ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                                       Three Months           Six Months
                                       Ended June 30         Ended June 30
                                     ------------------    ------------------
                                      1999       1998       1999       1998
                                     -------    -------    -------    -------

Data recovery lab services           $ 5,896    $ 6,518    $11,979    $13,274
Remote data recovery services            615        185        950        300
Data recovery products                   850         --      1,183         --
Computer evidence services               446        532        846        866
                                     -------    -------    -------    -------
     Total data recovery services
     and products revenues           $ 7,807    $ 7,235    $14,958    $14,440
                                     =======    =======    =======    =======

SOFTWARE:

Software revenues for the second quarter of 1999 decreased 31% compared to the second quarter of 1998. For the six months ended June 30, 1999, software revenues decreased 29% compared to the first six months of 1998. While our primary software product continues to contribute strong operating margins, downward pricing pressure continues from our main customers.

GROSS MARGINS

DATA RECOVERY SERVICES AND PRODUCTS:

Gross margin on data recovery services and products revenues for the second quarter and six months ended June 30, 1999 were approximately 73% and 74%, respectively compared to 80% and 81% for the comparable periods of 1998. The decrease is due primarily to the inclusion of amortization of capitalized software related to the TIRAMISU(TM) product line and to a lesser degree, increased engineering labor costs.

SOFTWARE:

Gross margin on software revenues for the second quarter and six months ended June 30, 1999 were 86% and 83%, respectively, compared to 84% and 83% for the comparable periods of 1998.

OPERATING EXPENSES

RESEARCH AND DEVELOPMENT:

Research and development expenses for the second quarter of 1999 decreased 8% compared to the second quarter of 1998 and decreased 10% in the first six months of 1999 compared to the same period of 1998. As a percentage of revenues, research and development expenses were 16% and 17% for the second quarter and six months ended June 30, 1999, respectively, compared to 18% for the comparable periods of 1998. The expected decrease is in line with the Company's plans to focus research and development dollars more precisely.

SALES AND MARKETING:

Sales and marketing expenses for the second quarter of 1999 increased 1% compared to the second quarter of 1998 and increased 7% in the first six months of 1999 compared to the same period of 1998. As a percentage of revenues, sales and marketing expenses were 24% and 25% for the second quarter and six months ended June 30, 1999, respectively, compared to 24% and 23% for the comparable periods of 1998.

GENERAL AND ADMINISTRATIVE:

General and administrative expenses for the second quarter of 1999 increased 4% compared to the second quarter of 1998 and decreased 1% in the first six months of 1999 compared to the first six months of 1998. As a percentage of revenues, general and administrative expenses were 20% and 19% for the second quarter and six months ended June 30, 1999, respectively, compared to 19% for the comparable periods of 1998.

INTEREST AND OTHER INCOME

The decrease in interest and other income for the second quarter and six months is due principally to exchange losses resulting from currency fluctuations in the value of the Euro against the US Dollar.

PROVISION FOR INCOME TAXES

For the second quarter and six months ended June 30, 1999, the Company provided for taxes at an effective rate of 33%. The effective rate is lower than the statutory rate because of the impact of tax exempt interest income earned on investments and the impact of research and development credits.

NET INCOME PER SHARE

The changes in basic and diluted net income per share for the second quarter and six months ended June 30, 1999 and 1998 are due to changes in net income.

LIQUIDITY AND CAPITAL RESOURCES

Net cash flow from operations was $3.4 million and $1.1 million for the six months ended June 30, 1999 and 1998, respectively. Cash provided by and used in investment activities was primarily for the purchase of furniture and equipment and the purchase and sale of short-term and long-term marketable securities.

The Company has invested its cash principally in high-grade taxable and tax exempt government securities. As of June 30, 1999, $4.1 million are classified as long-term, with the remaining amount classified as cash and cash equivalents or short-term marketable securities.

In July, 1999 the Company completed its acquisition of Mijenix Corporation. The purchase price consisted of $6 million in cash and 215,345 shares of its common stock. The agreement also contained an earnout whereby additional consideration will be paid if certain financial goals are met. See the Company's Report on Form 8-K filed July 27, 1999 for more information.

YEAR 2000 COMPLIANCE

The "Year 2000" problem concerns the inability of existing information systems to properly recognize and process date-sensitive information beyond January 1, 2000. If not corrected, these systems could fail or create erroneous information. The Company has undertaken various initiatives to evaluate and respond to the potential impact of the Year 2000 issue on its computer and other operating systems. A Year 2000 committee has formulated a plan to address the Year 2000 issue. Under this plan, Company personnel have identified business systems that are critical to the Company's business operations that require testing. The Company has completed testing and remediation of its software products and the software and hardware used in product development. The Company is in the process of testing its internal systems, the hardware and software tools it uses in its data recovery business and the systems in its satellite offices. The Company has completed this testing and remediation except for certain systems that are being updated for reasons other than Year 2000 compliance. These systems are expected to be tested and remediated by December 31, 1999. The Company also expects its non-information technology systems to be compliant after it moves into its new leased office space, anticipated for the third quarter of 1999.

The Company is also communicating and working with its significant vendors, customers and other business partners to minimize Year 2000 risks and protect the Company and its customers from potential service interruptions. However, the Company could be adversely affected by the failure of third parties to become Year 2000 compliant, including the risk of operational outages due to disruptions in communications or electrical service. Although the Company believes the effect of such disruptions would be localized and temporary, there is no assurance that these or other Year 2000 risks will not have a material financial impact in any future period.

After assessing the information received from vendors, customers and other business partners, and evaluating the completion of its Year 2000 project, the Company will develop contingency plans if appropriate. It is anticipated that these plans will be developed before the fall of 1999.

The Company believes that its expenses for the Year 2000 compliance through June 30, 1999 are not material, and total expenses for compliance are not expected to exceed $100,000.

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements within the meaning of federal securities laws. These statements include statements regarding intent, belief, or current expectations of the Company and its management. These forward-looking statements are not guarantees of the future performance

and involve a number of risks and uncertainties that may cause the Company's actual results to differ materially from the results discussed in these statements. Please refer to the Management's Discussion and Analysis section of the Company's Annual Report on Form 10-K for the year ended December 31, 1998, for cautionary statements on important factors to consider in evaluating the forward-looking statements included in this Form 10-Q.