        10,814         8,628            967
Basic earnings per share (1)....................      0.26          0.21          0.16          0.21           0.06
Shares used in basic
     earnings per share calculations............    76,762        72,849        68,565        41,100         15,900
Diluted earnings per share (1)..................      0.24          0.19          0.14          0.14           0.02
Shares used in diluted
     earnings per share calculations (1)........    83,074        78,886        78,215        63,246         47,844
Cash, cash equivalents and investments..........   125,972        87,433        76,945        53,805          7,227
Working capital.................................   119,717        87,848        71,427        41,156          6,085
Total assets....................................   207,747       141,908       111,704        69,946         13,984
Retained earnings (accumulated deficit).........    43,364        23,495         9,741        (1,073)        (9,701)
Total stockholders' equity......................   158,529       114,737        90,813        56,229          7,378
</TABLE>

----------
(1)  See Note 1 of Notes to Consolidated Financial Statements
(2)  Selected financial data for the fiscal year-ended December 31, 1996, 1995
     and 1994 was derived by combining Legato's selected financial data for the
     fiscal year-ended December 31, 1996, 1995 and 1994 with FullTime's
     financial data for the fiscal year-ended June 30, 1997, 1996 and 1995,
     respectively.
(3)  Selected financial data for the fiscal year-ended December 31, 1998 and
     1997 was derived by combining Legato's selected financial data for the
     fiscal year-ended December 31, 1998 and 1997 with FullTime's financial data
     for the twelve-months ended December 31, 1998 and 1997, respectively.
<PAGE>

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

     The discussion in this report on Form 10-K/A contains forward-looking
statements that involve risks and uncertainties. The statements contained in
this Report that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including
statements regarding our expectations, beliefs, intentions or strategies
regarding the future. All forward-looking statements included in this document
are based on information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statements. Our actual results
could differ materially from those discussed. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
elsewhere in item 1 under the heading "Risk Factors", as well as those discussed
elsewhere in this Report, and the risks discussed in our other Securities and
Exchange Commission filings.

RESULTS OF OPERATIONS

Overview

     We develop, market and support network storage management software products
for heterogeneous client/server computing environments and large scale
enterprises. Our data protection products, primarily the NetWorker family of
software products, from which we derive a substantial majority of our revenue,
and our data availability products primarily HA+, Octopus, Replication and
Cluster products, support many storage management server platforms and can
accommodate a variety of servers, clients, applications, databases and storage
devices. We license our products through resellers and directly to end users
primarily located in North America, Europe and Asia Pacific. We also license our
source code to original equipment manufacturers ("OEMs") in exchange for initial
licensing fees and receive 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.

     We acquired Software Moguls, Inc. in August 1998 and FullTime in April
1999, primarily for their product offerings and research and development teams.
We accounted for the acquisitions as poolings-of-interests. Accordingly, we
restated the financial statements to represent the combined financial results of
previously separate entities for all periods presented.

     Selected elements of our consolidated financial statements are shown below
for the last three years as a percentage of total revenue and as a percentage
change from year to year.
<PAGE>
<TABLE>
<CAPTION>



                                                                                                % INCREASE
                                                         % OF TOTAL REVENUE               ----------------------
                                                      YEARS ENDED DECEMBER 31,               1998          1997
                                                --------------------------------------    COMPARED      COMPARED
                                                  1998          1997           1996        TO 1997       TO 1996
                                                ----------    ----------    ----------    --------       -------
<S>                                                     <C>         <C>           <C>           <C>           <C>
Revenue:
    Product license                                     62%         58%           57%           51%           36%
    Service and support                                 23          20            17            68            52
    Royalty                                             11          14            14            15            29
    Other products                                       4           8            12           (39)           (3)
                                                ----------    --------      --------
       Total revenue                                   100         100           100            42            33

Cost of revenue:
    Product license                                      3           4             7            14           (20)
    Service and support                                  9           7             6            71            (2)
    Other products                                       3           6             8           (39)           65
                                                ----------    --------      --------

Gross profit                                            85          83            79            46            39

Operating expenses:
    Research and development                            15          15            13            44            51
    Sales and marketing                                 43          38            33            58            55
    General and administrative                          10          10            11            35            19
    Amortization of intangibles                          1           1             1            --             2
    Merger-related expenses                             --            --           1            --          (100)
    In-process research and development                 --            --           2            --          (100)
                                                ----------    ----------    --------
       Total operating expenses                         69          64            61            51            40
                                                ----------    --------      --------

Income from operations                                  16          18            18            29            36

Interest income, net                                     3           3             3            38            29
                                                ----------    --------      --------

Income before provision for income taxes                19          21            21            31            35

Provision for income taxes                               8           8             8            27            38
                                                ----------    --------      --------

Net income                                             11%          13%           13%           33%           33%
                                                =========     ========      ========
</TABLE>


Revenue

     Total revenue was $167.9 million in 1998, $118.5 million in 1997 and $88.9
million in 1996. Total revenue increased 42 percent from 1997 to 1998 and 33
percent from 1996 to 1997. Total revenue increased primarily as a result of the
continued acceptance of our Networker family of products, increased sales of
service and support contracts, as well as increased royalty revenue.

     Product License Revenue. Product license revenue was $103.8 million in
1998, $68.8 million in 1997 and $50.5 million in 1996. Product license revenue
increased 51 percent from 1997 to 1998 and 36 percent from 1996 to 1997. Product
license revenue increased primarily as a result of the continued market
acceptance of our products. Product license revenue also increased as a result
of product sales to large-scale enterprises. The increase in our number of sales
and marketing personnel, as well as sales and marketing programs helped to
increase the market acceptance of our products and product sales. Our sales and
marketing personnel increased from 157 employees in 1996 to 324 employees in
1998. We recognize product revenue upon shipment if a signed contract exists,
the fee is fixed and determinable, collection of resulting receivables is
probable and product returns are reasonably estimable, except for sales to
domestic distributors, which are recognized upon sale by the domestic
distributors to end-users. We recognize revenue from domestic distributors upon
sale by the distributor to end users since these distributors have unlimited
rights of return and we historically have not been able to make reasonable
estimates of product returns for these distributors. We also incur additional
internal costs to assist our distributors in selling our products to end users.
Prior growth rates of our product license revenue are not indicative of future
product license revenue growth rates and may not be sustainable in the future.
<PAGE>

     Service and Support Revenue. Service and support revenue was $38.8 million
in 1998, $23.1 million in 1997 and $10.3 million in 1996. Service and support
revenue increased 68 percent from 1997 to 1998 and 52 percent from 1996 to 1997.
Service and support revenue increased primarily as a result of the growth in the
number of registered customers electing to subscribe to support contracts and to
renew software support contracts after the initial one-year term. Our increase
in internal staffing for software support helped to increase new sales and
renewals of our software support contracts. Our increase in internal staffing
for education and consulting services resulted in increased sales of the
education and consulting services we offer. Our technical support personnel
increased from 89 employees in 1996 to 113 employees in 1998. Our consulting and
education services personnel increased from 19 employees in 1997 to 34 employees
in 1998. We collect fees for ongoing customer support and product updates in
advance and recognize this support revenue ratably over the period of the
contract. For education and consulting services, we recognize revenue as such
services are performed. Prior growth rates of our software service and support
revenue are not indicative of future software service and support revenue growth
rates and may not be sustainable in the future.

     Royalty Revenue. Royalty revenue was $19.2 million in 1998, $16.7 million
in 1997 and $12.9 million in 1996. Royalty revenue increased 15 percent from
1997 to 1998 and 29 percent from 1996 to 1997. The increase in royalty is
attributed to increased product sales by OEMs. Royalty revenues are recognized
upon receipt of quarterly royalty reports from OEMs related to their product
sales for the previous quarter. Prior growth rates of our product license
revenue are not indicative of future product license revenue growth rates and
may not be sustainable in the future.

     Other Product Revenue. Revenue from sales of other products was $6.2
million in 1998, $10.0 million in 1997 and $15.2 million in 1996. Other product
revenue decreased 39 percent from 1997 to 1998 and 3 percent from 1996 to 1997.
Other revenue represented 4 percent of total revenue in 1998, 8 percent in 1997
and 12 percent in 1997. Other product revenue consists primarily of third-party
ancillary hardware and software products for distributed computing systems that
are resold by Qualix Direct, the telesales organization of FullTime. The
decrease in other revenue is primarily attributable to the continued focus on
sales of internally developed software products rather than third party products
sold through Qualix Direct.

     International product license revenue accounted for 29 percent of total
revenue in 1998, 23 percent in 1997 and 19 percent in 1996. International
license revenue increased primarily as a result of the continued market
acceptance of our products overseas. An increase in the number of international
sales offices and international distributors and resellers marketing our
products helped increase the market acceptance of our products overseas. The
majority of international sales during these periods were made in Europe and
Canada. We established sales offices in Canada and the Netherlands during 1996,
sales offices in Japan and Sweden during 1997 and sales offices in Belgium, Hong
Kong, Italy, Poland and Switzerland during 1998. We believe that our continued
growth and profitability will require further expansion of our international
operations. In order to successfully expand international sales in 1999 and
subsequent periods, we must continue to establish additional foreign operations,
hire additional personnel for these operations and recruit additional
international resellers. Expansion and management of our international
operations will require significant management attention and financial resources
and could seriously harm certain operating results if such efforts are not
successful. To the extent that we are unable to effect these additions in a
timely manner, our growth, if any, in international revenue will be limited, and
our business, operating results and financial condition could be seriously
harmed. In addition, we cannot guarantee that we will be able to maintain or
increase international market demand for our products. Our 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 our products more expensive
and, therefore, potentially less competitive in those markets. In some markets,
localization of our products is essential to achieve market penetration. We may
incur substantial costs and experience delays in localizing our products, and we
cannot guarantee that any localized product will ever generate significant
revenue.


Gross Profit

     Gross profit was $143.1 million in 1998, $97.8 million in 1997 and $70.5
million in 1996, representing 85 percent of total revenue in 1998, 83 percent in
1997 and 79 percent in 1996. Gross profit consists of product license and
service and support revenue less related costs.
<PAGE>

     Gross profit from product license revenue was $98.5 million in 1998, $64.1
million in 1997 and $44.7 million in 1996, representing 95 percent of product
license revenue in 1998, 93 percent in 1997 and 89 percent in 1996. Gross profit
from product license revenue increased 54 percent from 1997 to 1998 and 43
percent from 1996 to 1997. Gross profit from product license revenue consists of
product license revenue less the related costs. Related costs of revenue consist
primarily of product media, documentation and packaging. Gross profit from
product license revenue as a percentage of product license revenue increased
primarily as a result leveraging the costs of sales over a higher product
license revenue base.

     Gross profit from service and support revenue was $23.7 million in 1998,
$14.2 million in 1997 and $9.9 million in 1996, representing 61 percent of the
service and support revenue in 1998, 62 percent in 1997 and 65 percent in 1996.
Gross profit from service and support revenue increased 66 percent from 1997 to
1998 and 44 percent from 1996 to 1997. Gross profit from service and support
revenue as a percentage of service and support revenue decreased primarily as a
result of the increased costs incurred to continue our investment in providing
services and support offerings. The continued investment consists of additional
costs associated with supporting a larger installed base of products, as well as
costs to provide higher support levels to customers. Costs of service and
support revenue consist primarily of personnel-related costs incurred in
providing telephone support, consulting services, and training to customers,
costs of providing software updates and costs of education and consulting
materials.

     Gross profit from other product revenue was $4.4 million in 1998, $2.8
million in 1997 and $3.0 million in 1996, representing 29 percent of other
product revenue in 1998, 28 percent in 1997 and 29 percent in 1996. Gross profit
from other product revenue decreased 38 percent from 1997 to 1998 and 7 percent
from 1996 to 1997. Gross profit from other product revenue decreased in absolute
dollars primarily as a result of FullTime's continued focus on sales of
internally developed software products rather than third party products sold
through Qualix Direct telesales organization.

Operating Expenses

     Research and Development. Research and development expenses consist
primarily of personnel-related costs. Research and development expenses were
$25.6 million in 1998, $17.8 million in 1997 and $11.8 million in 1996,
representing 15 percent of total revenue in 1998, 15 percent in 1997 and 13
percent in 1996. Research and development expenses increased 44 percent from
1997 to 1998 and 51 percent from 1996 to 1997. The increases in research and
development expenses in absolute dollars primarily reflect increased staffing
and associated support for engineers necessary to expand and enhance our product
line. The number of research and development personnel increased from 113
employees in 1996 to 217 employees in 1998. Research and development expenses as
a percentage of total revenue increased primarily as a result of our continuing
efforts to invest in developing new products, applications and product
enhancements. We believe that research and development expenses will continue to
increase in absolute dollars as we continue to invest in developing new products
and enhancing existing products.

     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 $72.0 million in 1998, $45.6 million
in 1997 and $29.4 million in 1996, representing 43 percent of total revenue in
1998, 38 percent in 1997 and 33 percent in 1996. Sales and marketing expenses
increased 58 percent from 1997 to 1998 and 55 percent from 1996 to 1997. The
increases in sales and marketing expenses were primarily attributable to the
growth of our sales force and associated support personnel from 157 employees in
1996 to 324 employees in 1998. Sales and marketing expenses also increased from
1996 to 1998 as a result of additional marketing and promotional activities to
increase awareness of our products. We believe that sales and marketing expenses
will increase in absolute dollars as we continue to expand our sales and
marketing staff.

     General and Administrative. General and administrative expenses include
personnel and other costs of our finance, human resources, facilities,
information systems and other administrative departments. General and
administrative expenses were $15.9 million in 1998, $11.8 million in 1997 and
$9.9 million in 1996, representing 10 percent of total revenue in 1998, 10
percent in 1997 and 11 percent in 1996. General and administrative expenses
increased 35 percent from 1997 to 1998 and 19 percent from 1996 to 1997. The
decreases in general and administrative expenses as a percentage of total
revenue were attributable to leveraging general and administrative expenses over
a larger revenue base. General and administrative expenses increased at a slower

<PAGE>

rate than our rate of increase for revenue. The increases in absolute dollars of
general and administrative expenses from 1996 to 1998 were primarily
attributable to increased staffing and related costs required to manage and
support our expansion. General and administrative personnel increased from 67
employees in 1996 to 119 employees in 1998. We expect that general and
administrative expenses will increase in dollar amount as we continue to expand
our operations.

     Amortization of Intangibles. Amortization of intangibles was $1.1 million
for each of 1998, 1997 and 1996. We recorded the related intangibles following
an acquisition in the first quarter of 1996. We amortize these intangibles on a
straight-line basis over five years.

     Merger-Related Expenses. In connection with the our acquisitions of
Software Moguls, Inc. during the third quarter of 1998 and Octopus Technologies
in the third quarter of 1996, we incurred merger-related expenses of $645,000
and $595,000 respectively, consisting primarily of investment bankers',
attorneys' and accountants' fees. (See Note 5 of the Notes to the Consolidated
Financial Statements)

     In-process Research and Development. We did not incur any in-process
research and development costs during 1998 or 1997. In 1996, we incurred
in-process research and development costs of $1.8 million related to an
acquisition in the first quarter of 1996. (See Note 5 of the Notes to the
Consolidated Financial Statements)

     On January 5, 1996, we completed our 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 amount allocated to the in-process technology represented the purchased
in-process technology for two projects that had not yet reached technological
feasibility and had no alternative future use. The value of these projects was
determined by estimating the costs to develop the purchased in-process
technology into commercially viable products; estimating the resulting net cash
flows from the sale of the products resulting from the completion of the
projects reduced by the portion of the revenue attributable to core technology;
and discounting the net cash flows back to their present value.

     The nature of the efforts to develop the purchased in-process technology
into commercially viable products principally related to the completion of all
planning, designing, prototyping, verification and testing activities that are
necessary to establish that the product can be produced to meet its design
specification including function, features and technical performance
requirements. The resulting net cash flows from such products were based on the
Company's estimates of revenue, cost of sales, research and development costs,
sales and marketing costs, and income taxes from such projects.

     The estimated revenue includes average compounded annual revenue growth
rates for the projects from 1996 to 1998, and declining growth rates thereafter
through 2000. These projections were based on the our estimates of market size
and growth, expected trends in technology and the nature and expected timing of
our new product introductions. Estimated cost of sales was consistent with our
current cost of sales and future expectations for cost of sales. Sales and
marketing costs were expected to be consistent with that of our average costs in
these areas. Research and development costs as a percentage of estimated revenue
were expected to be higher than our average costs in the introduction and early
phases of product sales and then decline to the our average costs. This research
and development cost pattern is consistent with our historical experience
through product life cycles. Estimated income taxes were consistent with our
anticipated tax rate for the foreseeable future.

     We introduced the products during 1996 as anticipated. The related net cash
flows in 1996, 1997 and 1998 have been in excess of those projected. We
currently believe the aggregate net cash flows originally anticipated will be
realized and that there has been no material change in the expected return on
investment related to these products. However, we cannot guarantee that we will

<PAGE>

realize revenue from these products in amounts estimated and actual revenue
realized from these products may be significantly lower than expected in the
future.

     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. We are amortizing purchased technology and goodwill on a
straight-line basis over five years. The operating results of Innovus have been
consolidated with our operating results beginning as of the acquisition date.
Substantially all of the net assets of Innovus, Inc., our clinical research
business, were sold in September 1996 for approximately $150,000, which
approximated the carrying amount of those net assets. We have discontinued all
clinical research activities. The discontinuance did not have a significant
effect on our operating results. At December 31, 1998 and 1997, purchased
technology and goodwill, net of accumulated amortization of $3,334,000 and
$2,197,000, were $2,233,000 and $3,431,000, respectively.


Interest Income, Net

     Interest income, net, was $4.8 million in 1998. Interest income, net, was
$3.5 million in 1997 and $2.7 million in 1996. The increase in interest income
relates primarily to interest earned from the increased cash balances.


Provision for Income Taxes

     The provision for income taxes was $12.7 million in 1998, $10.0 million in
1997 and $7.6 million in 1996, with an effective rate of 41 percent in 1998, 40
percent in 1997 and 39 percent in 1996. The decrease in the effective rate from
1998 to 1997 was primarily attributable to the acquisition of Software Moguls,
Inc. which was an S-corporation for income tax purposes, and therefore, did not
record a provision for or benefit from income taxes. Rather, income tax
attributes of these losses were used by Software Moguls, Inc. shareholders. If
the losses of Software Moguls, Inc., had been reflected in our financial
statements in 1997, the effective tax rate would have been 37 percent. (See Note
8 of the Notes to the Consolidated Financial Statements). The 1997 effective tax
rate decreased from 1996 primarily as a result of nonrecurring research and
development charge in 1996 partially offset by losses of Software Moguls, Inc.,
which were not benefitted in 1997. We anticipate that the tax rate for 1999 may
increase primarily as a result of the expected statutory expiration of the
research and development credit and impact of non-deductible merger expenses.


LIQUIDITY AND CAPITAL RESOURCES

     Our cash, cash equivalents and investments totaled $126.0 million at
December 31, 1998 and represented 61 percent of total assets. Cash and cash
equivalents increased $45.0 million during 1998. Cash and cash equivalents are
highly liquid investments with original maturities of ninety days or less.
Investments consist mainly of short-term and long-term municipal and U.S. agency
securities. At December 31, 1998, we had no long-term debt and stockholders'
equity was $158.5 million.

     We have financed our operations to date primarily by cash from operations
and sales of common stock. Net cash provided by operating activities was $42.1
million in 1998. Net cash provided from operations in 1998 consisted primarily
of net income of $19.9 million plus the tax benefit from exercise of stock
options of $12.8 million, depreciation and amortization of $7.2 million and the
change in operating assets and liabilities of $9.6 million, offset by $8.4
million attributable to the change in net deferred tax assets. Net cash provided
by operating activities was $15.5 million in 1997. Net cash provided from
operations in 1997 consisted primarily of net income of $15.0 million plus the
tax benefit from stock options of $5.0 million and depreciation and amortization
of $4.5 million, offset by the change in operating assets and liabilities of
$9.0 million. Net cash provided by operating activities was $17.5 million in
1996. Net cash provided from operations in 1996 consisted primarily of net
income of $10.8 million plus the tax benefit from exercise of stock options of
$7.1 million, depreciation and amortization of $2.5 million, the write-off of
in-process research and development of $1.8 million, offset by the change in
operating assets and liabilities of $1.0 million, the change in net deferred tax
assets of $2.1 million and pooling-of-interests adjustment of $1.8 million
relating to our acquisition of FullTime. Accounts payable and accrued
liabilities increased during 1998 and 1997 because of increased purchases to
support the growth in our operations. Accrued compensation and benefits

<PAGE>

increased during 1998 and 1997 primarily as a result of the growth in the number
of employees worldwide. Accounts receivables and deferred revenue increased
during 1998 and 1997 because of increasing sales of our product licenses as well
as service and support contracts.

     Net cash used in investing activities was $8.0 million in 1998. Net cash
used in investing activities was $28.3 million in 1997 and $31.9 million in
1996. Net cash from investing activities for 1996 includes a pooling of
interests adjustment of $10.1 million relating to our acquisition of FullTime.
Net cash used in investing activities primarily reflected net purchases of
marketable securities and property and equipment. Purchases of property and
equipment increased during 1998 and 1997 to support the growth in our
operations.

     Net cash provided by financing activities was $10.7 million in 1998. Net
cash provided by financing activities was $20.0 million in 1997 and $16.8
million in 1996. Net cash from financing activities for 1996 includes a pooling
of interests adjustment of $14.8 million relating to our acquisition of
FullTime. Net cash provided by financing activities consisted primarily of
proceeds received from the issuance of our common stock.

     We believe our current cash balances and cash flow from operations, if any,
will be sufficient to meet our working capital and capital expenditure
requirements for at least the next twelve months.


YEAR 2000 COMPLIANCE

     Many currently installed computer systems and software products include
coding to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. Significant uncertainty
exists in the software industry concerning the potential effects associated with
such problems.

     We have conducted Year 2000 compliance reviews for current versions of our
products. The reviews include:

       - Assessment;
       - Implementation;
       - Validation testing; and
       - Contingency planning.

     We respond to customer concerns about our products on a case-by-case basis.
Although we have performed validation testing to ensure our products are Year
2000 compliant and believe our software products are Year 2000 compliant, our
software products may not contain all the necessary software routines and
programs for the accurate calculation, display, storage and manipulation of data
involving dates. Failures of our software products to contain all the necessary
software routines and programs for the accurate calculation, display, storage
and manipulation of data involving dates would seriously harm our business,
operating results and financial condition.

     We have tested software obtained from third parties that is incorporated
into our products and believe that such licensed software is Year 2000
compliant. Despite such testing and assurances, products incorporated into our
products may contain undetected errors or defects associated with Year 2000 date
functions. Known or unknown errors or defects in our products may result in:

       - Delay or loss of revenue;
       - Diversion of development resources;
       - Damage to our reputation; or
       - Increased service and warranty costs.

The occurrence of any of the foregoing could seriously harm our business,
operating results, or financial condition.
<PAGE>

     We do not currently have any information concerning the Year 2000
compliance status of our customers. If our current or future customers fail to
achieve Year 2000 compliance or if they divert technology expenditures to
address Year 2000 compliance problems, our business, results of operations, or
financial condition could be seriously harmed.

     We believe the software and hardware we use internally comply with Year
2000 requirements. During 1998, we replaced or upgraded much of our internal use
hardware and software. In addition, we are not aware of any material operational
issues or costs associated with preparing our internal use software and hardware
for the Year 2000. However, serious, unanticipated negative consequences,
including material costs caused by undetected errors or defects in the
technology used in our internal systems may occur. The occurrence of any of the
foregoing could seriously harm our business, operating results or financial
condition.

     We have funded our Year 2000 compliance review from operating cash flows
and have not separately accounted for these costs in the past. We will incur
additional amounts related to the Year 2000 compliance review including:

       - Administrative personnel to manage the review; and
       - Outside contractors to provide technical advice and technical support
         for our products, product engineering, and customer satisfaction.

     We have developed contingency plans to be implemented as part of our
efforts to identify and correct Year 2000 problems. Depending on the systems
affected, these plans include:

       - Accelerated replacement of affected equipment or software;
       - Short to medium-term use of backup equipment and software;
       - Increased work hours for our personnel or use of contract personnel to
         correct (on an accelerated schedule) any Year 2000 problems that arise
         or to provide manual workarounds for information systems; and
       - Other similar approaches

If we are required to implement any of these contingency plans, it could
seriously harm our business, financial condition and operating results. Our
ability to achieve Year 2000 compliance and the level of incremental costs
associated therewith, could be seriously impacted by, among other things:

       - The availability and cost of programming and testing resources;
       - Vendors' ability to modify proprietary software; and
       - Unanticipated problems identified in the ongoing compliance review.

FINANCIAL RISK MANAGEMENT

     As a global concern, we face exposure to adverse movements in foreign
currency exchange rates. These exposures may change over time as business
practices evolve and could seriously harm our financial results. All of our
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 our
products more expensive and therefore, reduce the demand for our products.
Reduced demand for our products could seriously harm our financial results.
Currently, we do not hedge against any foreign currencies and as a result, could
incur unanticipated gains or losses.

     We maintain an investment portfolio of various issuers, types and
maturities. Our investment portfolio consists of both fixed and variable rate
financial instruments. These securities are classified as available-for-sale,
and consequently, are recorded on the balance sheet at fair value with
unrealized gains or losses reported as a separate component of stockholders'
equity, net of taxes. At any time, a sharp rise in interest rates could
seriously harm the fair value of our investment portfolio. Conversely, declines
in interest rates could seriously harm interest earnings of our investment
portfolio. Currently, we do not hedge these interest rate exposures.
<PAGE>

     The table below presents principal amounts and related weighted average
interest rates by year of maturity for our investment portfolio.
<TABLE>
<CAPTION>

                                                1999     2000    2001    2002    2003   THEREAFTER   TOTAL
                                                ----     ----    ----    ----    ----   ----------   -----
<S>                                           <C>       <C>       <C>     <C>     <C>      <C>      <C>
     Municipal securities                     $22,975    8,797    --      --      --       400      $32,172
       Average interest rate                     4.92%    5.16%   --      --      --        --          5.0%

     Auction rate receipts
         & other short-term investments        $9,050    1,615    --      --      --        --      $10,665
       Average interest rate                     4.70%    6.68%   --      --      --        --          5.0%
</TABLE>


RECENT PRONOUNCEMENTS

     In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, or SFAS 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS 133 establishes new standards of accounting and reporting for
derivative instruments and hedging activities. SFAS 133 requires that all
derivatives be recognized at fair value in the statement of financial position,
and that the corresponding gains or losses be reported either in the statement
of operations or as a component of comprehensive income, depending on the type
of hedging relationship that exists. We do not currently hold derivative
instruments or engage in hedging activities.

     In July 1999, the FASB issued Statement of Financial Accounting Standards
No. 137, or SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB No. 133. SFAS 137 deferred
the effective date of SFAS 133 until the first fiscal quarter beginning after
June 15, 2000.

     In March 1998, the Accounting Standards Executive Committee, or AcSEC,
released Statement of Position 98-1, or SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires
companies to capitalize certain costs of computer software developed or obtained
for internal use, provided that those costs are not research and development.
SOP 98-1 is effective for fiscal years beginning after December 15, 1998. We are
evaluating the requirements of SOP 98-1 and the effects, if any, on our current
policies on accounting for software costs.

     In December 1998, AcSEC released Statement of Position 98-9, or SOP 98-9,
Modification of SOP 97-2, "Software Revenue Recognition," with Respect to
Certain Transactions. SOP 98-9 amends SOP 97-2 to require that an entity
recognize revenue for multiple element arrangements by means of the "residual
method" when (1) there is vendor-specific objective evidence ("VSOE") of the
fair values of all the undelivered elements that are not accounted for by means
of long-term contract accounting, (2) VSOE of fair value does not exist for one
or more of the delivered elements, and (3) all revenue recognition criteria of
SOP 97-2 (other than the requirement for VSOE of the fair value of each
delivered element) are satisfied.

     The provisions of SOP 98-9 that extend the deferral of certain paragraphs
of SOP 97-2 became effective December 15, 1998. These paragraphs of SOP 97-2 and
SOP 98-9 were effective for transactions that were entered into in fiscal years
beginning after March 15, 1999. Retroactive application is prohibited. We do not
expect the provisions of SOP 98-9 to have a significant impact on our current
revenue recognition policies.
<PAGE>

ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>

    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<S>                                                                                                           <C>
Consolidated Balance Sheets at December 31, 1998 and 1997 ................................................    37

Consolidated Statements of Income and Comprehensive Income for each of the three years in the period
     ended December 31, 1998 .............................................................................    38

Consolidated Statements of Stockholders' Equity for each of the three years in the period ended
     December 31, 1998 ...................................................................................    39

Consolidated Statements of Cash Flows for each of the three years in the period ended
     December 31, 1998 ...................................................................................    40

Notes to the Consolidated Financial Statements ...........................................................    41

Report of Independent Accountants ........................................................................    57
</TABLE>

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE

    Not applicable.

<PAGE>
<TABLE>
<CAPTION>


                              LEGATO SYSTEMS, INC.

                           CONSOLIDATED BALANCE SHEETS

                     (in thousands, except per share amount)

                                                                                             DECEMBER 31,
                                                                                     ---------------------------
                                                                                        1998              1997
                                                                                     ----------        ---------
<S>                                                                                  <C>               <C>
                                     ASSETS

Current assets:
     Cash and cash equivalents ...................................................   $   83,177        $  38,155
     Short-term investments.......................................................       31,730           38,525
     Accounts receivable, net.....................................................       39,982           29,421
     Other current assets.........................................................        6,059            4,948
     Deferred tax assets..........................................................        7,464            3,202
                                                                                     ----------        ---------
         Total current assets.....................................................      168,412          114,251
Long-term investments.............................................................       11,065           10,753
Property and equipment, net.......................................................       21,119           12,842
Intangible assets, net............................................................        2,243            3,431
Deferred tax assets - long-term...................................................        4,372              269
Other assets......................................................................          536              362
                                                                                     ----------        ---------
              Total assets........................................................   $  207,747        $ 141,908
                                                                                     ==========        =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable.............................................................   $    4,577        $   3,288
     Accrued compensation and benefits............................................       10,796            5,398
     Accrued liabilities..........................................................       11,443            3,344
     Deferred revenue.............................................................       21,879           14,373
                                                                                     ----------        ---------
         Total current liabilities................................................       48,695           26,403
Deferred tax liability............................................................          523              768
Commitments and contingencies (Note 4)
Common stock, $.0001 par value: 100,000 shares authorized and
   82,490 and 78,711 shares issued and outstanding at December 31, 1998
   and 1997, respectively.........................................................            8                8
Additional paid-in capital........................................................      115,435           91,525
Retained earnings.................................................................       43,364           23,495
Deferred stock compensation.......................................................           (4)             (22)
Accumulated other comprehensive income (loss).....................................           71              (94)
Notes receivable from sale of stock...............................................         (345)            (175)
                                                                                     ----------        ---------
         Total stockholders' equity...............................................      158,529          114,737
                                                                                     ----------        ---------
              Total liabilities and stockholders' equity..........................   $  207,747        $ 141,908
                                                                                     ==========        =========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>

                              LEGATO SYSTEMS, INC.

           CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

                      (in thousands, except per share data)


                                                                                  YEAR ENDED DECEMBER 31,
                                                                         ---------------------------------------
                                                                           1998            1997           1996
                                                                         ---------      ---------       --------
<S>                                                                     <C>             <C>             <C>
Revenue:
    Product license..................................................   $  103,828      $  68,752       $ 50,496
    Service and support..............................................       38,774         23,085         15,216
    Royalty   .......................................................       19,155         16,661         12,872
    Other products...................................................        6,150         10,001         10,336
                                                                         ---------      ---------       --------
       Total revenue.................................................      167,907        118,499         88,920
Cost of revenue:
    Product license..................................................        5,304          4,672          5,825
    Service and support..............................................       15,097          8,848          5,349
    Other products...................................................        4,392          7,167          7,289
                                                                         ---------      ---------       --------
       Total cost of revenue.........................................       24,793         20,687         18,463
                                                                         ---------      ---------       --------
Gross profit.........................................................      143,114         97,812         70,457
Operating expenses:
    Research and development.........................................       25,645         17,826         11,789
    Sales and marketing..............................................       72,017         45,594         29,410
    General and administrative.......................................       15,874         11,686          9,970
    Amortization of intangibles......................................        1,118          1,117          1,097
    Merger-related expenses..........................................          645             --            595
    In-process research and development..............................           --             --          1,849
                                                                         ---------      ---------       --------
       Total operating expenses......................................      115,299         76,223         54,710
                                                                         ---------      ---------       --------
Income from operations...............................................       27,815         21,589         15,747
Interest income, net.................................................        4,799          3,481          2,702
                                                                         ---------      ---------       --------
Income before provision for income taxes.............................       32,614         25,070         18,449
Provision for income taxes...........................................       12,745         10,004          7,635
                                                                         ---------      ---------       --------
Net income...........................................................    $  19,869      $  15,066       $ 10,814
                                                                         =========      =========       ========
Other comprehensive income, net of tax:
    Unrealized gains (losses) on securities..........................          165            457           (536)
                                                                         ---------      ----------      ---------
Comprehensive income.................................................    $  20,034      $  15,523       $ 10,278
                                                                         =========      =========       ========

Basic earnings per share.............................................    $    0.26      $    0.21       $   0.16
                                                                         =========      =========       ========
Diluted earnings per share...........................................    $    0.24      $    0.19       $   0.14
                                                                         =========      =========       ========
Shares used in basic earnings per share calculations.................       76,762         72,849         68,565
                                                                         =========      =========       ========
Shares used in diluted earnings per share calculations...............       83,074         78,886         78,215
                                                                         =========      =========       ========
</TABLE>

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

<PAGE>
<TABLE>
<CAPTION>

                              LEGATO SYSTEMS, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                 (in thousands)


                       Convertible-                                               Deferred    Accumulated      Notes
                      Preferred Stock    Common Stock     Additional               Stock         Other       Receivable
                      ---------------   --------------     Paid-in     Retained    Compen-    Comprehsive       From
                      Shares  Amount    Shares  Amount     Capital     Earnings    sation    Income (Loss)  Sale of Stock    Total
                      ------  ------    ------  ------    ----------   ---------  ---------  ------------   -------------  ---------
<S>                   <C>    <C>        <C>     <C>       <C>          <C>         <C>          <C>           <C>          <C>
Balances,
  December 31, 1995.. 3,979  $8,031     65,595  $  6      $   49,132  $   (1,073)  $   (58)     $   360       $  (169)    $  56,229
Conversion of
  preferred stock....(3,979) (8,031)     1,348     1           8,030          --        --           --            --            --
Issuance of
  common stock.......    --      --        622    --          14,950          --        --           --            --        14,950
Stock issued
  under option plans
  and warrants.......    --      --      3,177    --           1,179          --        --           --            (6)        1,173
Stock issued under
  employee stock
  purchase plan......    --      --        420    --             887          --        --           --            --           887
Tax benefit from
  exercise of
  stock options......    --      --         --    --           7,115          --        --           --                       7,115
Deferred stock
  compensation.......    --      --         --    --             163          --        18           --                         181
Unrealized loss on
  investments........    --      --         --    --              --          --        --         (536)           --          (536)
Net income...........    --      --         --    --              --      10,814        --           --                      10,814
                      ------  ------    ------  ------    ----------    --------  ---------   -----------   -------------  ---------
Balances,
  December 31, 1996..    --      --     71,162     7          81,456       9,741       (40)        (176)         (175)       90,813
Adjustment to
  conform fiscal
  year of pooled
  entity - FullTime..    --      --      3,488    (1)        (14,964)     (1,312)       --         (375)           --       (16,652)
Issuance of common
  stock..............    --      --        622    --          14,950          --        --           --            --        14,950
Stock issued under
  option plans
  and warrants.......    --      --      2,901     2           3,464          --        --           --            --         3,466
Stock issued under
  employee stock
  purchase plan......    --      --        538    --           1,649          --        --           --            --         1,649
Tax benefit from
  exercise of stock
  options............    --      --         --    --           4,970          --        --           --            --         4,970
Deferred stock
  compensation.......    --      --         --    --              --          --        18           --            --            18
Unrealized gain on
  investments........    --      --         --    --              --          --        --          457            --           457
Net income...........    --      --         --    --              --      15,066        --           --            --        15,066
                      ------  ------    ------  ------    ----------    --------  ---------   -----------   -------------  ---------
Balances,
  December 31, 1997..    --      --     78,711     8         91,525       23,495       (22)         (94)         (175)      114,737
Stock issued under
  option plans.......    --      --      3,345    --          8,913           --        --           --          (170)        8,743
Stock issued under
  employee stock
  purchase plan......    --      --        434    --          2,183           --        --           --            --         2,183
Tax benefit from
  exercise of
  stock options......    --      --         --    --         12,814           --        --           --            --        12,814
Deferred stock
  compensation.......    --      --         --    --             --           --        18           --            --            18
Unrealized gain on
  investments........    --      --         --    --             --           --        --          165            --           165
Net income...........    --      --         --    --             --       19,869        --           --            --        19,869
                      ------  ------    ------  ------    ----------    --------  ---------   -----------   -------------  ---------
Balances,
  December 31, 1998..    --   $  --     82,490  $  8      $ 115,435   $   43,364   $    (4)      $   71       $  (345)    $ 158,529
                       ====   =====     ======  =====     =========   ==========   ========      =======     =========    ==========

</TABLE>

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

<PAGE>
<TABLE>
<CAPTION>

                              LEGATO SYSTEMS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (in thousands)
                                                                                  YEAR ENDED DECEMBER 31,
                                                                         ---------------------------------------
                                                                           1998            1997           1996
                                                                         ---------      ---------       --------
<S>                                                                      <C>            <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income......................................................    $  19,869      $  15,066       $ 10,814
     Adjustments to reconcile net income to net cash provided by
         operating activities:
         Net deferred tax assets.....................................       (8,427)          (133)        (2,112)
         Depreciation and amortization...............................        7,190          4,529          2,497
         Write-off of in-process research and development............           --             --          1,849
         Provision for doubtful accounts.............................          833            628            468
         Gain on sale of available-for-sale securities...............           --           (528)          (528)
         Tax benefit from exercise of stock options..................       12,814          4,970          7,115
         Pooling-of-interests adjustment - FullTime..................           --             --         (1,783)
         Other.......................................................          204             --            163
         Changes in operating assets and liabilities:
              Accounts receivable....................................      (11,394)       (15,341)        (6,507)
              Other current assets...................................       (1,111)        (1,454)        (2,103)
              Accounts payable.......................................        1,289            546            596
              Accrued compensation and benefits......................        5,398          2,321          1,714
              Accrued liabilities....................................        7,916           (149)         1,901
              Deferred revenue.......................................        7,506          5,083          3,428
                                                                         ---------      ---------       --------
              Net cash provided by operating activities..............       42,087         15,538         17,512
CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchase of available-for-sale securities.......................      (64,491)       (73,648)       (69,183)
     Maturities of available-for-sale securities.....................       71,139         54,126         49,473
     Sales of available-for-sale securities..........................           --            828            828
     Acquisition of property and equipment...........................      (14,514)        (9,360)        (6,951)
     Payment for purchase of subsidiaries, net of cash acquired......           --             --         (5,924)
     Pooling-of-interests adjustment - FullTime......................           --             --         10,086
     Other...........................................................         (103)          (240)          (173)
                                                                         ----------     ----------      ---------
              Net cash used in investing activities..................       (7,969)       (28,294)       (21,844)
CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from issuance of common stock..........................       10,904         20,063         17,010
     Pooling-of-interests adjustment - FullTime......................           --             --        (14,836)
     Other...........................................................           --             (6)          (109)
                                                                         ---------      ----------      --------
              Net cash provided by financing activities..............       10,904         20,057          2,065
                                                                         ---------      ---------       --------
              Net increase (decrease) in cash and cash equivalents...       45,022          7,301         (2,267)
Cash and cash equivalents at beginning of period.....................       38,155         30,854         33,121
                                                                         ---------      ---------       --------
Cash and cash equivalents at end of period...........................    $  83,177      $  38,155       $ 30,854
                                                                         =========      =========       ========

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash Transaction:
     Cash paid for income taxes......................................    $      13      $   5,278       $  3,394
     Cash paid for interest..........................................           --             --             41
Non-cash transactions
     Deferred tax liability..........................................           --             41          1,568
     Unrealized gains (losses) on investments........................          165            457           (536)
     Common stock exchanged for notes receivable.....................          170             --              6

</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, licenses, markets and supports network storage
management software products for heterogeneous client/server computing
environments and large-scale enterprises. The Company's data protection
products, primarily the NetWorker family of software products, from which the
Company derives a substantial majority of its revenue, and data availability
products, primarily HA+, Octopus, Replication and Cluster products, support many
storage management server platforms and can accommodate a variety of servers,
clients, applications, databases and storage devices. The Company licenses its
products through resellers and directly to end users primarily located in North
America, Europe and Asia Pacific. The Company also licenses its source code to
original equipment manufacturers ("OEMs") in exchange for initial licensing fees
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.

     We acquired Software Moguls, Inc. in August 1998 and FullTime in April
1999, primarily for their product offerings and research and development teams.
We accounted for the acquisitions as poolings-of-interests. Accordingly, we
restated the financial statements to represent the combined financial results of
previously separate entities for all periods presented. (See Note 5)

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 remeasurement, 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 such instruments.

     Short-term and long-term investments on the balance sheet are classified as
available-for-sale and are carried at fair value, with the unrealized gains or
losses, net of tax, reported in accumulated other comprehensive income (loss).
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. Realized gains or losses were not significant in 1998. Realized gains
were $528,000 for 1997 and 1996.

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 that

<PAGE>

has been approved by the Board of Directors and is 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. (See Note 3)

Property and Equipment

     Property and equipment are stated at cost. Depreciation for property and
equipment is provided using the straight-line method over the estimated useful
lives of the respective assets, which is generally three years for computer
equipment, computer software and office furniture and three to ten years for
furniture and fixtures. Depreciation for leasehold improvements is provided
using the straight-line method over the shorter of the estimated useful lives of
the respective assets or the remaining lease term, generally seven to ten years.
Depreciation expense for 1998, 1997 and 1996 was $6,066,000, $3,422,000 and
$1,347,000, respectively.

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. To
date, the Company has not recorded any impairment charges against the value of
its intangible assets.

Revenue Recognition

     The Company's revenue is derived from primarily two sources, across many
industries: (i) product license revenue, derived primarily from product sales to
resellers and end users, including large scale enterprises and royalty revenue,
derived primarily from initial license fees and ongoing royalties from product
sales by source code OEMs; and (ii) service and support revenue, derived
primarily from providing software updates, support and education and consulting
services to end users. Other product revenue consists primarily of third-party
ancillary hardware and software products for distributed computing systems that
are resold by Qualix Direct, the telesales organization of FullTime.

     The Company adopted the provisions of Statement of Position 97-2, or SOP
97-2, Software Revenue Recognition, as amended by Statement of Position 98-4,
Deferral of the Effective Date of Certain Provisions of SOP 97-2, effective
January 1, 1998. SOP 97-2 supercedes Statement of Position 91-1, Software
Revenue Recognition, and delineates the accounting for software product and
maintenance revenue. Under SOP 97-2, the Company recognizes product revenue upon
shipment if a signed contract exists, the fee is fixed and determinable,
collection of resulting receivables is probable and product returns are
reasonably estimable, except for sales to domestic distributors, which are
recognized upon sale by the distributor to end-users. The Company has recognized
revenue from domestic distributors upon sale by the distributor to end users
since these distributors have unlimited rights of return and the Company
historically has not been able to make reasonable estimates of product returns
for these distributors. Estimated product returns are recorded upon recognition
of revenue from customers having rights of return, including exchange rights for
unsold products and product upgrades. Provisions for estimated warranty costs
and anticipated retroactive price adjustments are recorded at the time products
are shipped. In 1997 and 1996, the Company's revenue recognition policy was the
same as set forth above.

     For contracts with multiple obligations (e.g. deliverable and undeliverable
products, maintenance and other services), the Company allocates revenue to each
component of the contract based on objective evidence of its fair value, which
is specific to the Company, or for products not being sold separately, the price
established by management. The Company recognizes revenue allocated to
undelivered products when the criteria for product revenue set forth above are
met. The Company recognizes revenue from maintenance fees for ongoing customer
support and product updates ratably over the period of the maintenance contract.
Payments for maintenance fees are generally made in advance and are
non-refundable. For revenue allocated to education and consulting services, or
derived from the separate sales of these services, the Company recognizes

<PAGE>

revenue as the related services are performed. In 1997 and 1996, the Company's
revenue recognition policy for education and support services was the same as
set forth above.


     The Company recognizes product revenue from royalty payments upon receipt
of quarterly royalty reports from OEMs related to their product sales for the
previous quarter.

     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. Development
costs are capitalized beginning when a products technological feasibility has
been established and ending when the product is available for general release to
customers. Technological feasibility is reached when the product reaches the
beta stage. To date, products and enhancements have generally reached
technological feasibility and have been released for sale at substantially the
same time.

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 and Promotional Costs

     The Company expenses advertising and promotional costs as they are
incurred. Advertising expense for 1998, 1997 and 1996 was $3,104,000, $3,633,000
and $2,553,000, respectively.

Computation of Earnings Per Share

     Basic earnings per share is computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share is computed giving effect to all
dilutive potential common shares that were outstanding during the period.
Dilutive potential common equivalent shares consist of the incremental common
shares issuable upon exercise of stock options.
<PAGE>

     A reconciliation of the numerator and denominator of basic and diluted
earnings per share is provided as follows (in thousands, except per share
amounts):

<TABLE>
<CAPTION>
                                                                           1998            1997           1996
                                                                         ---------      ---------       --------

<S>                                                                      <C>            <C>             <C>
Numerator - Basic and diluted earnings per share,
     Net income......................................................    $  19,869      $  15,066       $ 10,814
                                                                         =========      =========       ========

Denominator - Basic earnings per share
     Weighted average common shares outstanding......................       76,762         72,849         68,565
                                                                         ---------      ---------       --------
     Basic earnings per share........................................    $   0.26       $    0.21       $   0.16
                                                                         ========       =========       ========

Denominator - Diluted earnings per share
     Weighted average common shares outstanding......................       76,762         72,849         68,565
Effect of dilutive securities - common stock options.................        6,312          6,037          9,650
                                                                         ---------      ---------       --------
     Weighted average common and common equivalent shares............       83,074         78,886         78,215
                                                                         ---------      ---------       --------
     Diluted earnings per share......................................    $   0.24       $    0.19       $   0.14
                                                                         ========       =========       ========

Options excluded from diluted earnings per share calculation.........          485            440            152
                                                                         =========      =========       ========
</TABLE>

     Certain shares of common stock issuable upon exercise of stock options were
excluded from the calculation of diluted net income per share because the
options' exercise price was greater than the average market price of the common
shares.


Comprehensive Income (Loss)

     The Company adopted Statement of Financial Accounting Standards No. 130, or
SFAS 130, Accounting for Comprehensive Income, during the fiscal year ended
1998. This statement establishes standards for reporting and display of
comprehensive income and its components (including revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. The Company's
unrealized gains on investments represent the only component of comprehensive
income which are excluded from net income for 1998 and prior years. The
Company's comprehensive income has been presented in the consolidated financial
statements. The tax effects allocated to the component of other comprehensive
income and accumulated other comprehensive income balances are as follows:

<TABLE>
<CAPTION>
                                                                                            TAX
                                                                         BEFORE-TAX       BENEFIT       NET OF TAX
                                                                          AMOUNT        (EXPENSE)       AMOUNT
                                                                          ------        ---------       ------
                                                                                       (IN THOUSANDS)
<S>                                                                      <C>            <C>             <C>
1998:
Unrealized gains on securities.......................................    $     275      $   (110)       $    165
                                                                         ---------      ---------       --------
Total other comprehensive income.....................................    $     275      $   (110)       $    165
                                                                         =========      =========       ========

1997:
Unrealized losses on securities......................................    $     234      $   (105)       $    129
Realized gains on securities.........................................          528          (200)            328
                                                                         ---------      ---------       --------
Total other comprehensive income (loss)..............................    $     762      $   (305)       $    457
                                                                         ==========     ========        =========

1996:
Unrealized loss on securities........................................    $    (865)     $    329        $   (536)
Realized gains on securities.........................................          528          (200)            328
Pooling adjustment...................................................         (528)          200            (328)
                                                                         ----------     --------        ---------
Total other comprehensive income (loss)..............................    $    (865)     $    329        $   (536)
                                                                         ==========     ========        =========
</TABLE>
<PAGE>

                                                                 ACCUMULATED
                                                            OTHER COMPREHENSIVE
                                                                   INCOME
                                                                   ------

Balance, December 31, 1995................................       $    360
Current period change.....................................           (536)
                                                                 ---------
Balance, December 31, 1996................................           (176)
Pooling adjustment........................................           (375)
Current period change.....................................            457
                                                                 ---------
Balance, December 31, 1997................................            (94)
Current period change.....................................            165
                                                                 --------
Balance, December 31, 1998................................       $     71
                                                                 ========


Recent Pronouncements

     In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, or SFAS 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS 133 establishes new standards of accounting and reporting for
derivative instruments and hedging activities. SFAS 133 requires that all
derivatives be recognized at fair value in the statement of financial position,
and that the corresponding gains or losses be reported either in the statement
of operations or as a component of comprehensive income, depending on the type
of hedging relationship that exists. We do not currently hold derivative
instruments or engage in hedging activities.

     In July 1999, the FASB issued Statement of Financial Accounting Standards
No. 137, or SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB No. 133. SFAS 137 deferred
the effective date of SFAS 133 until the first fiscal quarter beginning after
June 15, 2000.

     In March 1998, the Accounting Standards Executive Committee, or AcSEC,
released Statement of Position 98-1, or SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires
companies to capitalize certain costs of computer software developed or obtained
for internal use, provided that those costs are not research and development.
SOP 98-1 is effective for fiscal years beginning after December 15, 1998. We are
evaluating the requirements of SOP 98-1 and the effects, if any, on our current
policies on accounting for software costs.

     In December 1998, AcSEC released Statement of Position 98-9, or SOP 98-9,
Modification of SOP 97-2, "Software Revenue Recognition," with Respect to
Certain Transactions. SOP 98-9 amends SOP 97-2 to require that an entity
recognize revenue for multiple element arrangements by means of the "residual
method" when (1) there is vendor-specific objective evidence ("VSOE") of the
fair values of all the undelivered elements that are not accounted for by means
of long-term contract accounting, (2) VSOE of fair value does not exist for one
or more of the delivered elements, and (3) all revenue recognition criteria of
SOP 97-2 (other than the requirement for VSOE of the fair value of each
delivered element) are satisfied.

     The provisions of SOP 98-9 that extend the deferral of certain paragraphs
of SOP 97-2 became effective December 15, 1998. These paragraphs of SOP 97-2 and
SOP 98-9 were effective for transactions that were entered into in fiscal years
beginning after March 15, 1999. Retroactive application is prohibited. We do not
expect the provisions of SOP 98-9 to have a significant impact on our current
revenue recognition policies.

Reclassifications

     Certain reclassifications were made to the 1996 and 1997 consolidated
financial statements to conform to the 1998 presentation. The reclassifications
have no significant effect on previously reported financial position, results of
operations or cash flows.
<PAGE>

2.  CONSOLIDATED BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
                                                                                             DECEMBER 31,
                                                                                     ---------------------------
                                                                                        1998              1997
                                                                                     ----------        ---------
                                                                                           (IN THOUSANDS)
<S>                                                                                  <C>               <C>
Accounts receivable:
     Trade accounts receivable....................................................   $   41,810        $  30,770
     Allowance for doubtful accounts..............................................       (1,828)          (1,349)
                                                                                     -----------       ---------
                                                                                     $   39,982        $  29,421
                                                                                     ==========        =========

Property and equipment:
     Computer equipment and software..............................................   $   20,844        $  12,966
     Furniture and fixtures.......................................................        4,812            2,136
     Office equipment.............................................................        1,879            1,470
     Leasehold improvements and construction in process...........................        6,416            2,874
                                                                                     ----------        ---------
                                                                                         33,951           19,446
     Accumulated depreciation.....................................................      (12,832)          (6,604)
                                                                                     ----------        ---------
                                                                                     $   21,119        $  12,842
                                                                                     ==========        =========
</TABLE>

3.  INVESTMENTS

     The following table summarizes the fair value and unrealized gains and
losses of debt securities at December 31, 1998 and 1997. All debt securities
have been classified as available-for-sale:

<TABLE>
<CAPTION>

                                                                        GROSS           GROSS
                                                                      UNREALIZED    UNREALIZED     ESTIMATED
                                                           COST          GAINS         LOSSES      FAIR VALUE
                                                           ----          -----         ------      ----------
                                                                             (IN THOUSANDS)
<S>                                                     <C>           <C>            <C>           <C>
December 31, 1998:

    Municipal securities............................    $  31,987     $      116     $       (8)   $   32,095
    Auction rate receipts and
    other short-term investments ...................       10,690             10             --        10,700
                                                        ---------     ----------     ----------    ----------
                                                        $  42,677     $      126     $       (8)   $   42,795
                                                        =========     ==========     ===========   ==========

December 31, 1997:

    Municipal securities............................    $  37,446     $       47     $     (193)   $   37,300
    U.S. government agency securities...............        9,389             --            (11)        9,378
    Auction rate receipts...........................        2,600             --             --         2,600
                                                        ---------     ----------     ----------    ----------
                                                        $  49,435     $       47     $     (204)   $   49,278
                                                        =========     ==========     ==========    ==========
</TABLE>

     The amortized cost and estimated fair value of investments in debt
securities at December 31, 1998 and 1997, by contractual maturity, are as
follows:
<TABLE>
<CAPTION>
                                                                                                   ESTIMATED
                                                                                    COST          FAIR VALUE
                                                                                    ----          ----------
                                                                                       (IN THOUSANDS)
<S>                                                                             <C>              <C>
December 31, 1998:

    Due in 1 year or less..................................................     $     31,659     $     31,730
    Due in 1-5 years.......................................................           10,618           10,665
    Due in more than 5 years...............................................              400              400
                                                                                ------------     ------------
    Total investment in debt securities....................................     $     42,677     $     42,795
                                                                                ============     ============
<PAGE>

December 31, 1997:

    Due in 1 year or less..................................................     $     38,577     $     38,525
    Due in 1-5 years.......................................................            9,058            8,953
    Due in more than 5 years...............................................            1,800            1,800
                                                                                ------------     ------------
    Total investment in debt securities....................................     $     49,435     $     49,278
                                                                                ============     ============
</TABLE>

4.  COMMITMENTS AND CONTINGENCIES

     The Company leases its operating facilities under non-cancelable operating
leases that expire at various dates through February 2007. Minimum lease
commitments at December 31, 1998 were as follows (in thousands):

             1999                                      $   5,129
             2000                                          4,701
             2001                                          4,442
             2002                                          4,288
             2003 and thereafter                          16,507
                                                       ---------
             Total minimum lease commitments           $  35,067
                                                       =========

     Rent expense for 1998, 1997 and 1996 was $5,650,000, $3,519,000 and
$2,387,000, respectively.

       The Company is engaged in certain legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of these actions at this time, management
believes that any liabilities resulting from such proceedings, or claims which
are pending or known to be threatened, will not have a material adverse effect
on the Company's financial position or results of operations.

5.  ACQUISITIONS

     Unless otherwise stated, for acquisitions accounted for under the
pooling-of-interests method, the Company restated the accompanying financial
statements and financial data to represent the combined financial results of the
previously separate entities for all periods presented. No significant
adjustments were required to conform the accounting policies of the acquired
companies. For acquisitions accounted for under the purchase method, the
Company's consolidated results of operations include the operating results of
the acquired companies from their acquisition dates. Acquired assets and
liabilities were recorded at their estimated fair values at the dates of
acquisition, and the aggregate purchase price plus costs directly attributable
to the completion of acquisitions have been allocated to the assets and
liabilities acquired.

     Qualix Group, Inc. On April 19, 1999, the Company completed the merger with
Qualix Group, Inc. (dba FullTime Software, Inc.) ("FullTime"),a developer of
distributed, enterprise-wide, cross-platform, adaptive computing solutions that
enable customers to proactively manage application service level availability.
The agreement provides for the issuance of 3,442,000 shares of the Company's
common stock in exchange for all the common stock and options of FullTime.

     The Company's financial statements for 1998 and 1997 have been combined
with those of FullTime for 1998 and 1997. However, the Company's statements of
income and comprehensive income, cashflows and stockholders' equity for the year
ended December 31, 1996 have been combined with FullTime's statements of income
and comprehensive income, cashflows and stockholders' equity for the fiscal year
ended June 30, 1997. Therefore, FullTime's results of operations for the six
months ended June 30, 1997 are included in the accompanying statements of income
and comprehensive income, cashflows and stockholders' equity for 1997 and 1996.
Adjustments have been made in the statement of cashflows for 1996 and the
statement of stockholders' equity for 1997 to eliminate the impact of including
the results of operations of FullTime for the six-month period ended June 30,
1997 in both 1996 and 1997. FullTime's revenue and net income for the six-month
period ended June 30, 1997 were $17.1 million and $2.0 million, respectively.

     Software Moguls, Inc. In August 1998, the Company issued 498,998 shares of
common stock in exchange for all the outstanding shares of Software Moguls,
Inc., a developer of advanced backup-retrieval products for the Windows NT and
UNIX environments. The Company accounted for the combination as a pooling of
interests.
<PAGE>

     Octopus Technologies, Inc. In August 1996, FullTime acquired Octopus by
issuing 545,769 shares of the Company's common stock in exchange for all of the
outstanding common stock and preferred stock of Octopus. FullTime also assumed
and exchanged all options to purchase Octopus stock for options to purchase an
aggregate of 42,214 shares of the Company's common stock with an average
exercise price of $9.21 per share. The merger was accounted for as a
pooling-of-interests. Octopus develops, markets and supports real-time data
protection software throughout the United States and internationally. The
separate results of operations of Octopus prior to its combination with FullTime
were insignificant.

     The table below presents the separate results of operations for Software
Moguls and FullTime for the periods prior to the combination. The Company's
results of operations include Software Moguls and FullTime since the
transaction:
<TABLE>
<CAPTION>

                                                                                  YEAR ENDED DECEMBER 31,
                                                                           -----------------------------------
                                                                           1998            1997           1996
                                                                           ----            ----           ----
                                                                                      (in thousands)

<S>                                                                     <C>             <C>             <C>
Revenue:
     Legato Systems, Inc.............................................   $  142,233      $  81,834       $ 54,249
     FullTime........................................................       24,729         34,614         32,146
     Software Moguls.................................................          945          2,051          2,525
                                                                        ----------      ---------       --------
         Total.......................................................   $  167,907     $  118,499       $ 88,920
                                                                        ==========     ==========       ========

Net income (loss):
     Legato Systems, Inc.............................................   $   28,111      $  15,739       $  8,530
     FullTime........................................................      (11,643)         1,376          2,707
     Software Moguls.................................................         (403)        (1,646)           302
                                                                        -----------     ----------      --------
         Total.......................................................       16,065         15,469         11,539
         Adjustment to reflect elimination of valuation allowance....        3,804           (403)          (725)
                                                                        ----------      ----------      ---------
         Net income..................................................   $   19,869      $  15,066       $ 10,814
                                                                        ==========      =========       ========
</TABLE>


     Approximately $595,000 of costs directly attributable to the merger,
primarily professional fees associated with investment bankers, attorneys and
accountants were incurred by FullTime in conjunction with the acquisition of
Octopus.

     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 amount allocated to the in-process technology represented the purchased
in-process technology for two projects that had not yet reached technological
feasibility and had no alternative future use. The value of these projects was
determined by estimating the costs to develop the purchased in-process
technology into commercially viable products; estimating the resulting net cash
flows from the sale of the products resulting from the completion of the
projects reduced by the portion of the revenue attributable to core technology;
and discounting the net cash flows back to their present value.

     The nature of the efforts to develop the purchased in-process technology
into commercially viable products principally related to the completion of all
planning, designing, prototyping, verification and testing activities that are
necessary to establish that the product can be produced to meet its design
specification including function, features and technical performance
requirements. The resulting net cash flows from such products were based on the

<PAGE>

Company's estimates of revenue, cost of sales, research and development costs,
sales and marketing costs, and income taxes from such projects.

     The estimated revenue includes average compounded annual revenue growth
rates for the projects from 1996 to 1998, and declining growth rates thereafter
through 2000. These projections were based on the Company's estimates of market
size and growth, expected trends in technology and the nature and expected
timing of new product introductions by the Company. Estimated cost of sales was
consistent with the Company's current cost of sales and future expectations for
cost of sales. Sales and marketing costs were expected to be consistent with
that of the Company's average costs in these areas. Research and development
costs as a percentage of estimate revenue were expected to be higher than the
Company's average costs in the introduction and early phases of product sales
and then decline to the Company's average costs. This research and development
cost pattern is consistent with the Company's historical experience through
product life cycles. Estimated income taxes were consistent with the Company's
anticipated tax rate for the foreseeable future.

     The Company introduced the products during 1996 as anticipated. The related
net cash flows in 1996, 1997 and 1998 have been in excess of those projected.
The Company currently believes the aggregate net cash flows originally
anticipated will be realized and that there has been no material change in the
expected return on investment related to these products. However, we cannot
guarantee that the Company will realize revenue from these products in amounts
estimated and actual revenue realized from these products may be significantly
lower than expected in the future.

     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 arose 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
discontinuance did not have a significant effect on the operating results of the
Company. At December 31, 1998 and 1997, purchased technology and goodwill, net
of accumulated amortization of $3,334,000 and $2,197,000, were $2,233,000 and
$3,431,000, respectively.

6.  STOCKHOLDERS' EQUITY

Initial Public Offeriing

     In February 1997, FullTime completed an initial public offering and issued
622,000 shares of common stock to the public at a price of approximately $24.00.
As a result of the offering, FullTime received $14,950,000, net of underwriting
discounts, commissions, offering costs and expenses payable by FullTime.
Simultaneously, all outstanding preferred shares of FullTime were automatically
converted into common stock.

Stock Splits

     The Company effected two-for-one splits of its common stock (in the form of
stock dividends) on July 5, 1996 and April 17, 1998. These stock splits have
been retroactively reflected in the accompanying Consolidated Financial
Statements.

Preferred Stock

     The Company is authorized to issue 5,000,000 shares of preferred stock,
none of which is 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.
<PAGE>

Stockholder Rights Plan

     In May 1997, the Company adopted a stockholder rights plan (the "Rights
Plan") in which preferred stock rights were distributed as a rights dividend at
a rate of one right for each share of common stock held as of the close of
business on June 23, 1997. The Rights Plan is designed to deter coercive or
unfair takeover tactics and to prevent an acquirer from gaining control of the
Company without offering a fair price in the event the Company is confronted in
the future with coercive or unfair takeover tactics. The rights expire May 23,
2007.

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 and became effective on July 5, 1995. Approximately
17,051,200 shares of common stock were authorized for issuance under the 1995
Plan. The share reserve automatically increases 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, at 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 96,000 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 96,000 share
option grant on the date such individual joins the Board, provided such
individual has not been previously employed by 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 24,000 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, 1998, 1997 and 1996, none of
the shares outstanding was subject to repurchase by the Company. Upon exercise,
approximately 373,000, 1,989,000 and 4,070,000 option shares under grant were
subject to repurchase by the Company at December 31, 1998, 1997 and 1996,
respectively.
<PAGE>

     The following is a summary of option activity:
<TABLE>
<CAPTION>

                                                    NUMBER           WEIGHTED                    OPTIONS
                                                      OF           AVERAGE PRICE                  PRICE
                                                    SHARES           PER SHARE                  PER SHARE
                                                    ------           ---------                  ---------
                                                (IN THOUSANDS)

<S>                                                   <C>            <C>                    <C>          <C>
    Outstanding at December 31, 1995                  11,375         $   0.70               $  0.02 -  $  4.69
       Options granted and assumed                     2,907         $   5.02               $  2.96 -  $  11.13
       Options exercised                              (3,100)        $   0.34               $  0.02 -  $  4.69
       Options canceled                                 (600)        $   2.19               $  0.19 -  $  11.13
                                                   ---------
    Outstanding at December 31, 1996                  10,582         $   1.92               $  0.03 -  $  11.13
       Options granted and assumed                     5,221         $   6.72               $  3.04 -  $  11.66
       Options exercised                              (2,839)        $   0.82               $  0.03 -  $  6.00
       Options canceled                               (1,881)        $   5.32               $  0.19 -  $  11.66
                                                   ---------
    Outstanding at December 31, 1997                  11,083         $   3.87               $  0.03 -  $  11.66
       Options granted and assumed                     4,039         $  12.86               $ 10.28 -  $  28.57
       Options exercised                              (3,345)        $   2.55               $  0.03 -  $  10.25
       Options canceled                               (1,058)        $   5.88               $  0.44 -  $  26.22
                                                   ---------
    Outstanding at December 31, 1998                  10,719         $   7.49               $  0.03 -  $  28.57
                                                   =========
</TABLE>


     At December 31, 1998, approximately 4,702,000 shares of common stock
remained available for grant under the 1995 Plan. At December 31, 1998, 1997 and
1996, approximately 3,947,000, 3,484,000 and 3,461,000 options were exercisable
at weighted average exercise price per share of $3.42, $1.43 and $0.57,
respectively. Approximately 7,526,000 shares of common stock were reserved for
future issuance as of December 31, 1998.

     The options outstanding and currently exercisable by exercise price at
December 31, 1998 are as follows:


                                 OPTIONS OUTSTANDING
                        ----------------------------------------
                                       WEIGHTED
                                        AVERAGE         WEIGHTED
                                      REMAINING         AVERAGE
         EXERCISE         NUMBER      CONTRACTUAL       EXERCISE
          PRICES        OUTSTANDING      LIFE            PRICE
         --------       -----------   -----------       --------
                        (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

    $ 0.03  -  $ 0.19           355       6.81         $   0.18
    $ 0.44  -  $ 0.78         1,818       7.42         $   0.73
    $ 1.41  -  $ 1.88           233       8.20         $   1.63
    $ 2.38  -  $ 5.94         2,990       7.64         $   4.57
    $ 6.00  -  $ 9.72         1,755       8.78         $   8.32
    $10.25  -  $10.85           234       8.98         $  10.51
    $11.00  -  $11.27         1,868       9.07         $  11.25
    $11.66  -  $28.57         1,466       9.47         $  18.37
                      -------------
                             10,719
                      =============





                                   OPTIONS EXERCISABLE
                             -------------------------------
                                                  WEIGHTED
                                                  AVERAGE
          EXERCISE               NUMBER           EXERCISE
           PRICES              EXERCISABLE          PRICE
          --------             -----------        ---------
                          (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

     $ 0.03  -  $ 0.19                 299        $   0.13
     $ 0.44  -  $ 0.78               1,389        $   0.70
     $ 1.41  -  $ 1.88                 167        $   1.67
     $ 2.38  -  $ 5.94               1,435        $   4.01
     $ 6.00  -  $ 9.72                 323        $   8.17
     $10.25  -  $10.85                  28        $  10.43
     $11.00  -  $11.27                 300        $  11.27
     $11.66  -  $28.57                   6        $  19.30
                                ----------
                                     3,947
                                ==========



     The Company has elected to continue to follow the provisions of Accounting
Principles Board Opinion 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, or SFAS 123, Accounting for
Stock-Based Compensation. Accordingly, no compensation cost has been recognized
for the options granted under the 1995 Plan. The fair value of the Company's
stock options was estimated using a Black-Scholes option pricing model. The
Black-Scholes option pricing model was developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, the Black-Scholes model requires the input of highly
subjective assumptions including the expected stock price volatility. Since the
Company's stock options granted to employees have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's

<PAGE>

opinion, the existing models do not necessarily provide a reasonable single
measure of the fair value of its stock options. The fair value of each option
grant is estimated on the date of grant using a type of Black-Scholes option
pricing model with the following assumptions used for grants:
<TABLE>
<CAPTION>

                                                                           1998            1997           1996
                                                                         ---------      ---------       --------
<S>                                                                         <C>             <C>            <C>
     Expected volatility.............................................       0.848           0.724          0.572
     Weighted-average risk-free interest rate........................        5.22%           6.14%          6.01%
     Expected life (from vesting date)...............................       1 year         1 year         1 year
     Expected dividends..............................................           --             --             --
</TABLE>

     Based on the above assumptions, the aggregate fair value and weighted
average fair value per share of options granted in 1998, 1997 and 1996 were
$30,464,000, $18,475,000 and $12,645,000, and $7.32, $3.48 and $2.63,
respectively.

Employee Stock Purchase Plan

     The Company maintains an Employee Stock Purchase Plan (the "Purchase Plan")
under which 3,200,000 shares of common stock are reserved for 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 4,000 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 into the
applicable offering period or the last day of the applicable purchase period,
whichever is lower. For the year ended December 31, 1998, 1997 and 1996,
434,000, 538,000 and 420,000 shares were issued under the plan at weighted
average purchase price of $7.45, $7.46 and $5.93, respectively. At December 31,
1998, 1,858,000 shares were reserved for future issuance under the plan.

     Under SFAS 123, compensation cost is also recognized for the fair value of
employee's purchase rights under the Employee Stock Purchase Plan, which was
estimated using the following assumptions for 1998, 1997 and 1996, respectively:
<TABLE>
<CAPTION>

                                                                           1998            1997           1996
                                                                         ---------      ---------       --------
<S>                                                                         <C>             <C>            <C>
     Expected volatility.............................................       0.848           0.724          0.645
     Weighted-average risk-free interest rate........................        5.23%           5.88%          5.86%
     Expected life...................................................    6 months        6 months       6 months
     Expected dividends..............................................          --              --             --
</TABLE>

     Based on the above assumptions, the aggregate fair value and weighted
average fair value per share of those purchase rights granted in 1998, 1997 and
1996 was $2,099,000, $2,557,000 and $335,000, and $3.75, $3.65 and $3.57,
respectively.
<PAGE>

Pro Forma Stock Compensation Cost

     For pro forma purposes, had compensation cost for the 1995 Plan and the
Purchase Plan been determined based on the fair value at the grant date for
awards from 1995 through 1998 consistent with the provisions of SFAS No. 123,
the Company's net income, basic and diluted earnings per share for 1998, 1997
and 1996 would have been as follows:

<TABLE>
<CAPTION>
                                                                           1998            1997           1996
                                                                         ---------      ---------       --------
                                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)

<S>                                                                      <C>            <C>             <C>
     Net income - as reported........................................    $  19,869      $  15,066       $ 10,814
                                                                         =========      =========       ========
     Net income - pro forma..........................................    $   8,382      $  10,751       $  8,587
                                                                         =========      =========       ========
     Basic earnings per share - as reported..........................    $    0.26       $   0.21       $   0.16
                                                                         =========      =========       ========
     Basic earnings per share - pro forma............................    $    0.11       $   0.15       $   0.13
                                                                         =========      =========       ========
     Diluted earnings per share - as reported........................    $    0.24       $   0.19       $   0.14
                                                                         =========      =========       ========
     Diluted earnings per share - pro forma..........................    $    0.10       $   0.14       $   0.11
                                                                         =========      =========       ========
</TABLE>

     As the provisions of SFAS 123 are only applied to stock options granted
after January 1, 1995 in the above pro forma amounts, the impact of pro forma
stock compensation cost will likely continue to increase as the vesting period
for the Company's options and the period over which the stock compensation is
charged to expense is generally four years.

7.  EMPLOYEE BENEFIT PLANS

Profit Sharing Plan

     The Company has a 401(k) Profit Sharing Plan (the Plan) covering all of its
employees. Under the Plan, participating employees may elect to contribute up to
15 percent of their eligible compensation, subject to certain limitations. The
Company may make contributions to the Plan at the discretion of the Board of
Directors. The Company contributed $662,000 and $260,000 to the Plan in 1998 and
1997, respectively. No contributions were made to the Plan in 1996.

8.  INCOME TAXES

     The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
                                                                           1998            1997           1996
                                                                         ---------      ---------       --------
                                                                                      (IN THOUSANDS)
<S>                                                                      <C>            <C>             <C>
Current:
     Federal (net of utilization of net operating loss
          carryforward of $1,335,000 in 1996)........................    $  16,026      $   7,696       $  5,898
     State (net of utilization of net operating loss
          carryforward of $190,000 in 1996)..........................        4,111          2,041          1,881
     Foreign.........................................................        1,035            400            443
                                                                         ---------      ---------       --------
                                                                            21,172         10,137          8,222
Deferred:
     Federal.........................................................       (7,649)           154           (172)
     State...........................................................         (464)            27           (101)
     Foreign.........................................................         (314)          (314)          (314)
                                                                         ---------      ---------       ---------
                                                                            (8,427)          (133)          (587)
                                                                         ----------     ---------       --------

                                                                         $  12,745      $  10,004       $  7,635
                                                                         =========      =========       ========

</TABLE>

 In 1998, income before provision for income taxes consisted of $31,220,000 of
income from U.S. operations and $1,394,000 of income from foreign operations. In
1997, income before provision for income taxes consisted of $24,864,000 of
income from U.S. operations and $206,000 of income from foreign operations. In
1996, income before provision for income taxes consisted of $20,646,000 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 1998, 1997 and 1996 by $12,814,000, $4,970,000 and
$7,115,000, respectively. Such benefit was recorded to additional paid-in
capital.
<PAGE>

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

                                                                           1998            1997           1996
                                                                         ---------      ---------       --------

<S>                                                                         <C>             <C>            <C>
     Statutory federal income tax rate...............................       35.0%           35.0%          35.0%
     State income taxes, net of federal benefit......................        6.8             5.2            5.6
     Tax exempt interest income......................................       (1.8)           (2.7)          (2.8)
     Research and experimental credit................................       (1.1)           (1.5)          (0.7)
     Software Moguls, Inc. losses not benefited......................        0.1             2.4            --
     Other...........................................................        0.1             1.6            0.4
                                                                         -------        --------        --------
         Subtotal....................................................       39.1%           40.0%          37.5%
     In-process research and development.............................          --             --            3.9
                                                                         --------       --------        -------
         Effective tax rate..........................................       39.1%           40.0%          41.4%
                                                                         =======        ========        =======
</TABLE>


     As a result of the Company's acquisition of Software Moguls, Inc. in August
1998, accounted for as a pooling-of-interests, additional tax provisions were
not required since Software Moguls, Inc. was a non-taxable S-corporation prior
to the acquisition. On a pro forma basis, the tax impact of the acquisition on
the Company's 1998 and 1996 results of operations was not material. On a pro
forma basis, the tax impact of the acquisition would have increased the
Company's 1997 net income by approximately $609,000 as a result of a net loss of
$1.6 million for Software Moguls, Inc., assuming an effective tax rate of 37
percent. The pro forma basic and diluted net income per share would have been
$0.21 and $0.20, respectively for 1997.

     At December 31, 1998, as a result of the Company's acquisition of FullTime,
the Company had federal and state net operating loss carryforwards of
approximately $11,600,000 and $4,300,000 available to reduce future federal and
state taxable income, respectively. The federal and state carryforwards begin to
expire in 2001 and 2003, respectively. The Company has federal research and
experimentation credits of $726,000 which expire beginning 2018, and minimum tax
credit carryforwards of $39,000 which do not expire. The extent to which the
loss and credit carryforwards can be used to offset future taxable income or
taxes are limited under Section 382 of the Internal Revenue Code and applicable
state tax law. An adjustment to recognize the benefit of FullTime's net
operating loss in 1998 has been made to these consolidated financial statements
resulting in a decrease in the provision for income taxes of $3,804,000 for
1998. Adjustments have been made to eliminate the recognition of the benefit of
net operating loss carryforwards in the consolidated financial statements
resulting in increases in the provision for income taxes of $403,000 and
$337,000 for 1997 and 1996, respectively.

     Prior to the acquisition, FullTime provided a valuation allowance for its
net deferred tax assets related primarily to loss carryforwards generated since
inception in 1990. Upon acquisition of FullTime, the Company determined that
estimated combined taxable income is sufficient to conclude that such net
deferred tax assets of FullTime would be realized. Accordingly, the valuation
allowance was eliminated.

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

                                                                                             DECEMBER 31,
                                                                                     ---------------------------
                                                                                        1998              1997
                                                                                     ----------        ---------
                                                                                            (IN THOUSANDS)
<S>                                                                                  <C>               <C>
     Deferred tax assets:
         Allowances, accrued liabilities and other................................   $    3,247        $   1,574
         Accrued compensation and benefits........................................          896              360
         State taxes..............................................................          356              567
         Net operating loss and credit carryforwards..............................        4,372               --
         Intangible asset - purchased technology..................................          346              269
         Deferred revenue.........................................................        2,722              873
                                                                                     ----------        ---------
                                                                                         11,939            3,643
     Deferred tax liabilities:
         Intangible asset - purchased technology..................................         (626)            (940)
                                                                                     ----------        ---------

     Net deferred tax asset.......................................................   $   11,313        $   2,703
                                                                                     ==========        =========
</TABLE>
<PAGE>

     The noncurrent portion of the Company's deferred tax assets was $4,372,000
and $1,482,000 at 1998 and 1997, respectively.


9.  INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION

     The Company has adopted the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 131, or SFAS 131, Disclosures
about Segments of an Enterprise and Related Information, effective for fiscal
years beginning after December 31, 1997. SFAS 131 supercedes Statement of
Financial Accounting Standards, or SFAS 14, Financial Reporting for Segments of
a Business Enterprise. SFAS 131 changes current practice under SFAS 14 by
establishing a new framework on which to base segment reporting and also
requires interim reporting of segment information.

     Management uses one measurement of profitability for its business. The
Company's software products and related services are developed and marketed to
support heterogeneous client/server computing environments and large scale
enterprises. The Company markets its products and related services to customers
in the United States, Canada, Europe and Asia Pacific.

Revenue and long-lived-asset information by geographic area as of and for the
year ended:
<TABLE>
<CAPTION>

                                                                                                  LONG-LIVED
                                                                                   REVENUE          ASSETS
                                                                                   -------          ------
                                                                                       (IN THOUSANDS)
<S>                                                                             <C>              <C>
December 31, 1998:

    United States..........................................................     $    119,124     $     18,390
    International..........................................................           48,783            4,972
                                                                                ------------     ------------
    Total..................................................................     $    167,907     $     23,362
                                                                                ============     ============

December 31, 1997:

    United States..........................................................     $     90,826     $     11,200
    International..........................................................           27,673            5,073
                                                                                ------------     ------------
    Total..................................................................     $    118,499     $     16,273
                                                                                ============     ============

December 31, 1996:

    United States..........................................................     $     71,899     $      7,103
    International..........................................................           17,021            5,053
                                                                                ------------     ------------
    Total..................................................................     $     88,920     $     12,156
                                                                                ============     ============
</TABLE>

     No one customer accounted for more than 10 percent of the Company's total
revenue for 1998, 1997 and 1996.

10.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>

                                                             FIRST       SECOND           THIRD        FOURTH
                                                           QUARTER      QUARTER        QUARTER         QUARTER
                                                           -------      -------        -------         -------
                                                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<S>                                                        <C>          <C>            <C>           <C>
1998:

Total revenue.........................................     $ 34,385     $   39,257     $   44,493    $   49,772
Gross profit..........................................       29,207         32,968         37,926        43,013
Net income............................................        3,118          3,566          6,102         7,083
Basic earnings per share..............................     $   0.04     $     0.05     $     0.08    $     0.09
Diluted earnings per share............................     $   0.04     $     0.04     $     0.07    $     0.08

<PAGE>

1997:

Total revenue.........................................     $ 25,761     $   27,148     $   30,213    $   35,377
Gross profit..........................................       20,666         22,059         25,355        29,732
Net income............................................        3,572          3,665          4,293         3,536
Basic earnings per share..............................     $   0.05     $     0.05     $     0.06    $     0.05
Diluted earnings per share............................     $   0.05     $     0.05     $     0.05    $     0.04
</TABLE>

11.  SUBSEQUENT EVENTS

         On August 13, 1999, the Company effected a two-for-one stock split (in
the form of a stock dividend). This stock split has been retroactively reflected
in the accompanying Consolidated Financial Statements.

12.  SUBSEQUENT EVENTS (UNAUDITED)

         On April 1, 1999, the Company completed the acquisition of Intelliguard
Software, Inc. and O.R.P., Inc. (collectively "Intelliguard"), developers of
standards-based storage management solutions for storage area networks. The
Company issued 1,440,000 shares of its common stock with a fair market value of
$42.4 million, provided cash consideration of $9.1 million for all of the
outstanding stock of Intelliguard and incurred transaction costs consisting
primarily of professional fees of $3.9 million, resulting in a total purchase
price of $55.4 million.

         On July 30, 1999, the Company completed the acquisition of Vinca
Corporation ("Vinca"), a developer in high availability and data protection
software. The Company issued approximately 1,531,000 shares of its common stock
with a fair market value of $54.3 million, exchanged options to purchase 589,580
shares of the Company's common stock with a fair market value of $17.6 million
and provided cash consideration of $18.8 million for all of the outstanding
stock and options of Vinca. In connection with the acquisition, the Company
incurred transaction costs consisting primarily of professional fees of $1.0
million, resulting in a total purchase price of $91.7 million.

         On November 18, 1999, the Company entered into a definitive agreement
to acquire Ontrack Data International, Inc. ("Ontrack"), a developer of data
recovery software and a provider of storage service solutions. The agreement
provides for the issuance of common stock and cash, valued at approximately $134
million, in exchange for all the common stock and options of Ontrack. The
transaction will be accounted for as a purchase business combination, and is
expected to close in late January 2000, subject to regulatory and shareholder
approval.
<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, based upon our audits and the report of other auditors, the
consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Legato Systems, Inc
and its subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31,1998, in conformity with generally accepted accounting principles.
In addition, in our opinion the financial statement schedule listed in the index
under Item 14(a)(2) presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and the financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We did not audit the financial statements of
Qualix Group, Inc, a wholly-owned subsidiary, which statements reflect total
revenues of approximately $31.1 million for the year ended June 30, 1997 and are
included in the Legato Systems, Inc consolidated financial statements for the
year ended December 31, 1996. The statements of Qualix Group, Inc. were audited
by other auditors whose report thereon has been furnished to us, and our opinion
expressed herein for the year ended December 31, 1996, insofar as it relates to
the amounts included for Qualix Group Inc is based solely on the report of the
other auditors. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits and the report of other auditors provide a reasonable
basis for the opinion expressed above.



PricewaterhouseCoopers LLP

San Jose, California
January 18, 1999, except as to note 5 which is as of April 19, 1999, note 11
which is as of August 13, 1999 and the pooling of interests with Qualix Group,
Inc. which is as of November 30, 1999.

<PAGE>

                          INDEPENDENT AUDITORS' REPORT



Qualix Group Inc.:

We have audited the consolidated statements of income, stockholders' equity, and
cash flows of Qualix Group for the year ended June 30, 1997 (none of which are
presented herein). Our audit also included the consolidated financial statement
schedule of Qualix Group Inc. for the year ended June 30, 1997. These
consolidated financial statements and consolidated financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and consolidated
financial statement schedule based on our audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, such 1997 consolidated financial statements present fairly, in
all material respects, the results of Qualix Group Inc. operations and cash
flows for the year ended June 30, 1997 in conformity with generally accepted
accounting principles. Also, in our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.


DELOITTE & TOUCHE LLP


July 24, 1997
San Jose, California

<PAGE>

                                    PART III


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 our definitive Proxy
Statement to be filed pursuant to Regulation 14A of the Securities Exchange Act
of 1934, as amended, for our Annual Meeting of Stockholders to be held on May
20, 1999 (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,
1998. For information regarding our executive officers, see the information
appearing under the caption "Executive Officers of the Registrant" in Part I,
Item 4a of this Report on Form 10K.


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>

                                     PART IV


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.

(a) (2)  FINANCIAL STATEMENT SCHEDULE

     Schedule II - Valuation and Qualifying Accounts is filed on page 63 of this
Report on Form 10-K/A.

     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 reports with respect to the above listed
financial statements and financial statement schedule listed in Items 14 (a) (1)
and 14 (a) (2), are filed on page 57 and page 58 of this Report on Form 10-K/A.

(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.

2.3    (6)      Agreement and Plan of Reorganization, dated as of July 30,
                1998, by and among Legato Systems, Inc., Aspen Acquisition
                Corp., Software Moguls, Inc., Sunil Khadilkar, Louis C. Cole and
                the Undersigned Stockholders.

2.4    (10)     Agreement and Plan of Reorganization, dated October 25, 1998,
                by and among Legato Systems, Inc., Hat Acquisition Corp. and
                Qualix Group, Inc.

2.5    (11)     Amendment No. 1 to the Agreement and Plan of Reorganization ,
                dated October 25, 1998, by and among Legato Systems, Inc., Hat
                Acquisition Corp. and Qualix Group, Inc., dated February 9,
                1999.

3.1    (6) (9)  Amended and Restated Certificate of Incorporation of the
                Registrant, as amended to date

3.2    (7)      Amended and Restated Bylaws of the Registrant adopted on
                May 23, 1997

3.3    (8)      Form of Certificate of Designation filed in connection with
                Rights Agreement, dated May 23, 1997

4.7    (8)      Rights Agreement, dated May 23, 1997 between the Company and
                Harris Trust and Savings Bank, including the Certificate of
                Designation of Series A Junior Participating Preferred Stock,
                Form of Right Certificate and Summary of Rights to Purchase
                Preferred Shares attached thereto as Exhibit A, B and C,
                respectively.

4.8    (6)      Registration Rights Agreement, dated July 30, 1998, by and
                between Legato Systems, Inc., a Delaware corporation and the
                Stockholders of Software Moguls, Inc.

4.9    (6)      Affiliates Agreement, dated July 30, 1998, between Legato
                Systems, Inc. a Delaware corporation and the Stockholders of
                Software Moguls, Inc.

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

10.3   (1)      The Registrant's 1995 Stock Option/Stock Issuance Plan, as
                amended to date

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

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, 1995, 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, and Legato Systems,
                Inc., a Delaware corporation, regarding the space located at
                3210 Porter Drive, Palo Alto, California

21.1            Subsidiaries of the Registrant

23.1            Consent of PricewaterhouseCoopers LLP, Independent Accountants

23.2            Consent of Deloitte & Touche LLP, Independent Accountants

27.1            Financial Data Schedule
27.2            Financial Data Schedule
27.3            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 Registration Statement on
     Form S-3, filed December 15, 1998 (File No. 333-64693).

(7)  Incorporated by reference to the registrant's Current Report on Form 8-K,
     dated June 6, 1997.

(8)  Incorporated by reference to the registrant's Form 8-A, dated May 30, 1997.

(9)  Incorporated by reference to the registrant's  Registration Statement on
     Form S-8, filed November 10, 1998 (File No. 333-67031).

(10) Incorporated by reference to the registrant's Current Report on Form 8-K,
     dated October 25, 1998.

(11) Incorporated by reference to the registrant's Registration Statement on
     Form S-4, filed on March 15, 1999 (File No. 333-74433).
<PAGE>

(b)      REPORTS ON FORM 8-K

         On October 25, 1998, the Registrant filed a report on Form 8-K in
connection with the Registrant's proposed acquisition of Qualix Group, Inc. and
also filed a Report on Form 8-K/A on December 14, 1998, amending the former
filing to include certain financial information related to the proposed
acquisition.

(c)      EXHIBITS

See (a) (3) above.

(d)      FINANCIAL STATEMENT SCHEDULE

See (a) (2) above.
<PAGE>
<TABLE>
<CAPTION>

                                   SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS

                                 (in thousands)


                                              BALANCE AT    CHARGED TO                                  BALANCE AT
                                             BEGINNING OF    COSTS AND                     POOLING        END OF
DESCRIPTION                                     PERIOD       EXPENSES     DEDUCTIONS     ADJUSTMENT       PERIOD
-----------                                     ------       --------     ----------     ----------       ------
<S>                                         <C>              <C>            <C>          <C>              <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:

Year ended December 31, 1996                $    923         $  468         $   161      $  (180) (1)     $  1,050

Year ended December 31, 1997                   1,050            628             329           --             1,349

Year ended December 31, 1998                   1,349            833             354           --             1,828

</TABLE>

(1) Pooling adjustment represent activity of FullTime for the period from
January 1, 1997 to June 30, 1997. (see Note 5 of Consolidated Financial
Statements)
<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                         November 30, 1999
                     --------------------                      -----------------
                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>
<CAPTION>


SIGNATURE                                   TITLE                                              DATE

<S>                                         <C>                                                <C>
/s/ Louis C. Cole                           Chairman of the Board, President and Chief         November 30, 1999
-----------------                           Executive Officer (Principal Executive Officer)
Louis C. Cole



/s/ Stephen C. Wise                         Senior Vice President of Finance and               November 30, 1999
-------------------                         Administration and Chief Financial Officer
Stephen C. Wise                             (Principal Financial and Accounting Officer)



/s/ Eric A. Benhamou                        Director                                           November 30, 1999
--------------------
Eric A. Benhamou




/s/ H. Raymond Bingham                      Director                                           November 30, 1999
----------------------
H. Raymond Bingham




/s/ Kevin A. Fong                           Director                                           November 30, 1999
-----------------
Kevin A. Fong



/s/ David N. Strohm                         Director                                           November 30, 1999
-------------------
David N. Strohm



/s/ Phillip E. White                        Director                                           November 30, 1999
--------------------
Phillip E. White

</TABLE>
<PAGE>
                                 EXHIBIT INDEX

Exhibit
Number          Description
------          -----------

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.

2.3    (6)      Agreement and Plan of Reorganization, dated as of July 30,
                1998, by and among Legato Systems, Inc., Aspen Acquisition
                Corp., Software Moguls, Inc., Sunil Khadilkar, Louis C. Cole and
                the Undersigned Stockholders.

2.4    (10)     Agreement and Plan of Reorganization, dated October 25, 1998,
                by and among Legato Systems, Inc., Hat Acquisition Corp. and
                Qualix Group, Inc.

2.5    (11)     Amendment No. 1 to the Agreement and Plan of Reorganization ,
                dated October 25, 1998, by and among Legato Systems, Inc., Hat
                Acquisition Corp. and Qualix Group, Inc., dated February 9,
                1999.

3.1    (6) (9)  Amended and Restated Certificate of Incorporation of the
                Registrant, as amended to date

3.2    (7)      Amended and Restated Bylaws of the Registrant adopted on
                May 23, 1997

3.3    (8)      Form of Certificate of Designation filed in connection with
                Rights Agreement, dated May 23, 1997

4.7    (8)      Rights Agreement, dated May 23, 1997 between the Company and
                Harris Trust and Savings Bank, including the Certificate of
                Designation of Series A Junior Participating Preferred Stock,
                Form of Right Certificate and Summary of Rights to Purchase
                Preferred Shares attached thereto as Exhibit A, B and C,
                respectively.

4.8    (6)      Registration Rights Agreement, dated July 30, 1998, by and
                between Legato Systems, Inc., a Delaware corporation and the
                Stockholders of Software Moguls, Inc.

4.9    (6)      Affiliates Agreement, dated July 30, 1998, between Legato
                Systems, Inc. a Delaware corporation and the Stockholders of
                Software Moguls, Inc.

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

10.3   (1)      The Registrant's 1995 Stock Option/Stock Issuance Plan, as
                amended to date

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

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, 1995, 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, and Legato Systems,
                Inc., a Delaware corporation, regarding the space located at
                3210 Porter Drive, Palo Alto, California

21.1            Subsidiaries of the Registrant

23.1            Consent of PricewaterhouseCoopers LLP, Independent Accountants

23.2            Consent of Deloitte & Touche LLP, Independent Accountants

27.1            Financial Data Schedule
27.2            Financial Data Schedule
27.3            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 Registration Statement on
     Form S-3, filed December 15, 1998 (File No. 333-64693).

(7)  Incorporated by reference to the registrant's Current Report on Form 8-K,
     dated June 6, 1997.

(8)  Incorporated by reference to the registrant's Form 8-A, dated May 30, 1997.

(9)  Incorporated by reference to the registrant's  Registration Statement on
     Form S-8, filed November 10, 1998 (File No. 333-67031).

(10) Incorporated by reference to the registrant's Current Report on Form 8-K,
     dated October 25, 1998.

(11) Incorporated by reference to the registrant's Registration Statement on
     Form S-4, filed on March 15, 1999 (File No. 333-74433).