OTG SOFTWARE INC, S-1/A, 2000-11-01

OTG SOFTWARE INC
S-1/A, 2000-11-01
PREPACKAGED SOFTWARE

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 1, 2000

REGISTRATION NO. 333-48516

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

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

AMENDMENT NO. 1
TO

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 (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
</TABLE>

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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.
11951 FREEDOM DRIVE WASHINGTON, D.C. 20036
RESTON, VA 20190 TELEPHONE: (202) 861-3900
TELEPHONE: (703) 654-7000 TELECOPY: (202) 223-2085
TELECOPY: (703) 654-7100
</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(b)
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. / /

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

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.

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--------------------------------------------------------------------------------
<PAGE>
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.
<PAGE>

SUBJECT TO COMPLETION, DATED NOVEMBER 1, 2000

3,300,000 Shares

[LOGO]

Common Stock
-----------

We are selling 1,650,000 shares of common stock and the selling stockholders
are selling 1,650,000 shares of common stock. We will not receive any of the
proceeds from the shares of common stock sold by the selling stockholders.

Our common stock is listed on The Nasdaq Stock Market's National Market
under the symbol "OTGS." The last reported sale price on October 31, 2000, was
$31.50 per share.

The underwriters have an option to purchase from selling stockholders a
maximum of 495,000 additional shares of common stock to cover over-allotments of
shares.

Investing in the common stock involves risks. See "Risk Factors" beginning
on page 8.

<TABLE>
<CAPTION>
Underwriting
Discounts Proceeds
Price to and Proceeds to to Selling
Public Commissions OTG Stockholders
------------ ------------ ------------ ------------
<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

Salomon Smith Barney

Friedman Billings Ramsey

The date of this prospectus is November , 2000.

<PAGE>
Graphics on inside front cover.

Title "Integrated Solutions for Empowered Storage." The graphic depicts five
forms of input: e-mail, documents, video/audio, Web content and datastreams,
each leading into a box labeled "Data Generators." An arrow extends from the
data generators box to parts of the OTG product suite, including EmailXtender,
ApplicationXtender, WebXtender, SANXtender and OnlineStor.com. Another arrow
extends between this grouping and a graphic for DiskXtender. Above this arrow is
the OTG logo and text that states "Turn stored data into application data." The
text under this arrow states "Online storage and access for enterprise data.
Seamless integration with applications. Web access to stored data. Dynamic email
storage, retrieval and protection." The graphic for DiskXtender illustrates five
forms of storage: tape libraries, primary storage, NAS devices, CD/DVD and
optical jukeboxes. In the upper righthand corner is the OTG Logo.
<PAGE>
--------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PROSPECTUS SUMMARY...................... 3
RISK FACTORS............................ 8
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS............................ 17
USE OF PROCEEDS......................... 18
DIVIDEND POLICY......................... 18
PRICE RANGE OF COMMON STOCK............. 18
CAPITALIZATION.......................... 19
DILUTION................................ 20
SELECTED CONSOLIDATED FINANCIAL
DATA.................................. 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................ 23
</TABLE>

BUSINESS................................ 33
MANAGEMENT.............................. 46
RELATED PARTY TRANSACTIONS.............. 54
PRINCIPAL AND SELLING STOCKHOLDERS...... 56
DESCRIPTION OF CAPITAL STOCK............ 58
SHARES ELIGIBLE FOR FUTURE SALE......... 61
UNDERWRITING............................ 62
NOTICE TO CANADIAN RESIDENTS............ 65
LEGAL MATTERS........................... 66
EXPERTS................................. 66
CHANGE OF AUDITORS...................... 66
WHERE YOU CAN FIND MORE INFORMATION..... 66
INDEX TO 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
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY NOT BE ACCURATE
AFTER THE DATE OF THIS DOCUMENT.
<PAGE>
PROSPECTUS SUMMARY

YOU SHOULD READ THIS SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION,
INCLUDING OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES, APPEARING
ELSEWHERE IN THIS PROSPECTUS.

OTG SOFTWARE, INC.

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

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 storage area
networks. A storage area network 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. International Data Corporation, an
independent information technology research firm referred to as IDC, estimates
that the total worldwide storage area networks market will grow from
$3.4 billion in 1999 to more than $13.8 billion in 2003. Storage area networks
are designed to store more data more quickly but not to make the data storage
and access process more efficient.

Our software enhances the performance of both traditional storage and
back-up methods and storage area networks by:

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

- providing efficient transfer of data to and from storage devices
throughout networks, including storage area networks;

- 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;

- providing secure Web access to stored data; and

- automatically consolidating stored data and providing centralized storage
management.

We market our products primarily through more than 15 original equipment
manufacturers and more than 275 domestic and international value-added resellers
and distributors, as well as through our direct sales force. We have original
equipment manufacturer relationships with Agilent Technologies, Cerner, Data
General, a division of EMC, FileNet, Imation, Legato Systems, StorageTek and
Tivoli Systems, a subsidiary of IBM, among others.

We have licensed our products to more than 7,600 corporations, government
agencies and other organizations across a broad spectrum of industries. Our
customers include American Airlines, Boeing, Citicorp, Dow Chemical, Mayo
Clinic, Nabisco, the National Association of Securities Dealers, Nortel

3
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Networks, PSINet, Seaboard International Forest Products, the University of
Miami and the U.S. Department of Defense.

Though we were profitable for the nine months ended September 30, 2000, we
have had operating losses in the past. As of September 30, 2000, we had an
accumulated deficit of $20.8 million. We operate in a highly competitive market
characterized by rapid technological change. We are controlled by Richard A.
Kay, our chairman, president and chief executive officer, who beneficially owns
45.9% of our common stock outstanding prior to this offering and will
beneficially own 41.1% of our outstanding common stock after this offering.

RECENT DEVELOPMENTS

In April, 2000, we acquired xVault, Inc. for consideration of 159,996 shares
of our common stock and $1.75 million in cash. xVault was a provider of e-mail
management and archiving solutions to government, business and industry. We
incorporated xVault's technology into our recently released EmailXtender
product. The acquisition was accounted for using the purchase method.

In June 2000, we released our EmailXtender product. EmailXtender is designed
to be integrated with leading e-mail platforms and provides intelligent storage,
indexing, archiving, and retrieval of e-mail messages and attachments.
EmailXtender also provides timely recovery from virus attacks and eliminates the
need for administrative restrictions on message or attachment size. We intend to
continue to capitalize on our position as an early provider of e-mail storage
management and promote the adoption of our product in the electronic
collaboration market.

In June 2000, we also announced our OnlineStor.com offering. OnlineStor.com
provides our XtenderSolutions product suite on a leased or metered basis over
the Web through application service providers and storage service providers. We
intend to expand our capability to enable our customers to outsource data
storage capacity and management over the Web by expanding existing relationships
and pursuing additional relationships with application service providers and
storage service providers.

In September 2000, we released our SANXtender product. SANXtender provides
automated, centralized management of data stored on a storage area network,
enabling users and applications to access this data directly. We have
successfully demonstrated the compatibility of our technology and its ability to
operate with the products of leading manufacturers of storage area network
technologies such as Advanced Digital Information, ATL Products, ATTO
Technology, Brocade Communications Systems, Chaparral Network Storage, Compaq
Computer, Crossroads Systems, Emulex, Gadzoox Networks, Hewlett-Packard, QLogic
and Vixel. We intend to continue to pursue strategic alliances with other
leading providers of storage area network technologies.

4
<PAGE>
THE OFFERING

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<S> <C>
Common stock offered by us................... 1,650,000 shares

Common stock offered by the selling 1,650,000 shares
stockholders...............................

Common stock to be outstanding after this 27,581,886 shares
offering...................................

Use of proceeds.............................. General corporate purposes, including working
capital and capital expenditures. We will not
receive any proceeds from the sale of common
stock by the selling stockholders. See "Use
of Proceeds."

Nasdaq National Market symbol................ OTGS
</TABLE>

The number of shares to be outstanding after this offering is based on
shares outstanding at September 30, 2000 and excludes as of that date:

- 4,142,263 shares subject to outstanding options at a weighted average
exercise price of $7.43 per share; and

- 991,253 additional shares reserved for issuance under our stock plans.

Except where stated otherwise, the information we present in this prospectus
assumes no exercise by the underwriters of their over-allotment option and gives
effect to the exercise by selling stockholders of options and a warrant to
purchase 98,222 shares, which will be sold by them in this offering.

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. The information on our website is not
incorporated by reference into this document and should not be considered to be
part of this document. Our website address is included in this document as an
inactive textual reference only.

5
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SUMMARY CONSOLIDATED FINANCIAL DATA

The following table is a summary of the financial data for our business. You
should read this information together with the consolidated 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 consolidated statement of operations
data (A) gives effect to the acquisition of xVault, Inc. The pro forma
consolidated statement of operations data (B) reflects federal and state income
taxes based on applicable tax rates for the periods presented during which we
operated as an S corporation as if we had not elected S corporation status for
the periods indicated. See note 1 to our consolidated 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 as
adjusted balance sheet data reflects the sale of the common stock offered by us
in this offering based on an assumed public offering price of $31.50 per share,
after deducting estimated underwriting discounts and estimated offering expenses
payable by us and the assumed exercise by selling stockholders of options and a
warrant to purchase 98,222 shares of common stock at a weighted average exercise
price of $1.84 per share.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------- --------------------------------------
1996 1997 1998 1999 1999 2000
-------- -------- -------- ------------------------ -------- ------------------------
ACTUAL PRO FORMA (A) ACTUAL PRO FORMA (A)
-------- ------------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Software licenses.......... $6,075 $ 8,543 $12,089 $18,208 $18,290 $12,605 $22,751 $22,857
Services................... 1,321 3,361 5,230 7,232 7,232 5,011 7,276 7,276
------ ------- ------- ------- ------- ------- ------- -------
Total revenues........... 7,396 11,904 17,319 25,440 25,522 17,616 30,027 30,133
Cost of revenues:
Software licenses.......... 848 579 532 1,062 1,146 670 1,353 1,446
Services................... 442 1,219 1,639 3,017 3,017 2,188 3,207 3,207
------ ------- ------- ------- ------- ------- ------- -------
Total cost of revenues... 1,290 1,798 2,171 4,079 4,163 2,858 4,560 4,653
------ ------- ------- ------- ------- ------- ------- -------
Gross profit................. 6,106 10,106 15,148 21,361 21,359 14,758 25,467 25,480
Operating expenses:
Research and development... 2,012 2,455 3,958 5,137 5,705 3,725 6,142 6,467
Sales and marketing........ 2,979 5,313 8,986 11,487 11,831 7,959 12,691 12,976
General and
administrative........... 1,940 1,709 2,150 4,139 4,268 2,680 4,347 4,418
Amortization of acquired
intangible assets........ -- -- -- -- 763 -- 347 572
Write-off of acquired
in-process research and
development.............. -- -- -- -- -- -- 620 --
------ ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 6,931 9,477 15,094 20,763 22,567 14,364 24,147 24,433
------ ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations................. (825) 629 54 598 (1,208) 394 1,320 1,047
Interest income (expense),
net........................ (143) (162) (1,261) (2,053) (2,086) (1,519) 1,736 1,658
------ ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes...................... (968) 467 (1,207) (1,455) (3,294) (1,125) 3,056 2,705
Provision for income taxes... -- -- -- -- -- -- 343 514
------ ------- ------- ------- ------- ------- ------- -------
Net income (loss)............ $ (968) $ 467 $(1,207) $(1,455) $(3,294) $(1,125) $ 2,713 $ 2,191
====== ======= ======= ======= ======= ======= ======= =======
Net income per share:
Basic...................... $ 0.12
=======
Diluted.................... $ 0.10
=======
Weighted average shares
outstanding:
Basic...................... 23,410
=======
Diluted.................... 26,400
=======
Pro forma statement of
operations data (B):
Income (loss) before income
taxes as reported........ $ (968) $ 467 $(1,207) $(1,455) $(3,294) $(1,125) $ 3,056 $ 2,191
Pro forma income tax
provision
(benefit)................ -- -- -- -- -- -- 581 --
------ ------- ------- ------- ------- ------- ------- -------
Pro forma net income
(loss)................... $ (968) $ 467 $(1,207) $(1,455) $(3,294) $(1,125) $ 2,475 $ 2,191
====== ======= ======= ======= ======= ======= ======= =======
Pro forma net income (loss)
per share:
Basic.................... $ (0.07) $ (0.16) $ (0.05) $ 0.11 $ 0.09
======= ======= ======= ======= =======
Diluted.................. $ (0.07) $ (0.16) $ (0.05) $ 0.09 $ 0.08
======= ======= ======= ======= =======
Pro forma weighted average
shares outstanding:
Basic.................... 20,560 20,720 20,560 23,410 23,478
======= ======= ======= ======= =======
Diluted.................. 20,560 20,720 20,560 26,400 26,468
======= ======= ======= ======= =======
</TABLE>

6
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<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
-------------------------
ACTUAL AS ADJUSTED
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $67,818 $116,365
Working capital............................................. 72,215 120,762
Total assets................................................ 92,158 140,705
Total debt.................................................. 99 99
Total stockholders' equity.................................. $78,849 $127,396
</TABLE>

7
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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 our base of revenue increases. In addition, growing
competition, lower-than-expected market acceptance of Windows NT or Windows
2000, or the failure of the market for storage area networks 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,
ship and determine to be collectible in that quarter. In addition, we typically
receive a significant portion of orders during the last month of each quarter,
and we cannot predict whether those orders will be placed, fulfilled and shipped
in that period. If we have lower revenues than we expect, we probably will not
be able to reduce our operating expenses in time to compensate for any revenue
shortfall. Therefore, any significant shortfall in revenues or delay of customer
orders could have an immediate adverse effect on our operating results in that
quarter.

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;

- the rate of adoption of storage area networks;

- pricing policies, payment terms and distribution terms;

- the failure of customers, especially those to whom we have granted
extended payment terms, to pay amounts owed when due; and

- the timing and size of acquisitions, if any.

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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. 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.

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

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

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

We continue to increase the scope of our operations and have grown our
headcount substantially. As of December 31, 1998, we had a total of 144
employees, as of December 31, 1999, we had a total of 172 employees, and as of
September 30, 2000, we had a total of 251 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

9
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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 1997, 1998, 1999 and the nine months
ended September 30, 2000, sales of our XtenderSolutions products accounted for
approximately 72%, 70%, 72% and 76% 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 THAT COULD
ADVERSELY AFFECT OUR SALES

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 that incorporate our data storage management software into systems
they sell. We also expect future revenues from distributors and value-added
resellers that sell our software, often bundled with their own software or
services. We have no control over the shipping dates or volumes of systems our
original equipment manufacturers, value-added resellers 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. We develop customized versions of our
products for some of our original equipment manufacturers to be included in
their systems software and other products. Developing products for these
original equipment manufacturers causes us to divert resources from other
activities which are also important to our business. If these versions do not
result in substantial revenues, our business and financial results could be
adversely affected.

OUR ORIGINAL EQUIPMENT MANUFACTURERS COULD CHOOSE TO COMPETE WITH US OR WITH
EACH OTHER, WHICH COULD HARM OUR BUSINESS

Our original equipment manufacturers, value-added resellers and distributors
could choose to develop their own data storage management products and
incorporate those products into their systems or product offerings in lieu of
our products. In addition, the original equipment manufacturers that we

10
<PAGE>
do business with may compete with one another. To the extent that one of our
original equipment manufacturer customers views the products we have developed
for another original equipment manufacturer as competitive, it may decide to
stop doing business with us, which could harm our business.

OVERLAPPING SALES EFFORTS MAY LEAD TO INEFFICIENCIES AND MAY ADVERSELY AFFECT
OUR RELATIONSHIPS WITH THOSE WHO SELL OUR PRODUCTS

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

THE MARKET FOR OUTSOURCED DATA STORAGE SOFTWARE OVER THE WEB IS NEW AND
EVOLVING, AND IF THIS MARKET FAILS TO DEVELOP OR IF OUR PRODUCTS ARE NOT WIDELY
ACCEPTED IN THIS MARKET, OUR BUSINESS COULD SUFFER

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

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

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

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

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

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

11
<PAGE>
OTHER COMPANIES HAVE DEVELOPED OR MAY CHOOSE TO DEVELOP COMPETING PRODUCTS AND
POTENTIAL CUSTOMERS FOR OUR PRODUCTS MAY CHOOSE TO DEVELOP INTERNAL DATA STORAGE
MANAGEMENT CAPABILITIES OR SATISFY THEIR NEEDS WITH A TRADITIONAL DATA BACK-UP
SOLUTION, ANY OF WHICH COULD CAUSE OUR REVENUES AND OUR BUSINESS TO SUFFER

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

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

OUR PRODUCTS MUST REMAIN COMPATIBLE WITH OPERATING SYSTEM SOFTWARE, NETWORK
HARDWARE AND SOFTWARE CONFIGURATIONS, WHICH ARE CURRENTLY UNDERGOING, AND WILL
LIKELY CONTINUE TO UNDERGO, SIGNIFICANT CHANGE THAT COULD RENDER OUR PRODUCTS
OBSOLETE

The market for our data storage management software is characterized by
rapid technological change, frequent new product introductions and enhancements,
uncertain product life cycles, changes in customer demands and evolving industry
standards. Our products could be rendered obsolete if products based on new
technologies are introduced or new industry standards emerge. We have expended
significant resources to allow our products to take advantage of the release of
Windows 2000 and to prepare our products for the emergence of storage area
networks, and we expect to continue to do so. If Windows 2000 and storage area
networks are not widely adopted, our business and future operating results will
suffer.

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

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

12
<PAGE>
WE HAVE EXPERIENCED ERRORS IN OUR PRODUCTS IN THE PAST, AND ANY SUCH ERRORS IN
THE FUTURE COULD HARM OUR REPUTATION AND COULD CAUSE CUSTOMERS TO DEMAND REFUNDS
FROM US OR ASSERT CLAIMS FOR DAMAGES AGAINST US, WHICH COULD HARM OUR BUSINESS
AND FUTURE OPERATING RESULTS

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

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

- diversion of development resources;

- injury to our reputation; or

- increased maintenance and warranty costs.

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

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

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

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

We expect that our software products may be increasingly subject to
third-party infringement claims as the number of competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. We do not conduct comprehensive patent searches to determine whether
technologies used in our products infringe upon patents or patent applications
held by others. In addition, we hire employees who may be privy to the
proprietary information of their prior

13
<PAGE>
employers. Although we believe that our products do not employ technology that
infringes any proprietary rights of third parties, third parties nevertheless
may claim that we infringe their intellectual property rights. Regardless of
whether these claims have any merit, they could:

- be time-consuming to defend;

- result in costly litigation;

- divert our management's attention and resources;

- cause product shipment delays; or

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

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

THE EXPANSION OF OUR INTERNATIONAL OPERATIONS SUBJECTS OUR BUSINESS TO
ADDITIONAL ECONOMIC RISKS WHICH COULD HAVE AN ADVERSE IMPACT ON OUR REVENUE AND
BUSINESS

In both 1998 and 1999, products we sold to customers outside the United
States accounted for 6% of our total revenues. For the nine months ended
September 30, 2000, sales to customers outside the United States accounted for
approximately 11% of our total revenue, with one sale of software licenses
recognized in the second quarter of 2000 representing 34% of our international
revenue for that period. 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 each quarter
ending September 30 due to the summer slowdown in Europe; and

- the effects of currency fluctuations.

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

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
MARKET PRICE OF OUR STOCK

In April 2000, we acquired xVault, Inc. We may continue to acquire or make
investments in complementary companies, products or technologies. We could have
difficulty in integrating an acquired company's personnel and operations. In
addition, the key personnel of the acquired company may decide not to work for
us. If we make other types of acquisitions, we could have difficulty in
assimilating the acquired technology or products into our operations. These
difficulties could disrupt our ongoing business, distract our management and
employees and increase our expenses. We also expect that we would incur
substantial expenses if we acquired other businesses or technologies. If we
issue additional equity securities, our stockholders could experience dilution
and the market price of our stock may decline. As of the date of this
prospectus, we have no agreements or understandings regarding any future
acquisitions.

14
<PAGE>
RISKS RELATED TO THIS OFFERING

OUR STOCK MAY BE SUBJECT TO SUBSTANTIAL PRICE AND VOLUME FLUCTUATIONS DUE TO A
NUMBER OF FACTORS, INCLUDING THE FACT THAT WE ARE A TECHNOLOGY COMPANY, 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 and other
technology companies such as ours 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.

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
60.8% 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 of 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

15
<PAGE>
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.

FUTURE SALES OF OUR COMMON STOCK COULD DEPRESS OUR STOCK PRICE

Sales of substantial amounts of common stock by our officers, directors and
other stockholders in the public market after this offering, or the awareness
that a large number of shares is available for sale, could adversely affect the
market price of our common stock. In addition to the adverse effect a price
decline could have on holders of our common stock, that decline would likely
impede our ability to raise capital through the issuance of additional shares of
common stock or other equity securities. Substantially all of the shares of
common stock currently outstanding are eligible for resale in the public market.
Although our officers, directors and principal stockholders have agreed that for
90 days after the date of this prospectus they will not offer, sell, contract to
sell or otherwise dispose of any shares of our common stock, Credit Suisse First
Boston Corporation may, in its discretion, waive this lock-up at any time for
any holder.

16
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements 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," "would," "potential," "predict," or "continue," or the
negative of these and other 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.

17
<PAGE>
USE OF PROCEEDS

We estimate that our net proceeds from the sale of the 1,650,000 shares of
common stock we are offering will be approximately $48.4 million, assuming a
public offering price of $31.50 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 stockholders.

We intend to use the 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 of approximately $60,000,
$600,000, $5.5 million and $34,000 during the years ended December 31, 1996,
1997, 1998 and 1999, respectively. Following the closing of our initial public
offering in March 2000, we distributed $1.2 million to cover S corporation tax
liabilities of our then-existing stockholders. We do not anticipate paying cash
dividends in the foreseeable future. We currently intend to retain all future
earnings, if any, for use in the operation of our business. Our commercial
credit facility currently prohibits the payment of dividends.

PRICE RANGE OF COMMON STOCK

Our common stock began trading on the Nasdaq National Market on March 10,
2000, under the symbol "OTGS." The following table sets forth for the indicated
periods in 2000 the high and low sales prices of our common stock as reported by
the Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
First Quarter (beginning March 10, 2000).................... $61 7/16 $29
Second Quarter.............................................. $42 9/16 $13
Third Quarter............................................... $44 $19 3/8
Fourth Quarter (through October 31, 2000)................... $47 $29 1/8
</TABLE>

On October 31, 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $31.50.

18
<PAGE>
CAPITALIZATION

The following table sets forth our capitalization and other financial
information as of September 30, 2000:

- on an actual basis; and

- on an 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 the assumed exercise
by selling stockholders of options and a warrant to purchase 98,222 shares
of common stock and our receipt of the aggregate exercise proceeds from
that exercise.

You should read this table along with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," our consolidated financial
statements and the related notes and the other financial information in this
prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 67,818 $116,365
======== ========
Total debt.................................................. $ 99 $ 99
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding, actual and
as adjusted............................................. -- --
Common stock, $.01 par value; 65,000,000 shares
authorized; 25,833,664 shares issued and outstanding,
actual; 27,581,886 shares issued and outstanding, as
adjusted................................................ 258 276
Additional paid-in capital................................ 102,448 150,977
Deferred compensation..................................... (2,017) (2,017)
Accumulated deficit....................................... (20,819) (20,819)
Less stock subscriptions receivable..................... (1,021) (1,021)
-------- --------
Total stockholders' equity............................ 78,849 127,396
-------- --------
Total capitalization................................ $ 78,948 $127,495
======== ========
</TABLE>

The outstanding share information excludes:

- 4,142,263 shares of common stock issuable on exercise of outstanding
options as of September 30, 2000, at a weighted average exercise price of
$7.43 per share; and

- 991,253 shares of common stock reserved at that date for future issuance
under our stock plans.

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<PAGE>
DILUTION

Our net tangible book value as of September 30, 2000 was $75.5 million, or
$2.92 per share of common stock. We have calculated this amount by:

- subtracting our total liabilities from our total tangible assets; and

- then dividing the difference by the total number of shares of common stock
outstanding.

If we give effect to our sale of 1,650,000 shares of common stock in this
offering at an assumed public offering price of $31.50 per share, after
deducting the estimated underwriting discounts and commissions and the estimated
offering expenses payable by us, and the assumed exercise by selling
stockholders of options and a warrant to purchase 98,222 shares of common stock
at a weighted average exercise price of $1.84 per share, our adjusted net
tangible book value as of September 30, 2000 would have been $124 million, or
$4.50 per share. This amount represents an immediate dilution of $27.00 per
share to new investors. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $31.50
Net tangible book value per share before this offering.... $ 2.92
Increase in net tangible book value per share attributable
to
new investors........................................... 1.58
------
Net tangible book value per share after this offering....... 4.50
------
Dilution per share to new investors......................... $27.00
======
</TABLE>

The table above assumes no exercise of stock options to purchase 4,142,263
shares of common stock outstanding at September 30, 2000. To the extent any of
these options are exercised, there will be further dilution to new investors.

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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and the related notes,
and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations," included elsewhere in this prospectus. The consolidated
statement of operations data for the years ended December 31, 1997, 1998 and
1999 and the balance sheet data at December 31, 1998 and 1999 are derived from,
and are qualified by reference to, audited consolidated financial statements
included in this prospectus. The consolidated statement of operations data for
the years ended December 31, 1995 and 1996, and the balance sheet data at
December 31, 1995, 1996 and 1997, are derived from our consolidated financial
statements that are not included in this prospectus. The statement of operations
data for the nine months ended September 30, 1999 and September 30, 2000, and
the balance sheet data as of September 30, 2000 are derived from our unaudited
consolidated financial statements included in this prospectus. The unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements and, in our opinion, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information set forth therein. Historical results,
including those for the nine months ended September 30, 2000, are not
necessarily indicative of results that may be expected for any future period.
The pro forma consolidated statement of operations data reflects federal and
state income taxes based on applicable tax rates for the periods presented
during which we operated as an S corporation as if we had not elected
S corporation status for the periods indicated. See note 1 to our consolidated
financial statements appearing elsewhere in this prospectus for information
regarding shares used in computing pro forma net income (loss) per share--basic
and diluted.

21
<PAGE>

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses............................ $ 4,079 $ 6,075 $ 8,543 $ 12,089 $ 18,208 $ 12,605 $ 22,751
Services..................................... 908 1,321 3,361 5,230 7,232 5,011 7,276
------- ------- ------- -------- -------- -------- --------
Total revenues............................. 4,987 7,396 11,904 17,319 25,440 17,616 30,027
Cost of revenues:
Software licenses............................ 633 848 579 532 1,062 670 1,353
Services..................................... 581 442 1,219 1,639 3,017 2,188 3,207
------- ------- ------- -------- -------- -------- --------
Total cost of revenues..................... 1,214 1,290 1,798 2,171 4,079 2,858 4,560
------- ------- ------- -------- -------- -------- --------
Gross profit................................... 3,773 6,106 10,106 15,148 21,361 14,758 25,467
Operating expenses:
Research and development..................... 983 2,012 2,455 3,958 5,137 3,725 6,142
Sales and marketing.......................... 1,916 2,979 5,313 8,986 11,487 7,959 12,691
General and administrative................... 604 1,940 1,709 2,150 4,139 2,680 4,347
Amortization of acquired intangible assets... -- -- -- -- -- -- 347
Write-off of acquired in-process research and
development................................ -- -- -- -- -- -- 620
------- ------- ------- -------- -------- -------- --------
Total operating expenses................... 3,503 6,931 9,477 15,094 20,763 14,364 24,147
------- ------- ------- -------- -------- -------- --------
Income (loss) from operations.................. 270 (825) 629 54 598 394 1,320
Interest income (expense), net................. (140) (143) (162) (1,261) (2,053) (1,519) 1,736
------- ------- ------- -------- -------- -------- --------
Income (loss) before income taxes.............. 130 (968) 467 (1,207) (1,455) (1,125) 3,056
Provision for income taxes..................... -- -- -- -- -- -- 343
------- ------- ------- -------- -------- -------- --------
Net income (loss).............................. $ 130 $ (968) $ 467 $ (1,207) $ (1,455) $ (1,125) $ 2,713
======= ======= ======= ======== ======== ======== ========
Net income per share:
Basic........................................ $ 0.12
========
Diluted...................................... $ 0.10
========
Weighted average shares outstanding:
Basic........................................ 23,410
========
Diluted...................................... 26,400
========
Pro forma statement of operations data:
Income (loss) before income taxes, as
reported................................... $ 130 $ (968) $ 467 $ (1,207) $ (1,455) $ (1,125) $ 3,056
Pro forma income tax provision (benefit)..... -- -- -- -- -- -- 581
------- ------- ------- -------- -------- -------- --------
Pro forma net income (loss).................. $ 130 $ (968) $ 467 $ (1,207) $ (1,455) $ (1,125) $ 2,475
======= ======= ======= ======== ======== ======== ========
Pro forma net income (loss) per share:
Basic........................................ $ (0.07) $ (0.05) $ 0.11
======== ======== ========
Diluted...................................... $ (0.07) $ (0.05) $ 0.09
======== ======== ========
Pro forma weighted average shares outstanding:
Basic........................................ 20,560 20,560 23,410
======== ======== ========
Diluted...................................... 20,560 20,560 26,400
======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------- SEPTEMBER 30,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 4 $ 287 $ 1,098 $ 437 $ 2,494 $ 67,818
Working capital (deficit)....................... (1,330) (1,946) (3,227) (6,120) (19,983) 72,215
Total assets.................................... 1,086 2,079 5,143 7,284 12,589 92,158
Debt:
Note payable to bank.......................... -- -- 2,300 2,300 5,000 --
Current portion of long-term debt............. -- -- 250 1,437 13,803 46
Subordinated notes payable--stockholders...... 1,346 254 1,024 1,969 1,969 --
Long-term debt--net of current portion........ -- -- 200 16,341 3,529 53
------- ------- ------- -------- -------- --------
Total debt.................................. 1,346 254 3,774 22,047 24,301 99
Total stockholders' equity (deficit)............ (1,139) (2,166) (2,699) (20,876) (21,706) 78,849
</TABLE>

22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

OVERVIEW

We were founded in March 1992. Though we were profitable for the nine months
ended September 30, 2000, we have had operating losses in the past. As of
September 30, 2000, we had an accumulated deficit of $20.8 million. 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 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 maintain 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 customers primarily through indirect sales channels, including original
equipment manufacturers, value-added resellers and distributors. We also sell
through our direct sales force. Original equipment manufacturers 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 original equipment
manufacturer licenses a copy of its products that incorporates one or more of
our products. Our license agreements with original equipment manufacturers
generally contain no minimum sales requirements and we cannot assure you that
any original equipment manufacturer will either commence or continue shipping
our products in the future. Moreover, following the execution of new 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 groups within these
original equipment manufacturers, customers and resellers to become familiar
with our products.

We offer extended payment terms to certain customers. For arrangements with
payment terms within six months, we recognize the revenue when the agreement is
signed, the arrangement fee is fixed and determinable, delivery of the software
has occurred and collectibility of the fee is considered probable. As of
September 30, 2000, amounts due from such arrangements were $6.1 million. For
arrangements in which payment terms extend beyond six months, we recognize
revenue when payment by the customer is made or becomes due, if all other
revenue recognition criteria listed above have been met.

Our services revenues consist of fees derived from annual maintenance
agreements, consulting and training and other professional 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. We recently
began to require that at least one year of customer maintenance support be
purchased with new license purchases. Maintenance fees are recognized ratably
over the term of the maintenance contract. We provide consulting and other
professional services, for which we charge a fee based upon the amount of time
worked and the cost of the materials used in providing the services. We provide
classroom and on-site

23
<PAGE>
training to our customers on a daily fee basis. Professional services and
training services typically have lower gross margins than sales of software
licenses and customer support.

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 in each of 1998 and 1999 and accounted
for approximately 11% of our total revenues for the nine months ended
September 30, 2000.

We currently have sales and services offices in the United States and
provide sales and services support in Europe through employees located in
England, Germany and the Netherlands. We plan to expand 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
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses................ 82% 82% 72% 70% 72% 72% 76%
Services......................... 18 18 28 30 28 28 24
--- --- --- --- --- --- ---
Total revenues................. 100 100 100 100 100 100 100
--- --- --- --- --- --- ---
Cost of revenues:
Software licenses................ 13 11 5 3 4 4 5
Services......................... 12 6 10 10 12 12 10
--- --- --- --- --- --- ---
Total cost of revenues......... 25 17 15 13 16 16 15
--- --- --- --- --- --- ---
Gross profit....................... 75 83 85 87 84 84 85
Operating expenses:
Research and development......... 20 27 21 23 20 21 21
Sales and marketing.............. 38 40 45 52 45 45 42
General and administrative....... 12 26 14 12 16 16 15
Amortization of acquired
intangible assets.............. -- -- -- -- -- -- 1
Write-off of acquired in-process
research and development....... -- -- -- -- -- -- 2
--- --- --- --- --- --- ---
Total operating expenses....... 70 93 80 87 81 82 81
--- --- --- --- --- --- ---
Income (loss) from operations...... 5 (10) 5 0 3 2 4
Interest income (expense), net..... (3) (2) (1) (7) (8) (8) 6
--- --- --- --- --- --- ---
Income (loss) before income
taxes............................ 2 (12) 4 (7) (5) (6) 10
Provision for income taxes......... -- -- -- -- -- -- 1
--- --- --- --- --- --- ---
Net income (loss).................. 2% (12)% 4% (7)% (5)% (6)% 9%
=== === === === === === ===
</TABLE>

24
<PAGE>
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, 1999 AND 2000

REVENUES

Total revenues increased 70% from $17.6 million for the nine months ended
September 30, 1999 to $30.0 million for the same period in 2000. 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 professional services. Software
license revenues were 72% of total revenues for the nine months ended
September 30, 1999 and 76% of total revenues for the same period in 2000.

SOFTWARE LICENSE REVENUES. Software license revenues increased 80% from
$12.6 million for the nine months ended September 30, 1999 to $22.8 million for
the same period in 2000. The increase was primarily due to an increase in
overall demand for data storage management products, increased market acceptance
of our products, introduction of new products and continued expansion of sales
through our indirect distribution channels. For the nine months ended
September 30, 2000, we recognized revenues of approximately $2.9 million from
two customers, which accounted for 13% of our total software license revenues
during that period. In addition, for the nine months ended September 30, 2000,
we recognized revenues of approximately $10.4 million, or 46% of our total
software license revenues during that period, under arrangements with payment
terms extending up to six months.

SERVICES REVENUES. Services revenues increased 45% from $5.0 million for
the nine months ended September 30, 1999 to $7.3 million for the same period in
2000. The increase was primarily due to increased sales of maintenance and
technical 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, training and other professional 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 102% from $670,000 for the nine months ended September 30, 1999 to
$1.4 million for the same period in 2000, due primarily to an increase in
royalty expenses. As a result, gross margin on software license revenues
decreased from 95% for the nine months ended September 30, 1999 to 94% for the
same period in

25
<PAGE>
2000. 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 a significant
improvement in gross margin on software license revenues.

COST OF SERVICES REVENUES. Cost of services revenues increased 47% from
$2.2 million for the nine months ended September 30, 1999 to $3.2 million for
the same period in 2000 primarily due to personnel additions in our customer
support, training and consulting organizations, in anticipation of increased
demand for these services. Gross margin on services revenues remained at 56% for
the nine months ended September 30, 1999 and 2000. 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 65% from $3.7 million for the nine
months ended September 30, 1999 to $6.1 million for the same period in 2000. The
increase was primarily due to increased staffing levels. As a percentage of
total revenues, research and development expenses remained at 21% for the nine
months ended September 30, 1999 and 2000. 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.

SALES AND MARKETING. Sales and marketing expenses consist of salaries,
related benefits, commissions, consultant fees, tradeshow, advertising and other
costs associated with our sales and marketing efforts. Sales and marketing
expenses increased 59% from $8.0 million for the nine months ended
September 30, 1999 to $12.7 million for the same period in 2000. The increase in
sales and marketing expenses is attributable to an increase in the number of
sales and marketing employees and increases in marketing programs. As a
percentage of total revenues, sales and marketing expenses decreased from 45%
for the nine months ended September 30, 1999 to 42% for the same period in 2000.
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; accordingly, we expect our sales and marketing
expenses to increase in future periods.

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
62% from $2.7 million for the nine months ended September 30, 1999 to
$4.3 million for the same period in 2000. This increase was primarily due to
additional personnel costs and other expenses associated with enhancing our
infrastructure to support expansion of our operations. As a percentage of total
revenues, general and administrative expenses decreased from 16% for the nine
months ended September 30, 1999 to 15% for the same period in 2000. The decrease
as a percentage of total revenues was primarily due to the increase in total
revenues. We expect that the dollar amount of general and administrative
expenses will increase as we expand our operations.

INTEREST INCOME (EXPENSE), NET. Interest income (expense), net changed from
$(1.5) million, net in interest expense for the nine months ended September 30,
1999 to $1.7 million, net in interest income for the same period in 2000. This
change was primarily due to the use of proceeds from our initial public offering
in March 2000. We used the proceeds of our initial public offering to repay
outstanding balances under our credit facility, retire our senior subordinated
notes and retire all notes payable to certain of our stockholders. Further, the
conversion of our convertible subordinated notes into common stock in
conjunction with our initial public offering eliminated related interest
expense. In addition, the

26
<PAGE>
remaining proceeds from our initial public offering increased our cash and cash
equivalents, resulting in increased interest income.

INCOME TAX PROVISION (BENEFIT). We were treated as a subchapter S
corporation for federal and state income tax purposes prior to our initial
public offering in March 2000. Under subchapter S, our income was allocated and
taxable to our stockholders. Accordingly, we did not recognize any federal or
state income taxes prior to the consummation of our initial public offering.
Upon consummation of our initial public offering, we ceased to be treated as a
subchapter S corporation. Accordingly, we have been subject to federal and state
income taxes since our initial public offering.

We recorded a tax provision of approximately $343,000 for the nine months
ended September 30, 2000. This provision reflects an effective tax rate of 11.2%
for that period. A reduction in the valuation allowance against gross deferred
tax assets established when we ceased to be treated as a subchapter S
corporation had a positive impact on our income tax provision. We expect our
effective income tax rate to increase in future fiscal years.

COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1999

REVENUES

Total revenues increased 47% from $17.3 million for 1998 to $25.4 million
for 1999. 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 70% of total revenues for 1998, and 72% of total revenues
for 1999.

SOFTWARE LICENSE REVENUES. Software license revenues increased 51% from
$12.1 million for 1998 to $18.2 million for 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 38% from $5.2 million for
1998 to $7.2 million for 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. Cost of software license revenues
increased 100% from $532,000 for 1998 to $1.1 million for 1999. Gross margin on
software license revenues decreased from 96% for 1998 to 94% for 1999, primarily
because of higher product packaging and distribution costs in 1999.

COST OF SERVICES REVENUES. Cost of services revenues increased 84% from
$1.6 million for 1998 to $3.0 million for 1999. Gross margin on services
revenues decreased from 69% for 1998 to 58% for 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.

OPERATING EXPENSES

RESEARCH AND DEVELOPMENT. Research and development expenses increased 30%
from $4.0 million for 1998 to $5.1 million for 1999. The increase was due
primarily to increased staffing levels. As a percentage of total revenues,
research and development expenses decreased from 23% for 1998 to 20% for 1999.

27
<PAGE>
SALES AND MARKETING. Sales and marketing expenses increased 28% from
$9.0 million for 1998 to $11.5 million for 1999, which includes $36,000 in
non-cash compensation expense. 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 52% for 1998 to 45% for 1999. The decrease as a
percentage of total revenues was primarily due to the increase in total
revenues.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
93% from $2.2 million for 1998 to $4.1 million for 1999, which includes $623,000
in non-cash compensation expense. General and administrative expenses as a
percentage of total revenues increased from 12% for 1998 to 16% for 1999. The
increase 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 increased 63% from $1.3 million for
1998 to $2.1 million for 1999.

PRO FORMA INCOME TAX PROVISION (BENEFIT). Because we incurred net operating
losses in 1998 and in 1999, our pro forma effective tax rate in each year was
zero.

COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1998

REVENUES

Total revenues increased 45% from $11.9 million in 1997 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 42% from
$8.5 million in 1997 to $12.1 million in 1998. The increase was primarily the
result of continued growth in market acceptance of our software products, a
greater volume of large end-user transactions, increased revenues from original
equipment manufacturer resales of bundled and unbundled products and the
introduction of new products. Software license revenues growth also resulted
from increases in direct sales and indirect sales other than through original
equipment manufacturers.

SERVICES REVENUES. Services revenues increased 56% from $3.4 million in
1997 to $5.2 million in 1998. The increase was primarily due 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 8% from $579,000 in 1997 to $532,000 in 1998. The decrease was
primarily the result of lower product packaging and distribution costs. Gross
margin on software license revenues was 93% and 96%, respectively, in 1997 and
1998.

COST OF SERVICES REVENUES. Cost of services revenues increased 34% from
$1.2 million in 1997 to $1.6 million in 1998. Gross margin on services revenues
was 64% and 69% in 1997 and 1998, respectively. The change in gross margin was
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.

28
<PAGE>
OPERATING EXPENSES

RESEARCH AND DEVELOPMENT. Research and development expenses increased 61%
from $2.5 million in 1997 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 21% and 23% in 1997 and 1998,
respectively.

SALES AND MARKETING. Sales and marketing expenses increased 69% from
$5.3 million in 1997 to $9.0 million in 1998. Sales and marketing expenses as a
percentage of total revenues were 45% and 52% in 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 increased
26% from $1.7 million in 1997 to $2.2 million in 1998. General and
administrative expenses as a percentage of total revenues were 14% and 12% in
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 $162,000 for 1997 and
$1.3 million for 1998.

PRO FORMA INCOME TAX PROVISION (BENEFIT). As a result of net loss
carryforwards in 1997 and as a result of our net operating losses in 1998, our
pro forma effective tax rate in each year was zero.

29
<PAGE>
QUARTERLY RESULTS OF OPERATIONS

The following table sets forth items from our consolidated 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
consolidated 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. 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,
1999 1999 1999 1999 2000 2000 2000
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses.................... $3,842 $3,648 $5,115 $5,603 $6,437 $7,000 $9,314
Services............................. 1,592 1,913 1,506 2,221 1,863 2,603 2,810
------ ------ ------ ------ ------ ------ ------
Total revenues..................... 5,434 5,561 6,621 7,824 8,300 9,603 12,124
Cost of revenues:
Software licenses.................... 249 230 191 392 241 495 617
Services............................. 729 678 781 829 1,005 1,123 1,079
------ ------ ------ ------ ------ ------ ------
Total cost of revenues............. 978 908 972 1,221 1,246 1,618 1,696
------ ------ ------ ------ ------ ------ ------
Gross profit........................... 4,456 4,653 5,649 6,603 7,054 7,985 10,428
Operating expenses:
Research and development............. 1,306 1,177 1,242 1,412 1,828 2,009 2,305
Sales and marketing.................. 2,189 2,979 2,791 3,528 3,758 4,364 4,569
General and administrative........... 855 919 906 1,459 1,414 1,455 1,478
Amortization of acquired intangible
assets............................. -- -- -- -- -- 139 208
Write-off of acquired in-process
research and development........... -- -- -- -- -- 620 --
------ ------ ------ ------ ------ ------ ------
Total operating expenses........... 4,350 5,075 4,939 6,399 7,000 8,587 8,560
------ ------ ------ ------ ------ ------ ------
Income (loss) from operations.......... 106 (422) 710 204 54 (602) 1,868
Interest income (expense), net......... (480) (512) (527) (534) (411) 1,052 1,095
------ ------ ------ ------ ------ ------ ------
Income (loss) before income taxes...... (374) (934) 183 (330) (357) 450 2,963
Provision for income taxes............. -- -- -- -- -- -- 343
------ ------ ------ ------ ------ ------ ------
Net income (loss)...................... $ (374) $ (934) $ 183 $ (330) $ (357) $ 450 $2,620
====== ====== ====== ====== ====== ====== ======
</TABLE>

30
<PAGE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30,
1999 1999 1999 1999 2000 2000 2000
--------- --------- --------- --------- --------- --------- ---------
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses.................... 71% 66% 77% 72% 78% 73% 77%
Services............................. 29 34 23 28 22 27 23
--- --- --- --- --- --- ---
Total revenues..................... 100 100 100 100 100 100 100
--- --- --- --- --- --- ---
Cost of revenues:
Software licenses.................... 5 4 3 5 3 5 5
Services............................. 13 12 12 11 12 12 9
--- --- --- --- --- --- ---
Total cost of revenues............. 18 16 15 16 15 17 14
--- --- --- --- --- --- ---
Gross profit........................... 82 84 85 84 85 83 86
Operating expenses:
Research and development............. 24 21 19 18 22 21 19
Sales and marketing.................. 40 54 42 45 45 45 38
General and administrative........... 16 17 14 19 17 15 12
Amortization of acquired intangible
assets............................. -- -- -- -- -- 1 2
Write-off of acquired in-process
research and development........... -- -- -- -- -- 7 --
--- --- --- --- --- --- ---
Total operating expenses........... 80 92 75 82 84 89 71
--- --- --- --- --- --- ---
Income (loss) from operations.......... 2 (8) 10 2 1 (6) 15
Interest income (expense), net......... (9) (9) (8) (7) (5) 11 9
--- --- --- --- --- --- ---
Income (loss) before income taxes...... (7) (17) 2 (5) (4) 5 24
Provision for income taxes............. -- -- -- -- -- -- 3
--- --- --- --- --- --- ---
Net income (loss)...................... (7)% (17)% 2% (5)% (4)% 5% 21%
=== === === === === === ===
</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.

Services revenues vary from quarter to quarter based primarily on the level
of consulting and training services provided.

Cost of software license revenues has 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, particularly those 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 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

31
<PAGE>
these and other factors, our quarterly revenues and operating expenses are
difficult to forecast accurately.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2000, cash and cash equivalents totaled $67.8 million,
representing 74% of total assets. In March 2000, we raised $87.0 million of net
proceeds from our initial public offering. For the nine months ended
September 30, 2000, we earned interest of $2.4 million on cash and cash
equivalents. As of September 30, 2000, we had interest-bearing debt outstanding
of approximately $99,000, related to certain equipment acquired under a capital
lease.

For the nine months ended September 30, 2000, net cash used in operating
activities was approximately $125,000. For the same period in 1999, operating
activities provided net cash of $525,000. The decrease in cash provided by
operating activities primarily reflects an increase in accounts receivable and
prepaid expenses, partially offset by an increase in deferred revenues. The
increase in accounts receivable was primarily due to an increase in the number
and dollar value of arrangements with extended payment terms.

Net cash used in investing activities for the nine months ended
September 30, 2000 increased to $4.3 million from $685,000 for the same period
in 1999. The increase is a result of our acquisition of xVault in April 2000 and
an increase in our investment in property and equipment in support of our
rapidly expanding operations. We expect to continue to invest in property and
equipment in the ordinary course of business as required. In the third quarter
of 2000, we launched a project to implement software to improve management of
our sales and marketing, research and development, professional services and
technical support functions. The total investment in this program, which we
expect to be substantially complete before the end of 2000, is expected to
exceed $1.0 million, excluding training and other periodic costs. The
capitalized costs associated with this program will be amortized over a
three-year period.

For the nine months ended September 30, 2000, cash provided by financing
activities was $69.7 million, which reflects net proceeds from our initial
public offering offset by repayments of certain debt obligations. Employee
exercises of stock options generated proceeds of approximately $420,000 during
the first nine months of 2000. For the same period in 1999, cash provided by
financing activities was $812,000.

We have a loan agreement with a bank, which was amended and restated in
October 2000. The loan agreement consists of a revolving line of credit with a
maximum borrowing availability of $10 million for working-capital purposes,
including a subline of credit with a maximum borrowing availability of
$5 million for purposes of establishing letters of credit. The maximum
borrowings under the loan agreement at any time, including amounts under the
revolving line of credit and the subline of credit, are limited to the lesser of
$10 million of 80% of qualified accounts receivable, as defined in the
agreement, and are secured by certain of our assets. As of September 30, 2000,
we had no borrowings under the loan agreement, which expires in October 2001 and
bears interest at the prime rate or LIBOR rate plus 2.5%, as selected by us.

We believe that our current cash, cash equivalents, credit facilities and
anticipated cash flows from operating activities will satisfy our anticipated
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.

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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. We believe that our exposure to interest rate risk is not
material to our results of operations.

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. We have not
entered into any foreign currency exchange rate hedging activities 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 adopted the
provisions of SOP 98-9 effective January 1, 2000. The adoption of SOP 98-9 did
not have a material effect on our financial position, results of operations or
cash flows.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101-Revenue Recognition in Financial Statements, as
amended by SAB 101A and SAB 101B. This SAB expresses the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. Companies can apply the accounting and disclosure requirements of
this SAB retrospectively, or, for companies that report on a calendar year
basis, report a change in accounting principle no later than the fourth fiscal
quarter of the fiscal year ending December 31, 2000. We do not expect the
application of this SAB to have a material impact on our consolidated financial
statements.

In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation." FIN 44 is an interpretation of Accounting Principal Board's
Opinion No. 25, "Accounting for Stock Issued to Employees." Among other matters,
FIN 44 clarifies the application of APB 25 regarding the definition of employee
for purposes of applying APB 25, the criteria for determining whether a plan
qualifies as noncompensatory and the accounting consequences of modifications to
the terms of a previously issued stock options or similar awards. We adopted the
provisions of FIN 44 in the third quarter of 2000. The adoption of FIN 44 did
not have a material impact on our financial condition or results of operations.

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BUSINESS

OVERVIEW

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 worldwide will
grow from approximately 9.7 billion in 2000 to 35 billion in 2005. This growth
has resulted in an increased demand for more efficient methods to store and
retrieve data. IDC estimates that multi-user disk storage grew from more than
7,000 terabytes in 1993 to more than 184,000 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.

The dramatic growth in data storage is driving the demand for many types of
storage technology, such as new storage devices, networking hardware, network
transmission technology and software. Many enterprises are trying to manage
larger amounts of data, creating a demand for software that can automate this
task. Industry analysts predict that demand for data storage software in
particular will grow significantly. Gartner Group, an independent information
technology research firm, estimates that the storage management software market
will grow from $4.2 billion in 1999 to $14.7 billion in 2004.

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 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

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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.

- Data is stored randomly at diverse locations. The distribution of data and
applications on multiple personal computers and servers throughout a
computer network has led to the decentralization of data storage
management and the distribution of storage resources throughout the
network. Distributed storage management on expensive primary storage
devices throughout a network results in inadequate storage management,
increased administrative time and costs and inefficient use of storage
devices.

THE EMERGENCE OF STORAGE AREA NETWORKS

In response to the limitations of traditional data storage and back-up
methods, storage area networks have emerged. A storage area network 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 storage area networks in an effort to move data storage
operations off of their local area networks to a separate network dedicated to
data storage. Moving these operations to storage area networks frees up
bandwidth on the local area network for more efficient operation of enterprise
software applications and communications. Storage area networks can be
significantly less expensive to maintain and expand than traditional data
storage systems because they enable shared, high-speed access to stored data.
IDC estimates that the total worldwide storage area networks 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,
storage area networks do not address the need to make management and access of
data more efficient. In particular, storage area networks fail to determine
which data should be stored, do not provide efficient transfer of data to the
storage area network, do not enable immediate access to backed-up data and
cannot provide an effective index of stored data.

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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 storage area networks, a data storage
solution must:

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

- provide efficient transfer of data to and from storage devices throughout
networks, including local area networks and storage area networks;

- 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;

- provide secure Web access to stored data; and

- automatically consolidate stored data and provide centralized storage
management.

THE PROBLEMS OF E-MAIL MANAGEMENT AND STORAGE

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

THE NEED FOR E-MAIL MANAGEMENT AND STORAGE SOFTWARE

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

- provide fast and efficient access to stored e-mail messages and
attachments;

- reduce back-up time and enhance system performance while reducing costs;

- eliminate the need for administrative restrictions on message or
attachment size;

- facilitate management of message stores and guard against the loss of
information following virus attacks, enabling recovery within hours rather
than days; and

- ensure adherence to formal e-mail policies that correspond to an
enterprise's traditional record management policies and requirements.

THE OTG SOLUTION

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

- EFFICIENT USE OF STORAGE CAPACITY. We enable automated data migration to
less expensive secondary storage devices and networks.

- DATA CONSOLIDATION AND CENTRALIZED MANAGEMENT. We provide automated
consolidation of stored data and centralized data storage management.

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

- DYNAMIC E-MAIL MANAGEMENT. We provide efficient storage, indexing,
archiving and retrieval of e-mail messages and attachments.

- 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, which
allows a user to interact with our product through the use of windows and
icons in a point-and-click system.

- FLEXIBILITY AND SCALABILITY. Our software expands quickly and easily to
accommodate changes in the size of a data storage system from a single
storage device to an enterprise-wide network storage system and to support
additional users and applications.

THE OTG STRATEGY

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

EXPAND OUR PRESENCE IN THE STORAGE AREA NETWORK MARKET. We intend to expand
the current use of our XtenderSolutions product suite in the storage area
network market with our recently released SANXtender product. This product
customizes our core technology to maximize the capabilities of storage area
networks. We have successfully demonstrated the compatibility of our technology
and its ability to operate with the products of manufacturers of storage area
network technologies, such as Advanced Digital Information, ATL Products, ATTO
Technology, Brocade Communications Systems, Chaparral Network Storage, Compaq
Computer, Crossroads Systems, Emulex, Gadzoox Networks, Hewlett-Packard, QLogic
and Vixel. In addition, we are pursuing alliances with other leading storage
area network companies.

CAPITALIZE ON OUR POSITION AS AN EARLY PROVIDER OF E-MAIL STORAGE
MANAGEMENT. To meet accelerating demand for e-mail storage management software,
we recently released EmailXtender, an e-mail storage, indexing, archiving and
retrieval application, designed to be integrated with leading third-party e-mail
platforms. In April 2000, we completed the acquisition of xVault, enhancing our
core EmailXtender technology. In addition, we have recently entered into
relationships with JVC, Plasmon and Tech Data, whereby they will resell our
EmailXtender technology. We intend to pursue additional strategic alliances with
other leading providers of e-mail solutions, such as e-mail outsourcing
providers, hardware manufacturers and e-mail system integrators. We also intend
to leverage our dynamic e-mail management technology to broaden the adoption of
our solution in the electronic collaboration market, which includes applications
such as unified and instant messaging.

EXPAND THE AVAILABILITY OF OUR APPLICATION SERVICE PROVIDER OFFERING THROUGH
ONLINESTOR.COM. As Internet access becomes faster and more secure, increasing
numbers of enterprises are turning to leased or metered online storage solutions
as a cost-effective alternative to in-house capabilities. We intend to
capitalize on this market opportunity by expanding our existing relationships
and pursuing additional relationships with application service providers and
storage service providers.

BROADEN OUR CORE TECHNOLOGY. We intend to continue our efforts to broaden
our technology to operate on multiple operating systems and support all major
primary and secondary storage devices. In

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February 2000, we released DiskXtender 2000, which operates on the Windows 2000
platform. We intend to develop new versions of our products that will provide
the ability to manage data on UNIX and Linux file servers, allowing us to
address a broader market. In addition, with DiskXtender 2000, we introduced
support for network attached storage, or NAS, which refers to stand-alone,
intelligent storage devices that attach directly to a network.

INCREASE INTERNATIONAL SALES EFFORTS. We expect the international market
for our software to continue to grow, and we intend to continue to expand our
presence in strategic international markets. In March 2000, we entered into a
strategic alliance with Mitsui to resell our software in Japan and to create a
Japanese version of DiskXtender. In August 2000, we opened our European
headquarters in Cambridge, England. In order to continue to address this global
opportunity, we plan to accelerate the hiring of sales, service and support
personnel and establish new relationships with value-added resellers and
distributors in these markets.

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>
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

EmailXtender.................. Provides intelligent e-mail storage, indexing, archiving and
retrieval and is designed to be integrated with leading
e-mail platforms

SANXtender.................... Provides automated, centralized management of storage area
network data, enabling users and applications to access this
data directly

ColdXtender................... Manages the storage of computer-generated data for use in
preparing forms and reports in standardized formats

ERMXtender.................... Provides enterprise report management of data and makes
electronic reports accessible over the Web

OnlineStor.com................ Provides our XtenderSolutions product suite on a leased or
metered basis over the Web through application service
providers and storage service providers
</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
concurrent users accessing the data from the customer's network and 100
concurrent 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

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need to purchase four additional DiskXtender agent licenses to support the
remote storage servers required in its network for a list price of $56,000
and maintenance of $10,640.

- 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 $38,000 and
maintenance of $7,220.

- WEBXTENDER. To support 100 Web users, the customer would need to purchase
100 concurrent WebXtender licenses at a list price of approximately
$62,000 and maintenance of $11,780.

- EMAILXTENDER. To support the full management of up to 500 mailboxes, the
customer would need to purchase an EmailXtender license for a total list
price of $42,000 and maintenance of $8,000.

- SANXTENDER. Given the above configuration, to enable storage management
utilizing a Fibre Channel storage area network, the customer would need to
purchase SANXtender licenses for a total price, including maintenance, of
$2,975 per application or file server attached to the storage area
network. The number of servers attached to the storage area network
depends upon the number of applications and application or file servers
operating in the local area network.

The list price for this XtenderSolutions configuration, excluding
SANXtender, would be approximately $198,000, with annual maintenance of
approximately $37,640.

PRODUCTS

DISKXTENDER. The cornerstone of our product suite is DiskXtender.
DiskXtender is a server-based, Windows NT and Windows 2000 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 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 and Windows 2000 storage solution that manages all major types of
storage devices, from optical and tape to CD-ROM. DVD and NAS. We provide a
DiskXtender application programming interface allowing end-users and original
equipment manufacturers 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 application programming interface toolkit allows customers and
original equipment manufacturers 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.

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EMAILXTENDER. EmailXtender is an e-mail storage, indexing, archiving and
retrieval application that is designed to be integrated with leading e-mail
platforms. This technology provides for dynamic, real-time capture of e-mail
messages and attachments into a central repository without administrator
intervention and eliminates the need for administrative restrictions on message
or attachment size. In addition, EmailXtender enables full-text and key word
searches of messages and attachments. EmailXtender also permits timely recovery
from virus attacks; preserves non-infected messages, preventing loss of critical
information; and allows for system recovery in one central location. In
addition, EmailXtender's ability to categorize and manage e-mail according to
specific business needs provides flexible retention rules for any category of
e-mail, allowing enterprises to conform their e-mail management to their record
management policies and applicable regulatory and legal requirements.

SANXTENDER. SANXtender applies our core data storage management and access
technology to the storage area network. SANXtender links storage area network
technologies to local area network applications, allowing data transfer and
storage without moving data through servers on the local area network.
SANXtender automatically identifies and coordinates available switches, routers
and storage devices in a storage area network to enable more efficient movement
of data. SANXtender frees the resources of the local area network and provides
applications and users with the ability to access data at the faster speed of a
storage area network. We have successfully demonstrated the compatibility of our
technology and its ability to operate with the products of manufacturers of
storage area network technologies, such as Advanced Digital Information, ATL
Products, ATTO Technology, Brocade Communications Systems, Chaparral Network
Storage, Compaq Computer, Crossroads Systems, Emulex, Gadzoox Networks,
Hewlett-Packard, QLogic and Vixel.

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

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

ONLINESTOR.COM. We offer our products as an outsourced data storage and
management service under the name OnlineStor.com. These services are offered on
a metered or leased basis through application service providers and storage
service providers. OnlineStor.com enables enterprises to store and manage data
over the Web with functionality similar to that of the XtenderSolutions product
suite. Our customers realize substantial hardware and maintenance cost savings
over in-house storage systems by using this service.

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.

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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 and system integrators perform
professional services for our customers.

PRODUCT DEVELOPMENT

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

- broadening our core technology to operate on the UNIX and Linux operating
systems;

- extending our EmailXtender technology for use with electronic
collaboration applications, such as unified and instant messaging; and

- expanding our EmailXtender and DiskXtender technologies to NAS devices
dedicated to e-mail storage.

In addition, our advanced technology group actively identifies and
implements the latest technology developments, such as:

- Extensible Markup Language, referred to as XML, an emerging standard for
sharing data over the Internet that allows software applications to
communicate efficiently on a wide variety of software platforms;

- Microsoft's Simple Object Access Protocol, referred to as SOAP, which
further improves the ability of software applications to interact over the
Internet by using an XML-based approach to programming; and

- emerging standards for the creation of business systems that integrate
enterprise-wide software applications and network infrastructure.

We believe that by making our products compatible with XML, SOAP and
emerging business systems standards, we will have an opportunity to address
storage needs generated by a wide range of software applications.

Our research and development expenses were $4.0 million in 1998, $5.1
million in 1999 and $6.1 million in the nine months ended September 30, 2000. As
of September 30, 2000, we had 72 employees dedicated to research and
development. We intend to continue to make significant investments in research
and development activities.

TECHNOLOGY

DiskXtender is the cornerstone of the XtenderSolutions product suite.
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.

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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.

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: Title--"DiskXtender." The graphic depicts the DiskXtender
technology. The graphic is a picture of a cylinder, and the text under the icon
states "Hard disk." There is an arrow connecting three icons to the left side of
the "Hard disk" icon. One icon is a picture of a floppy disk, and the text under
the icon states "Tape library." The second icon is a picture of a file cabinet,
and the text under the icon states "Optical juke boxes." The third icon is a
picture of a CD, and the text under the icon states "CD/DVD Optical." There are
also three lines on the right side of the "Hard disk" icon pointing to three
separate portions of the "Hard disk" icon. The text at the end of the first line
states "Free space." The text at the end of the second line states "Pointers
(files on secondary storage)." The text at the end of the third line states
"Frequently used files."

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CUSTOMERS

We have licensed our products to over 7,600 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
Boeing
Booz.Allen & Hamilton
Citicorp
Delta Airlines
Dow Chemical
Ingram Entertainment
Marathon Oil
Mayo Clinic
McKesson/HBOC
Merrill Lynch
Nabisco
NASA Johnson Space Center
NASD
NationsBank (now Bank of America)
Nortel Networks
Parker Hannifin
PSINet
Raytheon
Seaboard International Forest Products
State of California
Unisys
U.S. Department of Defense
U.S. Federal Aviation Administration
U.S. Navy
University of Miami
Veterans Administration Hospitals
The Washington Post
Westinghouse (now General Electric)

HOW THREE OF OUR CUSTOMERS HAVE 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 data storage management software
providing access to critical files, document imaging and Web-based data
retrieval 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.

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<PAGE>
AUTOMATING DATA STORAGE AT NABISCO. Nabisco, an $8.7 billion marketer of
biscuit, snack and premium food products, makes thousands of deliveries every
day to grocery stores, convenience stores and other food outlets across the
United States and in 85 other countries worldwide. With each delivery, Nabisco
issues a proof of delivery document that lists the products delivered and the
total amount due for those products.

Nabisco had been keeping a copy of the proof of delivery on file and using a
manual system to retrieve, copy and fax proofs of delivery whenever customers
had questions or disputes on delivery. As the volume of proofs of delivery grew,
Nabisco needed to automate the process and provide improved access and
distribution.

In 1997, Nabisco engaged us to replace their existing data storage system
with DiskXtender to effectively manage increasingly large amounts of data,
provide for easy access on the Internet and work with their high volume,
automated tape library. The new system, deployed in Nabisco's Customer Financial
Services Department, makes the proofs of delivery quickly accessible, increasing
customer service, improving access time, and cutting down on delayed payments.

Nabisco processes 120,000 images a day, and it estimates that it has
processed 25 to 30 million documents since DiskXtender was installed. Another
benefit for Nabisco is that DiskXtender, with its capability to support multiple
applications, links to a second imaging system that replaces all manual
microfilm archiving systems.

MANAGING E-MAIL AND COMBATING VIRUS ATTACKS AT SEABOARD
INTERNATIONAL. Seaboard International Forest Products, one of the 20 largest
forest products wholesalers in the United States, needed a way to store and
manage an increasingly large volume of e-mail. Individual users at Seaboard
International were keeping up to three or four thousand messages in their
individual mailboxes, which overburdened the e-mail server. In addition,
Seaboard International and its employees lacked the ability to search its large
number of stored e-mails quickly and effectively.

Seaboard International recently engaged us to provide an e-mail management
and storage solution. By efficiently moving e-mail messages off of its e-mail
server and onto storage devices, EmailXtender has improved the performance of
Seaboard International's e-mail server while also providing quick access to
stored messages. In addition, EmailXtender's enhanced indexing and archiving
capabilities have allowed Seaboard International to conduct quick and effective
full-text searches of each e-mail message and attachment across the entire
enterprise. EmailXtender also successfully enabled Seaboard International to
combat a virus attack with minimal down time by identifying and isolating the
workstations that had received a virus-infected message.

SALES AND MARKETING

We sell our products primarily through relationships with original equipment
manufacturers, value-added resellers and distributors. Our distribution through
these channels accounted for 85% of our total revenues in 1998, 84% of our total
revenues in 1999, and 84% of our total revenues for the nine months ended
September 30, 2000, with no single original equipment manufacturer, value-added
reseller or distributor accounting for more than 10% of our total revenues in
these periods. We are also expanding our direct sales force to provide better
coverage for larger clients. As of September 30, 2000, we had 91 employees
dedicated to sales and marketing.

ORIGINAL EQUIPMENT MANUFACTURER RELATIONSHIPS. We currently have more than
15 original equipment manufacturer relationships. These original equipment
manufacturers buy our products to incorporate into their own product offerings
or resell our products under their own label. We have original equipment
manufacturer relationships with Advanced Financial Solutions, Agilent
Technologies, Cerner, Data General, a division of EMC, FileNet, Imation, Legato
Systems, StorageTek and Tivoli Systems, a subsidiary of IBM, among others.

44
<PAGE>
VALUE-ADDED RESELLER AND DISTRIBUTOR RELATIONSHIPS. We currently have more
than 275 value-added reseller and distributor agreements and relationships,
including Affiliated Computer Systems, Cranel, Datalink, Electronic Data
Systems, Envision, GE Capital, IKON, JVC, Law Cypress, National Computer
Systems, Optical Laser, Plasmon and Tech Data. These resellers service North
America, Europe, East Asia and Latin America. Pursuant to these alliances, our
value-added resellers and distributors typically market the entire
XtenderSolutions product suite, receiving a discount on products sold.

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, value-added resellers and original equipment manufacturers. We
have been hiring additional salespersons and expect to continue to do so.

MARKETING. Our marketing department consists of marketing professionals
dedicated to 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 original equipment
manufacturers, value-added resellers 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
Software, Legato Systems, Computer Associates International and IBM, our
products may compete against such traditional back-up solutions when a potential
customer seeks to address its storage needs with only a data back-up solution.
Furthermore, VERITAS Software has recently begun to offer a Windows NT-based
product that competes with DiskXtender and a Microsoft Exchange-based back-up
product for e-mail attachments that competes with EmailXtender.

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 business.

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<PAGE>
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 September 30, 2000, we had a total of 251 employees. Of these
employees, 91 were involved in sales and marketing; 42 were involved in product
development; 68 were involved in quality assurance and product support; 20 were
involved in professional services; and 30 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 field offices in Irvine, California, Longmont, Colorado,
Chicago, Illinois, Nashua, New Hampshire and Cambridge, England. We have entered
into a new lease for 93,000 square feet of office space in Rockville, Maryland.
We intend to move our headquarters into this new space in the second quarter of
2001, at which time we will seek to sublet our existing headquarters space. 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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<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

Our executive officers, directors and some other key employees and their
ages as of September 30, 2000, are as follows:

<TABLE>
<CAPTION>
NAME AGE TITLE
---- -------- -----
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Richard A. Kay.......................... 44 Chairman of the Board, President and Chief
Executive Officer

F. William Caple........................ 41 Executive Vice President, Secretary and
Director

Ronald W. Kaiser........................ 46 Chief Financial Officer and Treasurer

Gabriel A. Battista(2).................. 55 Director

John Burton(2).......................... 49 Director

Joseph R. Chinnici(1)................... 46 Director

Geaton A. DeCesaris, Jr.(1)(2).......... 45 Director

Donald B. Hebb, Jr.(1).................. 58 Director

KEY EMPLOYEES:
Amena Ali............................... 36 Senior Vice President of Marketing and
Strategy

Michael J. Del Rosso.................... 43 Chief Technology Officer

Mark L. Hanson.......................... 36 Vice President of Development--Web
Solutions

Gerald Held, Jr......................... 40 Vice President of Business Development

Scott R. Nickel......................... 33 Vice President of Development--Storage

Grant M. Wagner......................... 38 Senior 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., or ACSI, 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

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<PAGE>
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 Cable & Wireless, Inc., a
telecommunications company. Mr. Battista also currently serves as a director of
AXENT Technologies, Inc., Systems and Computer Technology Corporation and
ViaNet.Works, Inc.

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., an
investment and venture capital firm. Mr. Burton currently serves as a director
of AXENT Technologies and EPresence, Inc.

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 president, chief executive officer and
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 been a managing member of the general partner of ABS Capital
Partners II, L.P. and related entities since March 1993. Prior to that,
Mr. Hebb served as a managing director of Alex. Brown Incorporated. Mr. Hebb
currently serves as a director of T. Rowe Price Associates, Inc. and SBA
Communications Corporation.

Amena Ali has served as our senior vice president of marketing and strategy
since February 2000. From June 1991 to February 2000, Ms. Ali served in various
marketing and finance positions, including most recently, director of business
analysis, at MCI Worldcom, Inc., a telecommunications company.

Michael J. Del Rosso has served as our chief technology officer since
September 2000. From September 1999 to September 2000, Mr. Del Rosso served as
vice president, technology and information security at VII, Inc., an executive
consulting and engineering company. From October 1998 to September 1999,
Mr. Del Rosso served as executive vice president and chief information officer
at Infrastructure Defense, Inc., a network security company. From May 1983 to
October 1998, Mr. Del Rosso served as president and principal of Michael J. Del
Rosso Associates, an information technology consulting firm.

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 development--storage
since September 2000. From October 1999 to September 2000, Mr. Nickel served as
our vice president of technology. From November 1992 to September 1999,
Mr. Nickel served as one of our senior developers.

Grant M. Wagner has served as our senior 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

48
<PAGE>
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 terminated upon the closing of our initial public offering
in March 2000.

ELECTION OF DIRECTORS

The board of directors is divided into three classes, each of whose members
serves for a three-year term. Mr. Hebb and Mr. Chinnici serve in the class which
term expires in 2001. Mr. Caple and Mr. Burton serve in the class which term
expires in 2002; and Mr. Kay, Mr. Battista and Mr. DeCesaris serve in the class
which term expires in 2003. 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 10,000 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 $2.75 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.

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<PAGE>
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 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 initial annual compensation consisted of a base salary of $187,000
and a bonus of at least 30% of his base salary. In June 2000, our compensation
committee increased Mr. Kaiser's base salary to $205,700 per year, retroactive
to January 2000. 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 329,412 shares of our common stock at
a price of $1.84 per share vesting over four years. 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>
EXECUTIVE COMPENSATION

The following table sets forth, for the years ended December 31, 1998 and
1999, 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 in 1999, collectively referred to as the named executive
officers.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SHARES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1)
--------------------------- -------- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Richard A. Kay ........................ 1998 $485,000 $115,000 -- $ --
Chairman, President and 1999 485,000 115,000 -- 6,030
Chief Executive Officer

F. William Caple ...................... 1998 125,000 50,200 -- --
Executive Vice President 1999 155,503 49,950 200,000 6,030
and Secretary

Ronald W. Kaiser ...................... 1998 81,231 -- -- --
Chief Financial Officer 1999 192,524 41,076 100,000 6,030
and Treasurer
</TABLE>

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

(1) These amounts represent health insurance premiums.

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, 1999. The percentage of total options granted
to employees set forth below is based on an aggregate of 1,024,900 shares
subject to options granted to our employees in 1999. 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 POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(1)
OPTIONS EMPLOYEES BASE PRICE EXPIRATION ---------------------
NAME GRANTED IN FISCAL YEAR ($/SHARE) DATE 5% 10%
---- ---------- -------------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Kay............... -- --% $ -- -- $ -- $ --
F. William Caple............. 200,000 19.5 1.84 1/1/09 231,433 586,497
Ronald W. Kaiser............. 100,000 9.8 2.75 9/15/09 172,946 438,279
</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 stock price
on the date of

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<PAGE>
grant appreciates annually 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.

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,
1999. None of the named executive officers exercised any options to purchase
shares of common stock during the year ended December 31, 1999.

FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard A. Kay................................ -- -- $ -- $ --
F. William Caple.............................. 49,998 150,002 539,978 1,620,021
Ronald W. Kaiser.............................. 154,921 274,491 1,665,561 2,881,089
</TABLE>

There was no public trading market for our common stock as of December 31,
1999. 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, 1999 of $12.64 per
share, as determined by the board of directors, less the aggregate exercise
price.

BENEFIT PLANS

2000 STOCK INCENTIVE PLAN. Our 2000 Stock Incentive Plan was adopted by our
Board of Directors in January 2000 and received stockholder approval in February
2000. Up to 1,000,000 shares of our common stock, subject to adjustment in the
event of stock splits and other similar events, were reserved for issuance under
the 2000 plan. The number of shares of our common stock available for issuance
under the plan will automatically increase on the first trading day of each
calendar year, beginning with 2001 through the term of the plan, by an amount
equal to 3% of the shares of our common stock outstanding on the last trading
day of the preceding calendar year, but the annual increase will not in any
event exceed 1,000,000 shares.

The plan provides 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 plan. Under present
law, however, incentive stock options may only be granted to employees.

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 plan permits 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

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<PAGE>
"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.

Our board of directors administers the plan. Our board of directors has the
authority to adopt, amend and repeal the administrative rules, guidelines and
practices relating to the plan and to interpret its provisions. It may delegate
authority under the plan 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
plan, including the granting of options to our executive officers. Subject to
any applicable limitations contained in the plan, 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 plan be assumed or substituted for by the acquiror. Under the
plan, if any of these events constitutes a change in control, 50% of the shares
subject to the assumed or substituted options will become immediately
exercisable upon the occurrence of the acquisition event.

No award may be granted 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 2000 plan.

1998 STOCK INCENTIVE PLAN. We also have a 1998 Stock Incentive Plan under
which we granted stock options prior to our initial public offering in March
2000. Upon the adoption of the 2000 Stock Incentive Plan in February 2000, our
board of directors provided that no additional stock options would be granted
under the 1998 plan. As of September 30, 2000, options to purchase an aggregate
of 3,604,575 shares of common stock remained outstanding under the 1998 plan.

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
600,000 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 up 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

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<PAGE>

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 lower. In no event may an employee purchase in
any one-year period a number of shares that exceeds the number of shares
determined by dividing $25,000 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>
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 converted automatically into
4,161,506 shares of common stock upon the closing of our initial public
offering. The senior subordinated notes provided 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 became immediately due and payable upon
the closing of our initial public offering. On March 15, 2000, the outstanding
balance of principal and interest on all of the senior subordinated notes was
$4.5 million, which was paid in full at that time.

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
managing director of Deutsche Banc Alex. Brown, one of our managing
underwriters. These rights terminated upon the closing of our initial public
offering.

The following table sets forth

- the principal amount of subordinated convertible notes and the number of
shares of common stock into which such notes converted, and

- the amount of principal and interest paid on March 15, 2000 in full
satisfaction of the senior subordinated notes issued to each purchaser by
us.

<TABLE>
<CAPTION>
SUBORDINATED SHARES OF COMMON SENIOR
CONVERTIBLE STOCK ISSUED SUBORDINATED
NAME NOTES UPON CONVERSION NOTES
---- ------------ ---------------- ------------
<S> <C> <C> <C>
ABS Capital Partners II, L.P........................ $5,717,728 3,115,928 $3,354,102
Greylock IX Limited Partnership..................... 1,909,090 1,040,376 1,119,900
Michael P. Murray................................... 9,546 5,202 5,600
---------- --------- ----------
Total............................................... $7,636,364 4,161,506 $4,479,602
========== ========= ==========
</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
$6.0 million in cash and a promissory note in the principal amount of
$5.5 million bearing interest at a rate of 10% per year. In January 2000,
Mr. Kay partially satisfied our obligation to Mr. Sandler by paying Mr. Sandler
$1.0 million on our behalf. Under the terms of the promissory note, we paid
Mr. Sandler all outstanding principal and interest, or $4.2 million, upon the
the closing of our initial public offering. In March 2000, we reimbursed
Mr. Kay $1.0 million from the proceeds of our initial public offering.

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
amended to increase the maximum principal amount of the promissory note to
$700,000. On December 1, 1994,

55
<PAGE>

the promissory note was amended again to increase the maximum principal amount
of the promissory note to $1.0 million and to make the promissory note payable
upon demand. Amounts that we borrowed under the loan agreement bore simple
interest at a rate of 8% per year. Upon the closing of our initial public
offering, we paid Mr. Kay all outstanding principal and interest, or $477,000,
under this arrangement.

In addition, in June 1998, we borrowed an aggregate principal amount of
$1.5 million from Mr. Kay in order to secure working capital for our operations
pursuant to two promissory notes. These notes earned 8% interest which was
payable quarterly. The principal amount of these notes and all accrued interest,
or $1.5 million, was paid in full upon the closing of our initial public
offering.

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 had failed to make payments under this promissory note when due, or if we had
become obligated to make a balloon payment under the terms of the promissory
note, the escrow agreement provided that PNC Bank could have directed the escrow
agent to sell Mr. Kay's shares and could have applied the proceeds of the sale
to the required payment. The escrow agreement terminated when we paid in full
all of our obligations to PNC Bank under the loan agreement, or $5.0 million, in
March 2000.

STOCK SALES BY PRINCIPAL STOCKHOLDER. During the period beginning June 1998
through January 2000, Mr. Kay sold an aggregate of 795,826 shares of our common
stock to four members of our board of directors at a per share price ranging
from $1.84 to $5.50. During the same period, Mr. Kay issued convertible
promissory notes to ABS Capital Partners II, L.P. and Michael Murray, which
converted at the closing of our initial public offering into an aggregate of
1,962,190 and 1,000 shares of our common stock, respectively. The conversion
price of these convertible notes ranged from $2.75 to $5.50 per share of common
stock. Additionally, in October 1999, Mr. Kay sold 40,000 shares of our common
stock at a per share price of $2.75 to Mr. Kaiser, our chief financial officer.

OPTION GRANTS TO NON-EMPLOYEE DIRECTORS AND EXECUTIVE OFFICERS. In
June 1999, we granted options to purchase 10,000 shares of common stock at an
exercise price of $2.75 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 329,412
shares of common stock at an exercise price of $1.84 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 100,000 shares of
common stock at an exercise price of $2.75 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, secretary and
director, an option to purchase 200,000 shares of common stock at an exercise
price of $1.84 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
269,254 shares of common stock to Mr. Caple, 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 September 30, 2000,
the outstanding balance of Mr. Caple's note to us was $133,468.

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.

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>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding beneficial
ownership of our common stock as of September 30, 2000 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) all of our
directors and executive officers as a group and (4) each other selling
stockholder.

Several of our stockholders have granted to the underwriters an option to
purchase up to 495,000 shares of common stock to cover over-allotments. The
footnotes to this table provide information concerning the stock holdings of
such stockholders 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 25,833,664 shares of common stock outstanding as of
September 30, 2000. The number of shares of common stock deemed outstanding
after this offering includes the 1,650,000 shares that are being offered for
sale by us in this offering and the 98,222 shares which are to be sold in this
offering to be issued upon exercise of options and a warrant. 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 September 30, 2000. 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 OWNED SHARES BENEFICIALLY OWNED
BEFORE THE OFFERING SHARES TO BE SOLD AFTER THE OFFERING
------------------------- ----------------- -------------------------
BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE
---------------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
DIRECTORS, EXECUTIVE OFFICERS AND
5% STOCKHOLDERS:
ABS Capital Partners II, 5,078,118 19.7% 600,000 4,478,118 16.2%
L.P.(1) ........................
1 South Street
Baltimore, Maryland 21202
Richard A. Kay(2)................. 11,849,522 45.9 516,000 11,333,522 41.1
F. William Caple(3)............... 386,920 1.5 70,000 316,920 1.1
Ronald W. Kaiser(4)............... 290,039 1.1 70,000 220,039 *
Gabriel A. Battista(5)............ 147,464 * 20,000 127,464 *
John Burton(5).................... 228,360 * 40,000 188,360 *
Joseph R. Chinnici(5)............. 45,796 * -- 45,796 *
Geaton A. DeCesaris, Jr.(6)....... 327,900 1.3 40,000 287,900 1.0
Donald B. Hebb, Jr.(7)............ 5,088,118 19.7 600,000 4,488,118 16.3
All executive officers and
directors as a group
(8 persons)(8).................. 18,364,119 70.0 1,356,000 17,008,119 60.8

OTHER SELLING STOCKHOLDERS:
Robert Depelteau (9).............. 190,476 * 42,000 148,476 *
Mark Hanson (9)................... 190,476 * 45,000 145,476 *
Paul Matsko (9)................... 190,476 * 42,000 148,476 *
Scott Nickel (9).................. 190,476 * 48,000 142,476 *
Stewart Nickel (9)................ 190,476 * 45,000 145,476 *
Jeffrey Peterson (10)............. 190,476 * 42,000 148,476 *
Galina Schiff (11)................ 30,000 * 30,000 -- --
</TABLE>

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

* Less than 1% of the outstanding common stock.

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<PAGE>

(1) If the underwriters exercise their over-allotment option in full, ABS
Capital Partners II, L.P. will sell 90,000 additional shares of common stock
in this offering and would beneficially own 4,388,118 shares, representing
15.9% of the total shares outstanding after this offering.

(2) Includes 34,656 shares owned by Rebecca Kay, Mr. Kay's wife, 467,078 shares
owned by a minor daughter of Mr. Kay, and 1,572,994 shares held by grantor
retained annuity trusts organized for the benefit of other minor children of
Mr. Kay. Of the shares beneficially owned by Mr. Kay being sold in this
offering, an aggregate of 66,000 shares are owned by a minor daughter of
Mr. Kay and grantor retained annuity trusts for the benefit of other minor
children of Mr. Kay. If the underwriters exercise their over-allotment
option in full, Mr. Kay will sell an additional 405,000 shares of common
stock in this offering and would beneficially own 10,928,522 shares,
representing 39.6% of the total shares outstanding after this offering.

(3) Includes 116,666 shares issuable upon exercise of options and 1,000 shares
owned by Mr. Caple's wife.

(4) Includes 246,261 shares issuable upon exercise of options.

(5) Includes 10,000 shares issuable upon exercise of options.

(6) Includes 10,000 shares issuable upon exercise of options and 12,000 shares
owned by Mr. DeCesaris' minor children.

(7) Consists of 10,000 shares issuable upon exercise of options and 5,078,118
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 5,078,118
shares owned by ABS Capital Partners II, L.P.

(8) Includes 412,927 shares issuable upon exercise of options.

(9) Includes 95,238 shares issuable upon exercise of options.

(10) Consists of 190,476 shares issuable upon exercise of options.

(11) Consists of 30,000 shares issuable upon exercise of a warrant.

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<PAGE>
DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock consists 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 our amended and restated by-laws to be effective after the
closing of this offering, incorporated as exhibits to the registration statement
of which this prospectus is a part.

COMMON STOCK

As of September 30, 2000, there were 25,833,664 shares of common stock
outstanding held by 149 stockholders of record. Based upon the number of shares
outstanding as of that date and after giving effect to the issuance of the
shares of common stock offered by us in this offering, there will be 27,581,886
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

The board of directors is 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.

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 us and an interested stockholder.
In general, an "interested stockholder" is a

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<PAGE>
person who, together with affiliates and associates, owns, or within three years
did own, 15% or more of our voting stock.

Our amended and restated certificate of incorporation and amended and
restated by-laws 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:

- 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, 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.

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<PAGE>
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 FleetBoston, N.A.

61
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, we will have 27,581,886 shares of common
stock outstanding assuming no exercise of outstanding options other than the
options to purchase shares of common stock to be exercised by selling
stockholders. Substantially all of these shares will be freely tradeable 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.

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
275,819 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.

LOCK-UP AGREEMENTS

Subject to limited exceptions, we, our executive officers and directors and
other stockholders have agreed that they will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, any shares of our common
or securities convertible into or exchangeable or exercisable for any shares of
our common stock, enter into a transaction which would have the same effect, or
enter into any swap, hedge or other arrangement that transfers, in whole or in
part, any of the economic consequences of ownership of our common stock, whether
any of these transactions are to be settled by delivery of our common stock or
other securities, in cash or otherwise, or publicly disclose the intention to
make any offer, sale, pledge or disposition, or to enter into any transaction,
swap, hedge or other arrangement, without, in each case, the prior written
consent of Credit Suisse First Boston Corporation for a period of 90 days after
the date of this prospectus.

REGISTRATION RIGHTS

After this offering, the holders of approximately 15,499,322 shares of
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>
UNDERWRITING

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

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Deutsche Bank Securities Inc................................
Salomon Smith Barney Inc....................................
Friedman, Billings, Ramsey & Co., Inc.......................
---------
Total..................................................... 3,300,000
=========
</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.

Certain selling stockholders have granted to the underwriters a 30-day
option to purchase on a pro rata basis up to 495,000 additional shares from the
selling stockholders at the public offering price less the underwriting
discounts and commissions. The option may be exercised only to cover any
over-allotments of common stock. Underwriters' discounts and commissions
represent the public offering price of the common stock less the amount the
underwriters pay us or the selling stockholders for the 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 selling 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 public offering, the public offering
price and concession and discount to broker/dealers may be changed by the
representatives. A broker is any person engaged in the business of effecting
transactions in securities for the accounts of others, but does not include a
bank. A dealer is any person engaged in the business of buying and selling
securities for his own account, through a broker or otherwise, but does not
include a bank. A selling group member is a member of the selling syndicate.

The following table summarizes the compensation and estimated expenses we
and the selling stockholders will pay and includes all compensation items and
amounts considered to be underwriting compensation by the National Association
of Securities Dealers Inc. for purposes of its Rules of Fair Practice.

<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 stockholders.....
Expenses payable by the selling
stockholders......................... -- -- -- --
</TABLE>

63
<PAGE>
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. Upon the closing of our initial public
offering, the subordinated convertible notes were converted into 5,202 shares of
common stock and the outstanding balance of principal and interest on the senior
subordinated notes was paid in full. Mr. Murray is a managing director 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, agreed in December 1999 to provide us, in its ordinary course of
business, financial advisory services for a 12-month period for a fee of
$160,000. In October 2000, Friedman, Billings, Ramsey & Co., Inc. agreed to
provide us similar services over the next 12 months for a fee of $375,000.

A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the underwriters that may make Internet distributions on the same
basis as other allocations. DLJDIRECT, an online broker, may participate in this
offering as a selling group member.

We 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 shares 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 90 days after the date of this prospectus, except grants of stock options or
issuances of stock pursuant to our employee stock plans described in this
prospectus or issuances pursuant to the exercise of stock options or warrants
outstanding on the date hereof.

Our officers, directors and other selling stockholders, who together will
hold approximately 61.1% of our outstanding common stock following this
offering, have agreed that they will not offer, sell, contract to sell, pledge
or otherwise dispose of, directly or indirectly, any shares of our common or
securities convertible into or exchangeable or exercisable for any shares of our
common stock, enter into a transaction which would have the same effect, or
enter into any swap, hedge or other arrangement that transfers, in whole or in
part, any of the economic consequences of ownership of our common stock, whether
any of these transactions are to be settled by delivery of our common stock or
other securities, in cash or otherwise, or publicly disclose the intention to
make any offer, sale, pledge or disposition, or to enter into any transaction,
swap, hedge or other arrangement, without, in each case, the prior written
consent of Credit Suisse First Boston Corporation for a period of 90 days after
the date of this prospectus.

We and the selling stockholders 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.

Our common stock is listed on The Nasdaq Stock Market's National Market
under the symbol "OTGS."

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

- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.

64
<PAGE>
- Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any short position by exercising
their over-allotment option, purchasing shares in the open market or both.

- 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. In determining the source of shares to
close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option, a naked short position, the position
can only be closed out by buying shares in the open market. A naked
position is more likely to be created if the underwriters are concerned
that there could be downward pressure on the price of the shares in the
open market after pricing, that could adversely affect investors who
purchase in the offering.

- 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.

These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of our
common stock or preventing or retarding a decline in the market price of the
common stock. As a result, the price of the common stock may 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.

65
<PAGE>
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
shareholders prepare and file a prospectus with the securities regulatory
authorities in each province where trades of common stock are made. Any resale
of the common stock in Canada must be made under applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made under available statutory exemptions or under 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

By purchasing common stock in Canada and accepting a purchase confirmation,
a purchaser is representing to us, the selling shareholders and the dealer from
whom the purchase confirmation is received that

- the purchaser is entitled under applicable provincial securities laws to
purchase the common stock without the benefit of a prospectus qualified
under those securities laws,

- where required by law, that the purchaser is purchasing as principal and
not as agent, and

- the 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 shareholders 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.

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.

66
<PAGE>
LEGAL MATTERS

The validity of the shares of common stock we are offering will be passed
upon for us by Hale and Dorr LLP, Reston, Virginia. 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 consolidated financial statements and schedule of OTG Software, Inc. and
subsidiaries as of December 31, 1998 and 1999, and for each of the years in the
three-year period ended December 31, 1999 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.

The financial statements of xVault, Inc. as of December 31, 1999, and for
the period from January 12, 1999 (inception) to December 31, 1999 have been
included in this prospectus and elsewhere in the registration statement in
reliance upon the report 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 dismissed our independent auditors, Grant Thornton, LLP,
and retained KPMG LLP to act as our independent public accountants. Grant
Thornton, LLP had been our independent accountants since March 1997. In
connection with Grant Thornton, LLP's audit of the combined financial statements
for the years ended December 31, 1996 and 1997, and in connection with the
subsequent period up to July 1999, there were no disagreements with Grant
Thornton, LLP on any matters of accounting principles or practices, financial
statements disclosure or auditing scope or procedures, nor any reportable
events. 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 or incorporated as a part of the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document filed or incorporated as an exhibit to the registration statement
are not necessarily complete. If a contract or document has been filed or
incorporated 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. The SEC's toll-free telephone number
is 1-800-SEC-0330. 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.

We are subject to the information and reporting requirements of the
Securities Exchange Act of 1934, as amended, and, in accordance with these
requirements, we file periodic reports, proxy statements, and other information
with the Securities and Exchange Commission.

67
<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
OTG SOFTWARE, INC. AND SUBSIDIARIES
Independent Auditors' Report................................ F-2

Consolidated Balance Sheets as of December 31, 1998
and 1999 and as of September 30, 2000 (unaudited)......... F-3

Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999 and for the nine months
ended September 30, 1999 and 2000 (unaudited)............. F-4

Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1997, 1998 and 1999 and
for the nine months ended September 30, 2000
(unaudited)............................................... F-5

Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 and for the nine months
ended September 30, 1999 and 2000 (unaudited)............. F-6

Notes to Consolidated Financial Statements.................. F-7

XVAULT, INC.

Independent Auditors' Report................................ F-21

Balance Sheet as of December 31, 1999....................... F-22

Statement of Operations for the period from January 12, 1999
(inception) to December 31, 1999.......................... F-23

Statement of Stockholders' Deficit for the period from
January 12, 1999 (inception) to December 31, 1999......... F-24

Statement of Cash Flows for the period from January 12, 1999
(inception) to December 31, 1999.......................... F-25

Notes to Financial Statements............................... F-26

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION

Unaudited Pro Forma Condensed Consolidated Financial
Information............................................... F-31

Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 1999........... F-32

Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the nine months ended September 30, 2000... F-33

Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements...................................... F-34
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

Board of Directors
OTG Software, Inc.:

We have audited the accompanying consolidated balance sheets of OTG
Software, Inc. and subsidiary (the "Company") as of December 31, 1998 and 1999,
and the related consolidated statements of operations, stockholders' deficit,
and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of OTG
Software, Inc. and subsidiary as of December 31, 1998 and 1999, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.

KPMG LLP

McLean, Virginia
February 4, 2000

F-2
<PAGE>
OTG SOFTWARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1998 1999 2000
-------- -------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 437 $ 2,494 $ 67,818
Accounts receivable, net of allowances for doubtful
accounts and returns of $664, $803 and $1,134, at
December 31, 1998 and 1999, and September 30, 2000
(unaudited), respectively............................... 4,862 7,596 13,848
Deferred income taxes..................................... -- -- 1,445
Prepaid royalties and other current assets................ 400 693 2,019
-------- -------- --------
Total current assets.................................... 5,699 10,783 85,130
Property and equipment, net................................. 1,010 1,444 3,360
Goodwill, net............................................... -- -- 2,655
Other intangibles, net...................................... -- -- 699
Other assets, net........................................... 575 362 314
-------- -------- --------
Total assets.......................................... $ 7,284 $ 12,589 $ 92,158
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 1,092 $ 1,509 $ 2,020
Accrued bonuses, compensation and benefits................ 1,466 2,533 2,713
Accrued interest.......................................... 527 1,327 --
Accrued liabilities....................................... 454 1,175 2,027
Income taxes payable...................................... -- -- 1,447
Note payable to bank...................................... 2,300 5,000 --
Current portion of long-term debt......................... 1,437 13,803 46
Subordinated notes payable--stockholders.................. 1,969 1,969 --
Deferred revenues--other.................................. 574 400 542
Deferred revenues--maintenance and licenses............... 2,000 3,050 4,120
-------- -------- --------
Total current liabilities............................... 11,819 30,766 12,915
Long-term debt--net of current portion...................... 16,341 3,529 53
Deferred income taxes....................................... -- -- 341
-------- -------- --------
Total liabilities..................................... 28,160 34,295 13,309
-------- -------- --------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.01 par value; 5,000,000 shares
authorized, none issued and outstanding................. -- -- --
Common stock, $.01 par value; 65,000,000 shares
authorized; 16,314,682 shares issued and outstanding at
December 31, 1998 and 1999, 25,833,664 shares issued and
outstanding at September 30, 2000 (unaudited)........... 163 163 258
Additional paid-in capital.................................. 899 4,081 102,448
Deferred compensation....................................... -- (2,557) (2,017)
Accumulated deficit......................................... (20,961) (22,416) (20,819)
-------- -------- --------
Total stockholders' equity (deficit) before stock
subscriptions receivable................................ (19,899) (20,729) 79,870
Less: stock subscriptions receivable.................... (977) (977) (1,021)
-------- -------- --------
Total stockholders' equity (deficit).................. (20,876) (21,706) 78,849
-------- -------- --------
Total liabilities and stockholders' equity
(deficit)....................................... $ 7,284 $ 12,589 $ 92,158
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>
OTG SOFTWARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- -----------------------
1997 1998 1999 1999 2000
-------- -------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses......................................... $ 8,543 $12,089 $18,208 $12,605 $22,751
Services.................................................. 3,361 5,230 7,232 5,011 7,276
------- ------- ---------- ---------- ----------
Total revenues........................................ 11,904 17,319 25,440 17,616 30,027
Cost of revenues:
Software licenses......................................... 579 532 1,062 670 1,353
Services.................................................. 1,219 1,639 3,017 2,188 3,207
------- ------- ---------- ---------- ----------
Total cost of revenues................................ 1,798 2,171 4,079 2,858 4,560
------- ------- ---------- ---------- ----------
Gross profit................................................ 10,106 15,148 21,361 14,758 25,467
Operating expenses:
Research and development.................................. 2,455 3,958 5,137 3,725 6,142
Sales and marketing....................................... 5,313 8,986 11,487 7,959 12,691
General and administrative................................ 1,709 2,150 4,139 2,680 4,347
Amortization of acquired intangible
assets.................................................. -- -- -- -- 347
Write-off of acquired in-process research and
development............................................. -- -- -- -- 620
------- ------- ---------- ---------- ----------
Total operating expenses.............................. 9,477 15,094 20,763 14,364 24,147
------- ------- ---------- ---------- ----------
Income from operations...................................... 629 54 598 394 1,320
Interest income (expense), net.............................. (162) (1,261) (2,053) (1,519) 1,736
------- ------- ---------- ---------- ----------
Income (loss) before income taxes........................... 467 (1,207) (1,455) (1,125) 3,056
Provision for income taxes.................................. -- -- -- -- 343
------- ------- ---------- ---------- ----------
Net income (loss)........................................... $ 467 $(1,207) $(1,455) $(1,125) $ 2,713
======= ======= ========== ========== ==========
Net income per share:
Basic..................................................... $ 0.12
==========
Diluted................................................... $ 0.10
==========
Weighted average shares outstanding:
Basic..................................................... 23,409,866
==========
Diluted................................................... 26,400,139
==========
Pro forma statement of operations data (unaudited):
Income (loss) before income taxes, as reported............ $ 467 $(1,207) $(1,455) $(1,125) $ 3,056
Pro forma income tax provision
(benefit)............................................... -- -- -- -- 581
------- ------- ---------- ---------- ----------
Pro forma net income (loss)............................... $ 467 $(1,207) $(1,455) $(1,125) $ 2,475
======= ======= ========== ========== ==========
Pro forma net income (loss) per share:
Basic................................................... $ (0.07) $ (0.05) $ 0.11
========== ========== ==========
Diluted................................................. $ (0.07) $ (0.05) $ 0.09
========== ========== ==========
Pro forma weighted average shares
outstanding:
Basic................................................... 20,560,398 20,560,398 23,409,866
========== ========== ==========
Diluted................................................. 20,560,398 20,560,398 26,400,139
========== ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>
OTG SOFTWARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCK
----------------------- PAID-IN- DEFERRED ACCUMULATED SUBSCRIPTIONS
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT RECEIVABLE TOTAL
------------ -------- ---------- ------------ ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996...................... 25,938,352 $ 259 $ -- $ -- $ (2,825) $ -- $ (2,566)
Distribution to
stockholders............ -- -- -- -- (600) -- (600)
Issuance of common
stock................... 269,254 3 100 -- -- (103) --
Net income................ -- -- -- -- 467 -- 467
------------ ----- -------- ------- -------- ------- --------
Balance, December 31,
1997...................... 26,207,606 262 100 -- (2,958) (103) (2,699)
Distribution to
stockholders............ -- -- (100) -- (5,400) -- (5,500)
Redemption of shares...... (10,369,114) (104) -- -- (11,396) -- (11,500)
Issuance of common
stock................... 476,190 5 869 -- -- (874) --
Issuance of warrants...... -- -- 30 -- -- -- 30
Net loss.................. -- -- -- -- (1,207) -- (1,207)
------------ ----- -------- ------- -------- ------- --------
Balance, December 31,
1998...................... 16,314,682 163 899 -- (20,961) (977) (20,876)
Deferred compensation for
stock options granted... -- -- 2,886 (2,557) -- -- 329
Distribution to
stockholders............ -- -- (34) -- -- -- (34)
Compensation expense on
related party stock
transaction............. -- -- 330 -- -- -- 330
Net loss.................. -- -- -- -- (1,455) -- (1,455)
------------ ----- -------- ------- -------- ------- --------
Balance, December 31,
1999...................... 16,314,682 163 4,081 (2,557) (22,416) (977) (21,706)
Distribution to
stockholders
(unaudited)............. -- -- -- -- (1,160) -- (1,160)
Sale of common stock, net
of direct costs of the
offering (unaudited).... 5,000,000 50 86,985 -- -- -- 87,035
Conversion of long-term
debt into common stock
(unaudited)............. 4,161,506 42 8,791 -- -- -- 8,833
Exercises of employee
stock options
(unaudited)............. 194,643 2 373 -- -- -- 375
Stock compensation expense
(unaudited)............. -- -- -- 540 -- -- 540
Sale of common stock
through employee stock
purchase plan
(unaudited)............. 2,837 -- 46 -- -- -- 46
Interest on stock
subscription receivable
(unaudited)............. -- -- -- -- 44 (44) --
Acquisition of xVault
(unaudited)............. 159,996 1 2,172 -- -- -- 2,173
Net income (unaudited).... -- -- -- -- 2,713 -- 2,713
------------ ----- -------- ------- -------- ------- --------
Balance, September 30, 2000
(unaudited)............... 25,833,664 $ 258 $102,448 $(2,017) $(20,819) $(1,021) $ 78,849
============ ===== ======== ======= ======== ======= ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>
OTG SOFTWARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) for the period.................. $ 467 $(1,207) $(1,455) $(1,125) $ 2,713
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Write-off of acquired in-process research
and development........................... -- -- -- -- 620
Amortization of acquired intangible
assets.................................... -- -- -- -- 347
Depreciation and amortization............... 109 389 611 521 743
Stock compensation expense.................. -- 30 659 150 540
Provision for bad debts and returns......... 327 367 264 202 629
Deferred income taxes....................... -- -- -- -- (1,104)
Change in assets and liabilities:
Accounts receivable....................... (1,943) (2,015) (2,998) (1,238) (6,881)
Prepaid royalties and other assets........ (92) (877) (197) (336) (1,511)
Accounts payable and accrued expenses..... 1,051 1,001 3,005 1,767 1,120
Income taxes payable...................... -- -- -- -- 1,447
Deferred revenues......................... 977 1,044 876 584 1,212
------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities............................ 896 (1,268) 765 525 (125)
Cash flows from investing activities:
Acquisition of property and equipment............. (654) (667) (928) (685) (2,553)
Acquisition of xVault, net of cash acquired....... -- -- -- -- (1,731)
------- ------- ------- ------- -------
Net cash used in investing activities... (654) (667) (928) (685) (4,284)
Cash flows from financing activities:
Net proceeds from initial public offering......... -- -- -- -- 87,035
Proceeds from issuances of common stock........... -- -- -- -- 420
Borrowings under note payable to bank............. 1,000 -- 5,000 3,500 --
Repayments on note payable to bank................ -- -- (2,300) (2,300) (5,000)
Borrowings under long-term debt................... -- 12,136 -- -- 31
Repayments on long-term debt...................... (200) (307) (446) (388) (1,795)
Proceeds from stockholders' notes................. 770 1,500 -- -- --
Repayments of stockholders' notes................. -- (555) -- -- (9,798)
Distributions to stockholders..................... (600) (5,500) (34) -- (1,160)
Redemption of common stock........................ (400) (6,000) -- -- --
------- ------- ------- ------- -------
Net cash provided by financing
activities............................ 570 1,274 2,220 812 69,733
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 812 (661) 2,057 652 65,324
Cash and cash equivalents at beginning of period.... 286 1,098 437 437 2,494
------- ------- ------- ------- -------
Cash and cash equivalents at end of period.......... $ 1,098 $ 437 $ 2,494 $ 1,089 $67,818
======= ======= ======= ======= =======
Supplemental disclosure of cash flow information:
Interest paid..................................... $ 168 $ 738 $ 1,118 $ 847 $ 682
Non-cash investing and financing activities:
Common stock issued for notes receivable.......... $ 103 $ 874 $ -- $ -- $ --
Common stock redeemed for notes payable........... $ -- $ 5,500 $ -- $ -- $ --
Issuance of common stock related to the April 2000
acquisition of xVault........................... $ -- $ -- $ -- $ -- $ 2,173
Conversion of all outstanding convertible
subordinated notes payable (including related
accrued interest) into 4,161,506 shares of
common stock in March 2000...................... $ -- $ -- $ -- $ -- $ 8,833
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>
OTG SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED 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 CONSOLIDATION

The accompanying consolidated 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,
provides sales, marketing support and services. Prior to December 30, 1999, OTG
Sales was under common control and majority stock ownership with OTG Software.
On December 30, 1999, in connection with the Company's planned initial public
offering ("IPO"), the stock of OTG Sales was contributed to OTG Software for no
consideration. The combination has been accounted for at historical cost. The
accompanying financial statements have been retroactively restated to give
effect to the consolidation as if it had occurred prior to January 1, 1997.

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

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 occurred, and collectibility of the fee is considered probable.
For arrangements in which payment terms extend

F-7
<PAGE>
OTG SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 feasibility, subject to net realizable value considerations. To
date, the period between achieving technological feasibility and the general
availability of such software has been short; therefore, software development
costs qualifying for capitalization have been immaterial. Accordingly, the
Company has not capitalized any software development costs and has charged all
such costs to research and development expense. Research and development costs
are expensed as incurred.

(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 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.

F-8
<PAGE>
OTG SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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
$584,000, $378,000 and $522,000, respectively, for the years ended December 31,
1997, 1998, and 1999.

(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. Included in accounts receivable at December 31, 1999 is
approximately $1,626,000 due from two customers under arrangements with extended
payment terms. The amounts under these arrangements are all due within six
months from December 31, 1999. There were no significant amounts with extended
payment terms due at December 31, 1998.

Cash balances in financial institutions are insured by the Federal Deposit
Insurance Corporation up to $100,000. Uninsured balances at December 31, 1998
and 1999 were $337,000 and $2,294,000, 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) PRO FORMA STATEMENT OF OPERATIONS 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 an entity subject to tax as a regular
corporation under the Internal Revenue Code. Accordingly, the accompanying pro
forma statement of operations data has been prepared as if the Company were
treated as an entity subject to tax as a regular corporation for federal and
state income tax purposes from January 1, 1997.

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. The pro forma weighted average
shares outstanding includes 84,210 shares, at the offering price of $19.00 per
share,

F-9
<PAGE>
OTG SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
representing the number of shares whose proceeds would be necessary to cover the
$1,600,000 distribution to be paid at the closing of the initial public
offering, reflecting estimated S corporation tax liabilities of existing
shareholders, as well as 4,161,506 shares issuable upon the conversion of
convertible debt upon the closing of the initial public offering.

Certain 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.

(n) STOCK SPLIT

On January 18, 2000, the Board of Directors of the Company approved a
2-for-1 stock split of the Company's common stock. All share, per share and
conversion amounts relating to common stock, stock options and stock purchase
warrants included in the accompanying consolidated financial statements have
been retroactively adjusted to reflect the stock split.

(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
beginning after

F-10
<PAGE>
OTG SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1997, 1998 and 1999.

(s) UNAUDITED INTERIM FINANCIAL INFORMATION

The unaudited interim financial information as of September 30, 2000 and for
the nine months ended September 30, 1999 and 2000 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.

NOTE 2--COMMON STOCK

The Company is incorporated in the State of Delaware and has the authority
to issue 20,000,000 shares of common stock with a par value of $.01.

In December 1998, the Company issued a warrant to purchase 30,000 shares of
the Company's common stock at $1.84 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,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Computer software........................................... $ 199 $ 336
Computer hardware........................................... 885 1,406
Furniture, fixtures and office equipment.................... 426 625
Leasehold improvements...................................... 105 176
------ ------
1,615 2,543
Less accumulated depreciation and amortization.............. (605) (1,099)
------ ------
Property and equipment, net................................. $1,010 $1,444
====== ======
</TABLE>

NOTE 4--NOTES RECEIVABLE

Other assets at December 31, 1998 and 1999 include a $49,142 demand note
receivable from a former employee. The note bears interest at 10%.

F-11
<PAGE>
OTG SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--NOTES RECEIVABLE (CONTINUED)

The Company had stock subscription notes receivable at December 31, 1998 and
1999 in the amount of approximately $977,000 from certain employees of the
Company with interest rates ranging from 5% to 8%. The notes were issued in
connection with the issuance of 745,444 shares of the Company's common stock.
Approximately 476,190 of the shares were issued in connection with a restricted
stock purchase under the Company's 1998 Stock Incentive Plan (the "Stock Plan").
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 ins the accompanying consolidated balance sheets. The Company
has not accrued interest on the notes.

NOTE 5--DEMAND NOTE PAYABLE--BANK

At December 31, 1998, the Company had a bank demand note payable of
$2,300,000. The note required only interest payments at the bank's prime rate
plus 0.5% (9% at December 31, 1998) through March 31, 1999. The loan was
collateralized by a security interest in all of the Company's assets and was
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.

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% (9% at December 31,
1999). 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. The Company was in violation of certain covenants at
December 31, 1999, and has received waivers from the bank for such violations.

As a condition to entering into the revolving line of credit 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.

NOTE 6--LONG-TERM DEBT

At December 31, 1998, the Company was obligated under a severance agreement
with a former employee in the amount of $250,000. This obligation 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.

F-12
<PAGE>
OTG SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--LONG-TERM DEBT (CONTINUED)
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 the Company. 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 the
Company. Further, the principal amount of the notes shall be automatically
converted into common stock of the Company 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
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 the Company at $1.835 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 and 1999. However, in connection with the revolving line of
credit agreement entered into by the Company in July 1999 (see Note 5), 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, at December
31, 1998, the Company has classified the amounts as long-term obligations in
the accompanying consolidated balance sheet.

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

F-13
<PAGE>
OTG SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--LONG-TERM DEBT (CONTINUED)
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, 1999 are as follows
(in thousands):

<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------
<S> <C>
2000........................................................ $13,803
2001........................................................ 938
2002........................................................ 1,007
2003........................................................ 1,091
2004........................................................ 493
Thereafter.................................................. --
-------
$17,332
=======
</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% per annum. 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.

NOTE 8--EMPLOYEE BENEFIT PLANS

RETIREMENT PLANS

The Company has 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 1997. In 1998, the Company
began to match 25% of employee contributions up to 6% of compensation. The
amount recorded as expense for the years ended December 31, 1998 and 1999 was
$60,000 and $114,000, respectively.

The Company has a 419 Benefit Plan covering senior executives, contributions
to which are discretionary. The Company made no contributions to the plan in
1997, 1998, or 1999.

STOCK OPTION PLAN

During 1998, the Board of Directors adopted the Stock Plan. The Company has
reserved up to 4,529,412 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 500,000 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 1999, all options were granted to employees and directors
of the Company.

F-14
<PAGE>
OTG SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table summarizes option activity for the year ended
December 31, 1998 and 1999:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Options outstanding at January 1, 1998................... -- $ --
Options granted.......................................... 2,970,520 1.84
Options exercised........................................ -- --
Options forfeited/expired................................ (94,000) 1.84
---------
Options outstanding at December 31, 1998................. 2,876,520 1.84
Options granted.......................................... 1,024,900 3.14
Options exercised........................................ -- --
Options forfeited/expired................................ (442,314) 1.91
---------
Options outstanding at December 31, 1999................. 3,459,106 2.65
=========
</TABLE>

Under the Stock Plan, an additional 476,190 shares of restricted stock were
issued in December 1998 at a per share price of $1.84.

At December 31, 1998, all options granted had an exercise price of $1.84. At
December 31, 1999, the range of exercise prices was $1.84 to $12.64. At
December 31, 1998 and 1999, the weighted average remaining contractual life of
the outstanding options was 9.8 and 9 years, respectively, and the number of
options exercisable was 10,000 and 549,092, respectively. There were 176,702 and
594,116 options available for grant at December 31, 1998 and 1999, respectively.

The per share weighted average fair value of the options granted during 1998
and 1999 were $0.29, and $7.06, 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
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Average dividend yield...................................... -- --
Expected life in years...................................... 4 4
Risk free interest rate..................................... 4.25% 5.38%
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 recorded deferred
compensation expense of approximately $2,886,000 relating to options to purchase
1,024,900 shares granted in 1999 equal to the difference between the fair market
value of the Company's common stock on the grant date and the exercise price of
the options. The expense will be recognized ratably over the vesting period of
the options, which is generally four years. The Company recorded a $329,000
expense associated with the options granted during 1999 which is included as
compensation expense in the accompanying consolidated 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

F-15
<PAGE>
OTG SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--EMPLOYEE BENEFIT PLANS (CONTINUED)
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 1999:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net income:
As reported............................................. $(1,207) $(1,455)
Pro forma............................................... $(1,256) $(1,989)
Net income per share--basic and diluted:
As reported............................................. $ (0.07)
Pro forma............................................... $ (0.10)
</TABLE>

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

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>
2000........................................................ $844
2001........................................................ 852
2002........................................................ 660
2003........................................................ 34
</TABLE>

Rent expense of approximately $335,000, $540,000 and $743,000 was charged to
operations for 1997, 1998 and 1999, respectively.

NOTE 10--RELATED PARTY TRANSACTIONS

Interest expense on the notes payable to the principal stockholder
approximated $25,000, $88,000 and $158,000 for the years ended December 31,
1997, 1998 and 1999, respectively.

During October 1999, the principal stockholder of the Company sold 40,000
shares of the Company's common stock to an employee of the Company for $2.75 per
share. The Company has recorded compensation expense of approximately $330,000
in the accompanying 1999 statement of operations, reflecting the difference
between the purchase price and the estimated fair value of the common stock at
the time of the purchase.

F-16
<PAGE>
OTG SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 consummates an 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.

The Company is obligated to make payments in the amount of $80,000 per year
for the years 2000 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 EVENTS

On January 18, 2000, the board of directors of the Company authorized the
adoption of the 2000 Stock Incentive Plan (the "2000 stock plan") and the 2000
Employee Stock Purchase Plan (the "purchase plan"). Under the 2000 stock plan,
1,000,000 shares of common stock were reserved for issuance. The 2000 stock plan
provides for the grant of incentive stock options, nonstatutory stock options,
restricted stock awards, and other stock-based awards. Subsequent to
January 18, 2000, no additional stock options will be granted under the Stock
Plan. The purchase plan authorizes the issuance of up to 600,000 shares of
common stock to participating employees. Eligible employees are authorized to
purchase common stock using up to 10% of the employee's base pay at a purchase
price equal to 85% of the average market price, as defined in the purchase plan.

Additionally, on January 18, 2000 the board of directors approved an
increase in the authorized number of common stock to 65,000,000, and authorized
5,000,000 shares of preferred stock with a par value of $.01.

NOTE 13--UNAUDITED INTERIM FINANCIAL INFORMATION

(a) INITIAL PUBLIC OFFERING

On March 10, 2000, the Company issued 5,000,000 shares of its common stock
in an initial public offering. The transaction generated net proceeds to the
Company of $87.0 million after direct costs of the offering. A portion of the
net proceeds of the IPO was used to repay all outstanding balances under the
Company's commercial credit facility ($5.0 million), its senior subordinated
notes ($4.5 million) and certain obligations to stockholders and other related
parties ($8.7 million). In conjunction with the IPO, all of the Company's
outstanding convertible subordinated notes and accrued interest aggregating
approximately $8.8 million were converted into 4,161,506 shares of common stock.

In addition, in conjunction with the IPO, the Company is no longer an S
corporation. The Company recognizes income taxes using the asset and liability
method in accordance with SFAS No. 109, "Accounting for Income Taxes."

(b) ACQUISITION OF XVAULT, INC.

On April 25, 2000, the Company acquired xVault, Inc. ("xVault") by means of
a reverse triangular merger for consideration consisting of a cash payment of
$1.75 million and 159,996 shares of the

F-17
<PAGE>
OTG SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13--UNAUDITED INTERIM FINANCIAL INFORMATION (CONTINUED)
Company's common stock. xVault is a provider of e-mail solutions to government,
business and industry. xVault's products provide organizations with tools to
enforce e-mail policies, increase employee productivity, comply with statutory
and regulatory mandates and secure electronic data against loss or espionage.
xVault has since been renamed "OTG E-Mail Corp."

The cash component of the acquisition price was available to the Company
from cash on hand. The value of the common stock component of the consideration
was determined to be $2.2 million based on an analysis prepared by a third-party
appraiser. The common stock component of the consideration includes certain
restrictions on sale of these shares. The acquisition was accounted for using
the "purchase method" and, accordingly, activity related to the former xVault
entity is included in the Company's consolidated financial statements beginning
April 26, 2000.

The Company acquired net liabilities from xVault of approximately $72,000
and incurred direct costs associated with the acquisition of approximately
$325,000, including the elimination of a deposit related to an OEM agreement
entered into with xVault in early 2000. During the nine months ended
September 30, 2000, the Company recorded goodwill of approximately $2.9 million
and other intangibles totaling approximately $0.8 million resulting from the
acquisition. The other intangibles include developed technology, assembled
workforce and acquired customer base. The goodwill is being amortized over
5 years and the other intangibles are being amortized over lives ranging from 3
to 4 years. In addition, the Company recognized a one-time write-off of $620,000
during the nine months ended September 30, 2000 related to in-process research
and development resulting from the acquisition. In-process research and
development reflects the portion of the cost of acquisition representing
technology that did not meet the accounting definition of "completed
technology." As such, under generally accepted accounting principles, the amount
allocated to in-process research and development is required to be immediately
charged against earnings. The assessment of in-process research and development
involved analyzing the discounted cash flows associated with each of the
technologies that were under development at the time of the acquisition,
including estimated cash flows from successful completion and cash flows
necessary to complete each project. The resulting cash flows are adjusted for
certain risks before being discounted to present value. Risks taken into
consideration include estimates of market size, timing of completion, product
pricing and competitive factors for each of the acquired technologies. The
discount rate used reflects xVault's estimated weighted average cost of capital.
The acquired technologies were in various stages of completion ranging from 13%
to 43% of completion, with estimated completion dates no later than 2001. A
third-party appraiser was used to determine the fair value of the assets
(including goodwill and other intangible assets) and liabilities acquired from
xVault as well as the amount of acquired in-process research and development.
The amounts recorded by the Company in its consolidated financial statements
related to the acquisition of xVault, including the write-off of in-process
research and development, are subject to further study and analysis.

The following pro forma financial information was prepared as if the
acquisition occurred on January 12, 1999 (the date of xVault's inception). This
information excludes the one-time write-off of in-process research and
development discussed above. In the opinion of the Company's management, all
adjustments necessary to present fairly such information have been made based on
the terms and structure of the transaction. The following information is
presented for illustrative purposes only and does not necessarily represent the
financial results that would have resulted had the acquisition actually occurred
on the date indicated nor are the results indicative of the future results of
operations or

F-18
<PAGE>
OTG SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13--UNAUDITED INTERIM FINANCIAL INFORMATION (CONTINUED)
financial condition of the Company on a consolidated basis. In addition, this
information is based upon certain assumptions, including fair values of the
assets acquired and the liabilities assumed from xVault as part of the
acquisition which are subject to further study and analysis.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues.................................................. $30,133 $17,665
Operating income (loss)................................... $ 996 $ (851)
Net income (loss)......................................... $ 2,489 $(2,370)

Net income (loss) per share--basic........................ $ 0.09 $ (0.14)
Net income (loss) per share--diluted...................... $ 0.08 $ (0.14)
</TABLE>

In June 2000, the Company entered into a lease commitment for a portion of
an office building currently being constructed in Rockville, Maryland. The
payments due under the ten-year arrangement total approximately $39 million,
based on current cost estimates and excluding renewal options. The lease
provides for payments of approximately $271,000 per month during the first year
of the agreement escalating to approximately $362,000 per month in the last year
of the agreement. The Company expects to occupy the new building, which will
serve as the Company's new headquarters, in 2001.

In August 2000, the Company established a standby letter of credit at PNC
Bank naming the lessor of the Company's new headquarters building as
beneficiary. The letter of credit was issued in lieu of the Company making a
cash payment to the lessor for the security deposit. The letter of credit, which
expires on August 4, 2001, is for $2.8 million and is collateralized by U.S.
Treasury Bills.

(d) NET INCOME PER SHARE

The table below presents the computation of basic and diluted net income per
share (in thousands, except per share amounts):

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 2000
------------------
<S> <C>
Net income:
Net income (basic and diluted)............................ $ 2,713
=======
Shares of common stock:
Weighted average shares outstanding (basic)............... 23,410
=======
Incremental shares related to:
Outstanding stock options............................... 2,962
Outstanding warrants.................................... 27
Shares purchased by employees under Employee Stock
Purchase Plan......................................... 1
-------
Weighted average shares outstanding (diluted)............. 26,400
=======
Net income per share--basic................................. $ 0.12
=======
Net income per share--diluted............................... $ 0.10
=======
</TABLE>

F-19
<PAGE>
OTG SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13--UNAUDITED INTERIM FINANCIAL INFORMATION (CONTINUED)
Certain convertible debt securities were not included in the computation of
diluted net income per share as such amounts would be anti-dilutive.

(e) RELATED PARTY TRANSACTIONS

In March 2000, subsequent to the IPO, the Company made payments totaling
$1.2 million to certain current and former stockholders representing
reimbursement of income taxes paid by these stockholders when the Company was
treated as a Subchapter S corporation for income tax purposes. In addition, the
Company retired all of its outstanding senior subordinated notes and accrued
interest aggregating approximately $4.5 million held by certain stockholders.

Pursuant to an agreement with the Company's principal stockholder, the
Company repaid promissory notes with an aggregate principal amount of
$3.0 million in March 2000.

In January 2000, the Company made a principal payment of $1.0 million on a
note payable to a former stockholder. In March 2000, the Company retired the
note with a final payment of $4.2 million.

In March 2000, the Company made a bonus compensation payment to a former
employee in the amount of $250,000. The payment was contingent on the Company
consummating the IPO.

(f) SEGMENT INFORMATION AND RELATED DISCLOSURES

The Company operations consist of one business segment, providing data
storage management and data access solutions products and services. For the nine
months ended September 30, 1999 and 2000, the Company's revenues from foreign
countries represented 6% and 11%, respectively, of total revenues. One sale
(software licenses) recognized in the second quarter of 2000 represented 34% of
the international revenues for the first nine months of 2000.

(g) NEW ACCOUNTING PRONOUNCEMENTS

In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions involving
Stock Compensation." FIN 44 is an interpretation of Accounting Principal Board's
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Among other
matters, FIN 44 clarifies the application of APB 25 regarding the definition of
employee for purposes of applying APB 25, the criteria for determining whether a
plan qualifies as noncompensatory and the accounting consequences of
modifications to the terms of a previously issued stock option or similar award.
The Company adopted the provisions of FIN 44 in the third quarter of 2000. The
adoption of FIN 44 did not have a material impact on the Company's financial
condition or results of operations.

On January 1, 2000, the Company adopted the provisions of SOP 98-9, an
amendment to SOP 97-2. The adoption of these accounting policies did not have a
material impact on the Company's financial condition or results of operations.

(h) SUBSEQUENT EVENT

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

F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
xVault, Inc.:

We have audited the accompanying balance sheet of xVault, Inc. (the Company)
as of December 31, 1999, and the related statement of operations, stockholders'
deficit, and cash flows for the period from January 12, 1999 (inception) to
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of xVault, Inc. as of
December 31, 1999, and the results of its operations and its cash flows for the
period from January 12, 1999 (inception) to December 31, 1999 in conformity with
generally accepted accounting principles.

KPMG LLP

McLean, Virginia
June 2, 2000

F-21
<PAGE>
XVAULT, INC.

BALANCE SHEET

DECEMBER 31, 1999

<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 45,195
Certificate of deposit.................................... 53,820
Prepaid expenses.......................................... 9,750
-----------
Total current assets.................................. 108,765
Property and equipment, net................................. 69,182
-----------
Total assets.......................................... $ 177,947
===========
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
DEFICIT
Current liabilities:
Accounts payable.......................................... $ 75,965
Accrued compensation...................................... 13,000
Deferred revenue.......................................... 18,596
-----------
Total current liabilities............................. 107,561
Redeemable common stock, $0.01 par value; 1,552,972 shares
issued and outstanding; redeemable at approximately $0.32
per share................................................. 318,359
Stockholders' deficit:
Common stock, $0.01 par value; 15,000,000 shares
authorized, 8,000,160 shares issued and outstanding..... 80,002
Additional paid-in capital................................ 714,438
Accumulated deficit....................................... (1,042,413)
-----------
Total stockholders' deficit........................... (247,973)
-----------
Commitments and contingencies (notes 5 and 6)
Total liabilities, redeemable common stock and
stockholders' deficit............................... $ 177,947
===========
</TABLE>

See accompanying notes to financial statements.

F-22
<PAGE>
XVAULT, INC.

STATEMENT OF OPERATIONS

PERIOD FROM JANUARY 12, 1999 (INCEPTION) TO DECEMBER 31, 1999

<TABLE>
<S> <C>
Revenue--software sales..................................... $ 82,258
Cost of revenue............................................. (83,640)
-----------
Gross loss................................................ (1,382)
Operating expenses:
Sales and marketing....................................... (343,802)
Research and development.................................. (567,613)
General and administrative................................ (130,697)
-----------
Total operating expenses.............................. (1,042,112)
-----------
Loss from operations........................................ (1,043,494)
Interest income............................................. 1,081
-----------
Net loss.................................................... $(1,042,413)
===========
</TABLE>

See accompanying notes to financial statements.

F-23
<PAGE>
XVAULT, INC.

STATEMENT OF STOCKHOLDERS' DEFICIT

PERIOD FROM JANUARY 12, 1999 (INCEPTION) TO DECEMBER 31, 1999

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 12, 1999
(inception)......................... -- $ -- $ -- $ -- $ --
Issuance of 6,496,800 shares of common
stock for assets contributed and
services provided................... 6,496,800 64,968 397,756 -- 462,724
Issuance of 1,503,360 shares of common
stock for cash...................... 1,503,360 15,034 135,041 -- 150,075
Issuance of warrant to purchase
1,827,023 shares of common stock.... -- -- 181,641 -- 181,641
Net loss.............................. -- -- -- (1,042,413) (1,042,413)
--------- ------- -------- ----------- -----------
Balance at December 31, 1999.......... 8,000,160 $80,002 $714,438 $(1,042,413) $ (247,973)
========= ======= ======== =========== ===========
</TABLE>

See accompanying notes to financial statements.

F-24
<PAGE>
XVAULT, INC.

STATEMENT OF CASH FLOWS

PERIOD FROM JANUARY 12, 1999 (INCEPTION) TO DECEMBER 31, 1999

<TABLE>
<S> <C>
Cash flows from operations:
Net loss.................................................. $(1,042,413)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 18,095
Expenses paid by stockholders........................... 394,470
Changes in operating assets and liabilities:
Prepaid expenses...................................... (9,750)
Accounts payable...................................... 75,965
Accrued compensation.................................. 13,000
Deferred revenues..................................... 18,596
-----------
Net cash used in operating activities............. (532,037)
Cash flows used in investing activities:
Purchase of property and equipment........................ (19,023)
Purchase of certificate of deposit........................ (53,820)
-----------
Net cash used in investing activities............. (72,843)
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 650,075
-----------
Net increase in cash and cash equivalents......... 45,195
Cash and cash equivalents at beginning of year.............. --
-----------
Cash and cash equivalents at end of year.................... $ 45,195
-----------
Supplemental disclosure of cash flows information:
Interest paid............................................. $ --
===========
Income taxes paid......................................... $ --
===========
</TABLE>

See accompanying notes to financial statements.

F-25
<PAGE>
XVAULT, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1999

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) BUSINESS AND PRINCIPLES OF CONSOLIDATION

xVault, Inc. ("the Company") began operations and was incorporated on
January 12, 1999 and is engaged in the development, production, sale,
maintenance and licensing of software products designed to store and
manage electronic data. The Company is headquartered in Reston, Virginia
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 impact on the Company's results of operations and financial
condition.

(B) REVENUE RECOGNITION

Revenues are generated from software sales and providing services,
maintenance and technical support, training and installation.

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, SOP 98-4, and SOP 98-9 have been applied to transactions entered
into beginning January 12, 1999.

Software sales consist of fees for the Company's software products. The
Company sells its software products primarily through distributors and
resellers. The Company recognizes revenue upon installation of the
product at the customer's site when collectibility of the fee is deemed
probable. Revenues from maintenance and technical support, which consists
of unspecified when-and-if-available product updates and customer
telephone support, are recognized ratably over the term of the service
period. Revenues from training and installation are recognized as the
services are provided.

Deferred revenue consists of amounts received from customers in advance
of revenue recognized for maintenance and technical support services.

Software development costs are accounted for in accordance with Statement
of Financial Accounting Standards (SFAS) No. 86, ACCOUNTING FOR THE COSTS
OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. Under SFAS
No. 86, capitalization of software development costs begins upon the
establishment of technological feasibility, subject to net realizable
value considerations. To date, the period between achieving technological
feasibility and the general availability of such software has been short;
therefore software development costs qualifying for capitalization have
been immaterial. Accordingly, the Company has not capitalized any
software development costs and has charged all such costs to research and
development expense. Research and development costs are expensed as
incurred.

F-26
<PAGE>
XVAULT, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) 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 money market funds.

(E) PROPERTY AND EQUIPMENT

Depreciation is provided 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.
Leasehold improvements are amortized over the shorter of the useful life
of the asset or the lease term.

(F) 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 undiscounted 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.

(G) INCOME TAXES

The Company has 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 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.

(H) CERTIFICATE OF DEPOSIT

The Company's certificate of deposit has a contractual maturity of less
than 12 months and is being reported at historical cost, which
approximates fair value.

(I) USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements, and reported amounts of revenues and expenses
during the period. Actual results could differ from these estimates.

(J) 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

F-27
<PAGE>
XVAULT, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.

(2) PROPERTY AND EQUIPMENT

Property and equipment at December 31, 1999 consists of the following:

<TABLE>
<S> <C>
Computer hardware and software.............................. $ 85,444
Leasehold improvements...................................... 1,833
--------
87,277
Less -- accumulated depreciation and amortization........... (18,095)
--------
Property and equipment, net............................. $ 69,182
========
</TABLE>

(3) LINE OF CREDIT

At December 31, 1999, the Company had a $50,000 line of credit with a bank.
Borrowings under the line of credit are due on demand and must be paid in
full by December 31, 2000. The line of credit is collateralized by the
Company's time savings accounts and certificates of deposit and guaranteed
by a stockholder of the Company. At December 31, 1999, the Company did not
have an outstanding balance on the line of credit. Interest on the line of
credit accrues at the bank's prime rate plus 1 percent.

(4) LEASES

The Company is obligated under operating leases for office space and
equipment. Future minimum lease payments under noncancelable operating
leases as of December 31, 1999 are approximately as follows:

Rent expense for operating leases was approximately $52,100 for the period
from January 12, 1999 (inception) through December 31, 1999.

(5) CAPITAL STOCK

The Company was incorporated in the state of Virginia on January 12, 1999,
and reincorporated in the state of Delaware on May 17, 1999. The Company has
the authority to issue 15,000,000 shares of common stock with a par value of
$0.01 ("Common Stock").

F-28
<PAGE>
XVAULT, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

(5) CAPITAL STOCK (CONTINUED)
In May 1999, the Company issued 6,496,800 shares of Common Stock to the
founders of the Company. The shares were issued in lieu of repayment by the
Company of approximately $395,000 in expenses paid by the stockholders, and
for equipment contributed to the Company with an estimated fair value of
approximately $68,000.

In July 1999, the Company issued 1,503,360 shares of Common Stock for
approximately $150,000.

REDEEMABLE COMMON STOCK AND WARRANT

During October 1999, the Company issued 1,552,972 shares of Redeemable
Common Stock and an investor warrant to purchase an additional 1,827,023
shares of Common Stock for approximately $500,000. Shares under the warrant
can be purchased at an exercise price of approximately $0.27 per share. The
warrant becomes exercisable after February 2000 (see note 8).

The stockholder shall have the right to sell back to the Company the
1,552,972 shares of Common Stock at a price of approximately $0.32 per share
(the "Put Right"). The Put Right shall become exercisable at any time upon
(a) the Company's failure to achieve positive earnings before taxes for any
three of four consecutive quarters, commencing with the first quarter of
2000, or (b) the failure of the Company to cure a material breach of certain
covenants as defined in the investment agreement, which failure to cure
continues for sixty days following notification from the investor.

The Company has allocated approximately $318,000 to the 1,552,972 shares of
Redeemable Common Stock, which is included between debt and stockholders'
deficit in the accompanying balance sheet, and approximately $182,000 to the
warrant to purchase an additional 1,827,023 shares of Common Stock, which is
included in stockholders' deficit in the accompanying balance sheet.

The ability to exercise the warrant to purchase Common Stock and the Put
Right terminate upon liquidation of the Company or upon the closing of an
initial public offering.

(6) STOCK OPTION PLAN

Effective September 30, 1999, the Company adopted the 1999 Equity Incentive
Plan (the "Stock Plan"). xVault, Inc. has reserved up to 800,000 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. 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 four years, and generally expire in 10 years.
During 1999, all options were granted to employees and directors of the
Company.

F-29
<PAGE>
XVAULT, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1999

(6) STOCK OPTION PLAN (CONTINUED)
The following table summarizes option activity for the year ended
December 31, 1999:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
Options outstanding at Janurary 1, 1999............. -- $ --
Options granted..................................... 337,500 0.25
Options exercised................................... -- --
Options forfeited/expired........................... -- --
-------
Options outstanding at December 31, 1999............ 337,500 $0.25
=======
</TABLE>

At December 31, 1999, the weighted average remaining contractual life of the
outstanding options was 9.8 years, and there were no options exercisable.
There were 462,500 options available for grant at December 31, 1999.

The per share weighted average fair value of the options granted during 1999
was $0.05. The fair value of the option grant is estimated on the date of
grant, using the Black-Scholes options-pricing model with the following
weighted average assumptions (excluding volatility): average dividend yield
of zero, expected life of four years, and risk free interest rate of 5.5%.

The options granted by the Company during 1999 are subject to approval by
the Board of Directors. The Company is applying APB Opinion No. 25 to the
options. The final measurement date for measuring compensation expense
associated with the options will be the date on which the Board of Directors
approves the option grants. There was no material estimated compensation
expense to record during 1999 as the estimated fair value of the common
stock approximated the exercise price of the options.

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 net loss for 1999
would not have been materially different.

(7) MAJOR CUSTOMERS

The Company's principal business activities consist of developing technology
solutions and selling its products through distributors and resellers in the
domestic and international markets. All of the 1999 revenues were earned
through sales of its products to one distributor. The Company entered into a
contract with this distributor to supply them with the Company's software
products and services throughout North America.

(8) SUBSEQUENT EVENTS

Subsequent to year-end, the warrant to purchase 1,827,023 shares of Common
Stock was exercised by the stockholder resulting in proceeds of $500,000 to
the Company (see note 5).

On April 25, 2000 all issued and outstanding shares of Common Stock of the
Company were sold to OTG Software, Inc. for approximately $1.75 million in
cash and 159,996 shares of OTG Software, Inc. common stock.

F-30
<PAGE>

UNAUDITED PRO FORMA CONDENSED

CONSOLIDATED FINANCIAL INFORMATION

On April 25, 2000, we acquired xVault, Inc. ("xVault"). As a result of the
acquisition, xVault is now a wholly-owned subsidiary. xVault is a provider of
e-mail solutions to government, business and industry. xVault's products provide
organizations with tools to enforce e-mail policies, increase employee
productivity, comply with statutory and regulatory mandates and secure
electronic data against loss or espionage.

We issued 159,996 shares of its common stock and paid an aggregate of
$1.75 million in cash to the former xVault stockholders in exchange for all the
outstanding shares of xVault's capital stock. The value of the common stock
component of the consideration was determined to be $2.2 million based on an
analysis prepared by a third-party appraiser. The acquisition was accounted for
under the "purchase method."

The following unaudited pro forma condensed consolidated statements of
operations for the year ended December 31, 1999 and the nine months ended
September 30, 2000 were prepared as if the acquisition occurred on January 1,
1999, and reflects federal and state income taxes based on applicable tax rates
for the periods presented during which we operated as an S corporation as if we
had not elected S corporation status for the periods indicated. These unaudited
pro forma condensed consolidated statements of operations should be read in
conjunction with our and xVault's audited consolidated financial statements and
accompanying notes thereto included elsewhere in this prospectus.

In the opinion of our management, all adjustments necessary to present
fairly such unaudited pro forma condensed consolidated statements of operations
have been made based on the terms and structure of the transaction. The
following unaudited pro forma condensed consolidated statements of operations
are presented for illustrative purposes only and do not necessarily represent
the financial results that would have resulted had the acquisition actually
occurred on the date indicated nor are the results indicative of our future
results of operations or financial condition on a consolidated basis. In
addition, these statements are based upon information and assumptions including
preliminary estimates of the fair values of the assets acquired and the
liabilities assumed from xVault as part of the acquisition, which are subject to
further study and analysis.

F-31
<PAGE>
OTG SOFTWARE, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1999

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
OTG SOFTWARE XVAULT PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS CONSOLIDATED
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Software licenses.......................... $18,208 $ 82 $ -- $18,290
Services................................... 7,232 -- -- 7,232
------- ------- ------ -------
Total revenues........................... 25,440 82 -- 25,522

Cost of revenues:
Software licenses.......................... 1,062 84 -- 1,146
Services................................... 3,017 -- -- 3,017
------- ------- ------ -------
Total cost of revenues................... 4,079 84 -- 4,163
------- ------- ------ -------
Gross profit (loss).......................... 21,361 (2) -- 21,359

Operating expenses:
Research and development................... 5,137 568 -- 5,705
Sales and marketing........................ 11,487 344 -- 11,831
General and administrative................. 4,139 129 -- 4,268
Amortization of acquired intangible
assets................................... -- -- 763 (a) 763
Write-off of acquired in-process research
and development.......................... -- -- -- (a) --
------- ------- ------ -------
Total operating expenses................. 20,763 1,041 763 22,567
Income (loss) from operations................ 598 (1,043) (763) (1,208)

Other income (expense):
Interest income............................ 34 1 (34)(b) 1
Interest expense........................... (2,087) -- -- (2,087)
------- ------- ------ -------
Total other income (expense)............. (2,053) 1 (34) (2,086)
------- ------- ------ -------
Loss before income taxes..................... (1,455) (1,042) (797) (3,294)
------- ------- ------ -------

Provision for income taxes................... -- -- -- --
------- ------- ------ -------
Net loss..................................... $(1,455) $(1,042) $ (797) $(3,294)
======= ======= ====== =======

Pro forma net loss per share--basic and
diluted.................................... $ (0.16)(c)
=======

Pro forma weighted average shares used for
computation--basic and diluted............. 20,720 (c)
=======
</TABLE>

F-32
<PAGE>
OTG SOFTWARE, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
OTG SOFTWARE XVAULT PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS CONSOLIDATED
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Software licenses........................... $22,751 $ 106 $ -- $22,857
Services.................................... 7,276 -- -- 7,276
------- ----- ------ -------
Total revenues............................ 30,027 106 -- 30,133

Cost of revenues:
Software licenses........................... 1,353 93 -- 1,446
Services.................................... 3,207 -- -- 3,207
------- ----- ------ -------
Total cost of revenues.................... 4,560 93 -- 4,653
------- ----- ------ -------
Gross profit.................................. 25,467 13 -- 25,480

Operating expenses:
Research and development.................... 6,142 325 -- 6,467
Sales and marketing......................... 12,691 285 -- 12,976
General and administrative.................. 4,347 71 -- 4,418
Amortization of acquired intangible
assets.................................... 347 -- 225 (a) 572
Write-off of acquired in-process research
and development........................... 620 -- (620)(a) --
------- ----- ------ -------
Total operating expenses.................. 24,147 681 (395) 24,433
Income (loss) from operations................. 1,320 (668) 395 1,047

Other income (expense):
Interest income............................. 2,353 1 (79)(b) 2,275
Interest expense............................ (617) -- -- (617)
------- ----- ------ -------
Total other income (expense).............. 1,736 1 (79) 1,658
------- ----- ------ -------
Income (loss) before income taxes............. 3,056 (667) 316 2,705
------- ----- ------ -------

Provision for income taxes.................... 343 -- 171 (d) 514
------- ----- ------ -------
Net income (loss)............................. $ 2,713 $(667) $ 145 $ 2,191
======= ===== ====== =======
Pro forma net income (loss) per common share:
Basic....................................... $ 0.09 (c)
=======
Diluted..................................... $ 0.08 (c)
=======

Pro forma weighted average shares used for
computation:
Basic....................................... 23,478 (c)
=======
Diluted..................................... 26,468 (c)
=======
</TABLE>

F-33
<PAGE>
OTG SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED PRO FORMA CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS

(a.) The cost of acquisition was allocated to tangible net assets and
identifiable intangible assets with the remainder attributable to
goodwill. The value of the tangible assets acquired and liabilities
assumed approximated the amounts presented in xVault's historical
financial statements.

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Cash component of purchase price............................ $1,750
Issuance of 159,996 shares of OTG Software common stock..... 2,173
Direct acquisition costs.................................... 125
------
Cost of acquisition......................................... $4,048
======
Cost of acquisition (see above)............................. $4,048
Less the fair value of the tangible net assets acquired and
liabilities assumed of xVault............................. (70)
------
Excess of cost of acquisition over the fair value of the
tangible net assets acquired and liabilities assumed of
xVault.................................................... $3,978
------
</TABLE>

The estimated fair value of identifiable intangible assets and goodwill,
based on a preliminary assessment of management together with an
independent valuation firm, along with their estimated lives for
amortization, are as follows:

<TABLE>
<CAPTION>
ANNUAL
LIFE FAIR VALUE AMORTIZATION
-------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
In-process research and development... * $ 620 *

Goodwill.............................. 5 years 2,554 $511

Developed technology.................. 3 years 554 $185
Acquired workforce.................... 4 years 200 $ 50
Acquired customer base................ 3 years 50 $ 17
------
804
------
$3,978
======
</TABLE>

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

* Based on an assessment of purchased technology of xVault as of the
acquisition date, we recognized a non-recurring charge of
$0.6 million during the nine months ended September 30, 2000 to write
off in-process research and development. In-process research and
development reflects the portion of the cost of acquisition
representing technology that did not meet the accounting definition
of "completed technology." As such, under generally accepted
accounting principles, the amount allocated to in-process research
and development is required to be immediately charged against
earnings. The assessment of in-process research and development
involved analyzing the discounted cash flows associated with each of
the technologies that were under development at the time of the
acquisition, including estimated cash flows from successful
completion and cash flows necessary to complete each project. The
resulting cash flows are adjusted for certain risks before being
discounted to present value. Risks taken into consideration include
estimates of market size, timing of completion, product pricing and
competitive factors for each of

F-34
<PAGE>
OTG SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED PRO FORMA CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

the acquired technologies. The discount rate used reflects xVault's
estimated weighted average cost of capital. The acquired technologies
were in various stages of completion ranging from 13% to 43% of
completion, with estimated completion dates no later than 2001. This
non-recurring charge is not reflected in the unaudited pro forma
condensed consolidated financial statements for the year ended
December 31, 1999.

(b.) Reduction of interest income due to the use of cash and cash
equivalents to fund a portion of the cost of acquisition.

(c.) The pro forma basic and diluted weighted average shares outstanding
includes the historical OTG Software pro forma weighted average shares
adjusted as if the 159,996 shares component of the cost of the
acquisition were issued as of January 1, 1999.

(d.) Increase of provision for income taxes based on our estimated effective
income tax rate for the first nine months of 2000.

F-35
<PAGE>
Graphics on inside back cover.

Title "Products for Emerging Storage Management Requirements." The graphic
depicts OTG's logo surrounded by a circle of connecting arrows. There are three
smaller ovals contained within the connecting arrows for three of OTG's other
products, SANXtender, eMailXtender and OnlineStor.com. The text next to the
SANXtender icon states "Bridges Storage Area Networks with applications and the
Web to make SAN data accessible. Server-less data movement reduces local area
network traffic." The text next to the OnlineStor.com icon states "Outsourced
offering of core technology through application service providers. Integrated,
Web-accessible solution for storing and managing data." The text next to the
eMailXtender icon states "E-mail storage, indexing, archiving and retrieving.
Message server management, recovery from virus attack and full-text search
capability." There is a box below this whole graphic labeled New Initiatives.
The text below the heading states "UNIX and Linux solutions. Data storage and
access management for electronic collaboration applications."
<PAGE>
[LOGO]
<PAGE>
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 and the NASD filing fee.

<TABLE>
<S> <C>
SEC registration fee........................................ $ 36,290
NASD filing fee............................................. 14,246
Printing and engraving expenses............................. 200,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 80,000
Blue Sky fees and expenses (including legal fees)........... 10,000
Transfer agent and registrar fees and expenses.............. 20,000
Miscellaneous............................................... 89,464
--------
Total................................................... $750,000
========
</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 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 entered into with each executive officer and
director, provides that the Registrant shall

II-1
<PAGE>
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 Amended and Restated Certificate of Incorporation, Amended and
Restated By-Laws and Form of Indemnification Agreement incorporated by reference
as Exhibits 3.1, 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 "Securities 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

Since September 1997, 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 June 8, 1998, in connection with the Registrant's reincorporation
into Delaware, the Registrant issued an aggregate of 26,207,606 shares of
common stock to Richard A. Kay, F. William Caple, Eugene Sandler and
Alexandra Kay, the four stockholders of the Registrant's predecessor
Maryland corporation in exchange for all the outstanding common stock of the
Registrant's predecessor Maryland corporation. This transaction was exempt
from registration under Section 4(2) of the Securities Act.

2. On June 9, 1998, the Registrant issued convertible subordinated notes
in the aggregate principal amount of $7,636,364 to ABS Capital Partners II,
L.P., Greylock IX Limited Partnership and Michael P. Murray. 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 the Registrant's initial public offering, the principal balance of the
convertible subordinated notes converted automatically into 4,161,506 shares
of the Registrant's common stock and the interest thereon was forgiven. This
transaction was exempt from registration under Section 4(2) of the
Securities Act.

3. On December 1, 1998, the Registrant's predecessor corporation issued
a warrant to purchase 30,000 shares of common stock to Galina Schiff in
exchange for an executed release agreement. The Registrant's predecessor
corporation did not obtain a valuation for the release agreement and the
Registrant cannot estimate the value of the release agreement. This
transaction was exempt from registration under Section 4(2) of the
Securities Act.

4. On December 22, 1998, the Registrant issued an aggregate of 476,190
shares of common stock to five employees, Scott R. Nickel, Mark L. Hanson,
Stewart Nickel, Paul Matsko and Robert Alan Depelteau, for an aggregate
purchase price of $873,809 pursuant to restricted stock agreements under the
Registrant's 1998 Stock Incentive Plan. The employees each issued promissory
notes to the Registrant for their respective shares. This transaction was
exempt from registration under Rule 701 of the Securities Act.

II-2
<PAGE>
5. On April 25, 2000, the Registrant issued an aggregate of 160,000
shares of common stock and $1.75 million cash to seven individuals as
payment for all the outstanding stock of xVault, Inc. This transaction was
structured as a reverse triangular merger. This transaction was exempt from
registration under Rule 506 of the Securities Act.

(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 April 21, 2000, the date
the Registrant filed the Registration Statement on Form S-8 registering the
shares issuable under the Registrant's stock plans, 11,700 options to purchase
shares of common stock had been exercised, options to purchase 3,930,206 shares
of common stock were outstanding and 476,190 shares of restricted stock had been
granted under the 1998 Stock Incentive Plan. The Registrant's 2000 Stock
Incentive Plan was adopted by the Board of Directors and approved by the
Registrant's stockholders in February 2000. As of April 21, 2000, no options to
purchase shares of common stock had been exercised and options to purchase
61,000 shares of common stock were outstanding under the 2000 Stock Incentive
Plan.

No underwriters were involved in the foregoing sales of securities. 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** Amended and Restated Certificate of Incorporation of the
Registrant
3.2 [Intentionally deleted]
3.3 [Intentionally deleted]
3.4** Amended and Restated By-Laws of the Registrant
4.1** Specimen common stock certificate
4.2** See Exhibits 3.1 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, as amended
10.5** Lease for 6701 Democracy Boulevard, Suite 805, Bethesda,
Maryland 20817, as amended
10.6** Form of Indemnification Agreement executed with directors
and executive officers
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
10.10** Form of Subchapter S Tax Indemnification Agreement executed
with all existing stockholders
10.11** Registration Rights Agreement dated as of June 9, 1998
10.12**** Agreement and Plan of Merger by and among OTG Software,
Inc., OTG Merger Corp. and xVault, Inc., dated April 17,
2000.
10.13***** Lease for facilities at 2600 Tower Oaks Boulevard in
Rockville, Maryland.
10.14 Security Agreement dated as of July 22, 1999 by and among
Online Technologies Group, Inc., OTG Software, Inc. and
PNC Bank, National Association as amended by the
Affirmation and Partial Release dated as of October 30,
2000, by and between OTG Software, Inc. and PNC Bank,
National Association
10.15 Amended and Restated Loan Agreement dated as of October 30,
2000, by and betwen OTG Software and PNC Bank, National
Association, and a related Amended and Restated Revolving
Credit Note
</TABLE>

II-3
<PAGE>

<TABLE>
<C> <S>
16.1** Letter from Grant Thornton LLP
21.1+ Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
23.2 Consent of KPMG LLP
23.3* Consent of Hale and Dorr LLP (included in Exhibit 5.1)
24.1 Powers of Attorney (included on page II-5)
</TABLE>

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

<TABLE>
<S> <C>
* To be filed by amendment.
** Incorporated by reference to the exhibit of the same number
filed with the Registrant's Registration Statement on Form
S-1 (No. 333-93581).
*** Incorporated by reference to Exhibit 10.3 filed with the
Registrant's Quarterly Report on Form 10-Q for the three
month period ended March 31, 2000 (No. 000-29809).
**** Incorporated by reference to Exhibit 2.1 filed with the
Registrant's Current Report on Form 8-K, dated May 9, 2000
(No. 000-29809).
***** Incorporated by reference to Exhibit No. 10.6 filed with the
Registrant's Quarterly Report on Form 10-Q for the three
month period ended June 30, 2000 (No. 000-29809).
</TABLE>

+ Previously filed

(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

Insofar as indemnification for liabilities arising under the Securities 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
Securities 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
Securities 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 Securities 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 Securities 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 Securities 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>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Bethesda, Maryland, on
this 1st day of November, 2000.

<TABLE>
<CAPTION>
OTG SOFTWARE, INC.
<S> <C> <C>
By: /s/ RICHARD A. KAY
----------------------------------------
Richard A. Kay
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
</TABLE>

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
--------- ----- ----
<C> <S> <C>
President, Chief Executive Officer
/s/ RICHARD A. KAY and Chairman of the Board of
----------------------------------- Directors (Principal Executive November 1, 2000
Richard A. Kay Officer)
*
----------------------------------- Executive Vice President, Secretary November 1, 2000
F. William Caple and Director
* Chief Financial Officer and
----------------------------------- Treasurer (Principal Financial and November 1, 2000
Ronald W. Kaiser Accounting Officer)
*
----------------------------------- Director November 1, 2000
Gabriel A. Battista
*
----------------------------------- Director November 1, 2000
John Burton
*
----------------------------------- Director November 1, 2000
Joseph R. Chinnici
*
----------------------------------- Director November 1, 2000
Geaton A. DeCesaris, Jr.
*
----------------------------------- Director November 1, 2000
Donald B. Hebb, Jr.
</TABLE>

<TABLE>
<S> <C> <C> <C>
* /s/ RICHARD A. KAY
--------------------------------------
Richard A. Kay, ATTORNEY-IN-FACT
</TABLE>

II-5
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER DEDUCTIONS AT END
OF PERIOD EXPENSES ACCOUNTS (WRITE-OFFS) OF PERIOD
---------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
DESCRIPTION
01/01/97 - 12/31/97
Allowance for doubtful Accounts............ $184 $142 $124 $ (55) $395

01/01/98 - 12/31/98
Allowance for doubtful Accounts............ $395 $160 $187 $ (78) $664

01/01/99 - 12/31/99
Allowance for doubtful Accounts............ $664 $251 $ 13 $(125) $803
</TABLE>