OTG SOFTWARE INC, S-1, 1999-12-23

OTG SOFTWARE INC
S-1, 1999-12-23

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 1999

REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------

OTG SOFTWARE, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------

<TABLE>
<S> <C> <C>
DELAWARE 7372 52-1769077
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

------------------------

6701 DEMOCRACY BOULEVARD, SUITE 800
BETHESDA, MD 20817
(301) 897-1400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------

RICHARD A. KAY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
OTG SOFTWARE, INC.
6701 DEMOCRACY BOULEVARD, SUITE 800
BETHESDA, MD 20817
(301) 897-1400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------

Copies to:

<TABLE>
<S> <C>
DAVID SYLVESTER, ESQ. EDWIN M. MARTIN, JR., ESQ.
BRENT B. SILER, ESQ. JANE K. P. TAM, ESQ.
SCOTT E. PUESCHEL, ESQ. PIPER MARBURY RUDNICK & WOLFE LLP
HALE AND DORR LLP 1200 19TH STREET, N.W.
1455 PENNSYLVANIA AVENUE, N.W. WASHINGTON, D.C. 20036
WASHINGTON, D.C. 20004 TELEPHONE: (202) 861-3900
TELEPHONE: (202) 942-8400 TELECOPY: (202) 223-2085
TELECOPY: (202) 942-8484
</TABLE>

------------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
---------

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
---------

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
---------

If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value per share...................... $69,000,000 $18,216
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933,
as amended.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.

SUBJECT TO COMPLETION, DATED DECEMBER 23, 1999

[OTG LOGO]

Common Stock

------------------

Prior to this offering, there has been no public market for our common
stock. We are selling shares of our common stock and a selling stockholder
is selling shares of our common stock. We will not receive any of the
proceeds from the sale of the shares by the selling stockholder. We expect the
initial public offering price to be between $ and $ per share.
We have applied to list the common stock on The Nasdaq Stock Market's National
Market under the symbol "OTGS."

The underwriters have an option to purchase a maximum of additional
shares of common stock from a selling stockholder to cover over-allotments.

INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE
6.

<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS PROCEEDS TO
PRICE TO AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS OTG STOCKHOLDER
----------- ------------- ------------- --------------------
<S> <C> <C> <C> <C>
Per Share............................................ $ $ $ $
Total................................................ $ $ $ $
</TABLE>

Delivery of the shares of common stock will be made on or about ,
2000.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANC ALEX. BROWN
SG COWEN
FRIEDMAN BILLINGS RAMSEY

The date of this prospectus is , 2000.
<PAGE> 3

[Inside Front Cover]
<PAGE> 4

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.................... 2
RISK FACTORS.......................... 6
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS.................. 16
TERMINATION OF S CORPORATION STATUS
AND RELATED DISTRIBUTION............ 17
USE OF PROCEEDS....................... 18
DIVIDEND POLICY....................... 18
CAPITALIZATION........................ 19
DILUTION.............................. 21
SELECTED COMBINED FINANCIAL DATA...... 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 25
BUSINESS.............................. 35
</TABLE>

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MANAGEMENT............................ 45
RELATED PARTY TRANSACTIONS............ 53
PRINCIPAL AND SELLING STOCKHOLDERS.... 56
DESCRIPTION OF CAPITAL STOCK.......... 58
SHARES ELIGIBLE FOR FUTURE SALE....... 61
UNDERWRITING.......................... 63
NOTICE TO CANADIAN RESIDENTS.......... 65
LEGAL MATTERS......................... 67
EXPERTS............................... 67
CHANGE OF AUDITORS.................... 67
WHERE YOU CAN FIND MORE INFORMATION... 67
INDEX TO COMBINED FINANCIAL
STATEMENTS.......................... F-1
</TABLE>

------------------

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL
THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE
DATE OF THIS DOCUMENT.

DEALER PROSPECTUS DELIVERY OBLIGATION

UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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<PAGE> 5

PROSPECTUS SUMMARY

You should read this summary together with the more detailed information,
including our combined financial statements and the related notes, appearing
elsewhere in this prospectus.

OTG SOFTWARE, INC.

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

Traditionally, enterprises have focused on protecting data by backing it up
on secondary storage devices. This process restricts direct access to data by
users and software applications and results in repetitively backing up the same
data. One response to these limitations has been the emergence of SANs. A SAN is
a network of servers and data storage devices that are interconnected at high
speeds, allowing network resources to be located at remote and diverse
locations. IDC estimates that the overall SAN market will grow from $3.4 billion
in 1999 to more than $13.8 billion in 2003. SANs are designed to store more data
more quickly but not to optimize data storage and access.

Our solutions enhance the performance of both traditional storage and
back-up methods and SANs by:

- automatically applying policies that determine whether, or for how long,
data should be stored;

- providing optimized transfer of data to and from storage devices
throughout networks, including SANs;

- providing a detailed index of stored data;

- enabling rapid and easy retrieval of stored data selected by users and
software applications;

- maximizing the effective capacity of existing storage devices; and

- providing secure Web access to stored data.

We market our products primarily through more than 15 original equipment
manufacturers and more than 225 domestic and international value-added resellers
and distributors, as well as through our direct sales force. We have licensed
our products to more than 6,000 corporations, government agencies and other
organizations across a broad spectrum of industries. Our customers include
American Airlines, Caterpillar, Citicorp, Dow Chemical, Mayo Clinic, Nabisco,
the National Association of Securities Dealers, Nortel Networks, PSINet, the
University of Miami and the U.S. Department of Defense.

Our principal executive offices are located at 6701 Democracy Boulevard,
Suite 800, Bethesda, Maryland 20817 and our telephone number is (301) 897-1400.
We were initially incorporated as a Maryland corporation in March 1992. We
reincorporated in Delaware in June 1998. When we refer to ourselves or OTG
Software, Inc., these references include the predecessor Maryland corporation.
Our Web address is www.otg.com. Information on our website does not constitute
part of this prospectus.
2
<PAGE> 6

THE OFFERING

Common stock offered by us............... shares

Common stock offered by the selling
stockholder.............................. shares

Common stock to be outstanding after this
offering................................. shares

Use of proceeds.......................... For repayment of debt,
distribution of S corporation
earnings and general corporate
purposes, including working
capital and capital expenditures.
See "Use of Proceeds."

Proposed Nasdaq National Market symbol... OTGS

The number of shares to be outstanding after this offering is based on
shares outstanding at December 22, 1999 and excludes:

- 1,800,860 shares subject to outstanding options at a weighted average
exercise price of $4.08 per share;

- 15,000 shares subject to an outstanding warrant at an exercise price of
$3.67 per share; and

- 225,751 additional shares reserved for issuance under our stock plans.
------------------------

Except as otherwise indicated, information in this prospectus gives effect
to:

- a -for- stock split of all outstanding shares of our common
stock effected on , 2000; and

- the automatic conversion of all outstanding convertible notes issued by
us into 2,080,753 shares of our common stock upon the closing of this
offering.
3
<PAGE> 7

SUMMARY COMBINED FINANCIAL DATA

The following table is a summary of the financial data for our business.
You should read this information together with the combined financial statements
and the related notes appearing at the end of this prospectus and the
information under "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The pro forma statement of operations data reflects
federal and state income taxes based on applicable tax rates as if we had not
elected S corporation status for the periods indicated. See note 1 to the
combined financial statements appearing elsewhere in this prospectus for
information regarding shares used in computing pro forma net income (loss) per
share -- basic and diluted. The pro forma balance sheet data gives effect to the
automatic conversion of all outstanding convertible notes issued by us on the
closing of this offering and the distribution of estimated undistributed S
corporation earnings at the closing. The pro forma as adjusted balance sheet
data also reflects the sale of the common stock offered by us, after deducting
estimated underwriting discounts and estimated offering expenses payable by us,
and our use of a portion of the proceeds to repay debt.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses....................... $ 6,075 $ 8,543 $ 12,089 $ 8,310 $ 12,739
Services................................ 1,321 3,361 5,230 3,665 5,161
-------- -------- -------- -------- --------
Total revenues....................... 7,396 11,904 17,319 11,975 17,900
Cost of revenues:
Software licenses....................... 848 579 532 262 670
Services................................ 442 1,219 1,639 1,196 2,188
-------- -------- -------- -------- --------
Total cost of revenues............... 1,290 1,798 2,171 1,458 2,858
-------- -------- -------- -------- --------
Gross profit.............................. 6,106 10,106 15,148 10,517 15,042
Operating expenses:
Research and development................ 2,012 2,455 3,958 2,721 3,725
Sales and marketing..................... 2,979 5,313 8,986 6,360 7,959
General and administrative.............. 1,940 1,709 2,150 1,469 2,680
-------- -------- -------- -------- --------
Total operating expenses............. 6,931 9,477 15,094 10,550 14,364
-------- -------- -------- -------- --------
Income (loss) from operations............. (825) 629 54 (33) 678
Interest expense, net..................... (143) (162) (1,261) (714) (1,519)
-------- -------- -------- -------- --------
Net income (loss)......................... $ (968) $ 467 $ (1,207) $ (747) $ (841)
======== ======== ======== ======== ========
</TABLE>

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<PAGE> 8

<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 1,089 $ $
Working capital (deficit)................................. (8,284)
Total assets.............................................. 9,810
Total debt................................................ 22,859
Total stockholders' equity (deficit)...................... (21,567)
</TABLE>

5
<PAGE> 9

RISK FACTORS

You should carefully consider the following risk factors and all other
information contained in this prospectus before investing in our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following factors could harm our business and materially adversely affect our
future operating results and could result in a partial or complete loss of your
investment.

RISKS RELATED TO OUR BUSINESS

WE MAY NOT BE ABLE TO SUSTAIN OUR CURRENT REVENUE GROWTH RATES, WHICH COULD
CAUSE OUR STOCK PRICE TO DECLINE

Although our revenues have grown rapidly in recent years, we may not be
able to maintain this rate of revenue growth because of the difficulty of
maintaining high percentage increases as the base of revenue increases. In
addition, growing competition, lower-than-expected market acceptance of Windows
NT and the expected next version of Windows NT, known as Windows 2000, or the
failure of the market for storage area networks, or SANs, to develop, could also
affect our revenue growth. Our inability to maintain our rate of revenue growth
could cause our stock price to decline.

OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND MAY CAUSE OUR STOCK PRICE
TO DECLINE

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

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

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

- the unpredictability of the timing and level of sales through our
indirect sales channels;

- the timing and magnitude of large orders;

- changes in the mix of our sales, including the mix between higher margin
software licenses and lower margin services;

- the timing and amount of our marketing, sales and product development
expenses;

- the cost and time required to develop new software products;

- the introduction, timing and market acceptance of new products introduced
by us or our competitors;

- changes in data storage and networking technology or the introduction of
new operating system upgrades, which could require us to modify our
products or develop new products;

- the growth rate of Windows NT;

- the rate of adoption of Windows 2000;

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<PAGE> 10

- the rate of adoption of SANs;

- pricing policies and distribution terms; and

- the timing and size of acquisitions.

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

OUR BUSINESS DEPENDS ON THE ACCEPTANCE OF WINDOWS NT AND WINDOWS 2000 TO RUN
COMPUTER NETWORKS, AND A DECREASE IN THEIR RATES OF ACCEPTANCE COULD CAUSE OUR
REVENUES TO DECLINE

For the foreseeable future, we expect a substantial majority of our
revenues to continue to come from sales of our Windows NT-based data storage
software products. As a result, we depend on the growing use of Windows NT for
computer networks. If the deployment of Windows NT does not increase as we
anticipate, or if it decreases, our revenues could decline. In addition, if
users do not accept Windows 2000, or if there is a wide acceptance of other
existing or new operating systems, our business would suffer.

Windows 2000 may not gain market acceptance if its expected commercial
release date is delayed. In addition, users of previous versions of Windows NT
may decide to migrate to another operating system due to these delays or
improved functionality of another operating system. We have expended significant
resources on the development of Windows 2000-compatible versions of our product
suite and our future success depends upon sales of this product suite. If users
of Windows 2000 networks do not widely adopt and purchase our products, our
revenue and business will suffer. Furthermore, if we fail to introduce Windows
2000-compatible versions of our product suite within a short time after the
commercial release of Windows 2000, the delay may cause customers to forego
purchases of our products and instead purchase those of our competitors.

OUR SUCCESS DEPENDS UPON THE DEVELOPMENT OF THE EMERGING MARKET FOR SANS, AND IF
THIS MARKET FAILS TO DEVELOP, OR DEVELOPS MORE SLOWLY THAN WE ANTICIPATE, OR IF
OUR PRODUCTS ARE NOT WIDELY ACCEPTED IN THIS MARKET, OUR BUSINESS WILL SUFFER

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

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<PAGE> 11

WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS AND OUR FAILURE TO MANAGE
THIS GROWTH OR ANY FUTURE GROWTH COULD HARM OUR BUSINESS

We continue to increase the scope of our operations and have grown our
headcount substantially. As of June 30, 1998, we had a total of 104 employees,
as of December 31, 1998 we had a total of 144 employees and as of November 30,
1999 we had a total of 166 employees. Our productivity and the quality of our
products may be adversely affected if we do not integrate and train our new
employees quickly and effectively. We also cannot be sure that our revenues will
continue to grow at a rate sufficient to absorb the costs associated with a
larger overall headcount.

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

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

OUR REVENUES PRIMARILY DEPEND ON SALES OF LICENSES FOR ONE PRODUCT LINE, OUR
XTENDERSOLUTIONS PRODUCT SUITE, AND A DECLINE IN SALES OF LICENSES FOR THIS
PRODUCT SUITE COULD CAUSE OUR REVENUES TO FALL

We have derived the substantial majority of our revenue from the sale of
our XtenderSolutions product suite. During the fiscal years ended December 31,
1996, 1997 and 1998, and the nine months ended September 30, 1999, sales of our
XtenderSolutions products accounted for approximately 82%, 72%, 70% and 71% of
our total revenues, respectively. We expect that these products will continue to
account for a large portion of our revenues for the foreseeable future.
Accordingly, our business and future operating results depend on the continued
market acceptance of our XtenderSolutions products and future enhancements to
these products. Any factors adversely affecting the pricing of, demand for or
market acceptance of our XtenderSolutions products, including competition or
technological change, could cause our revenues to decline and our business and
future operating results to suffer.

OUR MULTIPLE DISTRIBUTION CHANNELS ARE SUBJECT TO MANY RISKS, AND IF WE FAIL TO
MANAGE OUR DISTRIBUTION CHANNELS EFFECTIVELY, OR IF OUR RESELLERS CHOOSE TO
COMPETE WITH US, OUR SALES WILL
BE ADVERSELY AFFECTED

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

- longer sales cycles, typically three to six months;

- our need to hire, train, retain and motivate our sales force; and

- the length of time it takes our new sales representatives to begin
generating sales.

Indirect sales. We expect that a significant portion of our revenues will
continue to come from indirect sales. These include sales to original equipment
manufacturers, or OEMs, that incorporate our data storage management software
into systems they sell. We also expect future revenues from

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<PAGE> 12

distributors and value-added resellers, or VARs, that sell our software, often
bundled with their own software or services. We have no control over the
shipping dates or volumes of systems our OEMs, VARs or distributors ship, and
they have no obligation to ship systems incorporating our software. They
generally have no minimum sales requirements and can terminate their
relationship with us on short notice. Our OEMs, VARs and distributors also could
choose to develop their own data storage management products and incorporate
those products into their systems or product offerings in lieu of our products.
Finally, the OEMs that we do business with may compete with one another. To the
extent that one of our OEM customers views the products we have developed for
another OEM as competitive, it may decide to stop doing business with us, which
could harm our business. We develop customized versions of our products for some
of our OEMs to be included in their systems software and products. Developing
products for these OEMs causes us to divert resources from other activities
which are also important to our business. If these versions do not result in
substantial revenue, our revenues could be adversely affected.

Our OEMs, VARs, distributors and direct sales force might target the same
sales opportunities, which could lead to an inefficient allocation of sales
resources. This would result in us marketing similar products to the same
end-users. These overlapping sales efforts could also adversely affect our
relationships with our OEMs, VARs, distributors and other sales channels and
result in them being less willing to market our products aggressively.

THE MARKET FOR OUTSOURCED DATA STORAGE SOLUTIONS OVER THE WEB IS NEW AND
EVOLVING, AND WE ARE NOT SURE THAT THIS MARKET WILL DEVELOP

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

- concerns over the reliability and security of the Web, especially as a
means of moving data that is critical to the customer's business; and

- customer reluctance to cede control over the hardware and network
infrastructure used to store important data and to rely on systems
provided by a third party.

We do not currently provide outsourced data storage services and do not have any
significant experience in the market for these services.

IF WE ENCOUNTER SYSTEM FAILURES OR OTHER DIFFICULTIES IN PROVIDING OUTSOURCED
DATA STORAGE SERVICES, WE COULD BE EXPOSED TO LIABILITY AND OUR REPUTATION COULD
SUFFER

We will depend upon a hardware and networking infrastructure to deliver
outsourced data storage capacity to our customers. If this infrastructure fails,
or customers otherwise experience difficulties or delays in retrieving data, we
could face liability claims from them and our reputation could be damaged. We
currently expect that we will not develop the hardware and networking
infrastructure ourselves, but rather will contract with third parties, such as
Internet service providers, or ISPs, and application service providers, or ASPs,
to supply these components on our behalf. For this reason, we will be dependent
on the performance of the systems deployed and maintained by these parties, whom
we will not control. In some cases, we might contract directly with the customer
to provide the outsourced services; in other cases, we might act as a reseller
of the services of ASPs, ISPs or others. In either case, we would expect to
include contractual provisions limiting our liability to the customer for system
failures and delays, but we cannot be sure that these limits will be
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<PAGE> 13

enforceable or will be sufficient to shield us from liability. We also expect
that we would carry liability insurance to cover problems of this nature, but we
cannot guarantee that insurance will be available or that the amounts of our
coverage will be sufficient to cover all potential claims.

WE FACE INTENSE COMPETITION ON SEVERAL FRONTS, WHICH COULD CAUSE US TO LOSE
SALES

We face a variety of competitors that offer products with some of our
products' features. Some potential customers may elect to internally develop
capabilities similar to those provided by our products rather than buying them
from us or another outside vendor. Although our products generally enhance
traditional data back-up capabilities offered by companies such as Veritas,
Legato Systems, Computer Associates and IBM, our products may compete against
traditional back-up solutions when a potential customer seeks to address its
storage needs with only a data back-up solution. Furthermore, Veritas has
recently begun to offer a Windows NT-based product that competes with
DiskXtender.

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

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

DATA STORAGE MANAGEMENT SOFTWARE PRODUCTS MUST REMAIN COMPATIBLE WITH CHANGING
OPERATING SYSTEM SOFTWARE AND NETWORK HARDWARE AND SOFTWARE CONFIGURATIONS, AND
OUR PRODUCTS COULD BE RENDERED OBSOLETE BY NEW TECHNOLOGIES

Our future success depends upon our ability to enhance existing products,
develop and introduce new products, satisfy customer requirements and achieve
market acceptance. We cannot be certain that we will successfully identify new
product opportunities and develop and bring new products to market in a timely
and cost-effective manner. The data storage management software market is
characterized by rapid technological change, frequent new product introductions
and enhancements, uncertain product life cycles, changes in customer demands and
evolving industry standards. Our products could be rendered obsolete if products
based on new technologies are introduced or new industry standards emerge. In
particular, if Windows 2000 and SANs are not widely adopted, our business and
future operating results will suffer.

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

Our future success also depends, in part, on the compatibility of our
products with other vendors' software and hardware products, particularly those
provided by Microsoft. Developers of these products may change their products so
that they will no longer be compatible with our products. These other vendors
may also decide to bundle their products with other competing products for
promotional purposes. If that were to happen, our business and future operating
results might suffer as we might be priced out of the market or no longer be
able to offer commercially viable products.
10
<PAGE> 14

ERRORS IN OUR PRODUCTS COULD HARM OUR REPUTATION AND COULD CAUSE CUSTOMERS TO
DEMAND REFUNDS FROM US OR ASSERT CLAIMS FOR DAMAGES AGAINST US, WHICH COULD HARM
OUR BUSINESS AND FUTURE OPERATING RESULTS

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

- the loss of or delay in market acceptance and sales of our products;

- diversion of development resources;

- injury to our reputation; or

- increased maintenance and warranty costs.

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

OUR SOFTWARE PRODUCTS RELY ON OUR INTELLECTUAL PROPERTY, AND ANY FAILURE BY US
TO PROTECT OUR INTELLECTUAL PROPERTY COULD ENABLE OUR COMPETITORS TO MARKET
PRODUCTS WITH SIMILAR FEATURES THAT MAY REDUCE DEMAND FOR OUR PRODUCTS

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

OUR PRODUCTS EMPLOY TECHNOLOGY THAT MAY INFRINGE THE PROPRIETARY RIGHTS OF
OTHERS, AND WE MAY BE LIABLE FOR SIGNIFICANT DAMAGES AS A RESULT

We expect that software products may be increasingly subject to third-party
infringement claims as the number of competitors in our industry segment grows
and the functionality of products in different industry segments overlaps. We
believe that our products do not employ technology that

11
<PAGE> 15

infringes any proprietary rights of third parties. Nevertheless, third parties
may claim that we infringe their intellectual property rights. Regardless of
whether these claims have any merit, they could:

- be time-consuming to defend;

- result in costly litigation;

- divert our management's attention and resources;

- cause product shipment delays; or

- require us to enter into royalty or licensing agreements, which may not
be available on terms acceptable to us, if at all.

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

WE FACE RISKS FROM THE EXPANSION OF OUR INTERNATIONAL OPERATIONS

In the year ended December 31, 1998 and the nine months ended September 30,
1999, products we sold to customers outside North America accounted for 6% of
our total revenues. We plan to increase our international sales activities, but
these activities are subject to a number of risks, including:

- greater difficulty in accounts receivable collection and longer
collection periods;

- political and economic instability;

- greater difficulty in attracting distributors that market and support our
products effectively;

- the need to comply with varying employment policies and regulations which
could make it more difficult and expensive to manage our headcount if we
need to establish more direct sales staff outside the United States;

- weaker operating results from our international operations in our
quarters ending each September 30 due to the summer slowdown in Europe;
and

- the effects of currency fluctuations.

IF WE UNDERTAKE ACQUISITIONS, THEY MAY BE EXPENSIVE AND DISRUPTIVE TO OUR
BUSINESS AND COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS, FUTURE OPERATIONS AND
STOCK PRICE

We may make investments in complementary companies, products or
technologies. If we buy a company, we could have difficulty in assimilating that
company's technology, employees and operations. In addition, the key personnel
of the acquired company may decide not to work for us. These difficulties could
disrupt our ongoing business, distract our management and employees and increase
our expenses. We also expect that we would incur substantial expenses if we
acquired other businesses or technologies. Furthermore, we may use the proceeds
of this offering, incur debt or issue equity securities to pay for any future
acquisitions. If we issue additional equity securities, our stockholders could
experience dilution and the market price of our stock may decline. We currently
have no agreements or understandings regarding any future acquisitions.

ANY YEAR 2000 PROBLEMS WITH OUR PRODUCTS OR OUR INTERNAL SYSTEMS AND SOFTWARE
COULD RESULT IN THIRD PARTY CLAIMS

Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the

12
<PAGE> 16

calendar year may not be able to determine whether "00" means 1900 or 2000. This
may result in software failures or the creation of erroneous results.

Our software products operate in complex system environments and directly
and indirectly interact with a number of other hardware and software systems.
Despite investigation and testing by us, our software products and the
underlying systems and protocols running our products may contain errors or
defects associated with Year 2000 date functions. Our vendors may also
experience Year 2000 problems that could affect our business. We are unable to
predict to what extent our business may be affected if our software or the
systems that operate in conjunction with our software experience a material Year
2000 failure or if our vendors experience Year 2000 problems. Known or unknown
errors or defects that affect the operation of our software could result in:

- delay or loss of revenues, cancellation of customer contracts;

- diversion of development resources;

- damage to our reputation;

- increased maintenance and warranty costs; and

- litigation costs.

Any of these negative effects could adversely affect our business and future
results of operations. Furthermore, if our vendors experience Year 2000
problems, we could experience disruption in the provision of products and
services to our customers, which could have many of the negative effects
described above. In addition, if our customers experience their own Year 2000
problems, they may delay or forego purchases of our products until they have
addressed such problems, which could have an adverse effect on our business and
future operating results.

Despite investigation and testing by us, our internal systems and/or
software may contain errors or defects associated with Year 2000 date functions
that we have not detected and corrected. We are unable to predict to what extent
our core business functions may be affected if our internal systems or software
experience a material Year 2000 failure. The section of this prospectus headed
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Year 2000 Compliance" contains a description of our Year 2000
readiness efforts.

RISKS RELATED TO THIS OFFERING

OUR STOCK MAY BE SUBJECT TO SUBSTANTIAL PRICE AND VOLUME FLUCTUATIONS DUE TO A
NUMBER OF FACTORS THAT MAY PREVENT OUR STOCKHOLDERS FROM RESELLING OUR COMMON
STOCK AT A PROFIT

The securities markets have experienced significant price and volume
fluctuations and the market prices of the securities of software companies have
been especially volatile. This market volatility, as well as general economic,
market or political conditions, could reduce our stock price in spite of our
operating performance. In addition, our operating results could be below the
expectations of public market analysts and investors, and in response our stock
price could decrease significantly. Investors may be unable to resell their
shares of our common stock at or above the offering price. In the past,
companies that have experienced volatility in their stock price have faced
securities class action litigation. If we become the object of securities class
action litigation, it could result in substantial costs and a diversion of
management's attention and resources.

13
<PAGE> 17

OUR OFFICERS, DIRECTORS AND PERSONS AFFILIATED WITH THEM CONTROL OUR BUSINESS
AND HOLD A MAJORITY OF OUR STOCK AND COULD REJECT MERGERS OR OTHER BUSINESS
COMBINATIONS THAT A STOCKHOLDER MAY BELIEVE ARE DESIRABLE

We anticipate that our directors, officers and individuals or entities
affiliated with our directors as a group will beneficially own approximately
% of our outstanding common stock after this offering closes. As a result,
these stockholders acting together would be able to determine the outcome of all
matters that our stockholders vote upon, including the election of directors and
mergers or other business combinations.

THE PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT POTENTIAL
ACQUISITION BIDS THAT STOCKHOLDERS MAY BELIEVE ARE DESIRABLE, AND THE MARKET
PRICE OF OUR COMMON STOCK MAY BE LOWER AS A RESULT

Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock. The board of directors can fix the price, rights, preferences,
privileges and restrictions of the preferred stock without any further vote or
action by our stockholders. The issuance of shares of preferred stock may delay
or prevent a change in control transaction. As a result, our stock price and the
voting and other rights of our stockholders may be adversely affected. The
issuance of preferred stock may result in the loss of voting control to other
stockholders. We have no current plans to issue any shares of preferred stock.

Our charter documents contain anti-takeover devices including:

- only one of the three classes of directors is elected each year;

- stockholders have limited ability to remove directors without cause;

- stockholders cannot act by written consent;

- stockholders cannot call a special meeting of stockholders; and

- stockholders must give advance notice to nominate directors or submit
proposals for consideration at stockholder meetings.

In addition, we are subject to the anti-takeover provisions of Section 203 of
the Delaware corporate statute, which regulates corporate acquisitions. These
provisions could discourage potential acquisition proposals and could delay or
prevent a change in control transaction. They could also have the effect of
discouraging others from making tender offers for our common stock. As a result,
these provisions may prevent our stock price from increasing substantially in
response to actual or rumored takeover attempts. These provisions may also
prevent changes in our management.

THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE NEAR
FUTURE COULD CAUSE OUR STOCK PRICE TO FALL

Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Sales of a
substantial number of shares of our common stock could cause our stock price to
fall. In addition, the sale of these shares could impair our ability to raise
capital through the sale of additional stock. The section headed "Shares
Eligible for Future Sale" appearing later in this prospectus contains more
information regarding the number of shares that may be sold in the future by our
existing stockholders and option holders.

14
<PAGE> 18

WE WILL TERMINATE OUR S CORPORATION STATUS IN CONNECTION WITH THE OFFERING, WILL
MAKE A SUBSTANTIAL DISTRIBUTION TO OUR CURRENT STOCKHOLDERS AND WILL BECOME
SUBJECT TO FEDERAL AND STATE INCOME TAXES

Since 1992, we have been treated for federal and certain state income tax
purposes as an S corporation under the Internal Revenue Code of 1986. This means
that our earnings have been attributed as income to our stockholders, and our
stockholders have paid the taxes due on them. Prior to the closing of this
offering, we will terminate our status as an S corporation and will make a
distribution to our stockholders in an amount equal to the actual amount of
undistributed S corporation earnings as of the date we terminate our S
corporation status. As of , 2000, these undistributed earnings equaled
$ , and we estimate that the actual amount of the S corporation
distribution will be between $ and $ . This distribution will
be paid using a portion of the proceeds of this offering. You will not receive
any portion of this distribution. Once we terminate our S corporation status, we
will become subject to federal and state income taxes. The sections headed
"Termination of S Corporation Status and Related Distribution" and "Use of
Proceeds" appearing later in this prospectus contain more information about the
effects of the termination of our S corporation status.

IF YOU INVEST IN THIS OFFERING, YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION

We expect that the initial public offering price of our common stock will
be substantially higher than the book value per share of the outstanding common
stock. As a result, investors purchasing common stock in this offering will
incur immediate and substantial dilution. In the past, we issued options and
warrants to acquire common stock at prices significantly below the initial
public offering price. To the extent these outstanding options or warrants are
ultimately exercised, there will be further dilution to investors in this
offering. The section headed "Dilution" appearing later in this prospectus
contains more information regarding the dilution you will experience if you
invest in this offering.

15
<PAGE> 19

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "should," "will" and "would" or similar words. You
should read statements that contain these words carefully because they discuss
our future expectations, contain projections of our future results of operations
or of our financial position or state other forward-looking information. We
believe that it is important to communicate our future expectations to our
investors. However, there may be events in the future that we are not able to
predict or control accurately. The factors listed above in the section headed
"Risk Factors," as well as any cautionary language in this prospectus, provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our forward-looking
statements. Before you invest in our common stock, you should be aware that the
occurrence of the events described in these risk factors and elsewhere in this
prospectus could have a material adverse effect on our business, results of
operations and financial position.

16
<PAGE> 20

TERMINATION OF S CORPORATION STATUS
AND RELATED DISTRIBUTION

Since inception, we have elected to operate under subchapter S of the
Internal Revenue Code and comparable provisions of some state income tax laws.
An S corporation generally is not subject to income tax at the corporate level,
with some exceptions under state income tax laws. Instead, an S corporation's
income generally passes through to its stockholders and is taxed on their
personal income tax returns. As a result, our earnings have been taxed for
federal and state income tax purposes, with some exceptions, directly to our
existing stockholders.

Prior to the closing of this offering, we will terminate our S corporation
status. At , 2000, our undistributed S corporation earnings were
estimated to be $ . We expect to accumulate additional earnings through
the date of this offering. We currently estimate that, with these additional
earnings, our total undistributed earnings will be between $ and
$ , although the actual amount may vary significantly. These
accumulated earnings will be distributed to the existing stockholders using a
portion of the net proceeds of this offering. The actual amount of this
distribution will be reduced to the extent distributions of accumulated earnings
are made by us to the existing stockholders prior to the date of this offering
with other corporate funds.

The existing stockholders have agreed to indemnify us should our S
corporation status during any portion of the period for which we claimed such
status in federal or state income tax filings ever be successfully challenged.

In connection with the termination of our S corporation status, we may be
obligated to record a deferred tax asset or liability which will be recognized
in the quarter during which this offering occurs.

17
<PAGE> 21

USE OF PROCEEDS

We estimate that our net proceeds from the sale of the shares of
common stock we are offering will be approximately $ million, assuming an
initial public offering price of $ per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us. We will not receive any of the proceeds from the sale of shares by the
selling stockholder.

We will use a portion of the net proceeds of this offering to make the
following payments:

- approximately $4.4 million to pay our outstanding senior subordinated
notes, including notes held by a party which is an affiliate of a
director and two parties which will be significant stockholders following
this offering. The senior subordinated notes accrued interest at the rate
of 8% per annum through June 9, 1999 and accrue interest at a rate of 10%
after June 9, 1999. These notes become due upon the closing of this
offering. As of , 2000, the outstanding balance of principal
and interest on the senior subordinated notes was $ ;

- approximately $2.0 million to repay loans from Richard A. Kay, our
chairman, president and chief executive officer. These loans were made to
provide working capital and bear interest at the rate of 10% per year. As
of , 2000, the outstanding balance of principal and interest on
these loans was $ ;

- approximately $5.0 million to repay all outstanding balances under our
commercial credit facility, which bears interest at the bank's prime rate
plus 1% and becomes due on July 21, 2000;

- approximately $5.2 million to repay a note issued to a former stockholder
in connection with the repurchase of his shares. This note bears interest
at the rate of 10% per annum and becomes due 60 days after the closing of
this offering. As of , 2000, the outstanding balance of
principal and interest under this note was $ ;

- approximately $250,000 to a former employee in respect of a deferred
bonus due to him upon the closing of this offering; and

- an amount that we currently estimate to be between $ and
$ to our existing stockholders as a distribution of accumulated
S corporation earnings.

We intend to use the remaining net proceeds of this offering for working
capital and general corporate purposes. Although we may use a portion of the net
proceeds to acquire businesses, products or technologies that are complementary
to our business, we have no specific acquisitions planned. Pending these uses,
we plan to invest the net proceeds in investment grade, interest-bearing
securities.

DIVIDEND POLICY

We made distributions to our stockholders related to our S corporation
status of approximately $60,000, $600,000 and $5.5 million during the years
ended December 31, 1996, 1997 and 1998, respectively, and have not made any
distributions since January 1, 1999. Other than the anticipated distribution of
accumulated S corporation earnings through the date of this offering, we do not
anticipate paying cash dividends in the foreseeable future. We currently intend
to retain all future earnings, if any, for use in the operation of our business.
Our line of credit currently prohibits the payment of dividends other than S
corporation distributions.

18
<PAGE> 22

CAPITALIZATION

The following table sets forth our capitalization and other financial
information as of September 30, 1999:

- on an actual basis;

- on a pro forma basis to reflect the automatic conversion of all
outstanding convertible notes into common stock on the closing of this
offering and the distribution of estimated accumulated S corporation
earnings at the closing; and

- on a pro forma as adjusted basis to reflect the sale of the shares of
common stock offered by us in this offering, our receipt and application
of the estimated net proceeds, after deducting the estimated underwriting
discounts and commissions and the estimated offering expenses that we
expect to pay in connection with this offering, and our use of a portion
of the net proceeds to repay debt.

This table also gives effect to an amendment to our charter filed after
September 30, 1999 that increased the number of shares of common stock and
preferred stock authorized for issuance and to the expected contribution to us
of all of the stock of an affiliated company. You should read this table along
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," our financial statements and the related notes and the other
financial information in this prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents.................................. $ 1,089 $ $
========
Short-term debt:
Note payable to bank..................................... 3,500
Current portion of long-term debt........................ 2,404
Subordinated notes payable -- stockholders............... 1,969
-------- -------- --------
Total short-term debt...................................... $ 7,873 $
======== ======== ========
Long-term debt -- net of current portion................... $ 14,986 $ $
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding, actual,
pro forma and pro forma as adjusted................... -- -- --
Common stock, $.01 par value; 65,000,000 shares
authorized; 8,157,341 shares issued and outstanding,
actual; 10,238,094 shares issued and outstanding, pro
forma; shares issued and outstanding, pro
forma as adjusted..................................... 82
Additional paid-in capital............................... 2,737
Deferred compensation.................................... (1,486)
Accumulated deficit...................................... (21,923)
Less stock subscriptions receivable................... 977
-------- -------- --------
Total stockholders' equity (deficit)................ (21,567)
-------- -------- --------
Total capitalization............................. $ (6,581) $ $
======== ======== ========
</TABLE>

19
<PAGE> 23

The outstanding share information excludes:

- 1,740,160 shares of common stock issuable on exercise of outstanding
options and a warrant as of September 30, 1999, at a weighted average
exercise price of $3.96 per share; and

- 301,451 shares of common stock reserved at that date for future issuance
under our stock plan.

After September 30, 1999, we issued options exercisable to purchase up to
75,700 shares of common stock at a weighted average exercise price of $7.03 per
share.

20
<PAGE> 24

DILUTION

Our pro forma net tangible book value as of September 30, 1999 was
$ million, or $ per share of common stock. We have calculated this
amount by:

- subtracting our total liabilities from our pro forma total tangible
assets, after giving effect to the automatic conversion of the
convertible notes into common stock upon the closing of this offering and
the distribution of estimated accumulated S corporation earnings at the
closing; and

- then dividing the difference by the total pro forma number of shares of
common stock outstanding, including the number of shares of common stock
that will be issued upon the conversion of the convertible notes issued
by us when we complete this offering.

If we give effect to our sale of shares of common stock in this
offering at an assumed initial public offering price of $ per share, after
deducting the estimated underwriting discounts and commissions and the estimated
offering expenses payable by us, our adjusted pro forma net tangible book value
as of September 30, 1999 would have been $ million, or $ per share. This
amount represents an immediate dilution of $ per share to new investors. The
following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share before this
offering............................................... $
Increase in pro forma net tangible book value per share
attributable to new investors..........................
------
Pro forma net tangible book value per share after this
offering..................................................
------
Dilution per share to new investors......................... $
======
</TABLE>

The following table summarizes, as of September 30, 1999, after giving
effect to the conversion of the convertible notes into common stock, the
difference between the number of shares of common stock purchased from us, the
total consideration paid to us, and the average price per share paid by existing
stockholders and by new investors, at an assumed initial public offering price
of $ per share before deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 10,238,094 % $8,789,029 % $0.86
New investors........................... $
---------- ----- ---------- -----
Total......................... 100.0% $ 100.0%
========== ===== ========== ===== =====
</TABLE>

Shares to be sold by the selling stockholder are excluded from the shares
purchased by the new investors and included in shares purchased by the existing
stockholders in this table. Sales by the selling stockholder in this offering
will reduce the shares held by existing stockholders to shares, or
% of the total shares of common stock outstanding after this offering. If
the underwriters exercise their over-allotment option in full, the number of
shares held by new investors will increase to shares, or % of the
total shares of common stock outstanding after this offering, and the number of
shares held by existing stockholders will be reduced to shares, or
% of the total shares of common stock outstanding after this offering.

21
<PAGE> 25

The table above assumes no exercise of stock options and a warrant
outstanding at September 30, 1999. As of September 30, 1999, there were options
and a warrant outstanding to purchase 1,740,160 shares of common stock at a
weighted average exercise price of $3.96 per share and 301,451 shares reserved
for future grant or award under our stock plan. To the extent any of these
options or warrants are exercised, there will be further dilution to new
investors. To the extent all of such outstanding options or the warrant had been
exercised as of September 30, 1999, net tangible book value per share after this
offering would have been $ and total dilution per share to new investors
would have been $ .

22
<PAGE> 26

SELECTED COMBINED FINANCIAL DATA

The following selected combined financial data should be read in
conjunction with our financial statements and the related notes, and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included elsewhere in this prospectus. The statement of operations
data for the years ended December 31, 1996, 1997 and 1998 and the balance sheet
data as of December 31, 1997 and 1998 are derived from, and are qualified by
reference to, audited combined financial statements included in this prospectus.
The statement of operations data for the years ended December 31, 1994 and 1995,
and the balance sheet data as of December 31, 1994, 1995 and 1996, are derived
from our combined financial statements that are not included in this prospectus.
The statement of operations data for the nine months ended September 30, 1998
and 1999, and the balance sheet data as of September 30, 1999, are derived from
our unaudited combined financial statements that are included in this
prospectus. In our opinion, these unaudited statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information when read in conjunction with the combined
financial statements and related notes included elsewhere in this prospectus.
Historical results are not necessarily indicative of results that may be
expected for any future period. The pro forma statement of operations data
reflects federal and state income taxes based on applicable tax rates as if we
had not elected S corporation status for the periods indicated. See note 1 to
the combined financial statements appearing elsewhere in this prospectus for
information regarding shares used in computing pro forma net income (loss) per
share -- basic and diluted.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses.............. $ 2,574 $ 4,079 $ 6,075 $ 8,543 $12,089 $ 8,310 $12,739
Services....................... 519 908 1,321 3,361 5,230 3,665 5,161
------- ------- ------- ------- ------- ------- -------
Total revenues............... 3,093 4,987 7,396 11,904 17,319 11,975 17,900
Cost of revenues:
Software licenses.............. 496 633 848 579 532 262 670
Services....................... 389 581 442 1,219 1,639 1,196 2,188
------- ------- ------- ------- ------- ------- -------
Total cost of revenues....... 885 1,214 1,290 1,798 2,171 1,458 2,858
------- ------- ------- ------- ------- ------- -------
Gross profit..................... 2,208 3,773 6,106 10,106 15,148 10,517 15,042
Operating expenses:
Research and development....... 661 983 2,012 2,455 3,958 2,721 3,725
Sales and marketing............ 980 1,916 2,979 5,313 8,986 6,360 7,959
General and administrative..... 638 604 1,940 1,709 2,150 1,469 2,680
------- ------- ------- ------- ------- ------- -------
Total operating expenses..... 2,279 3,503 6,931 9,477 15,094 10,550 14,364
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations.... (71) 270 (825) 629 54 (33) 678
Interest expense, net............ (106) (140) (143) (162) (1,261) (714) (1,519)
------- ------- ------- ------- ------- ------- -------
Net income (loss)................ $ (177) $ 130 $ (968) $ 467 $(1,207) $ (747) $ (841)
======= ======= ======= ======= ======= ======= =======
</TABLE>

23
<PAGE> 27

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
------- ------- -------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 264 $ 4 $ 287 $ 1,098 $ 437 $ 1,089
Working capital (deficit)........... (1,051) (1,330) (1,946) (3,227) (6,120) (8,284)
Total assets........................ 542 1,086 2,079 5,143 7,284 9,810
Total debt.......................... -- 1,346 254 3,774 22,047 22,859
Total stockholders' equity
(deficit)......................... (902) (1,139) (2,166) (2,699) (20,876) (21,567)
</TABLE>

24
<PAGE> 28

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with
our combined financial statements and the related notes included elsewhere in
this prospectus.

OVERVIEW

We are a leading provider of online data storage management and data access
solutions. Our software enables enterprises to move, store, manage and access
data quickly and efficiently over a variety of network architectures, including
the Web and SANs. Our software supports many different types of storage devices,
is easy to install and use, and can manage storage systems ranging in size from
a single storage device to an enterprise-wide network storage system.

We were founded in March 1992. Since our inception, we have incurred
significant losses. For the year ended December 31, 1998, our net loss was $1.2
million. As of September 30, 1999, we had an accumulated deficit of $21.9
million, and for the nine months ended September 30, 1999, our net loss was
$841,000. We expect to incur significant research and development, sales and
marketing and general and administrative expenses, and, as a result, we will
need to generate significant revenues to achieve and maintain profitability.
Although our revenues have grown, we may not be able to sustain these growth
rates, and we may not realize sufficient revenues to achieve profitability.

We generate revenues principally from licensing our software products and
providing related professional services including maintenance and technical
support, consulting and training.

We derive software license revenues from licenses of our software programs
to end-user customers primarily through indirect sales channels, including
original equipment manufacturers, or OEMs, value-added resellers, or VARs, and
distributors. We also sell through our direct sales force. OEMs either bundle
our products with the products they offer or resell our products under their own
label. We receive software license revenues each time an OEM licenses a copy of
its products that incorporates one or more of our products. Our license
agreements with OEMs generally contain no minimum sales requirements and we
cannot assure you that any OEM will either commence or continue shipping our
products in the future. Moreover, following the execution of new license
agreements, a significant period of time may elapse before any revenues are
generated due to the development work which we often undertake under these
agreements and the time needed for the sales and marketing organizations within
these OEMs, customers and resellers to become familiar with our products.

Our services revenues consist of fees derived from annual maintenance
agreements, consulting and training and other services. The maintenance
agreements covering our products provide for technical support and minor
unspecified product upgrades for fees based on the number of software licenses
purchased and the level of service chosen by the customer. Maintenance fees are
recognized ratably over the term of the maintenance contract. We provide
consulting services on a time-and-materials fee basis. We provide classroom and
on-site training to our customers on a daily fee basis.

Our international sales are primarily generated through indirect sales
channels. Revenues derived from customers located outside the United States and
Canada, most of which are denominated in U.S. currency, accounted for
approximately 6% of our total revenues for the nine months ended September 30,
1998 and the nine months ended September 30, 1999. Our international revenues
increased 42% from $775,000 for the nine months ended September 30, 1998 to $1.1
million for the nine months ended September 30, 1999.

We currently have sales and services offices in the United States and
provide sales and services support in Europe through employees located in
Germany and the Netherlands. We plan to expand

25
<PAGE> 29

our international operations by establishing additional foreign offices, hiring
additional personnel and recruiting additional international resellers.

RESULTS OF OPERATIONS

The following table sets forth items from our statements of operations
expressed as a percentage of total revenues for the periods indicated:

<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ ---------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses................. 83% 82% 82% 72% 70% 69% 71%
Services.......................... 17 18 18 28 30 31 29
--- --- --- --- --- --- ---
Total revenues................. 100 100 100 100 100 100 100
--- --- --- --- --- --- ---
Cost of revenues:
Software licenses................. 16 13 11 5 3 2 4
Services.......................... 13 12 6 10 10 10 12
--- --- --- --- --- --- ---
Total cost of revenues......... 29 25 17 15 13 12 16
--- --- --- --- --- --- ---
Gross profit........................ 71 75 83 85 87 88 84
Operating expenses:
Research and development.......... 21 20 27 21 23 23 21
Sales and marketing............... 32 38 40 45 52 53 44
General and administrative........ 21 12 26 14 12 12 15
--- --- --- --- --- --- ---
Total operating expenses....... 74 70 93 80 87 88 80
--- --- --- --- --- --- ---
Income (loss) from operations....... (3) 5 (10) 5 0 0 4
Interest expense, net............... (3) (3) (2) (1) (7) (6) (9)
--- --- --- --- --- --- ---
Net income (loss)................... (6)% 2% (12)% 4% (7)% (6)% (5)%
</TABLE>

The following table sets forth, for each component of revenues, the cost of
these revenues as a percentage of the related revenues for the periods
indicated:

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 TO NINE MONTHS ENDED
SEPTEMBER 30, 1999

Revenues

Total revenues increased 49% from $12.0 million for the nine months ended
September 30, 1998 to $17.9 million for the nine months ended September 30,
1999. We believe that the percentage increase in total revenues achieved in this
period is not necessarily indicative of future results. Our revenues consist of
software license revenues and services revenues. Software license revenues are
derived primarily from licenses of our software products. Services revenues are
derived primarily from contracts for software maintenance and technical support
and, to a lesser extent, consulting, training and other services. We also
experienced an increase in demand for consulting and training services directly
associated with the sale of new software licenses. Software license revenues
were 69% of total revenues for the nine months ended September 30, 1998, and 71%
of total revenues for the nine months ended September 30, 1999.

26
<PAGE> 30

Software License Revenues. Software license revenues increased 53% from
$8.3 million for the nine months ended September 30, 1998 to $12.7 million for
the nine months ended September 30, 1999. The increase was primarily due to an
increase in overall demand for data storage management products, increasing
market acceptance of our products, introduction of new products and increasing
revenues generated through our indirect sales channels.

Services Revenues. Services revenues increased 41% from $3.7 million for
the nine months ended September 30, 1998 to $5.2 million for the nine months
ended September 30, 1999. The increase was primarily due to increased sales of
services and support contracts on new license sales, increased renewals of these
contracts by our installed base of licensees and, to a lesser extent, increased
demand for consulting and training services.

Cost of Revenues

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

Cost of Software License Revenues. Cost of software license revenues
increased 156% from $262,000 for the nine months ended September 30, 1998 to
$670,000 for the nine months ended September 30, 1999. Gross margin on software
license revenues decreased from 97% for the nine months ended September 30, 1998
to 95% for the nine months ended September 30, 1999, primarily because of higher
product packaging and distribution costs in 1999. The gross margin on software
license revenues may vary from period to period based on the software license
revenues mix and certain products having higher royalty rates than other
products. We do not expect significant improvements in gross margin on software
license revenues.

Cost of Services Revenues. Cost of services revenues increased 83% from
$1.2 million for the nine months ended September 30, 1998 to $2.2 million for
the nine months ended September 30, 1999. Gross margin on services revenues
decreased from 67% for the nine months ended September 30, 1998 to 58% for the
nine months ended September 30, 1999. The increased cost and the reduced margin
was primarily due to personnel additions in our customer support and training
and consulting organizations, in anticipation of increased demand for these
services. The gross margin on services revenues may vary from period to period
based upon the mix of maintenance and technical support, consulting and training
services.

Operating Expenses

Research and Development. Research and development expenses consist
primarily of salaries, related benefits and other engineering-related costs.
Research and development expenses increased 37% from $2.7 million for the nine
months ended September 30, 1998 to $3.7 million for the nine months ended
September 30, 1999. The increase was due primarily to increased staffing levels.
As a percentage of total revenues, research and development expenses decreased
from 23% for the nine months ended September 30, 1998 to 21% for the nine months
ended September 30, 1999. We believe that a significant level of research and
development investment is required to remain competitive, and expect that the
dollar amount of these expenses will continue to increase in future periods.

27
<PAGE> 31

Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, related benefits, commissions, consultant fees, tradeshow, advertising
and other costs associated with our sales and marketing efforts. Sales and
marketing expenses increased 25% from $6.4 million for the nine months ended
September 30, 1998 to $8.0 million for the nine months ended September 30, 1999.
The increase in sales and marketing expenses is attributable to an increase in
the number of sales and marketing employees and increases in marketing programs.
Sales and marketing expenses as a percentage of total revenues decreased from
53% for the nine months ended September 30, 1998 to 44% for the nine months
ended September 30, 1999. The decrease as a percentage of total revenues was
primarily due to the increase in total revenues. We intend to continue to expand
our global sales and marketing infrastructure and, accordingly, we expect our
sales and marketing expenses to increase in the future.

General and Administrative. General and administrative expenses consist
primarily of salaries, related benefits and fees for professional services, such
as legal and accounting services. General and administrative expenses increased
82% from $1.5 million for the nine months ended September 30, 1998 to $2.7
million for the nine months ended September 30, 1999 which includes $150,000 in
non-cash compensation expense. General and administrative expenses as a
percentage of total revenues increased from 12% for the nine months ended
September 30, 1998 to 15% for the nine months ended September 30, 1999. The
increase was primarily due to additional personnel costs and other expenses
associated with enhancing our infrastructure to support expansion of our
operations. We expect that the dollar amount of general and administrative
expenses will increase as we expand our operations.

Interest Expense, Net. We incur interest expense on debt from a revolving
credit agreement, which bears interest at a rate of 1% over the bank's prime
lending rate, on notes payable to certain current and previous stockholders,
which bear interest at various rates from 8% to 10%, and on senior debt and
convertible debt from our investors. Our senior debt and convertible debt was
established in the amounts of approximately $4.4 million and $7.6 million,
respectively, in the second quarter of 1998 and bear interest at various rates
from 8% to 12%. Interest expense increased 113% from $714,000 for the nine
months ended September 30, 1998 to $1.5 million for the nine months ended
September 30, 1999.

Pro Forma Income Tax Provision (Benefit). Because we incurred net
operating losses in the nine months ended September 30, 1998 and in the nine
months ended September 30, 1999, our pro forma effective tax rate was zero.

COMPARISON OF YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

Revenues

Total revenues increased 61% from $7.4 million in 1996 to $11.9 million in
1997, and increased 45% to $17.3 million in 1998. We believe that the percentage
increase in total revenues achieved in this period is not necessarily indicative
of future results.

Software License Revenues. Software license revenues increased 41% from
$6.1 million in 1996 to $8.5 million in 1997, and increased 42% to $12.1 million
in 1998. The increases in both 1998 and 1997 were primarily the result of
continued growth in market acceptance of our software products, a greater volume
of large end-user transactions, increased revenues from OEM resales of bundled
and unbundled products and the introduction of new products. Software license
revenues growth in both periods also resulted from increases in direct sales and
indirect sales other than through OEMs.

Services Revenues. Services revenues increased 154% from $1.3 million in
1996 to $3.4 million in 1997, and increased 56% to $5.2 million in 1998. The
increases in both periods were primarily due

28
<PAGE> 32

to increased sales of services and support contracts on new licenses, renewal of
services and support contracts on existing licenses and the growth in services
provided by our professional services staff.

Cost of Revenues

Cost of Software License Revenues. Cost of software license revenues
decreased 32% from $848,000 in 1996 to $579,000 in 1997, and decreased 8% to
$532,000 in 1998. The decrease in 1998 was primarily the result of lower product
packaging and distribution costs. The decrease in 1997 was primarily the result
of the reduction of the sale of certain other vendors' products bundled with our
own. Gross margin on software license revenues was 86%, 93% and 96%,
respectively, in 1996, 1997 and 1998.

Cost of Services Revenues. Cost of services revenues increased 176% from
$442,000 in 1996 to $1.2 million in 1997, and increased 34% to $1.6 million in
1998. Gross margin on services revenues was 67%, 64% and 69% in 1996, 1997 and
1998, respectively. The changes in gross margin were primarily due to personnel
additions in our customer support and training and consulting organizations, in
anticipation of increased demand for these services, as well as to a change in
the mix of contracts for services with varying margins.

Operating Expenses

Research and Development. Research and development expenses increased 22%
from $2.0 million in 1996 to $2.5 million in 1997, and 61% to $4.0 million in
1998. The increase in both periods was due primarily to increased staffing
levels. As a percentage of total revenues, research and development expenses
were 27%, 21% and 23% in 1996, 1997 and 1998, respectively.

Sales and Marketing. Sales and marketing expenses increased 78% from $3.0
million in 1996 to $5.3 million in 1997, and increased 69% to $9.0 million in
1998. Sales and marketing expenses as a percentage of total revenues were 40%,
45% and 52% in 1996, 1997 and 1998, respectively. The dollar increase was
primarily attributable to increased sales and marketing staffing and, to a
lesser extent, increased costs associated with new marketing programs.

General and Administrative. General and administrative expenses decreased
12% from $1.9 million in 1996 to $1.7 million in 1997, and increased 26% to $2.2
million in 1998. General and administrative expenses as a percentage of total
revenues were 26%, 14% and 12% in 1996, 1997 and 1998, respectively. The dollar
increase in 1998 was primarily due to additional personnel costs and other
expenses associated with enhancing our infrastructure to support expansion of
our operations.

Interest Expense, Net. Interest expense, net was $143,000 for 1996,
$162,000 for 1997 and $1.3 million for 1998.

Pro Forma Income Tax Provision (Benefit). As a result of our net operating
losses in 1996 and 1998, and as a result of net loss carryforwards in 1997, our
pro forma effective tax rate in each period was zero.

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth items from our statements of operations for
the last seven quarters, as well as that data expressed as a percentage of our
total revenues. This data has been derived from unaudited combined financial
statements that, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of this information.

29
<PAGE> 33

We believe that period-to-period comparisons of our financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30,
1998 1998 1998 1998 1999 1999 1999
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses................... $2,656 $2,795 $2,859 $3,779 $3,842 $3,782 $5,115
Services............................ 1,119 1,115 1,431 1,565 1,652 2,003 1,506
------ ------ ------ ------ ------ ------ ------
Total revenues................... 3,775 3,910 4,290 5,344 5,494 5,785 6,621
Cost of revenues:
Software licenses................... 73 98 91 270 249 230 191
Services............................ 290 350 556 443 729 678 781
------ ------ ------ ------ ------ ------ ------
Total cost of revenues........... 363 448 647 713 978 908 972
------ ------ ------ ------ ------ ------ ------
Gross profit.......................... 3,412 3,462 3,643 4,631 4,516 4,877 5,649
Operating expenses:
Research and development............ 698 1,031 992 1,237 1,306 1,177 1,242
Sales and marketing................. 1,678 2,540 2,142 2,626 2,189 2,979 2,791
General and administrative.......... 371 572 526 681 855 919 906
------ ------ ------ ------ ------ ------ ------
Total operating expenses......... 2,747 4,143 3,660 4,544 4,350 5,075 4,939
Income (loss) from operations......... 665 (681) (17) 87 166 (198) 710
Interest expense, net................. (46) (154) (514) (547) (480) (512) (527)
------ ------ ------ ------ ------ ------ ------
Net income (loss)..................... $ 619 $ (835) $ (531) $ (460) $ (314) $ (710) $ 183
====== ====== ====== ====== ====== ====== ======

Revenues:
Software licenses................... 70% 71% 67% 71% 70% 65% 77%
Services............................ 30 29 33 29 30 35 23
------ ------ ------ ------ ------ ------ ------
Total revenues................... 100 100 100 100 100 100 100
------ ------ ------ ------ ------ ------ ------
Cost of revenues:
Software licenses................... 2 3 2 5 5 4 3
Services............................ 8 8 13 8 13 12 12
------ ------ ------ ------ ------ ------ ------
Total cost of revenues........... 10 11 15 13 18 16 15
------ ------ ------ ------ ------ ------ ------
Gross profit.......................... 90 89 85 87 82 84 85
Operating expenses:
Research and development............ 18 26 23 23 23 20 19
Sales and marketing................. 44 65 50 49 40 52 42
General and administrative.......... 11 15 12 13 16 16 14
------ ------ ------ ------ ------ ------ ------
Total operating expenses......... 73 106 85 85 79 88 75
Income (loss) from operations......... 17 (17) (0) 2 3 (4) 10
Interest expense, net................. (1) (4) (12) (10) (9) (9) (8)
------ ------ ------ ------ ------ ------ ------
Net income (loss)..................... 16% (21)% (12)% (8)% (6)% (13)% 2%
====== ====== ====== ====== ====== ====== ======
</TABLE>

The trends discussed in the period-to-period comparisons above generally
apply to the results of operations for our seven most recent quarters, except
for certain differences discussed below.

30
<PAGE> 34

Services revenues increased every quarter since March 31, 1998, except for
the quarter ended September 30, 1999. This exception was because we performed an
unusually large amount of consulting services during the quarter ended June 30,
1999.

Cost of software license revenues have remained relatively constant quarter
to quarter as a percentage of software license revenues. Cost of software
license revenues increased substantially in absolute terms in the quarter ended
December 31, 1998 due to a substantial investment in our shipping and packaging
infrastructure. Cost of services revenues as a percentage of services revenues
has fluctuated as the mix of services performed for our customers has varied
among higher and lower margin services.

Total operating expenses have fluctuated primarily as a result of
variations in our sales and marketing expenses. In each of the quarters ended
June 30, 1998, December 31, 1998 and June 30, 1999, we incurred additional sales
and marketing expenses associated with trade shows and significant marketing
programs. To a lesser extent, our operating expenses have fluctuated as a result
of costs associated with recruiting and hiring research and development
personnel.

We expect to experience significant fluctuations in future quarterly
operating results that may be caused by many factors including, among other
things, the release of software products by us or our competitors, market
acceptance of our products, the mix of our products and services sold, demand
for our products or the timing of customer acceptance of our products, renewal
of service agreements, software quality, changes in the level of operating
expenses and general economic conditions. Due to these and other factors, our
quarterly revenues and operating expenses are difficult to forecast accurately.

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents totaled $437,000 and $1.1 million at December
31, 1998 and September 30, 1999, and represented 6% and 11% of total assets,
respectively. Cash equivalents are highly liquid instruments with original
maturities of 90 days or less. At December 31, 1998 and September 30, 1999,
respectively, we had $16.3 million and $15.0 million of long-term obligations,
respectively, and stockholders' deficit was approximately $20.9 million and
$21.6 million, respectively.

For the nine months ended September 30, 1998, net cash used in operating
activities of $1.0 million resulted primarily from net losses and increases in
accounts receivable and prepaid expenses. This was partially offset by increases
in accounts payable, accrued expenses and deferred revenues. For the nine months
ended September 30, 1999, cash provided by operating activities of $525,000
resulted primarily from an increase in accounts payable, accrued expenses and
deferred revenues. This was partially offset by a net loss and an increase in
prepaid expenses. Net cash provided by or (used in) operating activities was
$(405,000), $896,000, and $(1.3) million in 1996, 1997 and 1998 respectively.
Increases in cash provided by operating activities in 1997 resulted primarily
from increases in accounts payable, accrued expenses, deferred revenues and net
income. For 1996 and 1998, cash used in operating activities resulted primarily
from net losses and an increase in accounts receivable, prepaid assets and other
assets. This was partially offset by increases in accrued expenses and deferred
revenues.

Our investing activities used cash of $685,000 in the nine months ended
September 30, 1999 and $562,000 in the nine months ended September 30, 1998,
primarily for capital expenditures. Our investing activities used cash of
$112,000, $654,000 and $667,000 in 1996, 1997 and 1998, respectively, primarily
due to capital expenditures, and, in 1996, a loan issued to a customer.

Financing activities provided cash of $799,000, and $570,000, in 1996 and
1997, respectively, primarily from borrowings under notes payable to the bank
and borrowings under long term debt, offset by distributions to stockholders and
redemptions of common stock.

31
<PAGE> 35

Financing activities provided cash of $812,000 in the nine months ended
September 30, 1999, primarily from increased net borrowings from the bank of
$1.2 million, and provided cash of $1.3 million in the nine months ended
September 30, 1998 and $1.3 million in the year ended December 31, 1998
primarily from the net proceeds of $12.1 million under the Company's senior
subordinated notes and convertible subordinated debt, which were issued on June
9, 1998. Borrowings from the bank bear interest at the bank's prime rate plus 1%
and become due on July 21, 2000. The senior subordinated notes and convertible
subordinated debt bore interest at 8% through June 1999, bear interest at 10%
from June 9, 1999 through June 9, 2000 and bear interest at 12% from June 9,
2000 through maturity, and are due and payable on December 9, 2000, with
interest payments due quarterly after inception. In specified events, such as
the closing of this offering, the notes are accelerated and become due in full.
In specified events, such as the closing of this offering, the convertible
subordinated debt is converted into shares of common stock at a rate of $3.67
per share, and interest, which has been accrued cumulatively since the inception
of the convertible subordinated debt, is forgiven.

In March 1992, we entered into a loan agreement and related promissory note
with Mr. Kay in order to secure working capital for our operations. The loan
agreement and the promissory note originally provided for Mr. Kay to make
unsecured loans to us up to a maximum principal amount of $650,000. On December
1, 1993, the promissory note was amended to increase the maximum principal
amount of the promissory note to $700,000. On December 1, 1994, the promissory
note was amended again to increase the maximum principal amount of the
promissory note to $1,000,000 and to make the promissory note payable upon
demand. Amounts that we borrow under the loan agreement bear simple interest at
a rate of 8% per year. As of , 2000, we owed Mr. Kay $
as a result of borrowings and accrued interest under this arrangement.

We believe that our current cash, cash equivalents, cash flow from
operations, and loans from our principal stockholder, will be sufficient to meet
our expected working capital and capital expenditure requirements for at least
the next twelve months. After that, we may require additional funds to support
our working capital requirements or for other purposes and may seek to raise
such additional funds through public or private equity financing or from other
sources. We cannot assure you that additional financing will be available at all
or that, if available, we will be able to obtain it on terms favorable to us.

YEAR 2000 COMPLIANCE

Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
determine whether "00" means 1900 or 2000. This may result in software failures
or the creation of erroneous results.

Our software products operate in complex system environments and directly
and indirectly interact with a number of other hardware and software systems. We
have tested the current versions of our products and the versions of our
products under development, as well as our internal systems, and believe that
they are Year 2000 compliant. In addition, we have inquired of our vendors who
provide us with goods and services as to their state of Year 2000 readiness.
Despite testing and investigation by us, our software products and the
underlying systems and protocols running our products may contain errors or
defects associated with Year 2000 date functions. Our vendors may

32
<PAGE> 36

also experience Year 2000 problems that could affect our business. We are unable
to predict to what extent our business may be affected if our software or the
systems that operate in conjunction with our software experience a material Year
2000 failure or if our vendors experience Year 2000 problems. Known or unknown
errors or defects that affect the operation of our software could result in:

- delay or loss of revenues, cancellation of customer contracts;

- diversion of development resources;

- damage to our reputation;

- increased maintenance and warranty costs; and

- litigation costs.

Any of these negative effects could adversely affect our business and future
results of operations. Furthermore, if our vendors experience Year 2000
problems, we could experience disruption in the provision of products and
services to our customers which could have many of the negative effects
described above. In addition, if our customers experience their own Year 2000
problems, they may delay or forego purchases of our products until they have
addressed such problems, which could have an adverse effect on our business and
future operating results.

The total cost of our Year 2000 compliance activities has not been, and is
not anticipated to be, material to our business, results of operations and
financial conditions. We estimate specific Year 2000 expenses to date to be not
more than $200,000 and do not expect total costs of the compliance activities to
exceed $300,000. While we believe that we have completed our Year 2000 readiness
process, we cannot assure you that we have identified and remedied all
significant Year 2000 problems, that we will not incur significant additional
time and expense or that such problems will not harm our business.

We believe that our products and internal systems are Year 2000 compliant,
and we presently have a contingency plan for handling Year 2000 problems that
are not detected and corrected prior to their occurrence.

QUALITATIVE AND QUANTITATIVE DISCLOSURE OF MARKET RISK

We do not currently have any derivative financial instruments and do not
intend to invest in derivatives. We invest our cash in short-term highly liquid
cash equivalents. All of our indebtedness will be automatically converted into
equity or repaid upon completion of this offering. As a result, we believe that
our exposure to interest rate risk is not material to our results of operations.

33
<PAGE> 37

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 establishes methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. We will be required to
implement SFAS No. 133 for the year ending December 31, 2001. Our foreign
currency exchange rate hedging activities have been insignificant to date and we
do not believe that the impact of SFAS No. 133 will be material to our financial
position, results of operations or cash flows.

In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires that
entities capitalize certain costs related to internal-use software once certain
criteria have been met. We adopted SOP 98-1 as of January 1, 1999. The impact of
adopting SOP 98-1 was not material, and we do not expect SOP 98-1 to have a
material impact on our financial position, results of operations and cash flows.

In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." SOP 98-9
amends SOP 97-2 "Software Revenue Recognition" to require recognition of revenue
using the "residual method" when certain criteria are met. We will be required
to implement these provisions of SOP 98-9 for the year ending December 31, 2000.
Effective in December 1998, SOP 98-9 also amends SOP 98-4, an earlier amendment
to SOP 97-2, to extend the deferral of the application of certain passages of
SOP 97-2 provided by SOP 98-4. We do not believe the impact of SOP 98-9 will be
material to our financial position, results of operations and cash flows.

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<PAGE> 38

BUSINESS

OVERVIEW

We are a leading provider of online data storage management and data access
solutions. Our software enables enterprises to move, store, manage and access
data quickly and efficiently over a variety of network architectures, including
the Web and SANs. Our software supports many different types of storage devices,
is easy to install and use, and can manage storage systems ranging in size from
a single storage device to an enterprise-wide network storage system.

INDUSTRY BACKGROUND

The growth of data storage

The growth of data-intensive computing functions such as e-commerce,
e-mail, multimedia applications, complex enterprise computer applications and
the conversion from paper to electronic storage has fueled rapid growth in the
amount of data stored within an enterprise. For example, International Data
Corporation, an independent information technology research firm referred to as
IDC, projects that the number of e-mail messages sent per day in the United
States will grow from approximately 3.5 billion in 1999 to 9.2 billion in 2003.
This growth has resulted in an increased demand for more efficient methods to
store and retrieve data. IDC estimates that multi-user disk storage grew from
more than 7,000 terabytes in 1993 to more than 188,000 terabytes in 1999, and
will reach more than 1.9 million terabytes in 2003. A byte is the amount of
computer memory required to store one number, letter or symbol; a terabyte is
equal to one trillion bytes.

This dramatic growth in data storage is driving the demand for many types
of storage technology, such as new storage devices, networking hardware, network
transmission technology and software. Many enterprises are trying to manage
larger amounts of data, creating a demand for solutions that can automate this
task. Industry analysts predict that demand for data storage software in
particular will grow significantly. IDC estimates that the overall market for
data protection and management software grew from $2.1 billion in 1996 to $3.5
billion in 1998 and will grow to $6.7 billion in 2003.

Traditional data storage and back-up

Users traditionally have stored data on hard disks or other storage devices
connected to their personal computers or computer networks, a configuration
referred to as primary storage. In addition to primary storage, enterprises have
widely adopted back-up processes to insure against the loss of data by creating
and storing duplicates of existing data files. The traditional back-up process
moves data to secondary storage devices not directly accessible by users and
applications. Typically, an enterprise will perform a full back-up of all data
once a week and incremental back-ups on each of the other six days of the week.
An incremental back-up operation copies only those files that have changed since
the last full back-up. There are several significant problems with traditional
data storage and back-up methods:

- Expensive primary storage capacity is consumed rapidly. Hard drives and
other storage devices used for primary storage are more expensive than
remote and back-up storage devices and have a limited capacity. This
capacity is often quickly exhausted, and the user or the enterprise must
then either purchase additional capacity or delete data. An enterprise
incurs additional expense not only for the purchase of additional storage
devices, but also for the administrative time required to install,
allocate and manage this additional primary storage capacity.

- Repetitive back-up consumes network transmission capacity. As the amount
of data increases, repeatedly backing up the same data consumes
increasing amounts of network transmission

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capacity, or bandwidth. Computer networks have a limited amount of
bandwidth, and most of this capacity is consumed during business hours by
the demands of the network's users. As a result, networks lack the
capacity to transmit data to storage devices for back-up during business
hours. In addition, as enterprises expand their operations
internationally, as the Internet makes networks more accessible and as
the workday becomes longer, the number of hours available each day for
back-up is shrinking. As a result, network administrators have smaller
windows of time in which they can back up increasing amounts of data
without impairing the performance or accessibility of the network.

- Failure to manage data results in an inefficient back-up process. Most
files on a typical file server are not frequently accessed more than 30
days after they are created. Repeatedly backing up the same unchanged
data consumes more back-up storage capacity unnecessarily, and requires
an enterprise to expand its storage capacity with each subsequent
back-up. In addition, because network administrators cannot determine
which files are important, they either save most files or randomly delete
them.

- Access to stored data is limited. Infrequently accessed data is
typically migrated from primary storage devices to secondary storage
devices, such as tape libraries. Once this process has occurred, the time
and effort necessary to retrieve a migrated file is significant. A user
will need to know information such as the file name, the original storage
location and the date of the back-up. When this information has been
determined, the network administrator will then use this information to
retrieve the file manually. This process is inefficient for the user, who
must wait for the needed file, and for the network administrator, who
must act as an intermediary and retrieve the file. In addition, files
that have been deleted from primary storage and only reside on secondary
storage devices are not readily accessible to software applications that
may need the data contained in the file.

The emergence of storage area networks

In response to the limitations of traditional data storage and back-up
methods, storage area networks, or SANs, have emerged. A SAN is a network of
servers and data storage devices that are interconnected at high speeds,
typically using Fibre Channel transport technology, which allows network
resources to be located at remote and diverse locations. Enterprises are
increasingly deploying SANs in an effort to move data storage operations off of
their local area networks, or LANs, to a separate network dedicated to data
storage. Moving these operations to SANs frees up bandwidth on the LAN for more
efficient operation of enterprise software applications and communications. SANs
can be significantly less expensive to maintain and expand than traditional data
storage systems because they enable shared, high-speed access to stored data.
IDC estimates that the overall SAN market will grow from $3.4 billion in 1999 to
$13.8 billion in 2003.

Despite the greater capacity and speed offered by storage area networks,
SANs do not address the need to make management and access of data more
efficient. In particular, SANs fail to determine which data should be stored, do
not provide optimized transfer of data to the SAN, do not enable immediate
access to backed-up data and cannot provide an effective index of stored data.

The need for data storage management software

In order to address the problems of traditional storage and back-up
methods, and to take advantage of the power of SANs, a data storage solution
must:

- automatically apply policies that determine whether, or for how long,
data should be stored;

- provide optimized transfer of data to and from storage devices throughout
networks, including LANs and SANs;

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<PAGE> 40

- provide a detailed index of stored data;

- enable rapid and easy retrieval of stored data selected by users and
software applications;

- maximize the effective capacity of existing storage devices; and

- provide secure Web access to stored data.

THE OTG SOLUTION

We are a leading provider of online data storage management and data access
solutions. Our Windows NT-based solutions provide customers with the following
benefits:

- Efficient use of storage capacity. We enable automated, intelligent data
migration to less expensive remote storage devices and networks.

- Fast data access. We provide quick and easy access to data for users and
software applications, including secure Web access.

- Increased efficiency of back-up systems. We reduce the time required for
data back-up, maximize use of back-up storage capacity and increase
available network bandwidth by eliminating the repetitive back-up of
unchanged data.

- Diverse storage options. We support many different types of data storage
devices within the same data storage system to maximize performance and
minimize cost.

- Fast and easy installation and use. We make installation, configuration
and use quick and easy, using an intuitive graphical user interface.

- Flexibility and scalability. Our solutions expand quickly and easily to
accommodate changes in the size of a data storage system from a single
storage device to an enterprise-wide network storage system and to
support additional users and applications.

THE OTG STRATEGY

Our objective is to extend our position as a leading provider of online
data storage management and data access solutions. To achieve this objective, we
intend to:

Expand our presence in the SAN market. We intend to expand the current use
of our XtenderSolutions product suite in the SAN market by introducing
SANXtender. This product will customize our existing technology to optimize the
capabilities of SANs. SANXtender will provide intelligent data storage
management over the SAN by linking SAN technologies to LAN applications. In
developing SANXtender, we are working with manufacturers of SAN technologies,
such as ATL Products, Brocade Communications Systems, Chaparral Network Storage,
Gadzoox and Hewlett-Packard, to ensure that SANXtender will be certified as
compatible with leading SAN hub, switch, router and storage technologies.

Capitalize on the release of Windows 2000. We plan to introduce a new
version of DiskXtender, called DiskXtender 2000, shortly after the release of
Windows 2000. DiskXtender 2000 will allow our existing technology to operate on
the Windows 2000 platform. We believe our engineering history with the Windows
NT code and our access to pre-release versions of Windows 2000 will enable us to
offer a closely integrated version of DiskXtender 2000 in a timely fashion. Over
time, we will integrate the XtenderSolutions product suite with new features
provided by Windows 2000.

Provide solutions to address e-mail storage management. To meet
accelerating demand for e-mail storage management solutions, we are building on
our DiskXtender technology to develop eMailXtender, an e-mail indexing,
archiving and retrieval application, and integrating it with leading

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<PAGE> 41

e-mail applications. A preliminary version of this product, currently being
implemented by one of our customers, allows users to conduct full-text searches,
archive to secondary or removable storage devices, and retrieve e-mail messages
and e-commerce transaction documents.

Offer our storage solutions over the Web through ISP and ASP
relationships. We intend to expand our capability to enable our customers to
outsource data storage management and capacity over the Web, through
relationships with Internet service providers, or ISPs, and application service
providers, or ASPs. As Internet access becomes faster and more secure, we
anticipate that increasing numbers of enterprises will turn to leased or metered
online storage solutions as a cost-effective alternative to in-house
capabilities. We intend to offer this capability through ISPs and ASPs under the
name OnlineStor.com. OnlineStor.com will enable individual users and enterprises
to store and manage data over the Web with functionality similar to that of
DiskXtender at substantial hardware and maintenance cost savings over in-house
storage systems.

Enable our core technology to run on additional operating systems. We are
currently modifying our DiskXtender technology to operate on the UNIX and Linux
operating systems. These new versions of our products will provide the ability
to manage data on UNIX and Linux file servers in addition to the Windows NT
servers currently supported today.

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<PAGE> 42

PRODUCTS AND SERVICES

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

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
CURRENT PRODUCTS DESCRIPTION
- --------------------------------------------------------------------------------------------
<S> <C>
DiskXtender Our core product; enables comprehensive data storage
management throughout an enterprise's network

ApplicationXtender Organizes and stores data used by Windows-based applications
and enables users to display, print, fax, e-mail or annotate
the stored data

WebXtender Provides access to data over an intranet or the Internet
using a standard Web browser

ColdXtender Manages the storage of computer-generated data for use in
preparing forms and reports in standardized formats
- --------------------------------------------------------------------------------------------
PRODUCTS UNDER DEVELOPMENT DESCRIPTION
- --------------------------------------------------------------------------------------------
SANXtender Will apply our technology to move, store, manage and access
data in a SAN environment

OnlineStor.com Will provide leased or metered data storage management and
capacity over the Web through ISPs and ASPs

eMailXtender Will provide intelligent e-mail storage, indexing, archiving
and retrieval, integrated with leading e-mail applications
- --------------------------------------------------------------------------------------------
</TABLE>

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

- DiskXtender. The list price of DiskXtender for two Storage Tek
9740-100 tape libraries (representing 10 terabytes of data) is
approximately $50,000. In addition, the customer would need to
purchase four additional DiskXtender agent licenses to support the
remote storage servers required in its network for a total cost of
$56,000.

- ApplicationXtender. To support 25 users accessing the data from the
network, the customer would need to purchase 25 concurrent
ApplicationXtender licenses at a list price of approximately
$25,000.

- WebXtender. To support 100 Web users, the customer would need to
purchase both a Web server component at a price of approximately
$10,000 and 100 concurrent WebXtender licenses at a list price of
approximately $41,000.

The price for this XtenderSolutions configuration would be approximately
$132,000, with annual maintenance fees of approximately $25,000.

Current products

DiskXtender. The cornerstone of our product suite is DiskXtender.
DiskXtender is a server-based, Windows NT solution that enables management of
data throughout an enterprise's network while tracking and managing stored file
locations. DiskXtender enhances a data storage system by increasing its primary
storage capacity and providing constant accessibility to data while integrating

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<PAGE> 43

stored files with other enterprise applications. DiskXtender uses advanced
features such as caching technologies, which temporarily store frequently
accessed or recently accessed data and thereby speed up an application's access
to data. DiskXtender is currently the only Windows NT storage solution that
manages all major types of storage devices, from optical and tape to CD-ROM and
DVD. We provide a DiskXtender application programming interface, or API,
allowing end-users and OEMs to integrate DiskXtender with software applications,
such as Web browsers, word processing, accounting and imaging.

DiskXtender has won the following awards, among others:

- 1999 Solutions Integrator Impact Award for Best Storage Product from
International Data Group, the parent of IDC; and

- 1998 and 1999 Product of the Year Awards from Imaging & Document
Solutions magazine.

ApplicationXtender. ApplicationXtender organizes and stores data used by
Windows-based applications and enables users to display, print, fax, e-mail or
annotate the stored data. Because ApplicationXtender integrates the host
applications chosen by the end-user with DiskXtender technology, end-users can
access, retrieve, control and view data through the host applications. As with
DiskXtender, an API toolkit allows end-user customers and OEMs to integrate
ApplicationXtender with existing applications.

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

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

Products under development

We plan to introduce several products in the near future to address
emerging storage management requirements. These include:

SANXtender. SANXtender will apply our XtenderSolutions technology to
optimize the performance of a SAN. SANXtender will provide intelligent data
storage management over a SAN by linking SAN technologies to LAN applications.
This will allow data transfer and storage without moving data through servers on
the LAN, thereby freeing the resources of the LAN for user applications. We are
working with manufacturers of SAN technologies, such as ATL Products, Brocade
Communications Systems, Chaparral Network Storage, Gadzoox and Hewlett-Packard,
to ensure that SANXtender will be certified as compatible with leading SAN hub,
switch, router and back-up technologies. We anticipate general commercial
availability of this product during the third quarter of 2000.

OnlineStor.com. We are adapting our products to be offered as an outsourced
data storage and management service under the name OnlineStor.com. These
services will be offered on a metered or leased basis through ISPs and ASPs.
OnlineStor.com will enable enterprises to store and manage data over the Web
with functionality similar to that of the XtenderSolutions product suite. We
expect that our customers will realize substantial hardware and maintenance cost
savings over in-house storage systems by using this service. We anticipate
general commercial availability of OnlineStor.com during the second quarter of
2000.

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<PAGE> 44

eMailXtender. eMailXtender is an e-mail indexing, archiving and retrieval
application that will be integrated with leading e-mail applications. It will
allow users to satisfy their legal, auditing and archiving requirements without
investing in expensive, fixed storage resources. A preliminary version of this
product, currently being implemented by one of our customers, allows users to
conduct full-text searches, and archive and retrieve e-mail messages and
e-commerce transaction documents. We anticipate general commercial availability
of this product during the second quarter of 2000.

Professional services and support

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

- analysis of a customer's requirements for data storage and management;

- software design and implementation;

- business process analysis and implementation;

- product installation and upgrading;

- custom documentation; and

- training.

When a customer licenses our products, we provide a 30-day support package
that includes installation, configuration and testing, access to an on-call
technical help desk, a technical support website and software updates. We also
host regularly scheduled training seminars in the Washington D.C. metropolitan
area, on the West Coast and, upon request, at a customer's site. In addition to
our own capabilities, our value-added resellers, or VARs, and system integrators
perform professional services for our customers.

TECHNOLOGY

DiskXtender employs a variety of advanced technology features. DiskXtender
uses software agents that prevent the file server hard disk from running out of
free space by checking space utilization against a watermark, or threshold
setting, that can be established by the customer. Migration, space management
and retention policies are defined by the user and can be customized for any
application requirements, based, for example, on age, size or file name. Based
on these rules, DiskXtender will migrate eligible files to secondary storage. In
addition, based on defined watermarks, DiskXtender will truncate the original
file data to make space for additional data. File truncation removes the
original file data from the file server hard disk, leaving behind a stub file,
or place marker, freeing the space for other use.

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

- captures the request to open the file;

- refers to the stub file associated with the file;

- determines the library and storage device to which the file was migrated;
and

- retrieves the file from the extended storage system by copying it back to
the original file server hard disk for use by the application that
requested it.

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<PAGE> 45

DiskXtender manages all file migration based on incoming file requests and
defined storage policies. Recall of file data from secondary storage devices is
performed automatically.

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

[GRAPHIC SHOWING ARCHITECTURE OF DISKXTENDER]

CUSTOMERS

We have licensed our products to over 6,000 corporations, government
agencies and other organizations across a broad spectrum of industries. The
following table lists some of our customers, each of which has accounted for
more than $25,000 of our revenues since January 1998.

Automobile Association of America
American Airlines
State of California
Caterpillar
Citicorp
Delta Airlines
Dow Chemical
Marathon Oil
Mayo Clinic
McKesson/HBOC
Nabisco
NASD
NationsBank (now Bank of America)
Nortel Networks
Parker Hannifin
PSINet
Raytheon
Unisys
U.S. Department of Defense
U.S. Federal Aviation Administration
U.S. Navy
University of Miami
Veterans Administration Hospitals
Westinghouse (now General Electric)

How one of our customers has used our data storage management solutions

CONVERTING FROM PAPER TO ELECTRONIC STORAGE AT PSINET. PSINet, a provider
of business Internet access, has over 3,000 employees and annual revenue of more
than $560 million. With growing worldwide operations, PSINet experienced an
increasing volume of paper files generated by contracts, legal documents,
financial records and customer provisioning files. As a result of this growth in
paper, PSINet realized the need to increase automation of their data storage and
reduce the space and retrieval time associated with files.

In 1998, PSINet engaged us to provide a data storage management solution
including access to critical files, document imaging and a Web-based retrieval
solution to handle the electronic contract files. We have helped PSINet convert
some areas where paper files were used to optical disk, and have installed an
optical storage management system utilizing DiskXtender, ApplicationXtender and
WebXtender for records generated by its domestic operations. We are currently
working with PSINet to extend these capabilities to many areas within their
international operations.

SALES AND MARKETING

We sell our products primarily through relationships with OEMs, VARs and
distributors. Our distribution through these channels accounted for % of our
total revenues in 1998 and 80% of our total revenues in the nine months ended
September 30, 1999, with no single OEM, VAR or

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<PAGE> 46

distributor accounting for more than 10% of our total revenues in either period.
We are also expanding our direct sales force to provide better coverage for
larger clients.

OEM Relationships. We currently have more than 15 OEM relationships. These
OEMs buy our products to incorporate into their own product offerings or resell
our products under their own label. We have OEM relationships with Advanced
Financial Solutions, Agilent Technologies, which is a subsidiary of
Hewlett-Packard, Cerner, Data General, which is a division of EMC, FileNet,
Imation, Legato Systems and StorageTek, among others.

VAR and Distributor Relationships. We currently have more than 225 VAR and
distributor agreements, including agreements with Affiliated Computer Systems,
Cranel, Datalink, Electronic Data Systems, Envision, GE Capital, IKON, Law
Cypress, National Computer Systems, Optical Laser. These resellers service North
America, Europe, East Asia and Latin America. Pursuant to these alliances, our
VARs and distributors typically market the entire XtenderSolutions product
suite, receiving a discount on products sold.

Direct Sales Force. We maintain a direct sales staff with responsibilities
for pursuing and managing larger customers, as well as providing support to our
distributors, VARs and OEMs. We have been hiring additional salespersons and
expect to continue to do so.

Marketing. Our marketing department consists of marketing professionals
dedicated to advertising, public relations, marketing communications, events and
channel partner programs. Our marketing efforts focus on building brand
recognition and developing leads for our sales force. To achieve these
objectives, we maintain a strategic marketing program which includes the
following elements:

- a national advertising campaign promoting the XtenderSolutions brand;

- a comprehensive Web marketing program and website;

- programs to enhance communication with our OEMs, VARs and distributors,
including our XpertPartner conference;

- seminars to increase the visibility of our executives and generate leads
for our sales force;

- participation in trade shows; and

- direct marketing to targeted corporate customers.

COMPETITION

We face a variety of competitors that offer products with some of our
products' features. Some potential customers may elect to internally develop
capabilities similar to those provided by our products rather than buying them
from us or another outside vendor. Although our products generally enhance
traditional data back-up capabilities offered by companies such as Veritas,
Legato Systems, Computer Associates and IBM, our products may compete against
such traditional back-up solutions when a potential customer seeks to address
its storage needs with only a data back-up solution. Furthermore, Veritas has
recently begun to offer a Windows NT-based product that competes with
DiskXtender.

This would reduce or eliminate the need to purchase our products, which would
cause our revenues and our business to suffer.

INTELLECTUAL PROPERTY

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

EMPLOYEES

As of November 30, 1999, we had a total of 166 employees. Of these
employees, 53 were involved in sales and marketing; 27 were involved in product
development; 44 were involved in quality assurance and product support; 25 were
involved in professional services; and 17 were involved in administrative and
corporate functions.

FACILITIES

Our operations are headquartered in one 35,000 square foot facility in
Bethesda, Maryland that is leased under an agreement expiring on September 30,
2002. We also lease a field office in Irvine, California. We believe that these
facilities are suitable to meet our needs for the foreseeable future.

LEGAL PROCEEDINGS

We are not party to any material legal proceedings.

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MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

Our executive officers, directors and some other key employees, and their
ages as of December 22, 1999, are as follows:

<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Executive officers and directors:
Richard A. Kay........................ 43 Chairman of the Board, President and
Chief Executive Officer
F. William Caple...................... 41 Executive Vice President, Secretary and
Director
Ronald W. Kaiser...................... 45 Chief Financial Officer and Treasurer
Gabriel A. Battista (2)............... 55 Director
John Burton (2)....................... 48 Director
Joseph R. Chinnici (1)................ 45 Director
Geaton A. DeCesaris, Jr. (1)(2)....... 44 Director
Donald B. Hebb, Jr. (1)............... 57 Director

Key employees:
Mark L. Hanson........................ 35 Vice President of Development -- Web
Solutions
Gerald Held, Jr....................... 39 Vice President of Business Development
Scott R. Nickel....................... 33 Vice President of Technology
Grant Wagner.......................... 37 Vice President of Sales
</TABLE>

- ---------------
(1) Member of the Audit Committee

(2) Member of the Compensation Committee

Richard A. Kay, our founder, has served as our chairman, president and
chief executive officer since our inception in 1992. Prior to founding OTG, Mr.
Kay co-founded National Operator Services, Inc., a reseller of telephone
operator services, and NOS Communications, a reseller of AT&T long distance
services.

F. William Caple has served as our executive vice president since May 1996.
Mr. Caple has served as a member of our board of directors since December 1997.
From January 1994 to April 1996, Mr. Caple was a partner of the law firm of
Galland, Kharasch, Morse & Garfinkel.

Ronald W. Kaiser has served as our chief financial officer and treasurer
since June of 1998. From April 1998 to June 1998, Mr. Kaiser was an employee of
Network Associates, Inc., an Internet security company, following the
acquisition of Trusted Information Systems, Inc. by Network Associates, Inc.
From May 1996 to April 1998, Mr. Kaiser served as the chief financial officer of
Trusted Information Systems, Inc., an information security company. From January
1996 to April 1996, Mr. Kaiser served as a consultant to American Communication
Services, Inc., now known as e.spire Communications, Inc. From November 1994 to
January 1996, Mr. Kaiser served as the chief financial officer of ACSI.

Gabriel A. Battista has served as a member of our board of directors since
June 1998. Mr. Battista has served as the chairman of the board of directors,
president and chief executive officer of Talk.com, Inc., an e-commerce and
telecommunications services company, since January 1999. From October 1996 to
December 1998, Mr. Battista served as the chief executive officer of Network
Solutions, Inc., an Internet domain name registration company. From February
1991 to October 1996, Mr. Battista served as the president and chief executive
officer of

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Cable & Wireless, Inc., a telecommunications company. Mr. Battista currently
serves as a director of AXENT Technologies, Inc. and Systems and Computer
Technology Corporation.

John Burton has served as a member of our board of directors since June
1998. Mr. Burton has served as managing director of Updata Capital, Inc., an
investment banking firm, since March 1997. From February 1995 to February 1997,
Mr. Burton served as president of Burton Technology Partners, Ltd. From March
1984 to January 1995, Mr. Burton served as president and chief executive officer
of Legent Corporation, a vendor of software development products. Mr. Burton
currently serves as a director of AXENT Technologies, Inc., Banyan Systems, Inc.
and Map Info Corporation.

Joseph R. Chinnici has served as a member of our board of directors since
June 1998. Since September 1994, Mr. Chinnici has served in a number of
positions at Ciena Corp., and currently serves as Ciena Corp.'s senior vice
president, finance and chief financial officer.

Geaton A. DeCesaris, Jr. has served as a member of our board of directors
since June 1998. Mr. DeCesaris has served as the president, chief executive
officer and a director of Washington Homes, Inc., a national homebuilding
company, since August 1988, and as the chairman of the board of directors of
Washington Homes, Inc. since April 1999.

Donald B. Hebb, Jr. has served on our board of directors since June 1998.
Mr. Hebb has served as a general partner of ABS Capital Partners since November
1995. Mr. Hebb has served as the managing member of ABS Partners II, LLC, the
general partner of ABS Capital Partners II, L.P. since March 1993. Prior to
that, Mr. Hebb served as a managing director of Alex. Brown Incorporated. Mr.
Hebb serves as a director of T. Rowe Price Associates, Inc. and SBA
Communications Corporation.

Mark L. Hanson has served as our vice president of development -- Web
solutions since October 1999. From November 1992 to September 1999, Mr. Hanson
served as one of our senior developers.

Gerald Held, Jr. has served as our vice president of business development
since January 1998. From April 1996 to January 1998, Mr. Held served as a
director of business development at Eastman Software, a document imaging
management company. From January 1984 to April 1996, Mr. Held served as a
manager of product management at Rexon, Inc., a storage hardware company.

Scott R. Nickel has served as our vice president of technology since
October 1999. From November 1992 to September 1999, Mr. Nickel served as one of
our senior developers.

Grant Wagner has served as our vice president of sales since July 1999.
From January 1999 to July 1999, Mr. Wagner served as vice president of sales for
Remedial Technologies Network, an Internet publishing company. From January 1990
to January 1999, Mr. Wagner served in various sales positions, including, most
recently, vice president of global sales, at Computer Associates International,
Inc., a software company.

Pursuant to the voting agreement dated June 9, 1998, by and among ABS
Capital Partners II, L.P., Greylock IX Limited Partnership and Michael P.
Murray, as purchasers, Richard A. Kay and OTG, the purchasers were given the
right to designate one director and Mr. Kay was given the right to designate six
directors. Mr. Hebb was elected to our board of directors as the designee of the
purchasers and Mr. Kay, Mr. Battista, Mr. Burton, Mr. Caple, Mr. Chinnici and
Mr. DeCesaris were elected to our board of directors as the designees of Mr.
Kay. These rights terminate upon the closing of this offering.

ELECTION OF DIRECTORS

Following this offering, the board of directors will be divided into three
classes, each of whose members will serve for a three-year term. Mr.
and Mr. will serve in the class which term expires in 2000. Mr.
and Mr. will serve in the class which term

46
<PAGE> 50

expires in 2001; and Mr. , Mr. and Mr. will serve
in the class which term expires in 2002. Upon the expiration of the term of a
class of directors, directors in that class will be elected for three-year terms
at the annual meeting of stockholders in the year in which that term expires.

COMPENSATION OF DIRECTORS

We reimburse directors for reasonable out-of-pocket expenses incurred in
attending meetings of the board of directors. We may, in our discretion, grant
stock options and other equity awards to our non-employee directors from time to
time pursuant to our stock incentive plans. In June 1999, we granted options to
purchase 5,000 shares of our common stock to each of Mr. Battista, Mr. Burton,
Mr. Chinnici, Mr. DeCesaris and Mr. Hebb, our non-employee directors, at an
exercise price of $5.50 per share. These options vested upon grant. We have not
yet determined the amount and timing of any future grants or awards.

BOARD COMMITTEES

The board of directors has established a compensation committee and an
audit committee. The compensation committee, which consists of Mr. Burton, Mr.
Battista and Mr. DeCesaris, reviews executive salaries, administers our bonus,
incentive compensation and stock plans and approves the salaries and other
benefits of our executive officers. In addition, the compensation committee
consults with our management regarding our pension and other benefit plans and
compensation policies and practices.

The audit committee, which consists of Mr. Chinnici, Mr. Hebb and Mr.
DeCesaris, reviews the professional services provided by our independent
accountants, the independence of our accountants from our management, our annual
financial statements and our system of internal accounting controls. The audit
committee also reviews other matters with respect to our accounting, auditing
and financial reporting practices and procedures as it may find appropriate or
may be brought to its attention.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

We did not have a compensation committee until November 1999. Prior to that
time, the entire board of directors performed the function of a compensation
committee. No member of our compensation committee is an officer or employee. No
interlocking relationships exist between our board of directors or compensation
committee and the board of directors or compensation committee of any other
company, nor has any interlocking relationship existed in the past.

INDEMNIFICATION AGREEMENTS

We have entered into indemnification agreements with each of our directors
and officers. Their indemnification agreements will require us to indemnify our
directors and officers to the fullest extent permitted by Delaware law.

EMPLOYMENT AGREEMENTS

Mr. Kay serves as our chairman, president and chief executive officer
pursuant to the terms of an employment agreement dated June 9, 1999. The term of
the agreement continues until December 31, 2003. Pursuant to the terms of the
agreement, Mr. Kay's initial annual compensation consists of a base salary of
$485,000 and a bonus of at least $115,000. After the first year, Mr. Kay's
annual compensation will be determined by the board of directors. Upon
termination without cause, as defined in the agreement, Mr. Kay is entitled to
severance payments equal to (1) the greater of (a) the remaining portion of his
compensation for the remaining term of the agreement, or (b) the amount of his
then current annual salary, to be paid in monthly installments over a 12 month
period

47
<PAGE> 51

and (2) the annual bonus that would otherwise have been paid to Mr. Kay for the
fiscal year in which he was terminated, to be paid in one lump sum payment
within 90 days of the date of termination. Upon termination without cause, Mr.
Kay is entitled to continue to receive the same health, disability and term life
insurance benefits as were provided prior to termination until the earlier of
his employment by a third party or December 31, 2003. Under the agreement, Mr.
Kay agreed not to compete with us during the term of his employment and for two
years after his termination. In addition, Mr. Kay agreed not to solicit our
employees or customers during the same period. However, if we terminate Mr. Kay
without cause, or he terminates his employment because we demoted him, because
he is not elected or is removed as chairman of the board or because we have
relocated our principal executive offices more than 50 miles from Bethesda,
Maryland, the non-competition and non-solicitation provisions of the agreement
expire upon the date of termination his employment.

Mr. Caple serves as our executive vice president pursuant to the terms of
an employment agreement dated January 1, 1998, as amended. The term of the
agreement continues until December 31, 2002. Pursuant to the terms of the
agreement, Mr. Caple's annual compensation consists of a base salary of $175,000
and a bonus of at least 33.3% of his base salary. Mr. Caple's base salary will
automatically increase by 10% on January 1, 2001 and each January 1 thereafter
throughout the term of the agreement. Upon termination without cause, as defined
in the agreement, Mr. Caple is entitled to severance payments equal to the
amount of his then current annual salary, to be paid in two installments, the
first of which must be paid on the date of termination and the second of which
must be paid within 90 days of the date of termination. Mr. Caple agreed not to
compete with us during the term of his employment and for a period after the
termination of his employment equal to the lesser of two years or the length of
his employment period, if less than two years. In addition, Mr. Caple agreed not
to solicit our employees or customers during the same period.

Mr. Kaiser serves as our chief financial officer pursuant to the terms of
an employment agreement dated May 28, 1998, as amended. The term of the
agreement continues until May 31, 2001. Pursuant to the terms of the agreement,
Mr. Kaiser's annual compensation consists of a base salary of $187,000 and a
bonus of at least 30% of his base salary. Upon termination without cause, as
defined in the agreement, Mr. Kaiser is entitled to severance payments equal to
12 months of his then current annual salary, to be paid in monthly installments
over a 12 month period, and health insurance benefits for the same period. In
addition, the agreement provides Mr. Kaiser's options will continue to vest for
a period of 12 months after termination without cause. Pursuant to the
agreement, Mr. Kaiser received an option to purchase 164,706 shares of our
common stock at a price of $3.67 per share vesting over four years, and the
right to future option grants in specified circumstances to prevent dilution of
Mr. Kaiser's shareholdings. This right terminates upon an initial public
offering. Mr. Kaiser agreed not to compete with us during the term of his
employment and for a period after the termination of his employment equal to the
lesser of two years or the length of his employment period, if less than two
years. In addition, Mr. Kaiser agreed not to solicit our employees or customers
during the same period.

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<PAGE> 52

EXECUTIVE COMPENSATION

The following table sets forth, for the year ended December 31, 1998, the
cash compensation earned and shares underlying options granted to (1) our
chairman, president and chief executive officer and (2) each of the other two
most highly compensated executive officers who received annual compensation in
excess of $100,000, collectively referred to as the named executive officers.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
---------------------------------- SHARES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS COMPENSATION
------------------ -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Richard A. Kay........................... $600,000 $ -- $ -- -- $ --
Chairman, President and Chief Executive
Officer
F. William Caple......................... 125,000 -- 50,200 -- --
Executive Vice President and Secretary
Ronald W. Kaiser......................... 81,231 -- -- -- --
Chief Financial Officer and Treasurer
</TABLE>

STOCK OPTIONS

The table below contains information concerning the grant of options to
purchase shares of our common stock to each of the named executive officers
during the year ended December 31, 1998. The percentage of total options granted
to employees set forth below is based on an aggregate of 1,729,848 shares
subject to options granted to our employees in 1998. All options were granted at
or above fair market value as determined by the board of directors on the date
of grant.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE
NUMBER TOTAL VALUE AT ASSUMED
OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OF OPTION TERM(1)
OPTIONS IN FISCAL BASE PRICE EXPIRATION -----------------------
NAME GRANTED YEAR ($/SHARE) DATE 5% 10%
---- ---------- ---------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Kay................ -- -- -- -- -- --
F. William Caple.............. -- -- -- -- -- --
Ronald W. Kaiser.............. 164,706 9.5% $3.67 10/21/08 $380,148 $963,371
</TABLE>

- ---------------
(1) The potential realizable value is calculated based on the term of the option
at the time of grant. Stock price appreciation of 5% and 10% is assumed
pursuant to rules promulgated by the SEC and does not represent our
prediction of our stock price performance. The potential realizable values
at 5% and 10% appreciation are calculated by assuming that the exercise
price on the date of grant appreciates at the indicated rate for the entire
term of the option and that the option is exercised at the exercise price
and sold on the last day of its term at the appreciated price.

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<PAGE> 53

FISCAL YEAR-END OPTION VALUES

The following table sets forth information for each of the named executive
officers with respect to the value of options outstanding as of December 31,
1998. None of the named executive officers exercised any options to purchase
shares of common stock during the year ended December 31, 1998.

FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END
--------------------------------- ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard A. Kay...................... -- -- $ -- $ --
F. William Caple.................... -- -- -- --
Ronald W. Kaiser.................... -- 164,706 -- 0
</TABLE>

There was no public trading market for our common stock as of December 31,
1998. Accordingly, as permitted by the rules of the SEC, we have calculated the
value of unexercised in-the-money options at fiscal year-end on the basis of the
fair market value of our common stock as of December 31, 1998 of $3.67 per
share, as determined by the board of directors, less the aggregate exercise
price.

BENEFIT PLANS

1998 Stock Incentive Plan and 2000 Stock Incentive Plan. Our 1998 Stock
Incentive Plan was adopted by our Board of Directors and received stockholder
approval in August 1998. Our 2000 Stock Incentive Plan was adopted by our Board
of Directors and received stockholder approval in January 2000. Up to 2,264,706
shares and shares of our common stock, subject to adjustment in the
event of stock splits and other similar events, were reserved for issuance under
the 1998 plan and 2000 plan, respectively. The board of directors has provided
however, that no additional awards will be made under the 1998 plan after this
offering.

The plans provide for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code, nonstatutory stock
options, restricted stock awards and other stock-based awards.

Our officers, employees, directors, consultants and advisors and those of
our subsidiaries are eligible to receive awards under the plans. Under present
law, however, incentive stock options may only be granted to employees. Under
the 1998 plan, no participant may receive any award for more than 250,000
shares, subject to adjustment in the event of stock splits and other similar
events, in any calendar year.

Optionees receive the right to purchase a specified number of shares of our
common stock at a specified option price, subject to the terms and conditions of
the option grant. We may grant options at an exercise price less than, equal to
or greater than the fair market value of our common stock on the date of grant.
Under present law, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Internal Revenue Code
may not be granted at an exercise price less than the fair market value of the
common stock on the date of grant, or less than 110% of the fair market value in
the case of incentive stock options granted to optionees holding more than 10%
of our voting power. The plans permit our board of directors to determine how
optionees may pay the exercise price of their options, including by cash, check
or in connection with a "cashless exercise" through a broker, by surrender to us
of shares of common stock, by delivery to us of a promissory note, or by any
combination of the permitted forms of payment.

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<PAGE> 54

Our board of directors administers the plans. Our board of directors has
the authority to adopt, amend and repeal the administrative rules, guidelines
and practices relating to the plans and to interpret their provisions. It may
delegate authority under the plans to one or more committees of the board of
directors and, in limited circumstances, to one or more of our executive
officers. Our board of directors has authorized the compensation committee to
administer the plans, including the granting of options to our executive
officers. Subject to any applicable limitations contained in the plans, our
board of directors, our compensation committee or any other committee or
executive officer to whom our board of directors delegates authority, as the
case may be, selects the recipients of awards and determines the:

- number of shares of common stock covered by options and the dates upon
which such options become exercisable;

- exercise price of options;

- duration of options; and

- number of shares of common stock subject to any restricted stock or other
stock-based awards and the terms and conditions of such awards, including
the conditions for repurchase, issue price and repurchase price.

In the event of a merger, liquidation or other acquisition event, our board
of directors must provide that all outstanding options or other stock-based
awards under the plans be assumed or substituted for by the acquiror. If any of
these events constitutes a change in control, the assumed or substituted options
will be immediately exercisable in full upon the occurrence of the acquisition
event if the holders such options has been employed by us for more than one year
prior to the change in control.

No award may be granted under the 1998 plan after August 2008 or under the
2000 plan after January 2010, but the vesting and effectiveness of awards
granted before those dates may extend beyond those dates. Our board of directors
may at any time amend, suspend or terminate the 1998 plan or the 2000 plan,
except that, under the 1998 plan, no award granted after an amendment of the
plan and designated as subject to Section 162(m) of the Internal Revenue Code by
our board of directors shall become exercisable, realizable or vested, to the
extent such amendment was required to grant such award, unless and until such
amendment is approved by our stockholders.

2000 Employee Stock Purchase Plan. Our 2000 Employee Stock Purchase Plan
was adopted by our board of directors and received stockholder approval in
January 2000. The purchase plan authorizes the issuance of up to a total of
shares of our common stock to participating employees.

All of our employees, including our directors who are employees, and all
employees of any participating subsidiaries, whose customary employment is more
than 20 hours per week and for more than five months in any calendar year, are
eligible to participate in the purchase plan. Employees who would immediately
after the grant own 5% or more of the total combined voting power or value of
our stock or that of any subsidiary are not eligible to participate.

On the first day of a designated payroll deduction period, or offering
period, we will grant to each eligible employee who has elected to participate
in the purchase plan an option to purchase shares of our common stock as
follows: the employee may authorize between 1% to 10% of his or her base pay to
be deducted by us from his or her base pay during the offering period. On the
last day of this offering period, the employee is deemed to have exercised the
option, at the option exercise price, to the extent of accumulated payroll
deductions. Under the terms of the purchase plan, the option price is an amount
equal to 85% of the average market price, as defined in the purchase plan, per
share of our common stock on either the first day or the last day of the
offering period, whichever is

51
<PAGE> 55

lower. The first offering period under the purchase plan will commence on the
date on which trading of our common stock commences on the Nasdaq National
Market, with the option price on the first day of such offering period
equivalent to the initial public offering price. In no event may an employee
purchase in any one offering period a number of shares that exceeds the number
of shares determined by dividing $ by the average market price of a
share of our common stock on the commencement date of the offering period. Our
compensation committee may, in its discretion, choose an offering period of 12
months or less for each offering and choose a different offering period for each
offering.

An employee who is not a participant on the last day of the offering period
is not entitled to exercise any option, and the employee's accumulated payroll
deductions will be refunded. An employee's rights under the purchase plan
terminate upon voluntary withdrawal from the purchase plan at any time, or when
the employee ceases employment for any reason, except that upon termination of
employment because of death, the employee's beneficiary has a right to elect to
exercise the option to purchase the shares which the accumulated payroll
deductions in the participant's account would purchase at the date of death.

Because participation in the purchase plan is voluntary, we cannot now
determine the number of shares of our common stock to be purchased by any of our
current executive officers, by all of our current executive officers as a group
or by our non-executive employees as a group.

401(k) Plan. In May 1996, we adopted an employee savings and retirement
plan qualified under Section 401 of the Internal Revenue Code and covering all
of our employees. Pursuant to the 401(k) plan, employees may elect to reduce
their current compensation by up to the statutorily prescribed annual limit and
have the amount of such reduction contributed to the 401(k) plan. We may make
matching or additional contributions to the 401(k) plan in amounts to be
determined annually by our board of directors.

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<PAGE> 56

RELATED PARTY TRANSACTIONS

June 1998 Issuance of Convertible Notes and Senior Subordinated Notes. In
June 1998, we entered into a note purchase agreement with ABS Capital Partners
II, L.P., Greylock IX Limited Partnership and Michael P. Murray, as purchasers.
Under the terms of the note purchase agreement, we issued an aggregate principal
amount of $7,636,364 in subordinated convertible notes and an aggregate
principal amount of $4,363,636 in senior subordinated notes to the purchasers.
The subordinated convertible notes issued by us will convert automatically into
2,080,753 shares of common stock upon the closing of this offering. The senior
subordinated notes provide for accrued interest of 8% per annum through June 9,
1999, 10% until June 9, 2000 and 12% thereafter until maturity. By their terms,
these notes will become immediately due and payable upon the closing of this
offering. As of , 2000, the outstanding balance of principal and
interest on all of the senior subordinated notes was $ .

Pursuant to the voting agreement, dated June 9, 1998, by and among the
purchasers, Richard A. Kay, F. William Caple, Alexandra Kay, Mr. Kay's daughter,
and us, the purchasers were given the right to designate one member of our board
of directors. The purchasers designated Donald B. Hebb, Jr., to serve on our
board of directors. Mr. Hebb is the managing member of ABS Capital Partners II,
LLC, the general partner of ABS Capital Partners II, L.P. Mr. Murray is a
principal of Deutsche Banc Alex. Brown, one of our managing underwriters.

The following table sets forth (i) the principal amount of subordinated
convertible notes, the number of shares of common stock into which such notes
will convert and (ii) the amount of principal and interest due as of ,
2000 pursuant to the senior subordinated notes issued to each purchaser by us.

<TABLE>
<CAPTION>
SUBORDINATED SHARES OF COMMON
CONVERTIBLE STOCK ISSUABLE SENIOR
NAME NOTES UPON CONVERSION SUBORDINATED NOTES
---- ------------ ---------------- ------------------
<S> <C> <C> <C>
ABS Capital Partners II, L.P.................... $5,717,728 1,557,964 $
Greylock IX Limited Partnership................. 1,909,090 520,188
Michael P. Murray............................... 9,546 2,601
---------- --------- -------------
Total........................................... $7,636,364 2,080,753 $
========== ========= =============
</TABLE>

Repurchase of shares from former stockholder. In March 1998, we entered
into a stock purchase agreement with Eugene S. Sandler, a former stockholder of
ours who then held 39.6% of our common stock. Under this agreement, we purchased
all of Mr. Sandler's shares of our common stock for a purchase price of
$6,000,000 in cash and a promissory note in the principal amount of $5,500,000
bearing interest at a rate of 10% per year. Under the terms of the promissory
note, we are obligated to pay Mr. Sandler all outstanding principal and interest
within 60 days of the closing of this offering. As of , 2000, we have
paid Mr. Sandler $ and owe $ in principal and $ in
interest.

Contribution to capital by OTG Sales, Inc. stockholders. Mr. Kay, Mr.
Caple and Alexandra Kay were all the stockholders of OTG Sales, Inc., an
affiliate of ours. In December 1999, they contributed all their shares of
capital stock of OTG Sales, Inc. to us as a contribution to capital, making OTG
Sales, Inc. our wholly owned subsidiary. We did not pay any consideration for
the contributed shares.

Loans from principal stockholder. In March 1992, we entered into a loan
agreement and related promissory note with Mr. Kay in order to secure working
capital for our operations. The loan agreement and the promissory note
originally provided for Mr. Kay to make unsecured loans to us up to a maximum
principal amount of $650,000. On December 1, 1993, the promissory note was

53
<PAGE> 57

amended to increase the maximum principal amount of the promissory note to
$700,000. On December 1, 1994, the promissory note was amended again to increase
the maximum principal amount of the promissory note to $1,000,000 and to make
the promissory note payable upon demand. Amounts that we borrow under the loan
agreement bear simple interest at a rate of 8% per year. Mr. Kay may require us
to provide security for outstanding and future loans at any time. As of
, 2000, we owed Mr. Kay $ as a result of borrowings and
accrued interest under this arrangement.

In addition, on June 16, 1998, we borrowed an aggregate principal amount of
$1,500,000 from Mr. Kay in order to secure working capital for our operations
pursuant to two promissory notes. These notes earn 8% interest which is payable
quarterly. The principal amount of these notes is due and payable upon the
earlier of December 16, 2000 or sixty days after the closing of this offering, a
qualified merger or a sale of substantially all of our assets. These notes are
subordinated to our senior subordinated notes, our subordinated convertible
notes and our credit facility with PNC Bank, collectively our senior
indebtedness. We can not make any payments of principal or interest on these
notes if we are in default under our senior indebtedness. As of ,
2000, we owed Mr. Kay $ under these notes.

Guarantee of our obligation by principal stockholder. As a condition to
entering into a loan agreement with us, PNC Bank required Mr. Kay to enter into
an escrow agreement, dated July 22, 1999, with us, PNC Bank and Bankers Trust,
as escrow agent. Pursuant to this escrow agreement, Mr. Kay deposited marketable
securities held by him with the escrow agent as security for payments to be made
by us under the promissory note we issued to Mr. Sandler, as described above. If
we fail to make payments under this promissory note when due, or if we become
obligated to make a balloon payment under the terms of the promissory note, the
escrow agreement provides that PNC Bank may direct the escrow agent to sell Mr.
Kay's shares and apply the proceeds of the sale to the required payment. The
escrow agreement terminates when we have paid in full all of our obligations to
PNC Bank under the loan agreement.

Option grants to non-employee directors and executive officers. In June
1999, we granted options to purchase 5,000 shares of common stock at an exercise
price of $5.50 per share under our 1998 stock incentive plan to each of Mr.
Battista, Mr. Burton, Mr. Chinnici, Mr. DeCesaris and Mr. Hebb, our non-employee
directors. These options vested upon grant. In October 1998, we granted Mr.
Kaiser, our chief financial officer, an option to purchase 164,706 shares of
common stock at an exercise price of $3.67 per share under our 1998 stock
incentive plan. This option vests over a four year period. In September 1999, we
granted Mr. Kaiser, an option to purchase 50,000 shares of common stock at an
exercise price of $5.50 per share under our 1998 stock incentive plan. This
option vests quarterly over a three year period. In January 1999, we granted Mr.
Caple, our executive vice president, an option to purchase 100,000 shares of
common stock at an exercise price of $3.67 per share under our 1998 stock
incentive plan. This option vests quarterly over a three year period.

Sale of stock to our executive vice president. In January 1997, we sold
134,627 shares of common stock to F. William Caple, our executive vice
president, secretary and director, for an aggregate purchase price of $102,698.
Mr. Caple paid for these shares with a promissory note bearing 8% interest per
annum that becomes due January 1, 2002. As of , 2000, the outstanding
balance of Mr. Caple's note to us was $ .

Indemnification agreements. We have entered into indemnification
agreements with each of our directors and officers. Such indemnification
agreements will require us to indemnify our directors and officers to the
fullest extent permitted by Delaware law.

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<PAGE> 58

Our board of directors has adopted the policy that all future transactions,
including loans between us and our officers, directors, principal stockholders
and their affiliates, will be approved by a majority of the board of directors,
including a majority of the independent and disinterested outside directors on
the board of directors, and will be on terms no less favorable to us than could
be obtained from unaffiliated third parties.

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<PAGE> 59

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding beneficial
ownership of our common stock as of December 22, 1999, assuming the conversion
of all our outstanding convertible notes, by (1) each person who beneficially
owns more than 5% of the outstanding shares of our common stock, (2) each of our
directors and the named executive officers, (3) Richard A. Kay, the selling
stockholder, and (4) all of our directors and executive officers as a group.

One of our stockholders, Mr. Kay, has granted to the underwriters an option
to purchase up to shares of common stock to cover over-allotments.
Footnote 1 to this table provides information concerning the stock holdings of
Mr. Kay after the offering if the over-allotment option is exercised in full.

The number of shares of common stock deemed outstanding prior to this
offering includes 10,238,094 shares of common stock outstanding as of December
22, 1999. This table gives effect to the conversion of all outstanding
convertible notes issued by Mr. Kay to other parties into shares of our common
stock held by Mr. Kay, which will occur automatically upon the closing of this
offering. The number of shares of common stock deemed outstanding after this
offering includes the shares that are being offered for sale by us in
this offering. Beneficial ownership is determined in accordance with the rules
of the SEC, and includes voting and investment power with respect to shares. The
number of shares beneficially owned by a person includes shares of common stock
subject to options held by that person that are currently exercisable or
exercisable within 60 days of December 22, 1999. The shares issuable under those
options are treated as if they were outstanding for computing the percentage
ownership of the person holding those options but are not treated as if they
were outstanding for the purposes of computing the percentage ownership of any
other person. Unless otherwise indicated below, to our knowledge, all persons
named in the table have sole voting and investment power with respect to their
shares of common stock, except to the extent authority is shared by spouses
under applicable law. Unless otherwise indicated, the address of each person
owning more than 5% of the outstanding shares of common stock is c/o OTG
Software, Inc., 6701 Democracy Boulevard, Suite 800, Bethesda, Maryland 20817.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO THE OFFERING SHARES TO BE SOLD AFTER THE OFFERING
--------------------- IN THIS --------------------
BENEFICIAL OWNER NUMBER PERCENT OFFERING NUMBER PERCENT
---------------- ---------- -------- ----------------- -------- ---------
<S> <C> <C> <C> <C> <C>
ABS Capital Partners II, L.P................ 2,057,464 20.1% -- %
1 South Street
Baltimore, Maryland 21202
Greylock IX Limited Partnership............. 520,188 5.1 --
One Federal Street
Boston, Massachusetts 02110-2065
Richard A. Kay (1).......................... 6,887,706 67.3
F. William Caple (2)........................ 167,959 1.6 --
Ronald W. Kaiser (3)........................ 91,098 * --
Gabriel A. Battista (4)..................... 67,015 * --
John Burton (5)............................. 155,000 1.5 --
Joseph R. Chinnici (6)...................... 21,898 * --
Geaton A. DeCesaris, Jr. (7)................ 153,000 1.5 --
Donald B. Hebb, Jr. (8)..................... 2,062,464 20.1 --
All executive officers and directors as a
group (8 persons) (9)..................... 9,606,140 92.7
</TABLE>

(footnotes
on next page)

56
<PAGE> 60

- ---------------
* Less than 1% of the outstanding common stock.

(1) Includes 233,539 shares owned by Alexandra Kay, Mr. Kay's minor daughter and
shares held by grantor retained annuity trusts organized for the
benefit of minor children of Mr. Kay. If the underwriters exercise their
over-allotment option in full, Mr. Kay will sell an additional shares
of common stock in this offering and would beneficially own
shares, representing % of the total shares outstanding.

(2) Includes 33,332 shares issuable upon exercise of options.

(3) Includes 71,098 shares issuable upon exercise of options.

(4) Includes 5,000 shares issuable upon exercise of options.

(5) Includes 5,000 shares issuable upon exercise of options.

(6) Includes 5,000 shares issuable upon exercise of options.

(7) Includes 5,000 shares issuable upon exercise of options.

(8) Consists of 5,000 shares issuable upon exercise of options and 2,057,464
shares owned by ABS Capital Partners II, L.P. Mr. Hebb is a managing member
of ABS Partners II, LLC, which is the general partner of ABS Capital
Partners II, L.P. Mr. Hebb disclaims beneficial ownership of the 2,057,464
shares owned by ABS Capital Partners II, L.P.

(9) Includes 129,430 shares issuable upon exercise of options.

57
<PAGE> 61

DESCRIPTION OF CAPITAL STOCK

On the closing of this offering, our authorized capital stock will consist
of 65,000,000 shares of common stock, $.01 par value per share, and 5,000,000
shares of preferred stock, $.01 par value per share. The following is a summary
of the material features of our capital stock. For more detail, please see our
amended and restated certificate of incorporation and amended and restated
by-laws to be effective after the closing of this offering, filed as exhibits to
the registration statement of which this prospectus is a part.

COMMON STOCK

As of December 22, 1999, after giving effect to the conversion of the
outstanding convertible notes issued by us, there were 10,238,094 shares of
common stock outstanding held by nineteen stockholders of record. Based upon the
number of shares outstanding as of that date. After giving effect to the
issuance of the shares of common stock offered by us in this offering, there
will be shares of common stock outstanding upon the closing of this
offering.

Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Directors are elected by a plurality of the votes of the shares present
in person or by proxy at the meeting and entitled to vote in such election.
Subject to preferences that may be applicable to any outstanding preferred
stock, holders of common stock are entitled to receive ratably such dividends,
if any, as may be declared by the board of directors out of funds legally
available to pay dividends. Upon our liquidation, dissolution or winding up, the
holders of common stock are entitled to receive ratably all assets after the
payment of our liabilities, subject to the prior rights of any outstanding
preferred stock. Holders of the common stock have no preemptive, subscription,
redemption or conversion rights. They are not entitled to the benefit of any
sinking fund. The outstanding shares of common stock are, and the shares offered
by us in this offering will be, when issued and paid for, validly issued, fully
paid and nonassessable. The rights, powers, preferences and privileges of
holders of common stock are subject to the rights of the holders of shares of
any series of preferred stock which we may designate and issue in the future.

PREFERRED STOCK

On the closing of this offering, the board of directors will be authorized,
subject to any limitations prescribed by law, without further stockholder
approval, to issue up to an aggregate of 5,000,000 shares of preferred stock.
The preferred stock may be issued in one or more series and on one or more
occasions. Each series of preferred stock shall have such number of shares,
designations, preferences, voting powers, qualifications and special or relative
rights or privileges as the board of directors may determine. These rights and
privileges may include, among others, dividend rights, voting rights, redemption
provisions, liquidation preferences, conversion rights and preemptive rights.
Our stockholders have granted the board of directors authority to issue the
preferred stock in order to eliminate delays associated with a stockholder vote
on specific issuances. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could adversely affect the voting power or other rights of
the holders of common stock. In addition, the issuance of preferred stock could
make it more difficult for a third party to acquire us, or discourage a third
party from attempting to acquire us.

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<PAGE> 62

DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS

We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. A "business combination" includes mergers, consolidations,
asset sales and other transactions involving OTG and an interested stockholder.
In general, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
the corporation's voting stock.

Our amended and restated certificate of incorporation and amended and
restated by-laws to be effective on the closing of this offering provide that:

- the board of directors be divided into three classes, as nearly equal in
size as possible, with staggered three-year terms;

- directors may be removed only for cause by the affirmative vote of the
holders of at least 75% of the shares of our capital stock entitled to
vote;

- any vacancy on the board of directors, however occurring, including a
vacancy resulting from an enlargement of the board, may only be filled by
vote of a majority of the directors then in office.

The classification of the board of directors and the limitations on the
removal of directors and filling of vacancies could have the effect of making it
more difficult for a third party to acquire us, which could have the effect of
discouraging a third party from attempting to do so.

Our amended and restated certificate of incorporation and amended and
restated by-laws also provide that, after the closing of this offering:

- any action required or permitted to be taken by the stockholders at an
annual meeting or special meeting of stockholders may only be taken if it
is properly brought before such meeting and may not be taken by written
action in lieu of a meeting.

- special meetings of the stockholders may only be called by the chairman
of the board of directors, the president, or by the board of directors.
Our amended and restated by-laws provide that, in order for any matter to
be considered "properly brought" before a meeting, a stockholder must
comply with requirements regarding advance notice to us. These provisions
could delay until the next stockholders' meeting stockholder actions
which are favored by the holders of a majority of our outstanding voting
securities. These provisions may also discourage another person or entity
from making a tender offer for our common stock, because such person or
entity, even if it acquired a majority of our outstanding voting
securities, would be able to take action as a stockholder (such as
electing new directors or approving a merger) only at a duly called
stockholders meeting, and not by written consent.

Delaware's corporation law provides generally that the affirmative vote of
a majority of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or by-laws, unless a corporation's
certificate of incorporation or by-laws, as the case may be, requires a greater
percentage. Our amended and restated certificate of incorporation requires the
affirmative vote of the holders of at least 75% of the shares of our capital
stock entitled to vote to amend or repeal any of the foregoing provisions of our
amended and restated certificate of incorporation. Generally,

59
<PAGE> 63

our amended and restated by-laws may be amended or repealed by a majority vote
of the board of directors or the holders of a majority of the shares of our
capital stock issued and outstanding and entitled to vote. To amend our amended
and restated by-laws regarding special meetings of stockholders, written actions
of stockholders in lieu of a meeting, and the election, removal and
classification of members of the board of directors requires the affirmative
vote of the holders of at least 75% of the shares of our capital stock entitled
to vote. The stockholder vote would be in addition to any separate class vote
that might in the future be required pursuant to the terms of any series
preferred stock that might be outstanding at the time any such amendments are
submitted to stockholders.

LIMITATION OF LIABILITY AND INDEMNIFICATION

Our amended and restated certificate of incorporation provides that our
directors and officers shall be indemnified by us to the fullest extent
authorized by Delaware law. This indemnification would cover all expenses and
liabilities reasonably incurred in connection with their services for or on
behalf of us. In addition, our amended and restated certificate of incorporation
provides that our directors will not be personally liable for monetary damages
to us for breaches of their fiduciary duty as directors, unless they violated
their duty of loyalty to us or our stockholders, acted in bad faith, knowingly
or intentionally violated the law, authorized illegal dividends or redemptions
or derived an improper personal benefit from their action as directors.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the common stock is .

60
<PAGE> 64

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, we will have shares of common stock
outstanding assuming no exercise of outstanding options. Of these shares, the
shares to be sold in this offering will be freely tradable without
restriction or further registration under the Securities Act of 1933, as
amended, except that any shares purchased by our affiliates, as that term is
defined in Rule 144 under the Securities Act, may generally only be sold in
compliance with the limitations of Rule 144 described below.

SALES OF RESTRICTED SHARES

<TABLE>
<CAPTION>
DAYS AFTER DATE OF APPROXIMATE SHARES
THIS PROSPECTUS ELIGIBLE FOR FUTURE SALE COMMENT
------------------ ------------------------ -------
<S> <C> <C>
On effectiveness................... Freely tradeable sold in offering
90 days............................ Shares salable under Rule 144
180 days........................... Lockup released; shares salable
under Rule 144, 144(k) or 701
Thereafter......................... Restricted securities held for one
year or less
</TABLE>

In general, under Rule 144, a person, including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater of
(1) one percent of the then outstanding shares of common stock , or
approximately shares immediately after this offering, or (2) the
average weekly trading volume in the common stock in the over-the-counter market
during the four calendar weeks preceding the date on which notice of such sale
is filed, provided specified requirements concerning availability of public
information, manner of sale and notice of sale have been satisfied. In addition,
our affiliates must comply with the restrictions and requirements of Rule 144,
other than the one-year holding period requirement, in order to sell shares of
common stock which are not restricted securities.

Under Rule 144(k), a person who is not an affiliate and has not been an
affiliate for at least three months prior to the sale and who has beneficially
owned shares for at least two years may resell these shares without compliance
with the foregoing requirements. In meeting the one- and two-year holding
periods described above, a holder of shares can include the holding periods of a
prior owner who was not an affiliate. The one- and two-year holding periods
described above do not begin to run until the full purchase price or other
consideration is paid by the person acquiring the shares from the issuer or an
affiliate. Rule 701 provides that currently outstanding shares of common stock
acquired under our employee compensation plans may be resold beginning 90 days
after the date of this prospectus (1) by persons, other than affiliates, subject
only to the manner of sale provisions of Rule 144, and (2) by affiliates under
Rule 144 without compliance with its one-year minimum holding period, subject to
certain limitations.

STOCK OPTIONS

At December 22, 1999, 274,955 shares of common stock were issuable pursuant
to vested options or pursuant to other rights granted under our 1998 Stock
Incentive Plan of which approximately shares are not subject to lock-up
agreements with the underwriters.

We intend to file a registration statement on Form S-8 under the Securities
Act following the date of this prospectus, to register up to shares of
common stock issuable under our stock plans, including the 1,800,860 shares of
common stock subject to outstanding options as of December 22, 1999. This
registration statement is expected to become effective upon filing.

61
<PAGE> 65

LOCK-UP AGREEMENTS

Subject to limited exceptions, we and our executive officers and directors
have agreed that, without the prior written consent of Credit Suisse First
Boston Corporation, none of us will, during the period ending 180 days after the
date of this prospectus, (1) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, lend, or otherwise transfer or dispose
of, directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock (regardless of
whether such shares or any such securities are then owned by such person or are
thereafter acquired), or (2) enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of the common stock, regardless of whether any such transactions
described in clauses (1) or (2) are to be settled by delivery of such common
stock or such other securities, in cash or otherwise. In addition, for a period
of 180 days from the date of this prospectus, except as required by law, we have
agreed that our board of directors will not consent to any offer for sale, sale
or other disposition, or any transaction which is designed or could be expected,
to result in, the disposition by any person, directly or indirectly, of any
shares of common stock without the prior written consent of Credit Suisse First
Boston Corporation. See "Underwriters."

REGISTRATION RIGHTS

After this offering, the holders of approximately 9,636,418 shares of
common stock and rights to acquire common stock will be entitled to certain
rights with respect to the registration of such shares under the Securities Act.
Under the terms of the agreement between us and the holders of such registrable
securities, if we propose to register any of our securities under the Securities
Act, either for our own account or for the account of other security holders
exercising registration rights, such holders are entitled to notice of such
registration and are entitled to include shares of such common stock therein.
Additionally, such holders are also entitled to certain demand registration
rights pursuant to which they may require us on up to two occasions to file a
registration statement under the Securities Act at our expense with respect to
our shares of common stock, and we are required to use our best efforts to
effect such registration. Further, holders may require us to file an unlimited
number of additional registration statements on Form S-3 at our expense. All of
these registration rights are subject to certain conditions and limitations,
among them the right of the underwriters of an offering to limit the number of
shares included in such registration and our right not to effect a requested
registration within six months following an offering of our securities pursuant
to a Form S-1, including the offering made hereby.

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<PAGE> 66

UNDERWRITING

Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we and the selling stockholder, Richard A.
Kay, have agreed to sell to the underwriters named below, for whom Credit Suisse
First Boston Corporation, Deutsche Bank Securities Inc., SG Cowen Securities
Corporation and Friedman, Billings, Ramsey & Co., Inc. are acting as
representatives the following respective numbers of shares of common stock:

<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
Credit Suisse First Boston Corporation...................
Deutsche Bank Securities Inc.............................
SG Cowen Securities Corporation..........................
Friedman, Billings, Ramsey & Co., Inc....................
--------
Total..........................................
========
</TABLE>

The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.

The selling stockholder has granted to the underwriters a 30-day option to
purchase on a pro rata basis up to additional shares from the selling
stockholder at the initial public offering price less the underwriting discounts
and commissions. The option may be exercised only to cover any over-allotments
of common stock.

The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.

The following table summarizes the compensation and estimated expenses we
and the selling stockholder will pay.

<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions paid by us........... $ $ $ $
Expenses payable by us........... $ $ $ $
Underwriting discounts and
commissions paid by the selling
stockholder.................... $ $ $ $
Expenses payable by the selling
stockholder.................... $ $ $ $
</TABLE>

In June 1998, we sold an aggregate principal amount of $9,546 in
subordinated convertible notes and an aggregate amount of $2,727 in senior
subordinated notes to Michael Murray. Mr. Murray is a principal of Deutsche Banc
Alex. Brown, Inc., one of the managing underwriters in this offering.

Friedman, Billings, Ramsey & Co., Inc., one of the managing underwriters in
this offering, has agreed to provide us, in its ordinary course of business,
financial advisory services over the next 12 months for customary fees.

63
<PAGE> 67

The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered by us and the
selling stockholder.

We, the directors, officers and other stockholders have agreed that we will
not offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the SEC a registration statement under the Securities
Act relating to, any additional shares of our common stock or securities
convertible into or exchangeable or exercisable for any of our common stock, or
publicly disclose the intention to make any such offer, sale, pledge,
disposition or filing, without the prior written consent of Credit Suisse First
Boston Corporation for a period of 180 days after the date of this prospectus,
except in our case issuances pursuant to the exercise of employee stock options
outstanding on the date hereof.

The underwriters have reserved for sale, at the initial public offering
price up to shares of the common stock for employees, directors and certain
other persons associated with us who have expressed an interest in purchasing
common stock in the offering. The number of shares available for sale to the
general public in the offering will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the other
shares.

We and the selling stockholder have agreed to indemnify the underwriters
against liabilities under the Securities Act, or contribute to payments which
the underwriters may be required to make in that respect.

We have made application to list the shares of common stock on The Nasdaq
Stock Market's National Market.

Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price will include: the information set forth in
this prospectus and otherwise available to the underwriters; the history and the
prospects for the industry in which we compete; the ability of our management;
the prospects for our future earnings; the present state of our development and
our current financial condition; the general condition of the securities markets
at the time of this offering; and the recent market prices of, and the demand
for, publicly traded common stock of generally comparable companies.

The representatives, may engage in over-allotment, stabilizing
transactions, syndicate covering transactions, penalty bids and "passive" market
making in accordance with Regulation M under the Securities Exchange Act of
1934.

- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.

- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.

- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by such
syndicate member is purchased in a stabilizing transaction or a syndicate
covering transaction to cover syndicate short positions.

- In "passive" market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to certain
limitations, make bids for or purchases of the common stock until the
time, if any, at which a stabilizing bid is made.

64
<PAGE> 68

These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.

NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we and the selling
shareholder prepare and file a prospectus with the securities regulatory
authorities in each province where trades of common stock are effected.
Accordingly, any resale of the common stock in Canada must be made in accordance
with applicable securities laws which will vary depending on the relevant
jurisdiction, and which may require resales to be made in accordance with
available statutory exemptions or pursuant to a discretionary exemption granted
by the applicable Canadian securities regulatory authority. Purchasers are
advised to seek legal advice prior to any resale of the common stock.

REPRESENTATIONS OF PURCHASERS

Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us, the selling shareholders and the
dealer from whom such purchase confirmation is received that (i) such purchaser
is entitled under applicable provincial securities laws to purchase such common
stock without the benefit of a prospectus qualified under such securities laws,
(ii) where required by law, that such purchaser is purchasing as principal and
not as agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."

RIGHTS OF ACTION (ONTARIO PURCHASERS)

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.

ENFORCEMENT OF LEGAL RIGHTS

All of the issuer's directors and officers as well as the experts named
herein and the selling shareholder may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or such persons. All or a substantial
portion of the assets of the issuer and such persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the issuer or such persons in Canada or to enforce a judgment obtained in
Canadian courts against such issuer or persons outside of Canada.

NOTICE TO BRITISH COLUMBIA RESIDENTS

A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.

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<PAGE> 69

TAXATION AND ELIGIBILITY FOR INVESTMENT

Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.

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<PAGE> 70

LEGAL MATTERS

The validity of the shares of common stock we are offering will be passed
upon for us by Hale and Dorr LLP, Washington, D.C. Certain legal matters in
connection with this offering will be passed upon for the underwriters by Piper
Marbury Rudnick & Wolfe LLP, Washington, D.C.

EXPERTS

The combined financial statements and schedule of OTG Software, Inc. and
affiliate as of December 31, 1997 and 1998, and for each of the years in the
three year period ended December 31, 1998 have been included in this prospectus
and elsewhere in the registration statement in reliance upon the reports of KPMG
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.

CHANGE OF AUDITORS

In July 1999, we retained KPMG LLP to act as our independent public
accountants and informed our prior auditors, Grant Thornton, LLP, who had been
our independent accountants since March 1997, of our decision. In connection
with Grant Thornton, LLP's audit of the combined financial statements for the
years ended December 31, 1996 and 1997, there were no disagreements with Grant
Thornton, LLP on any matters of accounting principles or practices, financial
statements disclosure or auditing scope or procedures. Grant Thornton, LLP's
report on our combined financial statements for the years ended December 31,
1996 and 1997 contained no adverse opinion or disclaimer of opinion and was not
modified or qualified as to uncertainty, audit scope or accounting principles.
The decision to change auditors was approved by our board of directors. We have
provided Grant Thornton, LLP with a copy of the disclosure contained in this
section of the prospectus.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock we propose to sell in this
offering. This prospectus, which constitutes part of the registration statement,
does not contain all of the information set forth in the registration statement.
For further information about us and the common stock we propose to sell in this
offering, we refer you to the registration statement and the exhibits and
schedules filed as a part of the registration statement. Statements contained in
this prospectus as to the contents of any contract or other document filed as an
exhibit to the registration statement are not necessarily complete. If a
contract or document has been filed as an exhibit to the registration statement,
we refer you to the copy of the contract or document that has been filed. The
registration statement may be inspected without charge at the principal office
of the SEC in Washington, D.C. and copies of all or any part of which may be
inspected and copied at the public reference facilities maintained by the SEC at
450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549, and
at the SEC's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such material can also be obtained at
prescribed rates by mail from the Public Reference Section of the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549. In addition, the SEC maintains a
website (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC.

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<PAGE> 71

OTG SOFTWARE, INC.
INDEX TO COMBINED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Combined Balance Sheets as of December 31, 1997 and 1998 and
as of September 30, 1999 (unaudited)........................ F-3
Combined Statements of Operations for the years ended
December 31, 1996, 1997 and 1998 and for the nine months
ended September 30, 1998 and 1999 (unaudited)............. F-4
Combined Statements of Stockholders' Deficit for the years
ended December 31, 1996, 1997 and 1998 and for the nine
months ended September 30, 1999 (unaudited)............... F-5
Combined Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 and for the nine months
ended September 30, 1998 and 1999 (unaudited)............. F-6
Notes to Combined Financial Statements...................... F-7
</TABLE>

F-1
<PAGE> 72

INDEPENDENT AUDITORS' REPORT

Board of Directors
OTG Software, Inc.:

We have audited the accompanying combined balance sheets of OTG Software,
Inc. and affiliate (the "Company") as of December 31, 1997 and 1998, and the
related combined statements of operations, stockholders' deficit, and cash flows
for each of the years in the three-year period ended December 31, 1998. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.

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

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of OTG Software, Inc.
and affiliate as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.

KPMG LLP

McLean, Virginia
December 17, 1999

F-2
<PAGE> 73

OTG SOFTWARE, INC. AND AFFILIATE
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1997 1998 1999
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,098 $ 437 $ 1,089
Accounts receivable, net of allowances for doubtful
accounts and returns of $395, $664 and $674, at
December 31, 1997, December 31, 1998 and September 30,
1999 (unaudited), respectively......................... 3,194 4,862 6,032
Prepaid royalties and other current assets................ 123 400 986
------- -------- --------
Total current assets.............................. 4,415 5,699 8,107
Property and equipment, net................................. 674 1,010 1,309
Other assets, net........................................... 54 575 394
------- -------- --------
Total assets...................................... $ 5,143 $ 7,284 $ 9,810
======= ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 1,227 $ 1,092 $ 1,484
Accrued bonuses, compensation and benefits................ 1,049 1,466 2,172
Accrued interest.......................................... -- 527 1,117
Accrued liabilities....................................... 262 454 736
Note payable to bank...................................... 2,300 2,300 3,500
Current portion of long-term debt......................... 250 1,437 2,404
Subordinated notes payable -- stockholders................ 1,024 1,969 1,969
Deferred revenues -- other................................ -- 574 460
Deferred revenues -- maintenance and licenses............. 1,530 2,000 2,549
------- -------- --------
Total current liabilities......................... 7,642 11,819 16,391
Long-term debt -- net of current portion.................... 200 16,341 14,986
------- -------- --------
Total liabilities................................. 7,842 28,160 31,377
------- -------- --------

Commitments and contingencies
Stockholders' deficit:
OTG Software:
Common stock, $.01 par value; 20,000,000 shares
authorized; 13,103,804 shares issued and outstanding at
December 31, 1997, 8,157,342 at December 31, 1998 and
September 30, 1999 (unaudited)......................... 131 82 82
OTG Sales:
Common stock, $.01 par value; 20,000,000 shares
authorized; 10,000,000 shares issued and outstanding at
December 31, 1997 and 1998 and September 30, 1999
(unaudited)............................................ 100 100 100
Additional paid-in capital................................ 100 1,001 2,637
Deferred compensation..................................... -- -- (1,486)
Accumulated deficit....................................... (2,927) (21,082) (21,923)
------- -------- --------
Total stockholders' deficit before stock
subscriptions receivable........................ (2,596) (19,899) (20,590)
Less: stock subscriptions receivable.............. (103) (977) (977)
------- -------- --------
Total stockholders' deficit....................... (2,699) (20,876) (21,567)
------- -------- --------
Total liabilities and stockholders' deficit....... $ 5,143 $ 7,284 $ 9,810
======= ======== ========
</TABLE>

See accompanying notes to combined financial statements.
F-3
<PAGE> 74

OTG SOFTWARE, INC. AND AFFILIATE
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses................ $ 6,075 $ 8,543 $ 12,089 $ 8,310 $ 12,739
Services......................... 1,321 3,361 5,230 3,665 5,161
----------- ----------- ----------- ----------- ----------
Total revenues................. 7,396 11,904 17,319 11,975 17,900
Cost of revenues:
Software licenses................ 848 579 532 262 670
Services......................... 442 1,219 1,639 1,196 2,188
----------- ----------- ----------- ----------- ----------
Total cost of revenues......... 1,290 1,798 2,171 1,458 2,858
----------- ----------- ----------- ----------- ----------
Gross profit....................... 6,106 10,106 15,148 10,517 15,042
Operating expenses:
Research and development......... 2,012 2,455 3,958 2,721 3,725
Sales and marketing.............. 2,979 5,313 8,986 6,360 7,959
General and administrative....... 1,940 1,709 2,150 1,469 2,680
----------- ----------- ----------- ----------- ----------
Total operating expenses....... 6,931 9,477 15,094 10,550 14,364
----------- ----------- ----------- ----------- ----------
Income (loss) from operations...... (825) 629 54 (33) 678
Interest expense, net.............. (143) (162) (1,261) (714) (1,519)
----------- ----------- ----------- ----------- ----------
Net income (loss).................. $ (968) $ 467 $ (1,207) $ (747) $ (841)
=========== =========== =========== =========== ==========
Pro forma statement of operations
data (unaudited):
Net income (loss) before income
taxes, as reported.......... $ (968) $ 467 $ (1,207) $ (747) $ (841)
Pro forma income tax provision
(benefit)................... -- -- -- -- --
----------- ----------- ----------- ----------- ----------
Pro forma net income (loss).... $ (968) $ 467 $ (1,207) $ (747) $ (841)
=========== =========== =========== =========== ==========
Pro forma net income (loss) per
share -- basic and
diluted..................... $ (.07) $ .04 $ (.12) $ (.07) $ (.10)
=========== =========== =========== =========== ==========
Pro forma weighted average
shares outstanding -- basic
and diluted................. 12,963,681 13,103,804 10,188,814 10,938,824 8,157,342
=========== =========== =========== =========== ==========
</TABLE>

See accompanying notes to combined financial statements
F-4
<PAGE> 75

OTG SOFTWARE, INC. AND AFFILIATE
COMBINED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------------
OTG SOFTWARE, INC. OTG SALES, INC. ADDITIONAL STOCK
------------------- ------------------- PAID-IN- DEFERRED ACCUMULATED SUBSCRIPTIONS
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT RECEIVABLE
---------- ------ ---------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1996.................... 12,963,681 $130 -- $ -- $ -- $ -- $ (1,268) $ --
Issuance of common
stock............. -- -- 16,389,500 163 -- -- (163) --
Distribution to
stockholders...... -- -- -- -- -- -- (60) --
Net loss............ -- -- -- -- -- -- (968) --
---------- ---- ---------- ---- ------ ------- -------- --------
Balance, December 31,
1996.................. 12,963,681 130 16,389,500 163 -- -- (2,459) --
Distribution to
stockholders...... -- -- -- -- -- -- (600) --
Redemption of
shares............ -- -- (6,553,333) (65) -- -- (335) --
Issuance of common
stock............. 140,123 1 163,833 2 100 -- -- (103)
Net income.......... -- -- -- -- -- -- 467 --
---------- ---- ---------- ---- ------ ------- -------- --------
Balance, December 31,
1997.................. 13,103,804 131 10,000,000 100 100 -- (2,927) (103)
Distribution to
stockholders...... -- -- -- -- -- -- (5,500) --
Redemption of
shares............ (5,184,557) (52) -- -- -- -- (11,448) --
Issuance of common
stock............. 238,095 3 -- -- 871 -- -- (874)
Issuance of
warrants.......... -- -- -- -- 30 -- -- --
Net loss............ -- -- -- -- -- -- (1,207) --
---------- ---- ---------- ---- ------ ------- -------- --------
Balance, December 31,
1998.................. 8,157,342 82 10,000,000 100 1,001 -- (21,082) (977)
Deferred
compensation for
stock options
granted
(unaudited)....... -- -- -- -- 1,636 (1,486) -- --
Net loss
(unaudited)....... -- -- -- -- -- -- (841) --
---------- ---- ---------- ---- ------ ------- -------- --------
Balance, September 30,
1999 (unaudited)...... 8,157,342 $ 82 10,000,000 $100 $2,637 $(1,486) $(21,923) $ (977)
========== ==== ========== ==== ====== ======= ======== ========

TOTAL
--------
<S> <C>
Balance, January 1,
1996.................... $ (1,138)
Issuance of common
stock............. --
Distribution to
stockholders...... (60)
Net loss............ (968)
--------
Balance, December 31,
1996.................. (2,166)
Distribution to
stockholders...... (600)
Redemption of
shares............ (400)
Issuance of common
stock............. --
Net income.......... 467
--------
Balance, December 31,
1997.................. (2,699)
Distribution to
stockholders...... (5,500)
Redemption of
shares............ (11,500)
Issuance of common
stock............. --
Issuance of
warrants.......... 30
Net loss............ (1,207)
--------
Balance, December 31,
1998.................. (20,876)
Deferred
compensation for
stock options
granted
(unaudited)....... 150
Net loss
(unaudited)....... (841)
--------
Balance, September 30,
1999 (unaudited)...... $(21,567)
========
</TABLE>

See accompanying notes to combined financial statements.
F-5
<PAGE> 76

OTG SOFTWARE, INC. AND AFFILIATE

COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) for the period................. $ (968) $ 467 $ (1,207) $ (747) $ (841)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization............. 44 109 389 226 454
Stock compensation expense................ -- -- 30 -- 150
Provision for bad debts and returns....... 184 327 367 254 202
Change in assets and liabilities:
Accounts receivable.................... (812) (1,943) (2,015) (1,501) (1,372)
Prepaid royalties and other assets..... (15) (92) (877) (332) (473)
Accounts payable and accrued
expenses............................. 911 1,051 1,001 309 1,970
Deferred revenues...................... 251 977 1,044 766 435
-------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities.............. (405) 896 (1,268) (1,025) 525
-------- -------- -------- -------- --------
Cash flows from investing activities:
Loan issued.................................... (82) -- -- -- --
Acquisition of property and equipment.......... (30) (654) (667) (562) (685)
-------- -------- -------- -------- --------
Net cash used in investing
activities........................ (112) (654) (667) (562) (685)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Borrowings under note payable to bank.......... 1,300 1,000 -- -- 3,500
Repayments on note payable to bank............. -- -- -- -- (2,300)
Borrowings under long-term debt................ 650 -- 12,136 12,136 --
Repayments on long-term debt................... -- (200) (307) (256) (388)
Proceeds from stockholders' notes.............. -- 770 1,500 1,500 --
Repayments of stockholders' notes.............. (1,091) -- (555) (555) --
Distributions to stockholders.................. (60) (600) (5,500) (5,500) --
Redemption of common stock..................... -- (400) (6,000) (6,000) --
-------- -------- -------- -------- --------
Net cash provided by financing
activities........................ 799 570 1,274 1,325 812
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 282 812 (661) (262) 652
Cash and cash equivalents at beginning of
period......................................... 4 286 1,098 1,098 437
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period....... $ 286 $ 1,098 $ 437 $ 836 $ 1,089
======== ======== ======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid.................................. $ 153 $ 168 $ 738 $ 376 $ 971
Non-cash investing and financing activities:
Common stock issued for notes receivable....... $ -- $ 103 $ 874 $ -- $ --
Common stock redeemed for notes payable........ $ -- $ -- $ 5,500 $ 5,500 $ --
</TABLE>

See accompanying notes to combined financial statements.
F-6
<PAGE> 77

OTG SOFTWARE, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 1 -- DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

(a) NATURE OF BUSINESS

The Company (as defined below) is engaged in the development, production,
sale, maintenance and licensing of data storage and document management software
products designed for managing information and enhancing enterprise
productivity. The Company is headquartered in Bethesda, Maryland and sells its
products primarily through distributors and resellers in the domestic and
international markets. The Company operates in a highly competitive environment
subject to rapid technological change and the emergence of new technology. Rapid
changes in technology could have an adverse financial impact on the Company. The
Company has historically been dependent on its principal stockholder for working
capital funding.

(b) PRINCIPLES OF COMBINATION

The accompanying combined financial statements include the accounts of OTG
Software, Inc. ("OTG Software") and OTG Sales, Inc. ("OTG Sales"). OTG Software
and OTG Sales are collectively referred to as the "Company." OTG Software
develops, produces, maintains and licenses the software. OTG Sales, which is
under common control and majority stock ownership with OTG Software, provides
sales, marketing support and services. OTG Sales commenced operations on October
1, 1997. The operations of the combined entity for 1997 and 1998 are comparable
to those for OTG Software for 1996. On November 18, 1999, the board of directors
of the Company authorized the contribution of the stock of OTG Sales to OTG
Software for no consideration, which is expected to occur on December 30, 1999.

All significant intercompany balances and transactions have been eliminated
in combination.

Revenues are generated from licensing software and providing services,
including maintenance and technical support, training and consulting.

In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 97-2, Software Revenue
Recognition. Subsequently, in March 1998 and December 1998, the AICPA issued SOP
98-4 and SOP 98-9, respectively, which defer until the Company's fiscal year
beginning January 1, 2000, the application of several paragraphs and examples in
SOP 97-2 that limit the definition of vendor specific objective evidence
("VSOE") for determining fair value of various elements in a multiple element
arrangement. The provisions of SOP 97-2 have been applied to transactions
entered into beginning January 1, 1998. Prior to 1998, the Company's revenue
recognition policy was in accordance with the preceding authoritative guidance
provided by SOP No. 91-1, Software Revenue Recognition. The adoption of SOP 97-2
did not have a material impact on the Company's financial statements. Further,
management of the Company does not believe that the adoption of the remaining
portions of SOP 97-2, which were deferred by SOP 98-4 and SOP 98-9, will have a
material impact on the Company's financial statements.

Software license revenues consist of fees for licenses of the Company's
software products. The Company sells its software products primarily through
distributors and resellers. In some cases, the Company provides extended payment
terms to certain distributors and resellers. For arrangements in which payment
terms are within six months, the Company recognizes the revenue when the
agreement is signed, the arrangement fee is fixed and determinable, delivery of
the software has

F-7
<PAGE> 78
OTG SOFTWARE, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

occurred, and collectibility of the fee is considered probable. For arrangements
in which payment terms extend beyond six months, the Company recognizes revenue
when payment by the customer is made or becomes due, if all other revenue
recognition criteria have been met.

Services revenues consist of maintenance and technical support, training
and consulting. Revenues from maintenance and technical support, which consists
of unspecified when-and-if-available product updates and customer telephone
support services, are recognized ratably over the term of the service period.
Other services revenues are recognized as the related services are being
provided.

(d) COST OF REVENUES

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

(e) SOFTWARE DEVELOPMENT COSTS

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

(f) PROPERTY AND EQUIPMENT

Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives, on a
straight-line basis. The estimated service lives used in determining
depreciation are three years for computer hardware and software, and seven years
for furniture and equipment. Leasehold improvements are amortized over the
shorter of the useful life of the asset, generally four years, or the lease
term.

Maintenance and repairs are charged to expense as incurred; additions and
betterments are capitalized. Upon retirement or sale, the cost and related
accumulated depreciation of the disposed assets are removed and any resulting
gain or loss is credited or charged to operations.

(g) RECOVERY OF LONG-LIVED ASSETS

The Company's policy is to review its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. The Company recognizes an impairment loss when the sum
of the expected future cash flows is less than the carrying amount of the asset.
The measurement of the impairment losses to be recognized is based upon the
difference between the fair value and the carrying amount of the assets.

(h) INCOME TAXES

OTG Software and OTG Sales each have elected to be treated as an S
corporation under the provisions of the Internal Revenue Code. Under those
provisions, the Company does not pay federal

F-8
<PAGE> 79
OTG SOFTWARE, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

or state corporate income taxes on its taxable income. Instead, the stockholders
are liable for federal and state income taxes on the Company's taxable income.

(i) CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an
original maturity of 90 days or less to be cash equivalents. The carrying values
of cash equivalents approximate fair values. Cash equivalents include overnight
repurchase agreements.

(j) ADVERTISING COSTS

Advertising costs are expensed as incurred. Total advertising expense was
$521,000, $584,000 and $378,000, respectively, for the years ended December 31,
1996, 1997, and 1998, and $305,000 and $347,000, respectively, for the nine
months ended September 30, 1998 and 1999 (unaudited).

(k) CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to credit risk
include accounts receivable and cash balances with financial institutions. The
Company extends credit to its customers on an unsecured basis in the normal
course of business and maintains an allowance for potential losses when
identified. Cash balances in one financial institution are insured by the
Federal Deposit Insurance Corporation up to $100,000. Uninsured balances at
December 31, 1997 and 1998 and September 30, 1999 (unaudited) were $998,000,
$331,000 and $889,000, respectively. The Company has not experienced any losses
in such accounts and believes it is not exposed to any significant credit risk
on cash.

(l) ESTIMATES

In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

(m) UNAUDITED INTERIM FINANCIAL INFORMATION

The unaudited interim financial information as of September 30, 1999 and
for the nine months ended September 30, 1998 and 1999, have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with instructions to Article 10 of Regulation S-X. In the
opinion of management, such information contains all adjustments, consisting of
only normal recurring adjustments, considered necessary for a fair presentation
of such periods. The operating results for any interim period are not
necessarily indicative of results for any future periods.

(n) PRO FORMA STATEMENT OF OPERATIONS DATA AND NET INCOME (LOSS) PER SHARE
(UNAUDITED)

In connection with the Company's planned initial public offering of common
stock, the Company intends to convert to a Subchapter C corporation under the
Internal Revenue Code. Accordingly, the accompanying pro forma information has
been prepared as if the stock of OTG Sales had been contributed to OTG Software,
and OTG Software were treated as a Subchapter C corporation for federal and
state income tax purposes from January 1, 1996.

F-9
<PAGE> 80
OTG SOFTWARE, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The Company computes net income (loss) per share in accordance with SFAS
No. 128, "Earnings Per Share," and SEC Staff Accounting Bulletin ("SAB") No. 98.
Under the provisions of SFAS No. 128 and SAB No. 98, pro forma basic net income
(loss) per share is computed by dividing the pro forma net income (loss)
available to common stockholders for the period by the weighted average number
of common shares outstanding during the period. Pro forma diluted net income
(loss) per share is computed by dividing the pro forma net income (loss) for the
period by the weighted average number of common and dilutive common stock
equivalent shares outstanding during the period. Pro forma basic and diluted net
income (loss) per share has been calculated assuming that the capital structure
established at the date of the proposed initial public offering ("IPO") was in
effect during the periods presented.

Certain shares issuable upon the conversion of convertible debt and stock
options and warrants outstanding were not included in the pro forma diluted net
income (loss) per share as such amounts would be anti-dilutive.

(o) STOCK-BASED COMPENSATION

The Company accounts for equity-based compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations,
and complies with the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Under APB Opinion No. 25, compensation expense is
based upon the difference, if any, on the date of grant, between the fair value
of the Company's stock and the exercise price. All equity-based awards to
non-employees are accounted for at their fair value in accordance with SFAS No.
123.

(p) FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable, and short-term debt approximates the fair values due to the
short-term nature of these instruments. The carrying value of the convertible
subordinated debt and the senior subordinated debt approximate fair value based
on borrowing rates currently available for financial instruments with similar
characteristics and maturities. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and, therefore, cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.

(q) RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The new standard establishes
accounting and reporting standards for derivative instruments embedded in other
contracts and for hedging activities. This statement, as amended, is effective
for all fiscal quarters beginning after June 15, 2000. The Company does not
expect SFAS No. 133 to have a material affect on its financial position or
results of operations.

In December 1999, the Securities and Exchange Commission ("SEC") issued SAB
No. 101-Revenue Recognition in Financial Statements. This SAB expresses the
SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements. Registrants can apply the accounting and
disclosure requirements of this SAB retrospectively, or may report a change in
accounting principle no later than the first fiscal quarter of the fiscal year

F-10
<PAGE> 81
OTG SOFTWARE, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

beginning after December 15, 1999. The Company does not expect the application
of this SAB to have a material impact on the Company's financial statements.

(r) SEGMENT INFORMATION

The Company operates under one business segment providing data storage
management and data access solutions products and services. The Company's
revenues from foreign countries represent approximately 6% of total revenues for
the years ended December 31, 1996, 1997 and 1998, and the nine months ended
September 30, 1999 (unaudited).

NOTE 2 -- COMMON STOCK

OTG Software and OTG Sales are incorporated in the State of Delaware and
each company has the authority to issue 20,000,000 shares of common stock with a
par value of $0.01.

In December 1998, the Company issued a warrant to purchase 15,000 shares of
OTG Software common stock at $3.67 per share to the estate of a former employee.
The warrant is exercisable for a period of five years. In accordance with SFAS
No. 123, the Company has recorded compensation expense during 1998 of $30,000
for the estimated fair value of the warrant.

NOTE 3 -- PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1997 1998 1999
----- ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Computer software........................................... $ 115 $ 199 $ 332
Computer hardware........................................... 448 885 1,253
Furniture, fixtures and office equipment.................... 219 426 596
Leasehold improvements...................................... 166 105 119
----- ------ ------
948 1,615 2,300
Less accumulated depreciation and amortization.............. (274) (605) (991)
----- ------ ------
Property and equipment, net................................. $ 674 $1,010 $1,309
===== ====== ======
</TABLE>

NOTE 4 -- NOTES RECEIVABLE

Other assets at December 31, 1997 and 1998 include a $49,142 demand note
receivable from a former employee. The note bears interest at 10%.

OTG Software had stock subscription notes receivable at December 31, 1997
and 1998 in the amount of approximately $103,000 and $977,000, respectively,
from certain employees of the Company with interest rates ranging from 5 to 8%.
The notes were issued in connection with the issuance of 372,722 shares of OTG
Software common stock. Approximately $103,000 of the notes are due in January
2002, and approximately $874,000 are due in October 2004. The Company has full
recourse against the employees to collect these notes. These notes receivable
are recorded as an offset to equity in the accompanying combined balance sheets.
The Company has not accrued interest on the notes.

F-11
<PAGE> 82
OTG SOFTWARE, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5 -- DEMAND NOTE PAYABLE -- BANK

In May 1996, the Company borrowed $1,300,000 from a bank evidenced by a
note bearing interest at the bank's prime rate plus 1%. Monthly payments of
interest were required with the principal originally due on May 20, 1997. On
December 22, 1997, the Company completed a refinancing of the obligation and
increased the borrowing to $2,300,000. The note required only interest payments
at the bank's prime rate plus 0.5% (9% at December 31, 1997 and 1998) through
March 31, 1999. The loan is collateralized by a security interest in all of the
Company's assets and is further collateralized by the pledge of certain assets
of the Company's principal stockholders. The note required the Company to comply
with certain financial covenants, including limits on debt and maintaining
tangible net worth, as defined. The Company was in violation of certain
covenants at December 31, 1998 and had received waivers from the bank for such
violations. Subsequent to December 31, 1998, this agreement was replaced with a
new financing agreement as explained in Note 12.

NOTE 6 -- LONG-TERM DEBT

On December 30, 1996, the Company entered into a severance agreement with
an employee in the amount of $650,000 through the issuance of a note payable. At
December 31, 1997 and 1998, the Company's remaining obligation under the note
payable was $450,000 and $250,000, respectively. The remaining balance under the
note at December 31, 1998 was paid in January 1999.

On June 9, 1998, the Company purchased from a former stockholder all of his
shares for $11,500,000. The Company paid $6,000,000 in cash and issued a note to
the former stockholder with a face value of $5,500,000 and a 10% rate of
interest. The Company recorded the note at its face value which approximated the
fair value at the date of issuance. The note calls for monthly payments of
principal and interest of $60,000 through December 15, 1999, a principal payment
of $1,000,000 on January 15, 2000, and monthly payments of principal and
interest of $100,000 thereafter, until the balance is paid. The note is due in
full 60 days after an IPO of the Company's common stock. The Company recorded
this transaction as the re-purchase and retirement of treasury stock.

On June 9, 1998, the Company borrowed $12,000,000 by issuing notes to fund
payments required under the stock re-purchase as described above, fund
distributions to other stockholders, and to provide working capital to the
Company. The notes are made up of convertible subordinated notes amounting to
$7,636,364 and senior subordinated notes amounting to $4,363,636, as described
below. The notes and the payment of the principal and interest thereon are
subordinate to and subject to prior payment of any bank indebtedness and the
indebtedness to the former stockholder.

The convertible subordinated notes, which are held by three noteholders,
and accrued interest thereon are due December 9, 2000. The notes bear interest
at 8% to June 9, 1999, 10% from June 9, 1999 to June 9, 2000 and 12% from June
9, 2000 to maturity. Principal and interest not paid in full at maturity shall
accrue interest at 14% increasing two percentage points each June 9 thereafter,
until paid in full or converted into common stock. At any time on or before June
9, 1999, upon the occurrence of certain events as defined in the agreement,
including the sale of the Company or breach of certain covenants, and upon the
request of the holders of at least 51% of the notes, the principal amount of the
notes shall be converted into common stock of OTG Software. At any time after
June 9, 1999, upon request of the holders of at least 51% of the notes, the
principal amount of the notes shall be converted into common stock of OTG
Software. Further, the principal amount of the notes shall be automatically
converted into common stock of OTG Software in the event of an offer and sale by
the Company of common stock to the public at a price not less than the price per

F-12
<PAGE> 83
OTG SOFTWARE, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

share that results from a valuation of the Company of $100,000,000 and which
results in aggregate net proceeds to the Company of not less than $20,000,000.
The notes are convertible into common stock of OTG Software at $3.67 per share,
subject to anti-dilution provisions. Upon the conversion of the principal amount
of the notes, the Company shall not be required to pay any accrued but unpaid
interest on the amount converted. The notes cannot be prepaid, in whole or in
part, without prior written consent of the noteholders.

The senior subordinated notes, which are also held by three noteholders,
and accrued interest thereon are due on December 9, 2000. Interest is paid
quarterly on these notes which bear interest at 8% to June 9, 1999, 10% from
June 9, 1999 to June 9, 2000 and 12% from June 9, 2000 to maturity. Principal
and interest not paid in full at maturity shall accrue interest at 14%
increasing two percentage points each June 9 thereafter, until paid in full.
These notes may be prepaid at any time without penalty.

The convertible subordinated and senior subordinated notes are secured by a
pledge of shares of common stock of the Company owned by the principal
stockholder of the Company. The convertible subordinated and senior subordinated
note agreements contain restrictive covenants, which may accelerate the due date
of the notes. The Company was not in compliance with certain of these covenants
at December 31, 1998. However, in connection with the revolving line of credit
agreement entered into by the Company in July 1999 (see Note 12), the holders of
the convertible subordinated and senior subordinated notes entered into
"standstill agreements", which prohibit the holders from commencing any action
against the Company to enforce collection of the notes until 180 calender days
after the bank accelerates the bank indebtedness. As a result, the Company has
classified the amounts as long-term obligations in the accompanying combined
balance sheets.

In accordance with EITF 86-15, "Increasing Rate Debt", the Company is
recognizing the interest related to the convertible subordinated and senior
subordinated notes using the effective interest method over the period it is
estimated that the notes will be outstanding. It is reasonably possible that
this estimate could change.

Annual maturities of long-term debt as of December 31, 1998 are as follows
(in thousands):

<TABLE>
<CAPTION>
YEAR AMOUNT
---- -------
<S> <C>
1999............................................... $ 1,437
2000............................................... 5,242
2001............................................... 934
2002............................................... 1,010
2003............................................... 1,097
Thereafter......................................... 8,058
-------
$17,778
=======
</TABLE>

NOTE 7 -- SUBORDINATED NOTES PAYABLE -- STOCKHOLDERS

The Company is party to revolving unsecured demand loan agreements with its
principal stockholder. Interest is due monthly at a rate of 8%. In connection
with the Company's issuance of convertible subordinated and senior subordinated
notes (see Note 6), the stockholder has agreed that payment of these notes is
restricted until payment or conversion of the convertible subordinated and
senior subordinated notes.

F-13
<PAGE> 84
OTG SOFTWARE, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8 -- EMPLOYEE BENEFIT PLANS

RETIREMENT PLANS

Effective October 1, 1996, the Company adopted a 401(k) Retirement Plan
(the "Plan") covering substantially all its employees. Participants in the Plan
may elect to defer up to 15% of their compensation. The Company may make a
discretionary matching contribution; the Company elected not to make a
contribution in 1996 and 1997. In 1998, the Company began to match 25% of
employee contributions up to 6% of compensation. The amount recorded as expense
for the year ended December 31, 1998, and the nine months ended September 30,
1998 and 1999 (unaudited) was $38,000, $60,000, and $85,000, respectively.

In 1996, the Company adopted a 419 Benefit Plan covering senior executives,
contributions to which are discretionary. The Company contributed $100,000 in
1996. The Company made no contributions to the plan in 1997, 1998, or the nine
months ended September 30, 1999 (unaudited).

STOCK OPTION PLAN

During 1998, the Board of Directors adopted the 1998 Stock Incentive Plan
("the Stock Plan"). OTG Software has reserved up to 2,264,706 shares for
issuance under the Stock Plan. All of the Company's employees, officers,
directors, consultants and advisors are eligible to be granted options under the
Stock Plan. Awards granted to any employee are limited to 250,000 shares per
calendar year. The exercise price and duration of the option are determined by
the Board at the date of grant. The options generally vest ratably over a period
of 4 years, and generally expire in 10 years. During 1998 and the nine months
ended September 30, 1999 (unaudited), all options were granted to employee and
directors of the Company.

The following table summarizes option activity for the year ended December
31, 1998, and the nine months ended September 30, 1999 (unaudited):

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Options outstanding at January 1, 1998...................... -- $ --
Options granted............................................. 1,723,355 3.67
Options exercised........................................... (238,095) 3.67
Options forfeited/expired................................... (47,000) 3.67
---------
Options outstanding at December 31, 1998.................... 1,438,260 3.67
Options granted............................................. 408,500 4.90
Options exercised........................................... -- --
Options forfeited/expired................................... (121,600) 3.76
Options outstanding at September 30, 1999................... 1,725,160 3.96
=========
</TABLE>

At December 31, 1998, all options granted had an exercise price of $3.67.
At September 30, 1999 (unaudited), the range of exercise prices was $3.67 to
$5.50. At December 31, 1998 and September 30, 1999 (unaudited), the weighted
average remaining contractual life of the outstanding options was 9.8 and 9.1
years, respectively, and the number of options exercisable was 5,000 and
193,095, respectively. There were 88,351 and 301,451 options available for grant
at December 31, 1998 and September 30, 1999 (unaudited).

F-14
<PAGE> 85
OTG SOFTWARE, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The per share weighted average fair value of the options granted during
1998 and the nine months ended September 30, 1999 (unaudited) were $0.57, and
$6.04, respectively. The fair value of each option grant is estimated on the
date of grant, using the Black-Scholes options-pricing model with the following
weighted average assumptions:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
1998 SEPTEMBER 30, 1999
------------ ------------------
(UNAUDITED)
<S> <C> <C>
Average dividend yield.................................. -- --
Expected life in years.................................. 4 4
Risk free interest rate................................. 4.25% 5.41%
Expected volatility..................................... -- --
</TABLE>

The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock options. As a result, no compensation expense was
recorded for the options granted during 1998. The Company will record
compensation expense of approximately $1,636,000 relating to options to purchase
408,500 shares granted in January through September 1999 (unaudited), equal to
the difference between the fair market value of the Company's common stock on
the grant date and the exercise price of the options. The expense will be
recognized ratably over the vesting period of the options, which is generally
four years. The Company recorded a $150,000 expense associated with the options
granted during the nine months ended September 30, 1999 (unaudited) which is
included as compensation expense in the accompanying combined statements of
operations.

SFAS No. 123 requires pro forma net income (loss) disclosures as if the
Company had accounted for its stock options granted under the fair value method
prescribed by that statement. Had the Company used the fair value methodology
for determining compensation expense, the following table presents the pro forma
net income (loss) that would have been recorded by the Company for the options
granted during 1998 and the nine months ended September 30, 1999 (unaudited):

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
1998 SEPTEMBER 30, 1999
------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
Net income:
As reported........................................... $(1,207) $(841)
Pro forma............................................. $(1,256) $(949)
Net income per share -- basic and diluted:
As reported........................................... $ (.12) $(.10)
Pro forma............................................. $ (.12) $(.12)
</TABLE>

The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.

F-15
<PAGE> 86
OTG SOFTWARE, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 9 -- OPERATING LEASES

The Company leases its facilities and certain office equipment under
non-cancelable operating leases. Future minimum lease payments under
non-cancelable operating leases approximate the following:

<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------------
(IN THOUSANDS)
<S> <C>
1999........................................... $471
2000........................................... 472
2001........................................... 385
2002........................................... 251
2003........................................... --
</TABLE>

Rent expense of approximately $149,000, $335,000, and $540,000 was charged
to operations for 1996, 1997 and 1998, respectively, and $405,000, and $538,000,
for the nine months ended September 30, 1998 and 1999 (unaudited) respectively.

NOTE 10 -- RELATED PARTY TRANSACTIONS

Interest expense on the notes payable to the principal stockholder
approximated $80,000, $25,000 and $88,000 for the years ended December 31, 1996,
1997 and 1998, respectively, and $48,000 and $118,000, for the nine months ended
September 30, 1998 and 1999 (unaudited), respectively.

NOTE 11 -- COMMITMENTS AND CONTINGENCIES

The Company has employment contracts with certain officers, directors, and
employees. The Company also has bonus agreements with certain employees based
upon net income, as defined in the agreements.

If the Company engages in a successful IPO (as defined), the Company is
obligated to pay a former employee bonus compensation of $300,000, less any
amounts then due and outstanding to the Company. See Note 4.

The Company is obligated to make payments in the amount of $80,000 per year
for the years 1999 through 2003, to the estate of a former employee. The
payments are contingent upon the Company meeting certain financial targets and
other criteria as defined in the agreement.

NOTE 12 -- SUBSEQUENT EVENT

In July 1999, the Company entered into a revolving line of credit agreement
which replaced the bank demand note payable at December 31, 1998. The new
agreement provides for borrowings up to $5,000,000 based on eligible accounts
receivable, as defined in the agreement, and expires in July 2000. Interest only
payments are due monthly at the bank's prime rate plus 0.5%. This line is
collateralized by substantially all of the Company's assets, and requires the
Company to comply with certain financial covenants as defined by the agreement.

As a condition to entering into the loan agreement, the lender required the
principal stockholder of the Company to enter into an escrow agreement as
security for payments to be made by the Company under a note issued to a former
stockholder.

F-16
<PAGE> 87

[LOGO]

[PROSPECTUS BACK COVER PAGE]
<PAGE> 88

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
common stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fees and the Nasdaq National Market listing
fee.

<TABLE>
<S> <C>
SEC registration fee........................................ $18,216
NASD filing fee............................................. 7,400
Nasdaq National Market listing fee.......................... *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue Sky fees and expenses (including legal fees)........... *
Transfer agent and registrar fees and expenses.............. *
Miscellaneous............................................... *
-------
Total............................................. $ *
=======
</TABLE>

- -------------------------
* To be filed by amendment.

The Company will bear all expenses shown above.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Registrant's Amended and Restated Certificate of Incorporation (the
"Restated Certificate") provides that, except to the extent prohibited by the
Delaware General Corporation Law (the "DGCL"), the Registrant's directors shall
not be personally liable to the Registrant or its stockholders for monetary
damages for any breach of fiduciary duty as directors of the Registrant. Under
the DGCL, the directors have a fiduciary duty to the Registrant which is not
eliminated by this provision of the Restated Certificate and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under the DGCL for breach of the director's
duty of loyalty to the Registrant, for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are prohibited by the DGCL. This provision
also does not affect the directors' responsibilities under any other laws, such
as the federal securities laws or state or federal environmental laws. The
Registrant has obtained liability insurance for its officers and directors.

Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL including
for an unlawful payment of dividend or unlawful stock purchase or redemption, or
(iv) for any transaction from which the director derived an improper personal
benefit. The DGCL

II-1
<PAGE> 89

provides further that the indemnification permitted thereunder shall not be
deemed exclusive of any other rights to which the directors and officers may be
entitled under the corporation's by-laws, any agreement, a vote of stockholders
or otherwise. The Restated Certificate eliminates the personal liability of
directors to the fullest extent permitted by the DGCL and, together with the
Registrant's Amended and Restated By-Laws (the "Restated By-Laws") and
Indemnification Agreements to be entered into with each executive officer and
director, provides that the Registrant shall fully indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that such person is or was a director or
officer of the Registrant, or is or was serving at the request of the Registrant
as a director or officer of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding. Reference is made to the Registrant's Form of Amended and Restated
Certificate of Incorporation, Form of Amended and Restated By-Laws and Form of
Indemnification Agreement filed as Exhibits 3.2, 3.4, and 10.6 hereto,
respectively.

The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Company against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Act"). Reference is made to the
form of Underwriting Agreement to be filed as Exhibit 1.1 hereto.

At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Restated Certificate. The Registrant is not
aware of any threatened litigation or proceeding that may result in a claim for
such indemnification.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

The following information regarding the issuance of the Registrant's
securities does not give effect to the stock split of the Registrant's common
stock. Pursuant to the Registrant's stock split, each share of common stock will
be split into a to-be-determined number of shares. Since December 1996, the
Registrant has issued the following securities that were not registered under
the Securities Act as summarized below.

(a) Issuances of Capital Stock, Convertible Notes and Warrants.

1. On January 1, 1997, our predecessor Maryland corporation issued
8.647 shares of common stock to one of its executive officers, for an
aggregate purchase price of $102,698. The purchaser issued our predecessor
Maryland corporation a promissory note for the aggregate purchase price.
The promissory note earns 8% interest per year and principal and interest
become due and payable on January 1, 2002.

2. On June 8, 1998, in connection with our reincorporation into
Delaware, the Registrant issued an aggregate of 13,103,803 shares of common
stock to four individuals in exchange for all the outstanding common stock
of our predecessor Maryland corporation.

3. On June 9, 1998, the Registrant issued convertible subordinated
notes in the aggregate principal amount of $7,636,364 to one individual and
two institutional investors. The convertible subordinated notes earn 8%
interest per year from the date of issuance to June 9, 1999, 10% interest
from June 9, 1999 to June 9, 2000 and 12% interest from June 9, 2000 to
maturity on December 9, 2000. Upon the closing of this offering, the
principal balance of the convertible subordinated notes converts
automatically into 2,080,753 shares of the Registrant's common stock and
the interest thereon is forgiven.

II-2
<PAGE> 90

4. On December 1, 1998, the Registrant issued a warrant to purchase
15,000 shares of common stock to one individual in exchange for an executed
release agreement.

5. On December 22, 1998, the Registrant issued an aggregate of 238,095
shares of common stock to five employees for an aggregate purchase price of
$873,809 pursuant to restricted stock agreements under the Registrant's
1998 Stock Incentive Plan.

(b) Certain Grants and Exercises of Stock Options. The Registrant's 1998
Stock Incentive Plan was adopted by the Board of Directors and approved by the
stockholders of the Registrant in August 1998. As of December 22, 1999, no
options to purchase shares of common stock had been exercised and options to
purchase 1,800,860 shares of common stock were outstanding under the 1998 Stock
Incentive Plan.

No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of options to purchase common stock, Rule 701 of the
Securities Act. All of the foregoing securities are deemed restricted securities
for the purposes of the Securities Act.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1* Certificate of Incorporation of the Registrant, as amended
3.2* Form of Amended and Restated Certificate of Incorporation of
the Registrant, to be filed prior to the closing of this
offering
3.3* By-Laws of the Registrant
3.4* Form of Amended and Restated By-Laws of the Registrant, to
be effective upon the closing of this offering
4.1* Specimen common stock certificate
4.2* See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the
Certificate of Incorporation and By-Laws of the Registrant
defining the rights of holders of common stock of the
Registrant
5.1* Opinion of Hale and Dorr LLP
10.1* 1998 Stock Incentive Plan, as amended
10.2* 2000 Stock Incentive Plan
10.3* 2000 Employee Stock Purchase Plan
10.4* 401(k) Plan
10.5* Lease for 6701 Democracy Boulevard, Suite 805, Bethesda,
Maryland 20817
10.6* Form of Indemnification Agreement
10.7* Employment Agreement with Richard A. Kay, as amended
10.8* Employment Agreement with F. William Caple, as amended
10.9* Employment Agreement with Ronald W. Kaiser, as amended
21.1* Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
</TABLE>

II-3
<PAGE> 91

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
23.2* Consent of Hale and Dorr LLP (included in Exhibit 5.1)
24.1 Powers of Attorney (see page II-5)
27.1 Financial Data Schedule
</TABLE>

- -------------------------
* To be filed by amendment.

(b) Financial Statements:

Schedule II -- Valuation and Qualifying Accounts

All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.

ITEM 17. UNDERTAKINGS

The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the registrant pursuant to the Delaware General
Corporation Law, the Restated Certificate of the registrant, the Underwriting
Agreement, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the registrant
will, unless in the opinion of counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.

The undersigned registrant hereby undertakes that:

(1) For purpose of determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Act shall be
deemed to be part of this Registration Statement as of the time it was declared
effective.

(2) For purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

II-4
<PAGE> 92

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Bethesda, Maryland, on this 23(rd)
day of December, 1999.

OTG SOFTWARE, INC.

By: /s/ RICHARD A. KAY
------------------------------------
Richard A. Kay
President, Chief Executive Officer
and
Chairman of the Board of Directors

II-5
<PAGE> 93

POWER OF ATTORNEY AND SIGNATURES

We, the undersigned officers, directors and authorized representatives of
OTG Software, Inc. hereby severally constitute and appoint Richard A. Kay, F.
William Caple, Ronald W. Kaiser and Brent B. Siler, and each of them singly, our
true and lawful attorneys with full power to them, and each of them singly, with
full powers of substitution and resubstitution, to sign for us and in our names
in the capacities indicated below, the Registration Statement on Form S-1 filed
herewith and any and all pre-effective and post-effective amendments to said
Registration Statement, and any subsequent Registration Statement for the same
offering which may be filed under Rule 462(b), and generally to do all such
things in our names and on our behalf in our capacities as officers and
directors to enable OTG Software, Inc. to comply with the provisions of the
Securities Act of 1933, as amended, and all requirements of the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorneys, or any of them, or their substitute or
substitutes, to said Registration Statement and any and all amendments thereto
or to any subsequent Registration Statement for the same offering which may be
filed under Rule 462(b).

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>

/s/ RICHARD A. KAY President, Chief Executive December 23, 1999
- --------------------------------------------- Officer and Chairman of the
Richard A. Kay Board of Directors (Principal
Executive Officer)

/s/ F. WILLIAM CAPLE Executive Vice President, December 23, 1999
- --------------------------------------------- Secretary and Director
F. William Caple

/s/ RONALD W. KAISER Chief Financial Officer and December 23, 1999
- --------------------------------------------- Treasurer (Principal Financial
Ronald W. Kaiser and Accounting Officer)

/s/ GABRIEL A. BATTISTA Director December 23, 1999
- ---------------------------------------------
Gabriel A. Battista

/s/ JOHN BURTON Director December 23, 1999
- ---------------------------------------------
John Burton

/s/ JOSEPH R. CHINNICI Director December 23, 1999
- ---------------------------------------------
Joseph R. Chinnici

/s/ GEATON A. DECESARIS, JR. Director December 23, 1999
- ---------------------------------------------
Geaton A. DeCesaris, Jr.

/s/ DONALD B. HEBB, JR. Director December 23, 1999
- ---------------------------------------------
Donald B. Hebb, Jr.
</TABLE>

II-6
<PAGE> 94

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND OTHER (WRITE- AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS OFFS) OF PERIOD
----------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1/1/96 - 12/31/96
Allowance for doubtful accounts............ -- 130,000 54,442 -- 184,442
1/1/97 - 12/31/97
Allowance for doubtful accounts............ 184,442 142,464 123,838 (55,442) 395,302
1/1/98 - 12/31/98
Allowance for doubtful accounts............ 395,302 160,000 186,646 (78,111) 663,837
</TABLE>

S-1

<PAGE> 1
CONSENT OF KPMG LLP

EXHIBIT 23.1
ACCOUNTANT'S CONSENT

The Board of Directors
OTG Software, Inc.

We consent to the use of our reports included herein and the reference to our
firm under the heading "Experts" in the prospectus.

KPMG LLP

McLean, Virginia
December 23, 1999
<PAGE> 2
The Board of Directors
OTG Software, Inc.

The audits referred to in our report dated December 17, 1999 included the
related financial statement schedule for each of the years in the three-year
period ended December 31, 1998, included in the registration statement. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement
schedule based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the combined financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.

KPMG LLP

McLean, Virginia
December 17, 1999

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