QAD INC, 424B4, 1997-08-06

QAD INC
424B4, 1997-08-06
PREPACKAGED SOFTWARE

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<PAGE>
P R O S P E C T U S

5,750,000 SHARES

[LOGO]

COMMON STOCK

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

All of the shares of Common Stock offered hereby are being sold by QAD Inc.
("QAD" or the "Company"). Of the 5,750,000 shares of Common Stock offered
hereby, 4,600,000 shares are being offered for sale in the United States and
Canada by the U.S. Underwriters (as defined herein) and 1,150,000 shares are
being offered in a concurrent international offering outside the United States
and Canada by the Managers (as defined herein) (collectively, the "Offering").

Prior to this Offering, there has been no public market for the Common Stock
of the Company. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price. The Common Stock
has been approved for listing on the Nasdaq National Market under the symbol
"QADI."

Upon completion of the Offering, the current directors and executive
officers of the Company will beneficially own approximately 71% of the
outstanding Common Stock of the Company. See "Risk Factors--Control by Principal
Stockholders."

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

SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share $15.00 $1.05 $13.95
Total (3) $86,250,000 $6,037,500 $80,212,500
</TABLE>

(1) For information regarding indemnification of the U.S. Underwriters and the
Managers, see "Underwriting."

(2) Before deducting estimated offering expenses of $1,800,000, payable by the
Company.

(3) The Company has granted the several U.S. Underwriters and the several
Managers a 30-day option to purchase up to 862,500 additional shares of
Common Stock solely to cover over-allotments, if any. See "Underwriting." If
such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $99,187,500,
$6,943,125 and $92,244,375, respectively.

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

The shares of Common Stock are being offered by the several U.S.
Underwriters named herein, subject to prior sale, when, as and if accepted by
them and subject to certain conditions. It is expected that certificates for the
shares of Common Stock offered hereby will be available for delivery on or about
August 11, 1997, at the office of Smith Barney Inc., 333 West 34th Street, New
York, New York 10001.

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

SMITH BARNEY INC.
COWEN & COMPANY

ROBERTSON, STEPHENS & COMPANY

August 6 , 1997
<PAGE>
[VISUAL DEPICTIONS OF USER INTERFACE FOR MFG/PRO AND QWIZARD SOFTWARE]

CAPTIONS:

1. MFG/PRO SOFTWARE PROVIDES MULTINATIONAL ORGANIZATIONS WITH AN INTERGRATED ERP
SOLUTION THAT IS BASED ON AN OPEN, CLIENT/SERVER ARCHITECTURE AND INCLUDES
MANUFACTURING, DISTRIBUTION, FINANCIAL AND SERVICE/SUPPORT MANAGEMENT
APPLICATIONS.

2. QWIZARD SOFTWARE IS A MENTOR FOR USERS OF MFG/PRO SOFTWARE WHICH PROVIDES
SELF-PACED INTERACTIVE TRAINING. QWIZARD SOFTWARE INCLUDES TOOLS TO DESIGN
AND CUSTOMIZE THE VISUAL INTERFACE OF MFG/PRO SOFTWARE TO MATCH THE USER'S
WORKFLOWS AND JOB RESPONSIBILITIES.

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

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTING, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."

2
<PAGE>
[GRAPHICAL DEPICTION OF QAD CUSTOMERS' BUSINESS MODEL]

CAPTION:

1. QAD TARGETS SPECIFIC VERTICAL MARKETS. THE BUSINESS MODEL OF QAD'S TARGET
CUSTOMERS VARIES BY SIZE AND COMPLEXITY OF THE ENTERPRISE. BUSINESS SOFTWARE
REQUIREMENTS ALSO VARY AT EACH LEVEL OF THE ORGANIZATION AS WELL AS BY
VERTICAL MARKETS.

SELECT CUSTOMER LIST

ELECTRONICS/INDUSTRIAL
ABB Flakt Oy
Alcatel Services International B.V.
Allen-Bradley Co. Inc.
Aluminum Company of America
AT&T
Courtaulds plc
Ingersoll-Rand Company
Lucent Technologies Inc.
Matsushita Electric-Industrial
Co., Ltd
NEC America, Inc.
Newbridge Networks Corporation
Philips International B.V.
RayChem Corporation
Schlumberger Technology Corp.
Silicon Graphics SA
Sun Microsystems, Inc.
Xerox Corporation
FOOD/BEVERAGE
AEP Borden Nederland B.V.
Cargill, Incorporated
Kraft Jacobs Suchard AG
Pepsi-Cola Company
Presto Foods Products
The Quaker Oats Company
Rich Products Corporation
CONSUMER GOODS
The Black & Decker
Corporation
Colgate-Palmolive Company
Gillette Company
Johnson & Johnson
Unilever N.V.
AUTOMOTIVE
Aeroquip-Vickers, Inc.
Daewoo Information
Systems Co. Ltd.
Ford Motor Corporation
Johnson Controls, Inc.
Lear Seating Corporation
R.J. Tower Corporation
Rockwell Automotive
United Technologies Automotive
Varity Kelsey-Hayes Company
MEDICAL
Alza Corporation
BOC Ohmeda Inc.
Physio-Control Corporation
Rexall Sundown, Inc.
St. Jude Medical, Inc.
Sunrise Medical Inc.
Ventritex, Inc.
<PAGE>
[GRAPHICAL DEPICTIONS OF QAD'S GLOBAL SUPPLY CHAIN MODEL, MFG/PRO-ERP
SOLUTION AND ON/Q-SUPPLY CHAIN SOLUTION]

CAPTIONS:

1. QAD BELIEVES THAT THE INCREASING COMPLEXITY AND DIVERSITY OF CUSTOMER
REQUIREMENTS LIMITS THE ABILITY OF A SINGLE-VENDOR SOLUTION TO FULLY MEET THE
ENTERPRISE-WIDE ERP SOFTWARE NEEDS OF ITS CUSTOMERS AND HAS LED TO THE
EMERGENCE OF THREE DISTINCT SEGMENTS WITHIN THE ERP SOFTWARE MARKET:
CORPORATE, PLANT AND SUPPLY CHAIN MANAGEMENT.

2. QAD HAS A NUMBER OF JOINT DEVELOPMENT AGREEMENTS WITH THIRD-PARTY SOFTWARE
DEVELOPERS WHO PROVIDE FUNCTIONALITY THAT HAS BEEN IMBEDDED INTO OR
INTEGRATED WITH MFG/PRO SOFTWARE TO DELIVER A MORE COMPLETE SOLUTION FOR ITS
TARGETED VERTICAL MARKETS.

3. THE COMPANY BELIEVES SUPPLY CHAIN OPTIMIZATION REPRESENTS ONE OF THE GREATEST
CURRENT OPPORTUNITIES FOR COMPANIES TO REDUCE COSTS AND ENHANCE CUSTOMER
RELATIONSHIPS. QAD IS DEVELOPING ON/Q SOFTWARE, A GROUP OF APPLICATIONS FOR
THIS MARKET, THAT ARE BASED ON AN OBJECT-ORIENTED TECHNOLOGY, RESULTING IN
FLEXIBLE AND CONFIGURABLE APPLICATION COMPONENTS. THE FIRST ON/Q SOFTWARE
APPLICATION UNDER DEVELOPMENT, LOGISTICS, IS EXPECTED TO BE COMMERCIALLY
AVAILABLE IN THE SECOND HALF OF 1998.
<PAGE>
PROSPECTUS SUMMARY

THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. EXCEPT AS OTHERWISE SPECIFICALLY NOTED HEREIN, ALL OF THE
INFORMATION IN THIS PROSPECTUS (I) REFLECTS THE CONVERSION OF ALL OF THE
COMPANY'S OUTSTANDING SHARES OF CLASS B COMMON STOCK INTO SHARES OF COMMON
STOCK, WHICH WILL OCCUR AUTOMATICALLY UPON THE CLOSING OF THE OFFERING, (II)
REFLECTS THE REINCORPORATION OF THE COMPANY IN DELAWARE EFFECTED PRIOR TO THE
COMPLETION OF THE OFFERING, (III) REFLECTS THE 2-FOR-1 SPLIT OF ALL OF THE
COMPANY'S OUTSTANDING SHARES OF COMMON STOCK EFFECTED PRIOR TO THE COMPLETION OF
THE OFFERING AND (IV) ASSUMES THAT THE U.S. UNDERWRITERS' AND THE MANAGERS'
OVER-ALLOTMENT OPTION IS NOT EXERCISED. ALL REFERENCES TO THE COMPANY OR QAD
SHALL REFER TO QAD INC., A DELAWARE CORPORATION, AND SHALL INCLUDE ITS
SUBSIDIARIES, EXCEPT AS OTHERWISE SPECIFICALLY NOTED HEREIN.

THE COMPANY

QAD is a provider of Enterprise Resource Planning ("ERP") software for
multinational and other large manufacturing companies. The Company's software
solutions are designed to facilitate global management of resources and
information to allow manufacturers to reduce order fulfillment cycle times and
inventories, improve operating efficiencies and measure critical company
performance criteria against defined business plan objectives. The flexibility
of the Company's products also helps manufacturers adapt to growth,
organizational change, business process reengineering, supply chain management
and other challenges.

The Company's principal product, MFG/PRO software, is specifically designed
for deployment at the plant or division level of global manufacturers in five
targeted industry segments--electronics/industrial, food/beverage, consumer
packaged goods, medical and automotive. MFG/PRO software provides multinational
organizations with an integrated ERP solution that is based on an open,
client/server architecture and includes manufacturing, distribution, financial
and service/support management applications. Additionally, the Company is
currently focused on extending its presence in multi-site manufacturing by
developing a line of object-oriented, supply chain management solutions, named
On/Q software. The Company's initial On/Q software product, Logistics, is
designed to allow for consolidation of orders, contract management, shipping and
logistics management. Logistics is currently in development and is expected to
be commercially available in the second half of 1998. As of April 30, 1997, the
Company had licensed MFG/PRO software at approximately 3,200 sites to
approximately 1,880 customers in over 70 countries. The Company's customers
include Cargill, Incorporated, Colgate-Palmolive Company, Johnson Controls,
Inc., Johnson & Johnson, Lucent Technologies Inc., Philips Electronics N.V., St.
Jude Medical, Inc., Unilever N.V. and United Technologies Automotive.

The Company was founded in 1979 and was incorporated in California as
qad.inc in 1986. In February 1997, the Company's name was changed to QAD Inc.
The Company was reincorporated in Delaware in July 1997. The Company's executive
offices are located at 6450 Via Real, Carpinteria, California 93013, and its
telephone number is (805) 684-6614.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered:
U.S. Offering...................... 4,600,000 shares
International Offering............. 1,150,000 shares
Total............................ 5,750,000 shares (1)
Common Stock to be outstanding after
the Offering.......................... 28,262,234 shares (1)(2)
Use of proceeds........................ For repayment of indebtedness, to fund capital
and other investments and for working capital
and general corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol.......... QADI
</TABLE>

- ------------------------------
(1) Does not include 862,500 shares of Common Stock that are subject to an
over-allotment option granted by the Company to the U.S. Underwriters and
the Managers.

(2) Excludes 1,061,000 shares of Common Stock issuable upon exercise of options
outstanding at April 30, 1997 with exercise prices ranging from $0.12 to
$15.00 per share and with a weighted average exercise price of $3.00 per
share. See Note 10 of Notes to Consolidated Financial Statements.

3
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED APRIL 30,
------------------------------------------ JANUARY 31, --------------------
1992 1993 1994 1995 1997(1) 1996 1997
--------- --------- --------- --------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue............................ $ 28,074 $ 46,543 $ 66,360 $ 89,949 $ 126,444 $ 20,116 $ 32,073
Operating income (loss)............ 3,565 6,442 4,084 (2,646) 2,322 (10,200) 317
Net income (loss).................. 1,589 3,694 2,878 (686) 1,000 (7,317) 560
Net income (loss) per
share (2)........................ $ 0.08 $ 0.18 $ 0.12 $ (0.03) $ 0.04 $ (0.33) $ 0.02
Shares used in computing income
(loss) per share................. 20,761 20,761 23,864 21,861 23,509 22,139 24,026
</TABLE>

<TABLE>
<CAPTION>
APRIL 30, 1997
-------------------------
AS ADJUSTED
ACTUAL (3)
--------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................................. $ 1,306 $ 58,256
Working capital (deficit).............................................................. (12,216) 59,877
Total assets........................................................................... 81,193 140,143
Notes payable and current installments of long-term debt............................... 15,143 0
Long-term debt, less current installments.............................................. 4,320 0
Total stockholders' equity............................................................. 10,952 89,365
</TABLE>

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

(1) Effective February 1, 1996, the Company changed its financial reporting year
end from December 31 to January 31. See Note 1 of Notes to Consolidated
Financial Statements.

(2) The basis for the determination of stock used in computing net income (loss)
per share is described in Note 1 of Notes to Consolidated Financial
Statements.

(3) Adjusted to give effect to the sale of 5,750,000 shares of Common Stock
offered by the Company in the Offering at an initial public offering price
of $15.00 per share, after deducting underwriting discounts and commissions
and estimated offering expenses payable by the Company and the application
of the estimated net proceeds therefrom, including the use of approximately
$19.5 million to repay amounts owed under notes payable and long-term debt
and $2.0 million to acquire an equity interest in a private technology
development company. See "Use of Proceeds" and "Capitalization."

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

"QAD," "Qwizard" and "On/Q" are trademarks and "MFG/PRO" is a registered
trademark of the Company. This Prospectus also contains trademarks and
registered trademarks of persons and companies other than QAD.

4
<PAGE>
RISK FACTORS

HISTORICAL FLUCTUATIONS IN QUARTERLY RESULTS AND POTENTIAL FUTURE SIGNIFICANT
FLUCTUATIONS

The Company's quarterly revenue, expenses and operating results have varied
significantly in the past, and the Company anticipates that such fluctuations
will continue in the future as a result of a number of factors, many of which
are outside the Company's control. The factors affecting these fluctuations
include demand for the Company's products and services, the size, timing and
structure of significant licenses by customers, market acceptance of new or
enhanced versions of the Company's software products and products that operate
with the Company's products, the publication of opinions about the Company, its
products and technology by industry analysts, the entry of new competitors and
technological advances by competitors, delays in localizing the Company's
products for new markets, delays in sales as a result of lengthy sales cycles,
changes in operating expenses, foreign currency exchange rate fluctuations,
changes in pricing policies by the Company or its competitors, customer order
deferrals in anticipation of product enhancements or new product offerings by
the Company or its competitors, the timing of the release of new or enhanced
versions of the Company's software products and products that operate with the
Company's products, changes in the method of product distribution (including the
mix of direct and indirect channels), product life cycles, changes in the mix of
products and services licensed or sold by the Company, customer cancellation of
major planned software development programs and general economic factors.

A significant portion of the Company's revenue in any quarter may be derived
from a limited number of large, non-recurring license sales. For example,
revenue from four customers represented approximately 23% of license fees in the
quarter ended April 30, 1997. The Company expects to continue to experience from
time to time large, individual license sales which may cause significant
variations in quarterly license fees. The Company also believes that the
purchase of its products is relatively discretionary and generally involves a
significant commitment of a customer's capital resources. Therefore, a downturn
in any potential customer's business could result in order cancellations which
could have a significant adverse impact on the Company's revenue and quarterly
results. Moreover, declines in general economic conditions could precipitate
significant reductions in corporate spending for information technology, which
could result in delays or cancellations of orders for the Company's products.

The Company has also historically recognized a substantial portion of its
revenue from sales booked and shipped in the last month of a quarter. As a
result, the magnitude of quarterly fluctuations in license fees may not become
evident until late in, or at the end of, a particular quarter. If sales
forecasted from a specific customer for a particular quarter are not realized in
that quarter, the Company is unlikely to be able to generate revenue from
alternate sources in time to compensate for the shortfall. As a result, a lost
or delayed sale could have a material adverse effect on the Company's quarterly
operating results. To the extent that significant sales occur earlier than
expected, operating results for subsequent quarters may be adversely affected.
The Company has also historically operated with little backlog because its
products are generally shipped as orders are received. As a result, revenue from
license fees in any quarter is substantially dependent on orders booked and
shipped in that quarter and on sales by the Company's distributors and other
resellers. Sales derived through indirect channels are harder to predict and may
have lower profit margins than direct sales.

5
<PAGE>
In addition, like many software companies, the Company typically realizes a
significant portion of its software license revenue in the last month of the
quarter and in the last quarter of the year. However, unlike a number of the
Company's competitors, the Company does not derive material revenue from the
provision of services in connection with its license sales. As a result, a
greater proportion of the Company's revenue tends to be less predictable and to
occur later in the quarter and in the year than the revenue of competitors who
provide such services.

The Company's expense levels are relatively fixed and are based, in
significant part, on expectations of future revenue. Consequently, if revenue
levels are below expectations, expense levels could be disproportionately high
as a percentage of total revenue, and operating results would be immediately and
adversely affected and losses could occur.

Based upon the factors described above, the Company believes that its
quarterly revenue, expenses and operating results are likely to vary
significantly in the future, that period-to-period comparisons of its results of
operations are not necessarily meaningful and that, as a result, such
comparisons should not be relied upon as indications of future performance.
Moreover, although the Company's revenue has generally increased in recent
periods, there can be no assurance that the Company's revenue will grow in
future periods, at past rates or at all, or that the Company will be profitable
on a quarterly or annual basis. The Company has in the past experienced and may
in the future experience quarterly losses.

QAD has recently implemented changes designed to mitigate the seasonal and
quarterly fluctuations in its operating results. Such changes include the hiring
of additional financial personnel, including a new Chief Financial Officer and a
Director of Financial Planning and Analysis, the changing of the Company's
fiscal year end from December 31 to January 31 and the changing of the Company's
planning systems to incorporate quarterly performance goals and quarterly
forecasting procedures. Additionally, the Company is introducing quarterly
financial incentives into its compensation system. There can be no assurance
that such changes will alleviate the seasonal, quarterly or other fluctuations
in the Company's financial results or that such changes will have a positive
effect at all.

In future periods, the Company's operating results may be below the
expectations of stock market analysts and investors. In such event, the price of
the Common Stock could be materially adversely affected. See "--Seasonality of
Operating Results" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

RISKS ASSOCIATED WITH SALES CYCLE

Because the license of the Company's products generally involves a
significant commitment of capital (which ranges from approximately $50,000 to
several million dollars), the sales cycle associated with a customer's purchase
of the Company's products is generally lengthy (with a typical duration of four
to 15 months), varies from customer to customer and is subject to a number of
significant risks over which the Company has little or no control. These risks
include customers' budgetary constraints, timing of budget cycle, concerns about
the introduction of new products by the Company or its competitors and general
economic downturns which can result in delays or cancellations of information
systems investments. Due in part to the strategic nature of the Company's
products, potential customers are typically cautious in making product
acquisition decisions. The decision to license the Company's products generally
requires the Company to provide a significant level of education to prospective
customers regarding the uses and benefits of the Company's products, and the
Company must frequently commit substantial presales support resources. The
Company is almost completely reliant on third parties for implementation and
systems integration services, which may cause sales cycles to be lengthened or
result in the loss of sales. The uncertain outcome of the Company's sales
efforts and the length of its sales cycles could result in substantial
fluctuations in operating results. If sales forecasted from a specific customer
for a particular quarter are not realized in that quarter, then the Company is
unlikely to be able to generate revenue from alternative sources in time to
compensate for the shortfall. As a result, and due to the relatively large size
of some orders, a lost or delayed sale could have a material adverse effect on
the Company's quarterly

6
<PAGE>
operating results. See "Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations."

SEASONALITY OF OPERATING RESULTS

The Company has generally realized lower revenue (i) in July and August, due
primarily to reduced economic activity in Europe during the summer months and
(ii) to a lesser extent, in the first two months of the calendar year, due to
the concentration by some customers of purchases in the fourth quarter of the
calendar year and their consequently lower purchasing activity during the
immediately following months. Notwithstanding the change in the Company's fiscal
year end from December 31 to January 31 and the recent changes in the Company's
planning and compensation systems, the Company anticipates that such seasonality
will continue to cause significant quarterly fluctuations in the Company's
operating results. See "--Historical Fluctuations in Quarterly Results and
Potential Future Significant Fluctuations" and "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations."

PRODUCT CONCENTRATION

The Company has historically derived substantially all of its revenue from
the licensing and maintenance of the Company's MFG/PRO software. In the fiscal
year ended January 31, 1997 and in the quarter ended April 30, 1997, such
revenue equaled approximately 94% and 93%, respectively, of the Company's total
revenue. The Company expects that such revenue will continue to represent
substantially all of the Company's revenue for the foreseeable future. The
Company's success depends on continued market acceptance of the Company's
MFG/PRO software, as well as the Company's ability to introduce new versions of
MFG/PRO software and other products to meet the evolving needs of its customers.
Although demand for MFG/PRO software has grown in recent years, management
believes that the market for ERP software is still developing and there can be
no assurance that it will continue to grow or that, even if the market does
grow, businesses will continue to adopt MFG/PRO software. The failure of the
market for ERP software to continue to grow, any reduction in demand for MFG/PRO
software as a result of increased competition in the market for ERP software,
technological change, failure by the Company to introduce new versions of
products acceptable to the marketplace or other similar factors would have a
material adverse effect on the Company's business, operating results and
financial condition. The Company has spent, and intends to continue to spend,
considerable resources educating potential customers about ERP in general and
about the features and functions of MFG/PRO software in particular. However,
there can be no assurance that such expenditures will enable MFG/PRO software to
achieve any additional degree of market penetration or a higher level of market
acceptance, nor can there be any assurance that any new ERP products being
developed by the Company will achieve the market acceptance necessary to make
such products profitable. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Products."

DEPENDENCE ON PROGRESS PRODUCTS

The Company's MFG/PRO software is written in a programming language that is
proprietary to Progress Software Corporation ("Progress"). The Company has
entered into a license agreement with Progress (the "Progress Agreement") that
provides the Company and each of its subsidiaries, among other things, with the
perpetual, worldwide, royalty-free right to use the Progress programming
language to develop, market, distribute and license the Company's software
products. The Progress Agreement also provides for continued software support
from Progress through June 2002 without charge to the Company. Progress may only
terminate the Progress Agreement upon the Company's adjudication as bankrupt,
its liquidation or other similar event, or if the Company has ceased business
operations in full. The Company's success is dependent upon Progress continuing
to develop, support and enhance this programming language, its tool set and
database, as well as the continued market acceptance of Progress as a standard
database program. The Company has in the past and may in the future experience
product release delays because of delays in the release of Progress products or
product enhancements. Any such delays could have a material adverse effect on
the Company's business, operating results and financial

7
<PAGE>
condition. MFG/PRO software employs Progress programming interfaces which allow
MFG/PRO software to operate with Oracle Corporation ("Oracle") database
software. However, the Company's software programs do not run within programming
environments other than Progress and the Company's customers must acquire rights
to Progress Software in order to use MFG/PRO software. The Company's On/Q soft-
ware products, the initial application of which is currently under development
and is expected to be commercially available in the second half of 1998, are not
dependent upon Progress technology. The failure of Progress to continue its
relationship with the Company or to develop, support or enhance its programming
language in a manner competitive with enhancements of other present or future
programming languages, the increased market acceptance of programming languages
other than Progress in the Company's market or the Company's inability to adapt
its software to such other languages could have a material adverse effect on the
Company's business, operating results and financial condition.

RAPID TECHNOLOGICAL CHANGE

The market for the Company's software products is characterized by rapid
technological advances, evolving industry standards in computer hardware and
software technology, changes in customer requirements and frequent new product
introductions and enhancements. Customer requirements for products can change
rapidly as a result of innovations or changes within the computer hardware and
software industries, the introduction of new products and technologies
(including new hardware platforms and programming languages) and the emergence,
evolution or widespread adoption of industry standards. For example, increasing
commercial use of the Internet may give rise to new customer requirements and
new industry standards. The Company's future success will depend upon its
ability to continue to enhance its current product line and to develop and
introduce new products that keep pace with technological developments, satisfy
increasingly sophisticated customer requirements and achieve market acceptance.
In particular, the Company believes its future success will depend on its
ability to convert its products to object-oriented technology as well as its
ability to develop products that will operate across the Internet. There can be
no assurance that the Company will be successful in developing and marketing, on
a timely and cost-effective basis, product enhancements or new products that
respond to technological advances by others, or that its products will achieve
market acceptance. The Company's failure to successfully develop and market
product enhancements or new products could have a material adverse effect on the
Company's business, operating results and financial condition.

While the Company generally takes steps to avoid interruptions of sales due
to the pending availability of new products, customers may delay their
purchasing decisions in anticipation of the general availability of new or
enhanced MFG/PRO software, which could have a material adverse effect on the
Company's business, operating results and financial condition. The actual or
anticipated introduction of new products, technologies and industry standards
can also render existing products obsolete or unmarketable or result in delays
in the purchase of such products. As a result, the life cycles of the Company's
products are difficult to estimate. The Company must respond to developments
rapidly and incur substantial product development expenses. Any failure by the
Company to anticipate or respond adequately to technology developments or
customer requirements, or any significant delays in introduction of new
products, could result in a loss of revenue. Moreover, significant delays in the
general availability of such new releases, significant problems in the
installation or implementation of such new releases, or customer dissatisfaction
with such new releases, could have a material adverse effect on the Company's
business, operating results and financial condition. The Company is also
dependent upon third parties for necessary services in connection with the
installation and implementation of the Company's products and associated
post-sales training. Any errors, delays or other deficiencies in such services
due to technology changes or other factors could have a material adverse effect
on the Company's business, operating results and financial condition. See
"Business--Products" and "--Third-Party Implementation Providers."

SUPPLY CHAIN SOLUTIONS UNDER DEVELOPMENT AND UNDERLYING TECHNOLOGY

A significant element of the Company's strategy is its development of On/Q
software, a series of new products targeted to the supply chain management needs
of manufacturing companies. Over the past

8
<PAGE>
year, the Company has devoted substantial resources to developing its On/Q
software. The Company's first On/Q software product, Logistics, is currently
under development and is anticipated to be commercially available in the second
half of 1998. Although the Company has performed preliminary tests on its
Logistics software, it has not completed its development or commenced beta
testing, nor has the product been implemented in a commercial setting. There can
be no assurance that Logistics or any other of the Company's planned On/Q
software products will achieve the performance standards required for
commercialization or that such products will achieve market acceptance or be
profitable. If Logistics or the Company's other planned supply chain management
software products do not achieve such performance standards or do not achieve
market acceptance, the Company's business, operating results and financial
condition would be materially and adversely affected.

On/Q software is being designed based upon object-oriented technology.
Object-oriented applications are characterized by technology, development style
and programming languages that differ from those used in traditional software
applications, including the current version of MFG/PRO software. The Company
believes that new object-based functionality will play a key role in the
competitive manufacturing, distribution, financial, planning and service/support
management information technology strategies of customers in the Company's
targeted industry segments. The Company is also currently in the process of
converting its MFG/PRO software modules to object-oriented technology where the
Company believes such conversion will add value. There can be no assurance that
the Company will be successful in developing its new supply chain management
software or converting its MFG/PRO software to object-oriented technology on a
timely basis, if at all, or that if developed or converted such software will
achieve market acceptance. The failure to successfully incorporate
object-oriented technology in new products or convert MFG/PRO software to
object-oriented technology could have a material adverse effect on the Company's
business, operating results and financial condition.

Convergent Engineering is a new software design methodology employed by the
Company to develop future products. Convergent Engineering methodology allows
business requirements to be captured as a series of simple facts, actions and
rules, enabling software to more flexibly accommodate business practices and
processes. Although Convergent Engineering does not require the user to adopt
new business practices or principles for their own work processes, Convergent
Engineering models business management processes differently than traditional
business models. As a result, use of Company products based upon Convergent
Engineering principles will require the Company's implementation partners to be
educated in the new methodology. There can be no assurance that the Company will
gain acceptance among its implementation providers for this methodology on which
the Company's new products are based. The failure to obtain such acceptance
would have a material adverse effect on the marketability of the Company's
products under development and the Company's business, operating results and
financial condition. See "Business -- Products."

RISK OF SOFTWARE DEFECTS

As a result of the complexities inherent in client/server computing
environments and the broad functionality and performance demanded by customers
for ERP products, major new products and product enhancements can require long
development and testing periods. In addition, software programs as complex as
those offered by the Company may contain undetected errors or "bugs" when first
introduced or as new versions are released that, despite testing by the Company,
are discovered only after a product has been installed and used by customers.
While the Company has on occasion experienced delays in the scheduled
introduction of new and enhanced products, to date the Company's business has
not been materially adversely affected by delays or the release of products
containing errors. There can be no assurance, however, that errors will not be
found in future releases of the Company's software, or that the Company will not
experience material delays in releasing product improvements or new products.
The occurrence of such errors could result in significant losses to the Company
or to customers. Such occurrences could also result in reduced market acceptance
of the Company's products, which would have a material adverse effect on the
Company's business, operating results and financial condition.

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MARKET CONCENTRATION

The Company has made a strategic decision to concentrate its product
development and sales and marketing in five primary vertical industry segments:
electronics/industrial, food/beverage, consumer packaged goods, medical and
automotive. An important element of the Company's strategy is to achieve
technological and market leadership recognition for its software products in
these segments. The failure of the Company's products to achieve or maintain
substantial market acceptance for its software products in one or more of these
segments could have a material adverse effect on the Company's product and
business strategy in that segment and on the business, operating results and
financial condition of the Company. If any of the industry segments targeted by
the Company experiences a material downturn in expansion or in prospects for
future growth, such downturn would materially adversely affect the demand for
the Company's products and will materially adversely affect its business,
operating results and financial condition. See "Business--Sales and Marketing."

MANAGEMENT OF GROWTH

The Company's business has grown rapidly in the last six years, with revenue
increasing from approximately $28.0 million in the fiscal year ended December
31, 1992 to approximately $126.4 million in the fiscal year ended January 31,
1997. During the fiscal year ended December 31, 1995 and continuing through the
quarter ended April 30, 1997, the Company significantly increased its sales and
marketing, service and support and research and development staffs, resulting in
substantial growth in the number of its full-time employees (from 521 at March
31, 1995 to 700 at April 30, 1997), the scope of its operating and financial
systems and the geographic distribution of its operations and customers. This
recent rapid growth has placed, and will continue to place, a significant strain
on the Company's management and operations. The Company expects to continue to
increase staffing levels, primarily in the sales and marketing and research and
development areas, and incur additional associated costs in future periods. The
Company's future operating results will depend on the ability of its officers
and other key employees to continue to implement and improve its operational,
customer support and financial control systems, and to effectively expand, train
and manage its employee base. There can be no assurance that the Company will be
able to manage any future expansion successfully, and any inability to do so
would have a material adverse effect on the Company's business, operating
results and financial condition. The Company has undertaken a project to
significantly upgrade its financial planning and control systems, including an
upgrade of its current transaction accounting systems. The Company believes the
success of such implementation will improve its budgeting, forecasting and
financial statement reporting capabilities. However, implementation of these
systems upgrades will require significant management and other employee
attention and coordination, and there can be no assurance that the
implementation will be successful. The failure to successfully implement the
upgrades could materially adversely affect the Company's future budgeting,
forecasting and financial statement reporting capabilities.

The Company has made a strategic decision to be a global provider of its
products. To accomplish this goal, over the last two years the Company has
expanded its direct sales and support operations from 12 countries to 17
countries. In addition, during that time, the Company has significantly expanded
its distributor and partner relationships. Currently, the Company has over 40
distributors worldwide. The management of these widely dispersed international
operations has placed and will continue to place significant strain on the
Company's management and operations. The Company believes that its ability to
provide products and services on a global basis is critical to the Company's
success. However, there can be no assurance that the Company will be able to
continue to successfully manage its widespread international operations or
successfully manage future expansion of such operations, and the failure by the
Company to do so would have a material adverse effect on its business, operating
results and financial condition.

The Company days' sales outstanding have generally exceeded industry
averages. If the Company experiences rapid growth, this lengthy collection cycle
could result in a significant impairment of the Company's cash position. While
the Company has undertaken efforts to reduce the length of its collection

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cycle, the failure of the Company to successfully implement such changes or the
failure of such changes to reduce such collection cycle could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Management."

DEPENDENCE UPON KEY PERSONNEL; NEED TO HIRE ADDITIONAL PERSONNEL IN ALL AREAS

The Company's future operating results depend in significant part upon the
continued service of a relatively small number of key technical and senior
management personnel, including Pamela M. Lopker, its President and founder, and
Karl F. Lopker, its Chief Executive Officer, neither of whom is bound by an
employment agreement. Pamela and Karl Lopker are married to each other and
jointly own approximately 84% of the outstanding Common Stock and will jointly
own approximately 67% of the Common Stock following consummation of the Offering
(assuming no exercise of the U.S. Underwriters' and the Managers' over-allotment
option). Although the Company maintains key-individual insurance in the amount
of $2.5 million with respect to each of Pamela and Karl Lopker and the Company
is the beneficiary of such policies, the loss of one or more of these or other
key individuals could have a material adverse effect on the Company's business,
operating results and financial condition.

The Company's future success also depends on its continuing ability to
attract and retain other highly qualified technical and managerial personnel.
Competition for such personnel is intense, and the Company has at times in the
past experienced difficulty in recruiting qualified personnel. There can be no
assurance that the Company will retain its key technical and managerial
employees or that it will be successful in attracting, assimilating and
retaining other highly qualified technical and managerial personnel in the
future. The loss of any member of the Company's key technical and senior
management personnel or the inability to attract and retain additional qualified
personnel could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business--Employees" and
"Management."

DEPENDENCE UPON DEVELOPMENT AND MAINTENANCE OF SALES AND MARKETING CHANNELS

The Company sells and supports its products through direct and indirect
sales organizations throughout the world. The Company has made significant
expenditures in recent years in the expansion of its sales and marketing force,
primarily outside the United States, and plans to continue to expand its sales
and marketing force. The Company's future success will depend in part upon the
productivity of its sales and marketing force and the ability of the Company to
continue to attract, integrate, train, motivate and retain new sales and
marketing personnel. Competition for sales and marketing personnel in the
software industry is intense. There can be no assurance the Company will be
successful in hiring such personnel in accordance with its plans. There can be
no assurance that the Company's recent and other planned expenses in sales and
marketing will ultimately prove to be successful or that the incremental revenue
generated will exceed the significant incremental costs associated with these
efforts. In addition, there can be no assurance that the Company's sales and
marketing organization will be able to compete successfully against the
significantly more extensive and better funded sales and marketing operations of
many of the Company's current and potential competitors. If the Company is
unable to develop and manage its sales and marketing force expansion
effectively, the Company's business, operating results and financial condition
would be materially adversely affected.

The Company's indirect sales channel consists of over 40 distributors
worldwide. The Company does not grant exclusive rights to any of its
distributors. The Company's distributors primarily sell independently to
companies within their geographic territory but may also work in conjunction
with the Company's direct sales organization. The Company will need to maintain
and expand its relationships with its existing distributors and enter into
relationships with additional distributors in order to expand the distribution
of its products. There can be no assurance that current or future distributors
will provide the level and quality of expertise and service required to
successfully license the Company's products, that the Company will be

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able to maintain effective, long-term relationships with distributors, or that
selected distributors will continue to meet the Company's sales needs. Further,
there can be no assurance that these distributors will not market software
products in competition with the Company in the future or will not otherwise
reduce or discontinue their relationships with or support of the Company and its
products. The failure by the Company to maintain successfully its existing
distributor relationships or to establish new relationships in the future would
have a material adverse effect on the Company's business, results of operations
and financial condition. In addition, if any of the Company's distributors
exclusively adopts a product other than the Company's products, or if any such
distributor materially reduces its sales efforts relating to the Company's
products or materially increases such support for competitive products, the
Company's business, operating results and financial condition could be
materially and adversely affected. See "Business--Sales and Marketing."

COMPETITION

The ERP software market is highly competitive, rapidly changing and affected
by new product introductions and other market activities of industry
participants. The Company currently competes primarily with (i) other vendors of
software focused on the specific needs of manufacturing plants and distribution
sites of multinational manufacturing companies, which include Baan Company N.V.
("Baan"), J.D. Edwards & Company ("J.D. Edwards") and Systems Software
Associates, Inc. ("SSA"), (ii) smaller independent companies that have developed
or are attempting to develop advanced planning and scheduling software which
complement or compete with ERP or manufacturing resource planning solutions,
(iii) internal development efforts by corporate information technology
departments and (iv) companies offering standardized or customized products on
mainframe and/or mid-range computer systems. The Company expects that
competition for its MFG/PRO software will increase as other large companies such
as Oracle and SAP AG ("SAP"), as well as other business application software
vendors, enter the market for plant-level ERP solutions. With the Company's
strategic entry into the supply chain management software market, the Company
can expect to meet substantial additional competition from companies presently
serving that market, such as i2 Technologies, Inc. ("i2"), Industri-Matematik
International, Inc. ("IMI") and Manugistics, Inc. ("Manugistics"), as well as
from broad based solution providers such as Baan, Oracle, PeopleSoft, Inc.
("PeopleSoft") and SAP that the Company believes are increasingly focusing on
this segment. In addition, certain competitors, such as Baan, Oracle, PeopleSoft
and SAP, have well-established relationships with present or potential customers
of the Company. The Company may also face market resistance from potential
customers with large installed legacy systems because of their reluctance to
commit the time, effort and resources necessary to convert to an open,
client/server-based software solution. Further, as the client/server market
continues to develop, companies with significantly greater resources than the
Company may attempt to increase their presence in these markets by acquiring or
forming strategic alliances with competitors of the Company. Increased
competition is likely to result in price reductions, reduced operating margins
and loss of market share, any one of which could materially adversely affect the
Company's business, operating results and financial condition. Many of the
Company's present or future competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources,
greater name recognition and a larger installed base of customers than the
Company. As a result, they may be able to respond more quickly to new or
emerging technologies and to changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products, than
can the Company. The Company believes that the principal factors on which it
competes in the ERP software market are functionality, ease of use and
implementation, technology, time to benefit, supplier viability, service and
cost. The Company intends to continue to acquire, develop and allocate its
resources to focus on these targeted competitive areas, as well as to identify
additional or different areas where the Company perceives competitive advantage.
There can be no assurance that the Company will be able to compete successfully
with existing or new competitors or that competition will not have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business--Competition."

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RELIANCE ON AND NEED TO DEVELOP ADDITIONAL RELATIONSHIPS WITH THIRD PARTIES

The Company has established strategic relationships with a number of
consulting and systems integration organizations that it believes are important
to its worldwide sales, marketing, service and support activities and the
implementation of its products. The Company is particularly reliant on third
parties for installation and implementation of its products because the Company,
unlike a number of its competitors, does not provide these services. If the
Company is unable to train adequately a sufficient number of system integrators
or, if for any reason, any such integrators terminate their relationship with
the Company or do not have or devote the resources satisfactory to provide
necessary consulting and implementation of the Company's products, the Company's
business, operating results and financial condition could be materially and
adversely affected. The Company is aware that these third-party providers do not
provide systems integration services exclusively for the Company's products and
in many instances such firms have similar, and often more established,
relationships with the Company's principal competitors. The Company expects to
continue to rely upon such third parties, particularly installation and
implementation service providers, for marketing and sales, lead generation,
product installation and implementation, customer support services, product
localization, end-user training assistance in the sales process and after-sale
training and support. These relationships also assist the Company in keeping
pace with the technological and marketing developments of major software
vendors, and, in certain instances, provide it with technical assistance for its
product development efforts. Organizations providing such consulting and systems
integration and implementation services in connection with the Company's
products include Arthur Andersen & Co. LLP, Deloitte & Touche LLP, Ernst & Young
LLP, Integrated Systems & Services, LLC and Strategic Information Group
International, Inc. in the United States, BDM Largotim US, Inc., CSBI S.A.,
Origin Technology in Business Nederland B.V. and Sligos S.A. in Europe and Iris
Ifec Co., Ltd and STCS Systems Pte Ltd in Asia. In most cases distributors will
also deliver consulting and systems integration services. The Company will need
to expand its relationships with these parties and enter into relationships with
additional third parties in order to expand the distribution of its products.
There can be no assurance that these and other third parties will provide the
level and quality of service required to meet the needs of the Company's
customers, that the Company will be able to maintain an effective, long-term
relationship with such third parties, or that such third parties will continue
to meet the needs of the Company's customers. Further, there can be no assurance
that these third-party implementation providers, many of which have
significantly greater financial, technical, personnel and marketing resources
than the Company, will not market software products in competition with the
Company in the future or will not otherwise reduce or discontinue their
relationships with or support of the Company and its products. The failure by
the Company to maintain its existing relationships or to establish new
relationships in the future, or the failure of such third parties to meet the
needs of the Company's customers, would have a material adverse effect on the
Company's business, results of operations and financial condition. In addition,
if such third parties exclusively adopt a product or technology other than the
Company's products or technology, or if such third parties materially reduce
their support of the Company's products and technology or materially increase
such support for competitive products or technology, the Company's business,
operating results and financial condition will be materially and adversely
affected.

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the license of its software products. The Company also relies on third parties
for the development or inter-operation of key components of its software so that
users of the Company's software will obtain the functionality demanded. Such
research and product alliances include software developed to be sold in
conjunction with the Company's software products, technology developed to be
included in or encapsulated within the Company's software products and numerous
third-party software programs that generally are not sold with the Company's
software but inter-operate directly with the Company's software through
application program interfaces. The Company generally enters into joint
development agreements with its third-party software development partners that
govern ownership of the technology collectively developed. Each of the Company's
partner agreements and third-party development agreements contain strict
confidentiality and non-disclosure provisions for the service provider, end user
and third-party developer and the Company's third-party development agreements
contain restrictions on the use of the Company's technology outside of the
development process. The failure of the Company to establish or maintain
successful relationships with such third-party software providers or such
third-party installation, implementation and development partners or the failure
of such third-party software providers to develop and support their software
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Business--Sales and Marketing,"
"--Third-Party Implementation Providers" and "--Proprietary Rights and
Licensing."

INTELLECTUAL PROPERTY RIGHTS; USE OF LICENSED TECHNOLOGY

The Company's success is dependent upon its proprietary technology and other
intellectual property. The Company relies primarily on a combination of the
protections provided by applicable copyright, trademark and trade secret laws,
as well as on confidentiality procedures and licensing arrangements, to
establish and protect its rights in its software. The Company enters into
license agreements with each of its customers. Each of the Company's license
agreements provides for the non-exclusive license of the Company's MFG/PRO
software. Such licenses generally are perpetual (unless terminated by either
party upon 30 days written notice) and contain strict confidentiality and
non-disclosure provisions, a limited warranty covering MFG/PRO software and
indemnification for the customer from any infringement action related to MFG/PRO
software. The pricing policy under each license is based on a standard price
list and may vary based on the number of end-users, number of sites, number of
modules, number of languages, the country in which the license is granted and
level of ongoing support, training and services to be provided by the Company.
The Company has no patents or pending patent applications. In order to
facilitate the customization required by most of the Company's customers, the
Company generally licenses its MFG/PRO software to end users in both object code
(machine-readable) and source code (human-readable) format. While this practice
facilitates customization, making software available in source code also makes
it easier for third parties to copy or modify the Company's software for
non-permitted purposes. One of the Company's distributors has developed
modifications to the Company's software which it owns jointly with the Company.
The Company has entered into a reciprocal license with this distributor who
markets the product enhancements in conjunction with MFG/PRO software. This or
other distributors or other persons may continue to independently develop a
modified version of the Company's software. The Company seeks to protect its
software, documentation and other written materials under the legal provisions
relating to trade secret, copyright and contract law. The Company's license
agreements generally allow the use of MFG/PRO software solely by the customer
for internal purposes without the right to sublicense or transfer MFG/PRO
software to third parties. The Company believes that the foregoing measures
afford only limited protection. Despite the Company's efforts, it may be
possible for third parties to copy certain portions of the Company's products or
reverse engineer or obtain and use information that the Company regards as
proprietary. In addition, the laws of certain countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. Accordingly, there can be no assurance that the Company will be able to
protect its proprietary software against unauthorized third-party copying or
use, which could adversely affect the Company's competitive position. Policing
unauthorized use of the Company's products is difficult, and while the Company
is

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unable to determine the extent to which piracy of its software products exist,
software piracy can be expected to be a problem. Furthermore, there can be no
assurance that the Company's competitors will not independently develop
technology similar to that of the Company.

The Company has in the past been subject to claims of intellectual property
infringement and may increasingly be subject to such claims as the number of
products and competitors in the Company's targeted vertical markets grows and
the functionality of products in other industry segments overlaps. Although the
Company is not aware that any of its products infringes upon the proprietary
rights of third parties, there can be no assurance that third parties will not
claim infringement by the Company with respect to current or future products.
Any such claims, with or without merit, could be time-consuming, result in
costly litigation, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, or at all,
which could have a material adverse effect upon the Company's business,
operating results and financial condition. The Company may also initiate claims
or litigation against third parties for infringement of the Company's
proprietary rights or to establish the validity of the Company's proprietary
rights. Litigation to determine the validity of any claims could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel from productive tasks, whether or not such
litigation were determined in favor of the Company.

The Company has in the past and may in the future resell certain software
which it licenses from third parties. In addition, the Company has in the past
and may in the future jointly develop software in which the Company will have
co-ownership or cross-licensing rights. There can be no assurance that these
third-party software arrangements and licenses will continue to be available to
the Company on terms that provide the Company with the third-party software it
requires to provide adequate functionality in its products, on terms that
adequately protect the Company's proprietary rights or on terms that are
commercially favorable to the Company. The loss of or inability to maintain or
obtain any of these software licenses, including as a result of third-party
infringement claims, could result in delays or reductions in product shipments
until equivalent software, if any, could be identified, licensed and integrated,
which could materially and adversely affect the Company's business, operating
results and financial condition. See "Business--Products" and "--Research and
Development."

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS

The Company derived approximately 45%, 44%, 42% and 46% of its total revenue
from sales outside the United States in the years ended December 31, 1994 and
1995 and January 31, 1997 and in the quarter ended April 30, 1997, respectively.
Of the Company's approximately 3,200 licensed sites in over 70 countries as of
April 30, 1997, over 70% are outside the United States. The Company's
engineering and research and development operations are located in the United
States and its sales and support operations are located in the United States and
in 16 other countries. The Company also has over 40 distributors and numerous
partnerships and alliances worldwide. The geographic distance between these
locations has in the past led, and could in the future lead, to logistical and
communications difficulties. There can be no assurance that the geographic, time
zone, language and cultural differences between the Company's international
personnel and operations will not result in problems that materially adversely
affect the Company's business, operating results and financial condition.

The Company expects to commit additional time and resources to expanding its
worldwide sales and marketing activities, localizing its products for selected
markets and developing local sales and support channels. There can be no
assurance that such efforts will be successful. Failure to sustain or increase
international revenue could have a material adverse effect on the Company's
business, operating results and financial condition. The Company may also
experience an operating loss in one or more regions of the world for one or more
periods. The Company's ability to manage such operational fluctuations and to
maintain adequate long-term strategies in the face of such developments will be
critical to the Company's continued growth and profitability. International
operations are subject to a number of risks, including the

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costs of localizing products for different countries, longer accounts receivable
collection periods and greater difficulty in accounts receivable collections in
certain geographic regions, unexpected changes in regulatory requirements,
dependence on distributors and technology standards, import and export
restrictions and tariffs, difficulties and costs of staffing and managing
international operations, potentially adverse tax consequences, political
instability, the burdens of complying with multiple, potentially conflicting
laws and the impact of business cycles and economic instability. See
"Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations" and "Business--Sales and Marketing."

EXPOSURE TO CURRENCY FLUCTUATIONS

To date, the Company's revenue from international operations has primarily
been denominated in United States dollars. The Company prices its products in
United States dollars and over 90% of the Company's sales in the years ended
December 31, 1995 and January 31, 1997 and in the quarter ended April 30, 1997
were denominated in United States dollars, with the remainder in ten different
currencies. The Company expects that a growing percentage of its business will
be conducted in currencies other than the United States dollar. The Company also
incurs a significant portion of its expenses in currencies other than the United
States dollar, including a substantial portion of its general and administrative
expenses. As a result, fluctuations in the values of the respective currencies
relative to the other currencies in which the Company generates revenue could
materially adversely affect its business, operating results and financial
condition. While the Company may in the future change its pricing practices, an
increase in the value of the United States dollar relative to foreign currencies
could make the Company's products more expensive and, therefore, less
competitive in other markets. Fluctuations in currencies relative to the United
States dollar will affect period-to-period comparisons of the Company's reported
results of operations. In the fiscal year ended January 31, 1997, the Company
realized $407,000 in foreign currency transaction gains, compared to losses of
$477,000 and $343,000 in the fiscal years ended December 31, 1995 and 1994,
respectively. Due to the constantly changing currency exposures and the
volatility of currency exchange rates, there can be no assurance that the
Company will not experience currency losses in the future, nor can the Company
predict the effect of exchange rate fluctuations upon future operating results.
The Company does not currently undertake hedging transactions and has limited
resources to cover its currency exposure. The Company may choose to hedge a
portion of its currency exposure in the future as it deems appropriate. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

CONTROL BY PRINCIPAL STOCKHOLDERS

Upon completion of the Offering, Pamela and Karl Lopker will jointly
beneficially own 67% of the Company's outstanding Common Stock (65% if the U.S.
Underwriters' and the Managers' over-allotment option is exercised in full).
Current directors and executive officers as a group will own approximately 71%
of the Common Stock following consummation of the Offering (assuming no exercise
of the U.S. Underwriters' and the Managers' over-allotment option).
Consequently, the directors and executive officers, and the Lopkers in
particular, will be able to control the outcome of all matters submitted for
stockholder action, including the election of members to the Company's Board of
Directors and the approval of significant change in control transactions, and
will effectively control the management and affairs of the Company, which may
have the effect of delaying or preventing a change in control of the Company.
Although the Company anticipates increasing the number of members on its Board
of Directors from three to five members within 90 days of the consummation of
the Offering, the Lopkers will nonetheless constitute two of the directors and
will therefore have significant influence in directing the actions of the Board
of Directors. See "Management" and "Principal Stockholders."

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PRODUCT LIABILITY

While the Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims, it is possible that such limitation of liability provisions
may not be effective under the laws of certain jurisdictions. Although the
Company has not experienced any product liability claims to date, there can be
no assurance that the Company will not be subject to such claims in the future.
The Company has product liability insurance, but the Company currently does not
have errors and omissions coverage, and there can be no assurance that such
insurance will be available to the Company on commercially reasonable terms or
at all. A successful product liability or errors or omissions claim brought
against the Company could have a material adverse effect on the Company's
business, operating results and financial condition. Moreover, defending such a
suit, regardless of its merits, could entail substantial expense and require the
time and attention of key management personnel, either of which could have a
material adverse effect on the Company's business, operating results and
financial condition.

NO PRIOR MARKET FOR THE COMMON STOCK; VOLATILITY OF STOCK PRICE

Prior to the Offering, there has been no public market for the Company's
Common Stock and there can be no assurance that an active trading market for the
Common Stock will develop or be sustained after the Offering or that the market
price of the Common Stock will not decline below the initial public offering
price. The initial public offering price of the Common Stock has been determined
by negotiations among the Company and the representatives of the U.S.
Underwriters and the Managers, and may not be representative of the price that
will prevail in the open market. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price.

The market price of the Common Stock after the Offering may be significantly
affected by factors such as quarterly fluctuations in the Company's results of
operations, demand for the Company's products and services, the size, timing and
structure of significant licenses by customers, market acceptance of new or
enhanced versions of the company's software products and products that operate
with the Company's products, the publication of opinions about the Company, its
products and technology by industry analysts, the entry of new competitors and
technological advances by competitors, delays in localizing the Company's
products for new markets, delays in sales as a result of lengthy sales cycles,
changes in operating expenses, foreign currency exchange rate fluctuations,
changes in pricing policies by the Company or its competitors, customer order
deferrals in anticipation of product enhancements or new product offerings by
the Company or its competitors, the timing of the release of new or enhanced
versions of the Company's software products and products that operate with the
Company's products, changes in the method of product distribution (including the
mix of direct and indirect channels), product life cycles, changes in the mix of
products and services licensed or sold by the Company, customer cancellation of
major planned software development programs, general economic factors and other
factors, many of which are beyond the Company's control. In future quarters the
Company's operating results may be below expectations of public market analysts
and investors. In such event, or in the event that adverse conditions prevail or
are perceived to prevail generally or with respect to the Company's business,
the price of the Company's Common Stock would likely be immediately materially
adversely affected. In addition, the stock market has experienced volatility
that has particularly affected the market prices of equity securities of many
technology companies and that often has been unrelated or disproportionate to
the operating performance of such companies. These broad market fluctuations, as
well as general economic, political and market conditions, such as recessions or
international currency fluctuations, may adversely affect the market price of
the Common Stock.

ANTI-TAKEOVER PROVISIONS

The Company's Certificate of Incorporation (the "Certificate of
Incorporation") and Bylaws (the "Bylaws"), contain certain provisions that may
have the effect of discouraging, delaying or preventing a

17
<PAGE>
change in control of the Company or unsolicited acquisition proposals that a
stockholder might consider favorable, including provisions which authorize the
issuance of "blank check" preferred stock, provide for a Board of Directors with
staggered three-year terms, require super-majority voting to effect certain
amendments to the Certificate of Incorporation and Bylaws, limit the persons who
may call special meetings of stockholders, and establish advance notice
requirements for stockholder nominations for election to the Board of Directors
or for stockholder proposals of business to be considered at stockholders
meetings. Certain provisions of Delaware law may also have the effect of
discouraging, delaying or preventing a change in control of the Company or
unsolicited acquisition proposals. See "Description of Capital Stock--Certain
Anti-Takeover, Limited Liability and Indemnification Provisions."

POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON MARKET PRICE OF THE
COMMON STOCK

Sales of a substantial number of shares of Common Stock after the Offering
could adversely affect the market price of the Common Stock and could impair the
Company's ability to raise capital through the sale of equity securities. Upon
completion of the Offering, the Company will have outstanding 28,262,234 shares
of Common Stock (29,124,734 shares if the U.S. Underwriters' and the Managers'
over-allotment option is exercised in full), assuming no exercise of options
outstanding as of April 30, 1997. Of these shares, the 5,750,000 shares offered
hereby (6,612,500 shares if the U.S. Underwriters' and the Managers'
over-allotment option is exercised in full) will be freely tradeable without
restriction or further registration under the Securities Act of 1933, as amended
(the "Act"), unless held by "affiliates" of the Company as that term is defined
in Rule 144 under the Act ("Rule 144"). The remaining 22,512,234 shares of
Common Stock outstanding upon completion of the Offering are "restricted
securities" as that term is defined in Rule 144.

The directors, executive officers and certain other stockholders of the
Company holding an aggregate of 20,416,172 outstanding shares of Common Stock
and options to purchase 967,000 shares of Common Stock, have agreed pursuant to
Lock-Up Agreements that, for a period of 180 days from the date of this
Prospectus, they will not, without the prior written consent of Smith Barney
Inc., offer, sell, contract to sell, or otherwise dispose of, any shares of
Common Stock or any securities convertible into, or exercisable or exchangeable
for Common Stock, or grant any options or warrants to purchase Common Stock,
except in certain circumstances. The representatives of the Underwriters have
informed the Company that the Underwriters have no current intention to release
shares from the Lock-Up Agreements prior to expiration of the 180-day term of
such agreements. Any request for release would be evaluated by the
representatives of the Underwriters, and the decision whether or not to permit
early release of stock would be made dependent upon the facts and circumstances
existing at the time of the request. Beginning upon expiration of the Lock-Up
Agreements, such shares will be eligible for sale pursuant to Rule 144 or Rule
701 under the Act ("Rule 701") subject to the provisions of such rules and
continued vesting. The remaining 2,096,062 outstanding shares of Common Stock
and options to purchase 94,000 shares of Common Stock are not subject to Lock-Up
Agreements and will become eligible for sale upon completion of the Offering,
subject to the provisions of Rule 144, Rule 701 and continued vesting.
Approximately 714,596 shares of Common Stock and 35,000 shares of Common Stock
subject to exercisable options will be eligible for immediate sale in the public
market as of the date of this Prospectus (the "Effective Date"), none of which
shares will be subject to volume and certain other restriction under Rule 144.
An additional 1,358,330 outstanding shares of Common Stock will be eligible for
sale in the public market 90 days after the Effective Date, of which 1,195,104
outstanding shares will not be subject to volume and certain other restrictions
under Rules 144 and 701. Approximately 20,274,202 shares of Common Stock and
813,666 shares of Common Stock subject to exercisable options will become
eligible for sale in the public market 180 days after the Effective Date upon
expiration of the Lock-Up Agreements, subject to volume and certain other
restrictions of Rule 144. See "Shares Eligible for Future Sale."

18
<PAGE>
NO SPECIFIC PLAN FOR PROCEEDS OF THE OFFERING

The Company has no current specific plans for a significant amount of the
net proceeds of the Offering. The principal purposes of the Offering are to
provide increased visibility of the Company in a marketplace where many of its
competitors are publicly held companies, to create a public market for the
Common Stock, to increase the Company's equity capital, to facilitate future
access by the Company to public equity market, to repay indebtedness and to fund
capital and other investments as well as potential investments and acquisitions.
The Company's management will have the discretion to allocate the proceeds of
the Offering to uses that the Company's stockholders may not deem desirable. See
"Use of Proceeds."

NO DIVIDENDS

The Company has not paid any cash dividends on its shares of capital stock
to date. The Company's bank credit agreement also presently prohibits the
payment of dividends on the Company's Common Stock. The Company currently
anticipates that it will retain any future earnings for use in its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future. See "Dividend Policy."

BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS

The Offering will provide substantial benefits to current equity
stockholders of the Company. Consummation of the Offering is expected to create
a public market for the Common Stock held by the Company's current stockholders,
including directors and executive officers of the Company. Current stockholders
(including the Company's directors and executive officers) and the Company's
directors and executive officers paid an aggregate of approximately $6.6 million
and $162,000, respectively, for an aggregate of approximately 22,512,234 shares
and 19,932,846 shares, respectively, of Common Stock. The Offering will result
in gross unrealized gain to such stockholders and directors and executive
officers in the aggregate of approximately $331 million and $299 million,
respectively.

IMMEDIATE SUBSTANTIAL DILUTION

The initial public offering price is substantially higher than the book
value per share of the outstanding Common Stock. As a result, investors
purchasing Common Stock in the Offering will incur immediate substantial
dilution in net tangible book value of $11.84 per share. In addition, the
Company has issued options to acquire Common Stock at prices significantly below
the initial public offering price. To the extent such outstanding options are
exercised, there will be further dilution. See "Dilution" and "Shares Eligible
for Future Sale."

19
<PAGE>
USE OF PROCEEDS

Based on an initial public offering price of $15.00 per share, the net
proceeds to the Company from the sale of the 5,750,000 shares of Common Stock
sold by the Company pursuant to the Offering are approximately $78.4 million
(approximately $90.4 million if the U.S. Underwriters' and the Managers'
over-allotment option is exercised in full), after deducting the underwriting
discounts and commissions and estimated offering expenses payable by the
Company.

The principal purposes of the Offering are to provide increased visibility
of the Company in a marketplace where many of its competitors are publicly held
companies, to create a public market for the Common Stock, to increase the
Company's equity capital, to facilitate future access by the Company to public
equity markets and to repay indebtedness and fund potential investments and
acquisitions.

The Company currently intends to use the net proceeds of the Offering to
repay all of its borrowings outstanding under the Company's revolving credit
agreement (which totaled approximately $16.0 million at April 30, 1997) and all
of its other indebtedness (which totaled approximately $3.5 million at April 30,
1997), to fund approximately $10.0 million in capital expenditures, to fund $2.0
million in connection with the Company's option to acquire a significant equity
interest in a private technology development company and in which the Company
has an existing equity investment, and for working capital and general corporate
purposes. The Company may also apply a portion of the net proceeds of the
Offering to construct facilities and to acquire or invest in other businesses,
products and technologies that are complementary to those of the Company.
Although, except as described above, the Company has not identified any specific
businesses, products or technologies that it may acquire or invest in, nor are
there any current agreements or negotiations with respect to any such
transactions, the Company from time to time evaluates such opportunities.
Pending such uses, the net proceeds will be invested in government securities
and other short-term, investment-grade, interest-bearing instruments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its capital
stock and currently intends to retain any future earnings to fund the growth of
the Company's business. The payment of any future dividends will be determined
by the Board of Directors in light of conditions then existing, including the
Company's results of operations, financial condition, cash requirements,
restrictions in financing agreements, business conditions and other factors.

The Company is restricted by the terms of its outstanding debt and financing
agreements from paying cash dividends on its Common Stock, and may in the future
enter into loan or other agreements that restrict the payment of cash dividends
on the Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and Note 4
of the Notes to Consolidated Financial Statements.

20
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company as of April
30, 1997 and such capitalization as adjusted to give effect to the sale by the
Company of 5,750,000 shares of Common Stock in the Offering at an initial public
offering price of $15.00 per share (after deducting underwriting discounts and
commissions and estimated offering expenses) and the application of net proceeds
of the Offering to the Company.

<TABLE>
<CAPTION>
APRIL 30, 1997
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Notes payable and current installments of long-term debt (1).......... $ 15,143 $ --
Long-term debt, less current installments (1)......................... 4,320 --
--------- -----------
Total debt........................................................ 19,463 --
--------- -----------

Stockholders' equity:
Preferred Stock, no par value, actual; par value $0.001 per share,
as adjusted; 5,000,000 shares authorized, none issued and
outstanding....................................................... -- --
Common Stock, no par value, actual; par value $0.001 per share, as
adjusted; 150,000,000 shares authorized; 22,512,234 shares issued
and outstanding, actual; and 28,262,234 shares issued and
outstanding, as adjusted (2)...................................... 6,554 28
Additional paid-in capital.......................................... -- 84,939
Retained earnings................................................... 8,099 8,099
Receivable from stockholders........................................ (642) (642)
Unearned compensation--restricted stock............................. (2,255) (2,255)
Cumulative foreign currency translation adjustment.................. (804) (804)
--------- -----------
Total stockholders' equity........................................ 10,952 89,365
--------- -----------
Total capitalization............................................ $ 30,415 $ 89,365
--------- -----------
--------- -----------
</TABLE>

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

(1) See Note 4 of Notes to Consolidated Financial Statements.

(2) Excludes 1,061,000 shares of Common Stock issuable upon exercise of options
outstanding as of April 30, 1997 with exercise prices ranging from $0.12 to
$15.00 per share and with a weighted average exercise price of $3.00 per
share. In May 1997, the Company adopted the QAD Inc. 1997 Stock Incentive
Program pursuant to which 4,000,000 shares of Common Stock are reserved for
issuance thereunder. See "Management--Executive Compensation," "Description
of Capital Stock" and Note 10 of Notes to Consolidated Financial Statements.

21
<PAGE>
DILUTION

The net tangible book value of the Company at April 30, 1997 was $11.0
million, or $0.49 per share of Common Stock. Net tangible book value represents
the amount of total tangible assets of the Company (total assets less goodwill,
trademarks and copyrights and other intangible assets) reduced by the amount of
its total liabilities. After giving effect to the Company's sale of 5,750,000
shares of Common Stock in the Offering at an initial public offering price of
$15.00 per share (assuming no exercise of the Underwriters' and Managers'
over-allotment option and after deducting the underwriting discounts and
commissions and estimated offering expenses payable by the Company), the
Company's pro forma net tangible book value at April 30, 1997 would have been
$89.4 million, or $3.16 per share of Common Stock. This represents an immediate
increase in net tangible book value of $2.67 per share to the Company's existing
stockholders and an immediate dilution in net tangible book value of $11.84 per
share to new investors purchasing shares of Common Stock in the Offering. The
following table illustrates the per share dilution in net tangible book value to
new investors:

<TABLE>
<S> <C> <C>
Initial public offering price per share...................................... $ 15.00
Net tangible book value per share at April 30, 1997........................ $ 0.49
Increase in net tangible book value per share attributable to new
investors.................................................................. 2.67
---------
Pro forma net tangible book value per share after the Offering............... 3.16
---------
Dilution per share to new investors.......................................... $ 11.84
---------
---------
</TABLE>

The following table sets forth on an as adjusted basis as of April 30, 1997,
the differences in the number of shares of stock purchased, the consideration
paid and the average price per share paid to the Company by the existing
stockholders and by investors purchasing shares of Common Stock in the Offering
at an initial public offering price of $15.00 per share (assuming no exercise of
the U.S. Underwriters' and Managers' over-allotment option and before deducting
the underwriting discount and estimated offering expenses):

<TABLE>
<CAPTION>
STOCK PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------------- --------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders................................ 22,512,234 80% $ 6,554,000 7% $ 0.29
New investors........................................ 5,750,000 20 86,250,000 93% 15.00
------------- --- ------------- ---
Total............................................ 28,262,234 100% $ 92,804,000 100%
------------- --- ------------- ---
------------- --- ------------- ---
</TABLE>

The preceding table assumes no exercise of any stock options outstanding as
of April 30, 1997. As of April 30, 1997, there were options outstanding to
purchase a total of 1,061,000 shares of Common Stock with exercise prices
ranging from $0.12 to $15.00 per share and with a weighted average exercise
price of $3.00 per share. If all options outstanding as of April 30, 1997 had
been exercised as of such date, the dilution per share to new investors in the
Offering would be $11.73. In May 1997, the Company adopted the QAD Inc. 1997
Stock Incentive Program pursuant to which 4,000,000 shares of Common Stock were
reserved for issuance thereunder. To the extent that options are granted and
subsequently exercised or shares are issued under the Program, new investors may
experience further dilution. See Note 10 of Notes to Consolidated Financial
Statements.

22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Consolidated Financial Statements and the Notes thereto and the
other financial information included elsewhere in this Prospectus. The statement
of income data for the fiscal years ended December 31, 1994 and 1995 and January
31, 1997 and the balance sheet data at January 31, 1996 and 1997 are derived
from the Consolidated Financial Statements included elsewhere in this Prospectus
which have been audited by KPMG Peat Marwick LLP, independent auditors. The
statement of income data for the fiscal years ended December 31, 1992 and 1993
and the balance sheet data at December 31, 1992, 1993, 1994 and 1995 are derived
from financial statements not included herein which have been audited by KPMG
Peat Marwick LLP, independent auditors. The selected financial data for the
three months ended April 30, 1996 and 1997 are unaudited but have been prepared
on the same basis as the audited financial statements and, in the opinion of
management, contain all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of operations for
such periods. The results of operations for the three months ended April 30,
1997 are not necessarily indicative of results to be expected for the year or
for any future period.

<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------
QUARTER ENDED
DECEMBER 31, APRIL 30,
---------------------------------- JANUARY 31, -----------------
1992 1993 1994 1995 1997 1996 1997
------- ------- ------- ------- ----------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue:
License fees.............................................. $15,408 $27,525 $48,665 $63,756 $85,753 $ 11,070 $19,149
Maintenance and other..................................... 12,666 19,018 17,695 26,193 40,691 9,046 12,924
------- ------- ------- ------- ----------- -------- -------
Total revenues.......................................... 28,074 46,543 66,360 89,949 126,444 20,116 32,073

Cost and expenses:
Cost of revenues.......................................... 6,643 11,125 18,944 23,599 29,158 6,863 8,462
Sales and marketing....................................... 10,043 15,526 21,552 38,341 53,258 13,728 13,566
Research and development.................................. 2,344 4,025 10,618 17,037 25,623 5,921 6,171
General and administrative................................ 5,479 9,425 11,162 13,618 16,083 3,804 3,557
------- ------- ------- ------- ----------- -------- -------
Total cost and expenses................................. 24,509 40,101 62,276 92,595 124,122 30,316 31,756
------- ------- ------- ------- ----------- -------- -------
Operating income (loss)..................................... 3,565 6,442 4,084 (2,646) 2,322 (10,200) 317

Other (income) expense:
Interest income........................................... (21) (9) (34) (38) (52) -- (48)
Interest expense.......................................... 111 232 462 825 1,657 429 435
Other..................................................... 786 886 (99) 48 (797) (146) (803)
------- ------- ------- ------- ----------- -------- -------
Total other (income) expense............................ 876 1,109 329 835 808 283 (416)
------- ------- ------- ------- ----------- -------- -------
Income (loss) before income taxes........................... 2,689 5,333 3,755 (3,481) 1,514 (10,483) 733
Income tax expense (benefit)................................ 1,100 1,860 877 (2,795) 514 (3,166) 173
------- ------- ------- ------- ----------- -------- -------
Income before cumulative effect of
change in accounting principle............................. 1,589 3,473 2,878 (686) 1,000 (7,317) 560
Cumulative effect of change in accounting principle......... -- 221 -- -- -- -- --
------- ------- ------- ------- ----------- -------- -------
Net income (loss)........................................... $ 1,589 $ 3,694 $ 2,878 $ (686) $ 1,000 $ (7,317) $ 560
------- ------- ------- ------- ----------- -------- -------
------- ------- ------- ------- ----------- -------- -------
Net income (loss) per share (1)............................. $ 0.08 $ 0.18 $ 0.12 $ (0.03) $ 0.04 $ (0.33) $ 0.02
Shares used in computing net income (loss) per share (1).... 20,761 20,761 23,864 21,861 23,509 22,139 24,026
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31,
---------------------------------- ----------------- APRIL 30,
1992 1993 1994 1995 1996 1997 1997
------- ------- ------- ------- ------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 390 $ 1,413 $ 1,706 $ 1,519 $ 1,463 $ 301 $ 1,306
Working capital (deficit)................................... 2,229 5,015 2,271 (2,814) (5,850) (6,609) (12,216)
Total assets................................................ 14,022 26,489 44,361 68,466 65,107 77,250 81,193
Notes payable and current installments of long-term debt.... 1,588 2,630 4,767 9,610 11,694 8,465 15,143
Long-term debt, less current installments................... 571 1,380 4,677 7,341 7,097 5,036 4,320
Total stockholders' equity.................................. 3,527 7,098 11,993 11,732 9,023 10,804 10,952
</TABLE>

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

(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of shares used in computing net income (loss) per share.

23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE SET FORTH IN THIS SECTION AS WELL AS THOSE UNDER THE
CAPTION "RISK FACTORS" APPEARING ELSEWHERE IN THIS PROSPECTUS.

INTRODUCTION

The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and the Notes thereto included elsewhere in
this Prospectus. Effective February 1, 1996, the Company changed its financial
reporting year end from December 31 to January 31. The Company's fiscal years
ending on or prior to December 31, 1995 ended December 31. All references to
"fiscal 1996" refer to the 12-month period ended January 31, 1997.

OVERVIEW

Founded in 1979, the Company is a provider of ERP software for multinational
and other large manufacturing companies. In 1986, the Company commercially
released its open, client/server based ERP application, MFG/PRO software. Since
that time, the Company has introduced several new generations of its MFG/PRO
software, and has significantly expanded its operations. As of April 30, 1997,
the Company had 700 employees, over 20 direct sales and support offices and 40
distributors worldwide, and approximately 1,880 customers in over 70 countries.
Total revenues have grown rapidly in recent years, increasing from $28.1 million
in 1992 to $126.4 million in fiscal 1996.

The Company derives its revenue from license fees, maintenance contracts and
other products and services. License fees are primarily derived from the
licensing of the Company's MFG/PRO software. License fees also include fees
received by the Company for licenses of third-party software sold in conjunction
with MFG/PRO software. Maintenance and other revenue consists primarily of
maintenance contracts and, to a lesser extent, revenue from consulting, training
and other services. Maintenance contract revenue typically represents 15% of the
software license list price (net of any distributor discounts) and is recognized
ratably over the life of the contract, which is typically 12 months. The Company
has made a strategic decision to rely increasingly on its network of third-party
distribution and implementation alliances to provide hardware, consulting and
implementation services. As a result, the Company's revenue related to license
fees and maintenance contracts as a percentage of total revenues has increased
from 72% in fiscal 1992 to 94% in fiscal 1996.

License fees for the Company's products generally range from $50,000 to
several million dollars, depending on the configuration of the products, the
number of sites and the number of users. No single customer has accounted for
greater than 10% of the Company's total revenues in any of the Company's last
three fiscal years. However, it is not uncommon for QAD to conclude a
multi-million dollar contract with a single customer, and the Company expects
revenue from large individual licenses to increase as a percentage of total
revenues.

The sales cycle for the Company's products is typically four to 15 months.
Like many enterprise software companies, the Company has experienced in the past
and expects to continue to experience seasonal fluctuations in its operating
results. The Company has generally realized lower total revenues (i) in July and
August, due primarily to reduced economic activity in Europe during that period
and (ii) to a lesser extent, in the first two months of the calendar year, due
to a concentration of customers which purchase products in the fourth calendar
quarter, and their resulting lower purchasing activity during the immediately
following months. In addition, like many enterprise software companies, the
Company also typically realizes a significant portion of its software license
revenue in the last month of each quarter.

24
<PAGE>
However, unlike a number of the Company's competitors, the Company does not
derive material revenue from the provision of implementation services in
connection with its license sales. As a result, the Company's revenue tends to
be less predictable. Furthermore, as a private company, QAD has historically
focused its efforts primarily on achieving annual financial results, with a
significant percentage of the Company's sales force compensation based on the
achievement of annual revenue goals. The Company believes that such practice has
also contributed to the weighting of total revenues to the fourth calendar
quarter.

QAD has recently implemented changes designed to mitigate the seasonal and
quarterly fluctuations in its operating results. Such changes include the hiring
of additional financial personnel who are experienced in quarterly budgeting,
including a new Chief Financial Officer and a Director of Financial Planning and
Analysis, the changing of the Company's fiscal year end from December 31 to
January 31 and the changing of the Company's planning systems to incorporate
quarterly performance goals and quarterly forecasting procedures. Additionally,
the Company is introducing quarterly financial incentives into its compensation
system. There can be no assurance that such changes will alleviate the seasonal,
quarterly or other fluctuations in the Company's financial results or that such
changes will have a positive effect at all.

During the year ended December 31, 1995, through the quarter ended April 30,
1997, the Company significantly increased its sales and marketing, service and
support and research and development staffs. These increases resulted in
substantial growth in the number of its full-time employees (from 521 at March
31, 1995, to 700 at April 30, 1997), the scope of its financial and operating
systems and the geographic distribution of its direct sales and support
operations (from 12 to 17 countries). These investments were incurred in
connection with the Company's strategy to establish and maintain a leadership
position as a global supplier of ERP solutions at the plant level as well as to
enter new markets such as supply chain management software. QAD believes that
such investments were essential in the development of the Company's products and
operations. Such commitment of resources has had, and may continue to have, a
significant impact on the Company's financial results, including annual and
quarterly profitability.

License fees revenue is recognized upon shipment of the software, provided
there are no vendor obligations to be fulfilled and collectibility is probable
within a 12-month period from date of shipment. Typically, the Company's
software licenses do not include significant vendor obligations. Maintenance
revenue for ongoing customer support and product updates is recognized ratably
over the term of the maintenance period, which is typically 12 months. Other
revenue is derived mainly from training, consulting and manual sales. Training
and consulting revenue is recognized as the services are performed.

The Company records revenue primarily in United States dollars. However, the
Company has historically recorded local expenses in local currency. The
Company's reporting currency is the United States dollar. Foreign currency
transaction and translation gains and losses are recorded in accordance with
Statement of Financial Accounting Standards No. 52. In fiscal 1996, the Company
realized $407,000 in foreign currency transaction gains, compared to losses of
$477,000 and $343,000 in fiscal 1995 and 1994, respectively. The Company has not
previously undertaken hedging transactions to cover its currency exposure, but
may implement programs to mitigate foreign currency exposure risk in the future
as management deems appropriate. See "Risk Factors--Risks Associated With
International Operations" and "--Exposure To Currency Fluctuations."

25
<PAGE>
RESULTS OF OPERATIONS

The following table sets forth for the periods indicated the percentage of
total revenues represented by certain items reflected on the Company's
Consolidated Statements of Income:

<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
QUARTER ENDED
DECEMBER 31, JANUARY 31, APRIL 30,
------------------------ --------------- ------------------------
1994 1995 1997 1996 1997
----- ----- --------------- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue:
License fees............................................... 73% 71% 68% 55% 60%
Maintenance and other...................................... 27 29 32 45 40
--- --- --- --- ---
Total revenues........................................... 100% 100% 100% 100% 100%
--- --- --- --- ---
--- --- --- --- ---

Cost and expenses:
Cost of revenues........................................... 29 26 23 34 27
Sales and marketing........................................ 32 43 42 68 42
Research and development................................... 16 19 20 30 19
General and administrative................................. 17 15 13 19 11
--- --- --- --- ---
Total cost and expenses.................................. 94 103 98 151 99
--- --- --- --- ---

Operating income (loss)...................................... 6 (3) 2 (51) 1

Other (income) expense:
Interest income............................................ (0) (0) (0) -- 0
Interest expense........................................... 1 1 1 2 1
Other...................................................... (0) 0 (0) (1) (3)
--- --- --- --- ---
Total other (income) expense............................. 1 1 1 1 (2)
--- --- --- --- ---
Income (loss) before income taxes............................ 5 (4) 1 (52) 3
Income tax expense (benefit)................................. 1 (3) 0 (16) 1
--- --- --- --- ---
Net income (loss)............................................ 4% (1)% 1% (36)% 2%
--- --- --- --- ---
--- --- --- --- ---
</TABLE>

INTERIM RESULTS FOR THE QUARTERS ENDED APRIL 30, 1997 AND 1996

TOTAL REVENUES. Total revenues for the three months ended April 30, 1997
increased 59% to $32.1 million from $20.1 million in the same period in 1996.
For the three months ended April 30, 1997, license fees as a percentage of total
revenues increased to 60% as compared to 55% in the same period in 1996. The
increase in total revenues was primarily due to growing acceptance of the
Company's MFG/PRO software, continued market penetration into its targeted
vertical markets and the Company's expansion into new geographical markets. The
increase in license fees and the decline in maintenance and other revenue as a
percentage of total revenues resulted primarily from increased license fee sales
in the first quarter of 1997 as compared to the same period in 1996.

COST OF REVENUES. Cost of revenues consists primarily of charges incurred
from reselling third-party databases (and their associated maintenance
contracts) which are required to run MFG/PRO software, support costs associated
with MFG/PRO software maintenance contracts and the costs associated with the
reproduction and delivery of the Company's software. During the three months
ended April 30, 1997, cost of revenues increased 23% to $8.5 million from $6.9
million in the same period in 1996. For the three months ended April 30, 1997,
cost of revenues as a percentage of total revenues decreased to 27% from 34%
during the same period in 1996. The increase in dollar amount was primarily the
result of costs associated with the growth in revenues of reselling third-party
databases. The decrease in cost of revenues as a percentage of total revenues
was primarily due to increased sales of MFG/PRO software licenses where the
purchase of third-party tools and databases were deferred or where the licensee
obtained licenses of third-party tools and databases directly from the
third-party vendor.

26
<PAGE>
SALES AND MARKETING. Sales and marketing expense consists primarily of
salaries and associated fringe benefits, travel and entertainment expenses and
promotional and advertising costs. During the three months ended April 30, 1997,
sales and marketing expense decreased 1% to $13.6 million from $13.7 million in
the same period in 1996. For the three months ended April 30, 1997, sales and
marketing expense as a percentage of total revenues decreased to 42% from 68%
during the same period in 1996. The first quarter of 1996 included substantial
expenses related to the Company's annual user conference, which did not occur
during the same period in 1997. The decrease in sales and marketing expense as a
percentage of total revenues was primarily due to the nonrecurring marketing
infrastructure expenses that were made in the first quarter of fiscal 1996, the
adjustment of sales and marketing expense made in the three months ended April
30, 1997 to better match anticipated revenue and the expenses related to the
Company's annual user conference in the first quarter of fiscal 1996.

RESEARCH AND DEVELOPMENT Research and development expense consists
primarily of salaries and associated fringe benefits, related overhead expenses
and amounts paid to consultants and third party developers to supplement the
product development efforts of the Company's in-house staff. During the three
months ended April 30, 1997, research and development expense increased 4% to
$6.2 million from $5.9 million in the same period in 1996. In the first quarter
of 1997, research and development expense as a percentage of total revenues
decreased from 30% to 19% from the same period in 1996. The increase in research
and development expense was primarily due to ongoing product enhancements. The
decrease in research and development expense as a percentage of total revenues
was primarily the result of a reduction in the utilization of third-party
software developers. Such reduction in the use of third-party developers was
accomplished through increased internal staffing within the research and
development department.

In accordance with Statement of Financial Accounting Standards No. 86, the
Company expenses software development costs as they are incurred until
technological feasibility has been established, at which time such costs are
capitalized until the product is available for general release to customers. To
date, the establishment of technological feasibility of the Company's products
and general release of such software have substantially coincided. As a result
the Company has not capitalized any material amount of software development
costs.

GENERAL AND ADMINISTRATIVE. During the three months ended April 30, 1997,
general and administrative expense decreased 6% to $3.6 million from $3.8
million in the same period in 1996. During the three months ended April 30,
1997, general and administrative expense as a percentage of total revenues
decreased to 11% from 19% during the same period in 1996. The decreases in
general and administrative expense in both dollar amount and as a percentage of
total revenues were primarily the result of the adjustment of general and
administrative expense to better match anticipated revenue. The Company
anticipates increases in general and administrative expense in the future.

TOTAL OTHER (INCOME) EXPENSE. Total other (income) expense is composed
primarily of interest expense, interest income and foreign exchange gains and
losses as well as other miscellaneous income and expense. During the three
months ended April 30, 1997, other (income) expense increased to $(416,000) from
$283,000 in the same period in 1996. This increase was primarily the result of
increased foreign currency transaction gains and miscellaneous rental income.

FISCAL YEARS 1996, 1995 AND 1994

TOTAL REVENUES. Total revenues increased 41% to $126.4 million in fiscal
1996 from $89.9 million in fiscal 1995, and increased 36% in fiscal 1995 from
$66.4 million in fiscal 1994. License fees as a percentage of total revenues
decreased to 68% in fiscal 1996 from 71% in fiscal 1995 and 73% in fiscal 1994.
The dollar increases in total revenues were primarily due to growing acceptance
of the Company's MFG/PRO software, continued market penetration into its
targeted vertical markets and the Company's expansion into new geographical
markets. The decreases in license fees and increases in maintenance and other
revenue as a percentage of total revenues were primarily a result of increased
maintenance renewals.

COST OF REVENUES. Cost of revenues increased 24% to $29.2 million in fiscal
1996 from $23.6 million in fiscal 1995, and increased 25% in fiscal 1995 from
$18.9 million in fiscal 1994. Cost of revenues as a

27
<PAGE>
percentage of total revenues decreased to 23% in fiscal 1996 from 26% in fiscal
1995 and 29% in fiscal 1994. The increase in dollar amount was primarily the
result of costs associated with the year over year growth in revenues of
reselling third-party databases. The decrease in cost of revenues as a
percentage of total revenues was primarily due to increased sales of MFG/PRO
software licenses where the purchase of third-party tools and databases were
deferred or where the licensee obtained licenses of third-party tools and
databases directly from the third-party vendor.

SALES AND MARKETING. Sales and marketing expense increased 39% to $53.3
million in fiscal 1996 from $38.3 million in fiscal 1995, and increased 78% in
fiscal 1995 from $21.5 million in fiscal 1994. Sales and marketing expense as a
percentage of total revenues decreased to 42% in fiscal 1996 from 43% in fiscal
1995 and 32% in fiscal 1994. The dollar increases as well as the increase as a
percentage of total revenues were primarily due to the expansion of the
Company's global sales force, opening and supporting global sales offices and
increasing marketing expense to promote the Company's name and products. The
expansion was initiated in fiscal 1995 and continued into fiscal 1996.

RESEARCH AND DEVELOPMENT. Research and development expense increased 50% to
$25.6 million in fiscal 1996 from $17.0 million in fiscal 1995, and increased
60% in fiscal 1995 from $10.6 million in fiscal 1994. Research and development
expense as a percentage of total revenues increased to 20% in fiscal 1996 from
19% in fiscal 1995 and 16% in fiscal 1994. The increases in research and
development expense both in dollar amount and as a percentage of total revenues
were primarily due to ongoing enhancements to MFG/PRO software, including the
ongoing migration of MFG/PRO software to object-oriented technology. In
addition, the increases were due to increased staffing of, and associated
support for, product engineers in connection with efforts to develop On/Q, the
Company's new supply chain management software which the Company expects to be
commercially available in the second half of fiscal 1998, and Qwizard, a
computer-based interactive training tool which became commercially available in
May 1997.

GENERAL AND ADMINISTRATIVE. General and administrative expense increased
18% to $16.1 million in fiscal 1996 from $13.6 million in fiscal 1995, and
increased 22% in fiscal 1995 from $11.2 million in fiscal 1994. General and
administrative expense as a percentage of total revenues decreased to 13% in
fiscal 1996 from 15% in fiscal 1995 and 17% in fiscal 1994. The dollar increases
in general and administrative expense were primarily the result of costs
associated with the expansion of the Company's administrative infrastructure to
support increases in the Company's total revenues. In addition, the Company
recognized compensation expense of $648,000 and $2.4 million in fiscal 1996 and
fiscal 1995, respectively, in connection with the repurchase of stock held by
employees upon their departure from the Company. The Company does not intend to
make such repurchases following completion of the Offering. The decrease in
general and administrative expense as a percentage of total revenues resulted
from total revenues growing faster than general and administrative expense. See
Note 10 of Notes to Consolidated Financial Statements.

TOTAL OTHER (INCOME) EXPENSE. Total other (income) expense decreased 3% to
$808,000 in fiscal 1996 from $835,000 in fiscal 1995, and increased 154% in
fiscal 1995 from $329,000 in fiscal 1994. The decrease in fiscal 1996 was
primarily the result of foreign currency transaction gains and miscellaneous
rental income offset by increased interest expense. The increase in fiscal 1995
was the result of increased interest expense.

INCOME TAX EXPENSE (BENEFIT). The Company recorded income tax expense
(benefit) of $514,000, $(2.8) million and $877,000 in fiscal 1996, 1995 and
1994, respectively. The Company's effective income tax rates were 34% and 23 %
in fiscal 1996 and 1994, respectively. The Company's effective income tax rate
historically has benefitted from the United States research and development tax
credit and tax benefits generated from export sales made from the United States.
The tax benefit recorded in 1995 relates primarily to loss carrybacks and
carryforwards associated with the Company's entry into new foreign taxing
jurisdictions and anticipated future taxable income to be earned in such
jurisdictions. The Company has available tax benefits associated with net
operating loss carryforwards of foreign subsidiaries aggregating $5.1 million at
January 31, 1997. See Note 6 of the Notes to Consolidated Financial Statements.

28
<PAGE>
QUARTERLY RESULTS OF OPERATIONS

The following table sets forth a summary of the Company's unaudited
quarterly results for the nine quarters ended April 30, 1997, together with the
percentage of total revenues represented by such results. This information has
been derived from the Company's unaudited quarterly consolidated financial
statements. In management's opinion, these quarterly results have been prepared
on a basis consistent with the audited Consolidated Financial Statements and the
Notes thereto contained elsewhere herein, and include all adjustments
(constituting only normal recurring adjustments), which the Company considers
necessary for a fair presentation of the information. The operating results for
any certain quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31,
1995 1995 1995 1996 1996 1996
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue:
License fees............................ $ 9,025 $ 19,181 $ 12,306 $ 21,271 $ 11,070 $ 23,151
Maintenance and other................... 5,519 6,026 7,393 8,298 9,046 10,404
----------- ----------- ----------- ----------- ----------- -----------
Total revenues........................ 14,544 25,207 19,699 29,569 20,116 33,555

Cost and expenses:
Cost of revenues........................ 5,145 6,021 6,066 6,779 6,863 7,177
Sales and marketing..................... 7,764 9,827 9,702 12,596 13,728 12,430
Research and development................ 3,906 3,847 4,593 5,338 5,921 5,438
General and administrative.............. 2,448 2,957 2,495 5,753 3,804 3,047
----------- ----------- ----------- ----------- ----------- -----------

Total cost and expenses............... 19,263 22,652 22,856 30,466 30,316 28,092
----------- ----------- ----------- ----------- ----------- -----------

Operating income (loss)................... (4,719) 2,555 (3,157) (897) (10,200) 5,463

Other (income) expense:
Interest income......................... (14) (18) 6 (8) -- (8)
Interest expense........................ 158 263 149 339 429 479
Other................................... (333) 126 (107) 262 (146) (75)
----------- ----------- ----------- ----------- ----------- -----------
Total other (income) expense.......... (189) 371 48 593 283 396
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes......... (4,530) 2,184 (3,205) (1,490) (10,483) 5,067
Income tax expense (benefit).............. (2,496) 1,203 (1,766) (821) (3,166) 1,554
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)......................... $ (2,034) $ 981 $ (1,439) $ (669) $ (7,317) $ 3,513
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
AS A PERCENTAGE OF TOTAL REVENUES:
Revenue:
License fees............................ 62% 76% 62% 72% 55% 69%
Maintenance and other................... 38 24 38 28 45 31
----------- ----------- ----------- ----------- ----------- -----------
Total revenues........................ 100% 100% 100% 100% 100% 100%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------

Cost and expenses:
Cost of revenues........................ 35 24 31 23 34 22
Sales and marketing..................... 53 39 49 43 68 37
Research and development................ 27 15 23 18 30 16
General and administrative.............. 17 12 13 19 19 9
----------- ----------- ----------- ----------- ----------- -----------
Total cost and expenses............... 132 90 116 103 151 84

Operating income (loss)................... (32) 10 (16) (3) (51) 16

Other (income) expense:
Interest income......................... (0) (0) 0 (0) -- (0)
Interest expense........................ 1 1 1 1 2 1
Other................................... (2) 0 (1) 1 (1) (0)
----------- ----------- ----------- ----------- ----------- -----------
Total other (income) expense.......... (1) 1 0 2 1 1
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes......... (31) 9 (16) (5) (52) 15
Income tax expense (benefit).............. (17) 5 (9) (3) (16) 5
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)......................... (14)% 4% (7)% (2)% (36)% 10%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------

OCT. 31, JAN. 31, APRIL 30,
1996 1997 1997
----------- ----------- -----------

<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue:
License fees............................ $ 13,915 $ 37,617 $ 19,149
Maintenance and other................... 9,891 11,350 12,924
----------- ----------- -----------
Total revenues........................ 23,806 48,967 32,073
Cost and expenses:
Cost of revenues........................ 6,341 8,777 8,462
Sales and marketing..................... 11,210 15,890 13,566
Research and development................ 6,096 8,168 6,171
General and administrative.............. 3,784 5,448 3,557
----------- ----------- -----------
Total cost and expenses............... 27,431 38,283 31,756
----------- ----------- -----------
Operating income (loss)................... (3,625) 10,684 317
Other (income) expense:
Interest income......................... (21) (23) (48)
Interest expense........................ 396 353 435
Other................................... 25 (601) (803)
----------- ----------- -----------
Total other (income) expense.......... 400 (271) (416)
----------- ----------- -----------
Income (loss) before income taxes......... (4,025) 10,955 733
Income tax expense (benefit).............. (1,235) 3,361 173
----------- ----------- -----------
Net income (loss)......................... $ (2,790) $ 7,594 $ 560
----------- ----------- -----------
----------- ----------- -----------
AS A PERCENTAGE OF TOTAL REVENUES:
Revenue:
License fees............................ 58% 77% 60%
Maintenance and other................... 42 23 40
----------- ----------- -----------
Total revenues........................ 100% 100% 100%
----------- ----------- -----------
----------- ----------- -----------
Cost and expenses:
Cost of revenues........................ 27 18 27
Sales and marketing..................... 47 32 42
Research and development................ 25 17 19
General and administrative.............. 16 11 11
----------- ----------- -----------
Total cost and expenses............... 115 78 99
Operating income (loss)................... (15) 22 1
Other (income) expense:
Interest income......................... (0) (0) (0)
Interest expense........................ 2 1 1
Other................................... 0 (1) (3)
----------- ----------- -----------
Total other (income) expense.......... 2 0 (2)
----------- ----------- -----------
Income (loss) before income taxes......... (17) 22 3
Income tax expense (benefit).............. (5) 7 1
----------- ----------- -----------
Net income (loss)......................... (12)% 15% 2%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

29
<PAGE>
The Company's quarterly revenue, expenses and operating results have varied
significantly in the past, and the Company anticipates that such fluctuations
will continue in the future as a result of a number of factors, many of which
are outside the Company's control. The factors affecting these fluctuations
include demand for the Company's products and services, the size, timing and
structure of significant licenses by customers, market acceptance of new or
enhanced versions of the Company's software products and products that operate
with the Company's products, the publication of opinions about the Company, its
products and technology by industry analysts, the entry of new competitors and
technological advances by competitors, delays in localizing the Company's
products for new markets, delays in sales as a result of lengthy sales cycles,
changes in operating expenses, foreign currency exchange rate fluctuations,
changes in pricing policies by the Company or its competitors, customer order
deferrals in anticipation of product enhancements or new product offerings by
the Company or its competitors, the timing of the release of new or enhanced
versions of the Company's software products and products that operate with the
Company's products, changes in the method of product distribution (including the
mix of direct and indirect channels), product life cycles, changes in the mix of
products and services licensed or sold by the Company, customer cancellation of
major planned software development programs and general economic factors.

The Company has generally realized lower revenue (i) in July and August, due
primarily to reduced economic activity in Europe in the summer months; and (ii)
to a lesser extent, in the first two months of the calendar year, due to the
concentration by some customers of purchases in the fourth quarter of the
calendar year, and their consequently lower purchasing activity during the
immediately following months. In addition, like many software companies, the
Company typically realizes a significant portion of its software license revenue
in the last month of the quarter and in the last quarter of the year. However,
unlike a number of the Company's competitors, the Company does not derive
material revenue from the provision of services in connection with its license
sales. As a result, a greater proportion of the Company's revenue tends to be
less predictable and to occur later in the quarter and in the year than the
revenue of competitors who provide such services.

30
<PAGE>
The Company's expense levels are relatively fixed and are based, in
significant part, on expectations of future revenue. Consequently, if revenue
levels are below expectations, expense levels could be disproportionately high
as a percentage of total revenue, and operating results would be immediately and
adversely affected and losses could occur.

QAD has recently implemented changes designed to mitigate the seasonal and
quarterly fluctuations in its operating results. Such changes include the hiring
of additional financial personnel including a new Chief Financial Officer and a
Director of Financial Planning and Analysis, the changing of the Company's
fiscal year end from December 31 to January 31 and the changing of the Company's
planning systems to incorporate quarterly performance goals and quarterly
forecasting procedures. Additionally, the Company is introducing quarterly
financial incentives into its compensation system. There can be no assurance
that such changes will alleviate the seasonal, quarterly or other fluctuations
in the Company's financial results or that such changes will have a positive
effect at all. See "Risk Factors--Seasonality of Operating Results."

TOTAL REVENUES. Total revenues increased in each of the five quarters ended
April 30, 1997 as compared to the corresponding quarters in the prior year.
License fees as a percentage of total revenues have fluctuated between 55% and
77% for the nine quarters ended April 30, 1997. The dollar increases in total
revenues were primarily due to growing market acceptance of the Company's
MFG/PRO software and continued market penetration into its targeted vertical
markets as well as expansion into new geographic markets. The fluctuations in
license fees as a percentage of total revenues were primarily a result of
significant variations in license fees from quarter to quarter, although
maintenance and other revenue has generally increased from quarter to quarter.
There can be no assurance that revenue will continue to grow in future periods
at historical rates or at all, or that the Company will remain profitable.

COST OF REVENUES. Cost of revenues generally increased in dollar amount for
the nine quarters ended April 30, 1997. Cost of revenues as a percentage of
total revenues fluctuated between 18% and 35% for the nine quarters ended April
30, 1997. The dollar increases in cost of revenues were primarily due to the
costs associated with increased sales of the Company's MFG/PRO software. The
fluctuations in cost of revenues as a percentage of total revenues were
primarily a result of fluctuations in sales of MFG/PRO software licenses and
where the purchase of third-party databases and associated maintenance contracts
were deferred or obtained directly from the vendor.

SALES AND MARKETING. Sales and marketing expense generally increased for
the nine quarters ended April 30, 1997. Sales and marketing expense fluctuated
between 32% and 68% of total revenues for the nine quarters ended April 30,
1997. Sales and marketing expense generally increased in dollar amount during
the nine quarters ended April 30, 1997 primarily as a result of expansion of the
Company's sales and marketing group to better promote and sell MFG/PRO software.
Historically, sales and marketing expense generally has been highest in dollar
amount in the fourth quarter as certain costs such as travel and entertainment
and commissions are incurred in connection with increased sales efforts and
closing of sales at year end. In the quarter ended July 31, 1996, the Company
adjusted sales and marketing costs to better match expense to anticipated
revenue. Fluctuations in sales and marketing expense as a percentage of total
revenues were primarily due to quarterly fluctuations in the Company's license
fees. The Company expects to increase sales and marketing staffing levels and to
incur associated costs in future periods.

31
<PAGE>
RESEARCH AND DEVELOPMENT. Research and development expense generally
increased in dollar amount for the nine quarters ended April 30, 1997. Research
and development expense fluctuated between 15% and 30% of total revenues for the
nine quarters ended April 30, 1997. The increases in dollar amount for research
and development expense have resulted primarily from increased staffing of, and
associated support for, product engineers in connection with efforts to develop
On/Q, the Company's new supply chain management software which the Company
expects to be commercially available in the second half of fiscal 1998, and
Qwizard, a computer-based interactive training tool which became commercially
available in May 1997. The increase in dollar amount in the quarter ended
January 31, 1997 was primarily due to expenses associated with the release of
the most recent version of MFG/PRO software, including a substantial increase in
the use of third-party developers in connection therewith. The Company's
research and development expense has been budgeted according to annual revenue
expectations as well as the Company's development schedule for new products and
updates to MFG/PRO software. As a result, research and development expense as a
percentage of total revenues has varied significantly during the nine quarters
ended April 30, 1997 due to fluctuations in total revenues.

GENERAL AND ADMINISTRATIVE. General and administrative expense has
fluctuated between 9% and 19% of total revenues for the nine quarters ended
April 30, 1997. The variations in general and administrative expense as a
percentage of total revenues were primarily due to variations in the quarter to
quarter total revenues and the fixed nature of certain components of the
Company's general and administrative expense. General and administrative expense
increased from $2.4 million in the quarter ended April 30, 1995 to $5.8 million
in the quarter ended January 31, 1996, primarily as a result of expansion of the
Company's administrative and information technology infrastructure in
conjunction with the expansion of the Company's operations. In addition, in the
quarters ended January 31, 1997 and 1996 general and administrative expense
increased due to compensation expense of $648,000 and $2.4 million,
respectively, in connection with the repurchase of stock held by employees upon
their departure from the Company. The Company does not intend to make such
repurchases following completion of the Offering. See Note 10 of "Notes to
Consolidated Financial Statements." In the quarter ended July 31, 1996, the
Company adjusted costs, including restructuring compensation, to better match
expenses to anticipated revenue. In the quarter ended January 31, 1997, certain
sales targets were met and general and administrative expense increased, largely
due to the restructuring of the compensation plan.

TOTAL OTHER (INCOME) EXPENSE. Total other (income) expense fluctuated in
dollar amount for the nine quarters ended April 30, 1997. Total other (income)
expense fluctuated between (2)% and 2% of total revenues for the nine quarters
ended April 30, 1997. The quarterly fluctuations in the dollar amount of total
other (income) expense were primarily related to varied amounts of debt
borrowings and the related interest expense. In addition, in each of the
quarters ended January 31, 1997 and April 30, 1997, the Company experienced
foreign currency transaction gains and miscellaneous rental income.

FISCAL YEAR TRANSITION PERIOD

As a result of the change in the Company's fiscal year end in 1996, the
Company is disclosing interim financial results for the one-month period ended
January 31, 1996. Total revenues, total cost and expenses, total other (income)
expense and net income (loss) were $3.5 million, $7.3 million, $65,000 and
$(2.9) million, respectively, for the one-month period. During that month, the
Company experienced normal monthly operational costs including planned increases
in headcount for the coming year. The net loss for this period reflects these
planned increases in conjunction with seasonally low revenue in the month of
January.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company has financed its operations and met its
capital expenditure requirements through cash flows from operations and short-
and long-term borrowings. At April 30, 1997, the Company had $1.3 million of
cash. Cash flows provided by (used in) operating activities were $(2.1)

32
<PAGE>
million, $6.7 million, $4.3 million and $4.3 million in the three months ended
April 30, 1997, and fiscal 1996, 1995 and 1994, respectively. Cash used in
investing activities was primarily related to the purchase of computer
equipment, office furniture and real estate and aggregated $2.4 million, $3.4
million, $9.5 million and $9.8 million in the three months ended April 30, 1997,
and fiscal 1996, 1995 and 1994, respectively. Cash flows from financing
activities in the three months ended April 30, 1997, and fiscal 1996, 1995 and
1994 were primarily related to net proceeds from (used in) borrowings and
proceeds from the sale of stock to employees and totaled $5.5 million, $(4.5)
million, $5.0 million and $5.8 million, respectively. At April 30, 1997, the
Company did not have any material commitments for capital expenditures.

At April 30, 1997, the Company had a working capital deficit of $12.2
million. Accounts receivable, net of allowance for doubtful accounts, decreased
to $43.8 million at April 30, 1997 from $46.7 million at January 31, 1997. The
Company's accounts receivable days' sales outstanding ("DSO"), calculated on a
quarterly basis (for quarters ending on April 30, July 31, October 31, and
January 31), has ranged from 134 days to 66 days over the last three years and
has demonstrated seasonal fluctuations. During each of those years, DSO peaked
in the quarter ended April 30 and (except for fiscal 1995) improved
significantly during the middle two quarters. The Company believes that the
days' sales outstanding are higher than desired and the Company is focusing on
its credit and collection processes to improve cash flows and working capital.
These efforts include a recruiting effort for a new credit and collections
manager, along with a complete review of credit policies and collection
procedures. If the Company is unsuccessful in reducing the day's sales
outstanding through such efforts, continued high days' sales outstanding could
impair the Company's cash position. Total deferred revenue increased to $30.2
million at April 30, 1997 from $29.1 million at January 31, 1997 primarily as a
result of increased billings of maintenance agreements.

The Company has a revolving credit agreement which expires on July 31, 1998,
subject to automatic successive one-year extensions if not terminated by the
Company or the lender 90 days prior to the expiration date. The maximum
available amount of borrowings under the revolving credit agreement is equal to
the lesser of $20 million or the sum of a percentage of the Company's accounts
receivable, $4 million of which may be used only for loans secured by real
estate owned by the Company. The total amount of available borrowings under the
revolving credit agreement at April 30, 1997 was approximately $20 million.
Borrowings under the revolving credit agreement bear interest, calculated
monthly, at an annual rate equal to the highest LIBOR rate in effect during the
month plus 4.875% but in no event less than 8%. Minimum monthly interest charges
are $20,000 (resulting in a rate of 10.565% at April 30, 1997). At April 30,
1997, the Company had approximately $14.7 million of borrowings outstanding
under the revolving credit agreement. The Company's revolving credit agreement
is collateralized by a security interest in substantially all of the Company's
assets. At April 30, 1997, the Company also had outstanding borrowings of $4.8
million under additional term loan agreements and capital leases with other
various credit institutions, which included approximately $3.1 million with
maturities of one year or less, at interest rates of approximately 9.94% per
annum. These term loans and capitalized leases are secured primarily by property
and equipment. Amounts outstanding under these additional credit agreements are
scheduled to be paid in monthly installments over varying maturities through
July 2002. Borrowings under the credit facility during the past 12 months were
used for general corporate purposes. The Company intends to repay all the
outstanding balances under the revolving credit agreement, the term loan
agreements and capital leases with the proceeds of the Offering, although it
intends to retain its revolving credit facility for future use. The revolving
credit agreement also limits the Company's ability to incur additional
indebtedness outside the ordinary course of business without the prior written
consent of the lender. The revolving credit agreement includes a number of other
restrictions, including the following: (i) restrictions on granting liens or
security interest in its assets, (ii) restrictions on any sale of assets of the
Company, other than in the ordinary course of its business, or any merger,
consolidation or change of control of the Company, (iii) restrictions on lending
or advancing funds to any person or entity except to employees in good-faith
arms' length transactions in the ordinary course of business and (iv)
restrictions on paying or declaring dividends on the Company's stock. The
Company is actively negotiating with a different lender to obtain improved
credit arrangements.

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The Company believes that the net proceeds from the Offering, the available
borrowings under its revolving credit agreement and cash generated by
operations, will satisfy the Company's working capital requirements for at least
the next 12 months.

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Standards Board issued SFAS No. 128,
EARNINGS PER SHARE. SFAS No. 128 specifies new standards designed to improve the
earnings per share ("EPS") information provided in financial statements by
simplifying the existing computational guidelines, revising the disclosure
requirements and increasing the comparability of EPS data on an international
basis. Some of the changes made to simplify the EPS computations include: (a)
eliminating the presentation of primary EPS and replacing it with basic EPS,
with the principal difference being that common stock equivalents are not
considered in computing basic EPS, (b) eliminating the modified treasury stock
method and the three percent materiality provision and (c) revising the
contingent share provision and the supplemental EPS data requirements. SFAS No.
128 also makes a number of changes to existing disclosure requirements. SFAS No.
128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. The Company has not determined the
impact of the implementation of SFAS No. 128.

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BUSINESS

The Company is a provider of Enterprise Resource Planning ("ERP") software
for multinational and other large manufacturing companies. The Company's
software solutions are designed to facilitate global management of resources and
information to allow manufacturers to reduce order fulfillment cycle times and
inventories, improve operating efficiencies and measure critical company
performance criteria against defined business plan objectives. The flexibility
of the Company's products also helps manufacturers adapt to growth,
organizational change, business process reengineering, supply chain management
and other challenges.

The Company's principal product, MFG/PRO software, is specifically designed
for deployment at the plant or division level of global manufacturers in five
targeted industry segments: electronics/industrial, food/beverage, consumer
packaged goods, medical and automotive. MFG/PRO software provides multinational
organizations with an integrated ERP solution that is based on an open,
client/server architecture and includes manufacturing, distribution, financial
and service/support management applications. Additionally, the Company is
currently focused on extending its presence in multi-site manufacturing by
developing a line of object-oriented, supply chain management solutions, named
On/Q software. The Company's initial On/Q software product, Logistics, is
designed to allow for consolidation of orders, contract management, shipping and
logistics management. Logistics is currently in development and is expected to
be commercially available in the second half of 1998. As of April 30, 1997, the
Company had licensed MFG/PRO software at approximately 3,200 sites to
approximately 1,880 customers in over 70 countries. The Company's customers
include Cargill, Incorporated, Colgate-Palmolive Company, Johnson Controls,
Inc., Johnson & Johnson, Lucent Technologies, Inc., Philips Electronics N.V.,
St. Jude Medical, Inc., Unilever N.V. and United Technologies Automotive.

INDUSTRY BACKGROUND

In recent years, businesses have been subject to increasing global
competition, resulting in pressure to lower production costs, improve product
performance and quality, increase responsiveness to customers and shorten
product development and delivery cycles. In addition, globalization has greatly
increased the scope and complexity of multinational manufacturing organizations.
Through business process reengineering, many organizations have begun to
reengineer their critical business processes and restructure their organizations
to accommodate and exploit rapid changes in the business environment. As part of
this process, businesses are seeking ERP software solutions which will enable
them to better manage resources across the enterprise and facilitate the
integration of sales management, component procurement, inventory management,
manufacturing control, project management, distribution, transportation, finance
and other functions on a global basis. While historically many companies have
developed their ERP software internally, companies are increasingly deploying
open, client/server-based ERP applications developed by third parties which
reduce internal software development costs and enable increased flexibility and
inter-operability across a broad range of hardware and software platforms. The
Gartner Group has estimated that the global ERP software market totaled more
than $4.4 billion in 1996 and will grow to an estimated $10.0 billion by the
year 2000.

While current ERP software enables the integration and management of
critical data within enterprises, organizations increasingly are recognizing the
need to deploy new software systems that manage the global supply chain by
enhancing the flow of information to and from customers, suppliers and other
business partners outside the enterprise. More recently, the availability and
use of the Internet has created a demand for software which will operate across
the Internet to enhance business-to-business electronic commerce.

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The Company believes that the increasing complexity and diversity of
customer requirements limits the ability of any single-vendor solution to fully
meet the enterprise-wide needs of its customers and has led to the emergence of
three distinct segments within the ERP software market: (i) corporate; (ii)
plant; and (iii) supply chain management.

CORPORATE ERP solutions are primarily focused on the consolidated data
management, financial and human resource needs of large Fortune 1000
companies. Leading vendors of corporate level solutions include Oracle,
PeopleSoft and SAP. While corporate ERP systems offer robust
functionality, the Company believes that the very broad scope,
significant cost and limited flexibility of many of these systems limit
their effectiveness in addressing the needs of individual plants or
divisions. In addition, this limited flexibility makes these systems
difficult to deploy throughout the enterprise.

PLANT ERP solutions are primarily focused on the specific needs of
manufacturing plants and distribution sites of global companies, such as
manufacturing planning, production control and distribution. Leading
vendors of plant ERP solutions include the Company, Baan, J.D. Edwards
and SSA. Given the diverse and constantly changing needs of manufacturing
and distribution sites, ERP users demand highly flexible,
industry-specific plant ERP solutions that can be deployed rapidly and
cost-effectively across multiple sites on a global basis.

SUPPLY CHAIN MANAGEMENT solutions are designed to link a company more
closely with customers, suppliers and other business partners in order to
optimize manufacturing and distribution processes, reduce costs and
enhance customer satisfaction. Supply chain management functions include
logistics and order management, advanced planning and scheduling, global
purchasing, and sales and support management. Leading vendors in the
supply chain management market include i2, IMI and Manugistics, as well
as certain corporate level ERP software vendors. The Company believes
that supply chain optimization represents one of the greatest current
opportunities for companies to reduce costs and enhance customer
relationships.

MARKET OPPORTUNITY

While ERP solutions have provided significant benefits to companies by
centralizing and integrating the management of enterprise-wide data, the Company
believes that customer requirements for industry-specific functionality,
flexibility and ease of implementation pose significant challenges for many ERP
vendors. As a result, the Company believes that there is a large and rapidly
growing market demand for industry-specific software solutions that meet
customers' needs for plant-level deployments and global supply chain management.

The Company believes that the adoption of open, client/server-based ERP
solutions at the plant level will accelerate as potential customers transition
from proprietary, legacy systems in coming years. In addition, the Company
believes that supply chain management represents a compelling market
opportunity. To be successful in meeting customer requirements in these market
segments, the Company believes ERP software vendors must:

- Offer localized, multi-language, multi-currency functionality to support
global deployments;

- Offer industry-specific product functionality and expertise in key
vertical markets;

- Provide global service and support, either directly or through third
parties;

- Offer ease of implementation and rapid time to benefit;

- Provide flexibility to meet the diverse needs and business practices of
global, multi-site manufacturing implementations;

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- Inter-operate and co-exist with corporate-level ERP solutions and
industry-leading supply chain management solutions;

- Address supply chain management challenges by offering technology which
integrates and optimizes interactions between companies and their
customers, suppliers and other business partners; and

- Develop and utilize advanced technologies to deliver superior product
functionality.

THE QAD SOLUTION

The Company is a leading provider of ERP software for multinational and
other large manufacturing companies. The Company's principal product, MFG/PRO
software, is a modular software program designed specifically to address the
plant-level needs of multinational manufacturers for flexible, inter-operable
and rapidly deployable ERP software solutions. Additionally, the Company is
currently focused on extending its presence in multi-site manufacturing by
developing a line of supply chain management solutions designed to serve the
needs of multinational manufacturing companies. The Company meets customer
requirements in its vertical markets by delivering the following:

GLOBAL SOLUTIONS FOR MULTINATIONAL MANUFACTURERS. The Company focuses on
the plant-level ERP and supply chain management requirements of global
manufacturers. The Company's MFG/PRO software incorporates multi-currency
capabilities, is available in 24 languages and is tailored to local financial
practices and requirements in many of its major markets. The Company's customers
have deployed MFG/PRO software in over 70 countries. In November 1995, the
Gartner Group stated that in terms of being able to provide service and support
around the globe, QAD has demonstrated the best performance of the leading
companies in an open systems environment, particularly in the European market.

EXPERTISE AND FUNCTIONALITY FOR KEY VERTICAL MARKETS. The Company targets
and has achieved leadership positions in the electronics/industrial,
food/beverage, consumer packaged goods, medical and automotive industries. The
Company believes that its substantial expertise in these markets, together with
its strategy of developing software modules that address specific industry
needs, provides the Company with a competitive advantage. For example, the
Company's MFG/PRO software includes features which facilitate United States Food
and Drug Administration ("FDA") compliance and validation for the medical
industry, advanced pricing and promotion management for the consumer packaged
goods industry, and customer/ supplier scheduling via electronic data
interchange for the automotive industry.

GLOBAL SERVICE AND SUPPORT. The Company believes that a high level of
global service and support is a critical component of its ERP solution for
multinational manufacturers. The Company offers product service and support
directly through its sales and support offices in 17 countries and indirectly
through its global network of systems integration partners and distributors
located in over 40 countries. The Company's systems integrator and distributor
network also offers consultancy services for the implementation of its software
solutions.

EASE OF IMPLEMENTATION. The modular product design of MFG/PRO software,
together with the Company's focus and expertise in its key vertical markets,
enables rapid product implementation, often within six months at a particular
site. Product modules are designed to address the specific needs of customers in
the Company's targeted markets, limiting the need for extensive customization
upon implementation. In addition, customers are able to purchase only those
modules with functionality appropriate for their needs, limiting time-consuming
implementation and training for unneeded features.

OPEN, CLIENT/SERVER-BASED SOLUTIONS. The Company's products are based on an
open, client/server computing architecture. The Company believes that this
architecture enables superior flexibility and inter-operability and addresses
the desire of customers to migrate critical business software to an open
platform.

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MFG/PRO software operates in Windows NT and major UNIX environments on more than
25 hardware platforms and is compatible with Oracle and Progress databases.

THE QAD STRATEGY

The Company's objectives are to expand its leadership position in
plant-level solutions and become a leading provider of supply chain management
software solutions to multinational manufacturers. The key elements of the
Company's strategy for achieving these objectives include the following:

MAINTAIN AND LEVERAGE LEADERSHIP IN PLANT-LEVEL MANUFACTURING. The Company
believes its
MFG/PRO software is the leading open systems ERP solution for plant-level
deployments worldwide. As of April 30, 1997, the Company had licensed MFG/PRO
software at approximately 3,200 sites to approximately 1,880 customers in over
70 countries. The Company's strategy is to continue to aggressively pursue
plant-level opportunities in its targeted markets to enhance its leadership
position. The Company believes that the success of its MFG/PRO software provides
a strong existing customer base from which to license additional modules and
additional users. In addition, the Company intends to leverage its installed
base of MFG/PRO software customers in order to accelerate the adoption of On/Q
software, the Company's new supply chain management solution.

FOCUS ON GLOBAL SUPPLY CHAIN MANAGEMENT SOLUTIONS. The Company believes
that supply chain optimization represents one of the greatest current
opportunities for companies to reduce costs and enhance customer relationships.
The Company is developing a group of new applications, known as On/Q software,
for this market. The initial product, Logistics, is being developed specifically
to meet demand-side requirements of multinational manufacturing companies,
including complex high-volume order processing, import/export management,
multiple-route segmentation and logistics, distribution point optimization, lead
and sales order management, contract management and liquidation. In addition,
the Company intends to develop additional applications, including procurement
and planning, and to provide seamless inter-operability with other industry
leading supply chain management solutions for scheduling. The Company believes
that these new products, coupled with its strength in plant-level ERP solutions
and the Company's products' demonstrated ability to inter-operate with other
corporate applications, positions the Company to succeed in the emerging supply
chain management marketplace.

LEVERAGE ALLIANCES. The Company leverages the expertise of distribution,
implementation and technology partners to meet the diverse needs of its
customers. The Company augments its direct sales organization with a global
network of over 40 distributors and numerous implementation providers. The
Company plans to leverage its network of distributors and implementation
providers to further penetrate its vertical markets. For implementation of its
software, the Company relies almost exclusively on third-party providers,
allowing the Company to maintain its focus on developing, marketing and
distributing its software. In addition, the Company has entered into a number of
joint development agreements with third-party software developers who provide
functionality that has been embedded into or integrated with
MFG/PRO software to deliver a more complete solution for its targeted vertical
markets.

MAINTAIN TECHNOLOGY LEADERSHIP. The Company was one of the first providers
of open, client/server-based ERP software and is committed to maintaining its
technology leadership. The Company's technology strategy is focused on migrating
its products to a component object architecture in order to enable customers to
improve inter-operability with existing software applications and to deploy and
integrate new "best of breed" software applications across the enterprise. The
Company believes inter-operability will become an important requirement of
software applications as organizations seek fully integrated ERP solutions. In
addition, the Company believes this object architecture will enable it to
provide enhanced functionality in its new On/Q software, which is currently
under development.

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CAPITALIZE ON YEAR 2000 COMPLIANCE. Many companies are facing significant
business problems due to the failure of their existing ERP systems to
appropriately recognize years after 1999. The Company believes that this problem
will accelerate the migration to open, client/server-based ERP solutions that
are configured to handle this transition. The Company's products have been year
2000 capable since their inception. The Company believes that it is well
positioned to leverage its MFG/PRO software and its On/Q software to be a part
of customers' year 2000 solutions.

PRODUCTS

The Company targets its MFG/PRO software to manufacturing companies within
the electronics/ industrial, food/beverage, consumer packaged goods, medical and
automotive industries. In addition, the Company is developing On/Q software, a
group of applications targeted to the supply chain management needs in these
industry segments. The first of these applications, Logistics, is currently
under development and is expected to be commercially available in the second
half of 1998.

The Company's principal product, MFG/PRO software, provides multinational
organizations with an integrated ERP solution that includes manufacturing,
distribution, financial and service/support management applications within an
open systems environment. MFG/PRO software is composed of an extensive set of
modules designed to address the needs of customers in the Company's vertical
markets. The Company's software supports multiple currencies and global tax
management and is tailored to financial practices and requirements in many of
its major geographic markets. MFG/PRO software supports 24 languages, including
most European languages, Japanese, Chinese, Korean and Russian. MFG/PRO software
operates in both host and distributed, client/server computing environments and
supports single or multiple sites, as well as multiple production and
operational processes. These capabilities enable multinational manufacturers to
manage multiple hybrid production methods within a single organization or a
single production site, and also provide the flexibility to adapt to additional
sites and processes as an organization's business evolves. Licensing fees for
the Company's MFG/PRO software generally range from $50,000 to several million
dollars, depending on the configuration of the software, the number of sites and
the number of users. Annual maintenance fees for such software generally
approximate 15% of the list price of the software.

The modular design of MFG/PRO software enables the Company's customers to
select the modules necessary to meet their specific operational needs. For
example, in the automotive industry, MFG/PRO software's Repetitive Manufacturing
module, coupled with the Customer Schedules and Supplier Schedules modules,
provides high-volume businesses with streamlined manufacturing capabilities. The
Product Change Control module allows electronics/industrial companies to meet
challenges presented by rapidly changing products and short product life-cycles
through sophisticated engineering change management. In the industrial and
consumer packaged goods industries, MFG/PRO software supports mixed-mode and
discrete manufacturing with powerful planning and execution management modules.
In the food/beverage industry, the Advanced Pricing Manager module tracks
product promotion life cycles from concept through analysis. In the medical
industry, MFG/PRO software has the tools to allow for accurate FDA compliance
reporting and validation.

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MFG/PRO software currently includes the following modules:

Accounts Payable
Accounts Receivable
Advanced Pricing Manager
Capacity Requirements Planning
Cash Management
Client/Server
Compliance (for FDA)
Configurator
Configurator Product Modeler
Configured Products
Cost Management
Customer Schedules
Data Warehousing
Decision Support
Distribution Requirements
Planning
Electronic Data Interchange
Enterprise Operations Planning
Fixed Assets
Forecasting
Formula/Process
General Ledger
Inventory Control
Master Scheduling
Materials Requirements
Planning
Multiple Currency
Physical Inventory
Product Change Control
Product Line Planning
Product Structures
Purchasing
Quality Management
Repetitive Manufacturing
Resource Planning
Results Files
Routings/Work Centers
Sales Analysis
Sales Orders/Invoices
Sales Quotations
Service/Repair Orders
Service/Support Management
Shop Floor Control
Supplier Schedules
Validation (for FDA)
Work Orders

The Company has a number of business alliances to enhance the functionality
of MFG/PRO software. The Company has entered into a number of joint development
agreements with third-party software developers who provide functionality that
has been embedded into or integrated with MFG/PRO software to deliver more
complete solutions for its targeted vertical markets.

To further enhance the rapid deployment and ease of use of MFG/PRO software,
the Company introduced Qwizard software in March 1997. Qwizard software is a
mentor for users of MFG/PRO software which provides self-paced interactive
training. In addition, Qwizard software includes tools to design and customize
the visual interface of MFG/PRO software to match the users' workflows and job
responsibilities.

PRODUCTS UNDER DEVELOPMENT

The Company's planned suite of supply chain management solutions, On/Q
software, is designed to inter-operate with MFG/PRO software and other ERP and
supply chain software solutions. The initial
On/Q software product under development, Logistics, is designed to allow for
consolidation of orders, contract management, shipping and logistics management.
The Company anticipates that Logistics will be commercially available in the
second half of 1998. Logistics is specifically designed to meet demand-side
requirements of global multinationals, including complex high-volume order
processing, import/export management, multiple-route segmentation and logistics,
distribution point optimization, lead and sales order management, contract
management and liquidation. The Logistics application is targeted to address
supply chain issues associated with global manufacturing operations, and is
designed to allow orders to be taken from any customer, placed with any number
of plants as capacity and product mix change, and filled from the most
cost-efficient available distribution center, while consolidating or
distributing invoices to any combination of sold-to-, ship-to- and
bill-to-customers. Logistics is also designed to provide cost-efficient
consolidation and to provide multi-lingual and multi-currency capabilities. The
Company plans to follow Logistics with additional On/Q software products. There
can be no assurance, however, that any of the Company's supply chain management
solutions will be successfully developed in accordance with planned schedules or
at all, or that if successfully developed, such software will achieve market
acceptance. See "Risk Factors--Supply Chain Solutions Under Development and
Underlying Technology."

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TECHNOLOGY

MFG/PRO software has been developed with a commercially available, fourth
generation language and tool set marketed by Progress that addresses relational
databases provided by Oracle and Progress. See "Risk Factors--Dependence on
Progress Products." MFG/PRO software is being migrated to an object-oriented
framework which the Company believes will enable customers to improve
inter-operability with existing software applications and to deploy and
integrate new "best of breed" software applications across the enterprise. The
Company also believes object-orientation will enable the Company to provide
enhanced functionality in its new On/Q software under development. While the
Company's MFG/PRO software is dependent upon Progress technology, the Company's
new On/Q software under development is not dependent on Progress technology. The
Company is currently in the process of converting its MFG/PRO software modules
to object-oriented technology where the Company believes such conversion will
add value. The software operates in Windows NT and major UNIX environments on
more than 25 hardware platforms. MFG/PRO software supports distributed and
mirrored databases, local and wide area networks, character-based and graphical
user interfaces.

The Company is also embracing object-oriented technology as a next
generation technology to address the complex supply chain management
requirements of companies and to improve business processes. The Company
believes that new object-based functionality will play a key role in the
competitive manufacturing, distribution, financial, planning and service/support
management strategies of customers in the Company's targeted industry segments.
Object-oriented technology allows for the creation of systems which are scalable
and flexible and which are capable of accommodating changes in business
requirements and technology infrastructure.

The Company's deployment of object-oriented technology consists of three
main elements: component objects; Convergent Engineering methodology; and an
open interface server.

COMPONENT OBJECTS are simple building blocks of small, discrete pieces of
functionality that can be configured to create complete applications and
enable developers to rapidly create and modify systems to provide the
desired set of functionality for specific vertical markets or individual
customers. The Company has defined three types of component objects:
business object frameworks; common business objects and application objects.

CONVERGENT ENGINEERING methodology is a new software design methodology
employed by the Company to develop future products. Convergent Engineering
methodology allows business requirements to be captured as a series of
simple facts, actions and rules, enabling software to more flexibly
accommodate current business practices and processes.

INTER/LINQ, the open interface server developed by the Company, uses
commercially available messaging tools along with the Company's proprietary
data mapping applications. This product is used to provide inter-operability
with other software applications, even among multiple revision levels of the
same or different products.

There can be no assurance that the Company will be successful in converting
its MFG/PRO software to object-oriented technology or developing its new supply
chain management software to incorporate object-oriented technology on a timely
basis, if at all, or that if converted or developed such software will achieve
necessary market acceptance. See "Risk Factors--Supply Chain Solutions Under
Development and Underlying Technology."

RESEARCH AND DEVELOPMENT

The Company originally introduced its client/server-based MFG/PRO software
in 1986 and has subsequently released a number of product enhancements. The
Company's research and development staff, augmented by third-party development
resources, is focused on continuing updates and enhancements to its MFG/PRO
software, as well as the conversion of MFG/PRO software to object-oriented

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technology. The Company also maintains a separate advanced technology
development organization to research longer term software solutions. This
organization is specifically focused on developing the Company's On/Q software
supply chain management solutions, the first of which will be Logistics. In
April 1997, the Company also invested in a private company focused on developing
the Convergent Engineering methodology to participate in research and
development efforts of that company. The Company has an option to acquire an
additional interest in such company, following which the Company would own a 33%
equity interest. See "Use of Proceeds" and Note 11 to Notes to Consolidated
Financial Statements.

The Company believes that Internet capability for its products will be
important to the future success of its products. Accordingly, the Company is
developing Web-enabled versions of its products through in-house and third-party
development. The Company's Logistics product is also being designed to include
Web enablement. There can be no assurance that the Company will be successful in
developing any new products or enhancements, that the Company will not
experience difficulties that could delay or prevent successful development,
introduction or sales of these products or that its new products will adequately
meet the requirements of the marketplace and achieve market acceptance.

Research and development expense increased significantly in recent years as
the Company has continued to focus on development of new and enhanced products.
Research and development expense, which does not include costs of product
support and customization, increased to $25.6 million for the fiscal year ended
January 31, 1997, from $17.0 million and $10.6 million for the fiscal years
ended December 31, 1995 and 1994, respectively. Research and development expense
for the quarter ended April 30, 1997 was $6.2 million. At April 30, 1997 the
Company had 164 personnel in its research and development department. See "Risk
Factors--Rapid Technological Change," "--Supply Chain Solutions Under
Development and Underlying Technology" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

SALES AND MARKETING

The Company sells and supports its products through direct and indirect
sales organizations throughout the world. The Company's direct sales
organization consists of approximately 170 personnel located at its corporate
headquarters in Carpinteria, California, its regional headquarters in Mt.
Laurel, New Jersey, Hoofddorp, The Netherlands, Hong Kong, China and Sydney,
Australia, and over 20 other direct sales offices worldwide. The Company's sales
team is organized around its five targeted vertical markets, enabling the
Company to address the specialized needs of its customers.

The Company's sales and marketing strategy is to develop demand for its
products by creating visibility for the Company and awareness of its principal
product, MFG/PRO software. The Company participates in major computer and
vertical market industry trade shows and sponsors regional and worldwide user
conferences and regional alliance conferences. The Company also advertises in
leading business and targeted industry publications.

The Company's future success will depend in part upon the productivity of
its sales and marketing force and the ability of the Company to continue to
attract, integrate, train, motivate and retain new sales and marketing
personnel. Competition for sales and marketing personnel in the Company's
industry is intense. There can be no assurance the Company will be successful in
hiring such personnel in accordance with its plans. In addition, the failure by
the Company to maintain successfully its distributor relationships or to
establish new relationships in the future would have a material adverse effect
on the Company's

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business, results of operations and financial condition. See "Risk
Factors--Dependence Upon Development and Maintenance of Sales and Marketing
Channels."

THIRD-PARTY IMPLEMENTATION PROVIDERS

The Company has made the strategic decision to utilize almost exclusively
third parties to provide implementation and customization services to the
Company's customers. The Company has chosen this strategy to allow the Company
to maintain its focus on developing, marketing and distributing its software and
to enhance the effectiveness, expertise and commitment of third parties who
provide services on behalf of the Company. The Company also uses these third
parties for sales lead generation. Implementation and system integration
services are provided by a network of consultants and system integrators,
including Arthur Andersen & Co. LLP, Deloitte & Touche LLP, Ernst & Young LLP,
Integrated Systems & Services, LLC and Strategic Information Group
International, Inc. in the United States, BDM Largotim US, Inc., CSBI S.A.,
Origin Technology in Business Nederland B.V. and Sligos S.A. in Europe and Iris
Ifec Co., Ltd and STCS Systems Pte Ltd in Asia. In most cases, the Company's
distributors also deliver consulting and integration services. All third-party
providers are required to be certified in the applications and methodologies of
the Company's products.

The Company typically enters into separate agreements with each of its
installation and implementation partners that provide such partners with the
non-exclusive right to promote and market the Company's products, and to provide
training, installation, implementation and other services for the Company's
products, within a defined territory for a specified period of time (generally
two years). Although the Company's installation and implementation partners do
not receive fees for the sale of the Company's software products, they generally
are permitted to set their own rates for such services and the Company typically
does not collect a royalty or percentage fee from such partners on services
performed. The Company also enters into similar agreements with its distributor
partners that grant such partners the non-exclusive right, within a specified
territory, to market, license, deliver and support the Company's products. In
exchange for such distributors' services, the Company receives a negotiated
royalty fee for the license of its software products. The Company also relies on
third parties for the development or inter-operation of key components of its
software so that users of the Company's software will obtain the functionality
demanded. Such research and product alliances include software developed to be
sold in conjunction with the Company's software products, technology developed
to be included in or encapsulated within the Company's software products and
numerous third-party software programs that generally are not sold with the
Company's software but inter-operate directly with the Company's software
through application program interfaces. The Company generally enters into joint
development agreements with its third-party software development partners that
govern ownership of the technology collectively developed. Each of the Company's
partner agreements and third-party development agreements contain strict
confidentiality and non-disclosure provisions for the service provider, end user
and third-party developer and the Company's third-party development agreements
contain restrictions on the use of the Company's technology outside of the
development process. The failure of the Company to establish or maintain
successful relationships with such third-party software providers or such
third-party installation, implementation and development partners or to failure
of such third-party software providers to develop and support their software
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Risk Factors--Reliance on and Need to
Develop Additional Relationships with Third Parties."

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CUSTOMERS

The Company targets the industrial/electronics, food/beverage, consumer
packaged goods, medical and automotive sectors worldwide. As of April 30, 1997,
the Company had licensed MFG/PRO software at approximately 3,200 sites to
approximately 1,880 customers in over 70 countries. No one customer accounted
for more than 10% of total revenue during any of the Company's last three fiscal
years or during the quarter ended April 30, 1997. The following are among
companies and/or subsidiaries of such companies in each of the Company's target
vertical markets that have each generated more than $400,000 in software license
and maintenance revenue over the last three fiscal years:

ELECTRONICS/INDUSTRIAL
ABB Flakt Oy
Alcatel Services
International B.V.
Allen-Bradley Co. Inc. Aluminum Company of America
AT&T
Courtaulds plc
Ingersoll-Rand Company
Lucent Technologies Inc.
Matsushita Electric-Industrial
Co., Ltd
NEC America, Inc.
Newbridge Networks
Corporation
Philips International B.V.
RayChem Corporation
Schlumberger Technology Corp.
Silicon Graphics SA
Sun Microsystems, Inc.
Xerox Corporation
FOOD/BEVERAGE
AEP Borden Nederland B.V.
Cargill, Incorporated
Kraft Jacobs Suchard AG
Pepsi-Cola Company
Presto Foods Products
The Quaker Oats Company
Rich Products Corporation
CONSUMER PACKAGED GOODS
The Black & Decker
Corporation
Colgate-Palmolive Company
Gillette Company
Johnson & Johnson
Unilever N.V.
AUTOMOTIVE
Aeroquip-Vickers, Inc.
Daewoo Information
Systems Co. Ltd.
Ford Motor Corporation
Johnson Controls, Inc.
Lear Seating Corporation
R.J. Tower Corporation
Rockwell Automotive
United Technologies Automotive
Varity Kelsey-Hayes Company

MEDICAL
Alza Corporation
BOC Ohmeda Inc.
Physio-Control Corporation
Rexall Sundown, Inc.
St. Jude Medical, Inc.
Sunrise Medical Inc.
Ventritex, Inc.

CUSTOMER SERVICE AND SUPPORT

The Company believes that providing a high level of customer service and
support is essential to customer satisfaction and the Company's long-term
success. The Company's service and support organization is based primarily in
centers located in Mt. Laurel, New Jersey, Hoofddorp, The Netherlands, Hong
Kong, China and Sydney, Australia. Global support is also provided through the
Company's extensive network of alliance partners. This global presence helps the
Company support customers and partners in different regions and time zones
worldwide.

The Company also provides its customers with access to information and
customer support services via the World Wide Web. The Company's Internet-enabled
services facilitate the exchange of information seven days per week, 24 hours a
day and provide customers with access to QAD support databases. These databases
contain a wide variety of product information, customer support functionality,
answers to frequently asked questions, and a search-enabled online knowledge
base. In addition, ongoing training of support personnel, internal and external
consultants and the Company's alliance partners helps to ensure that customers
are up to date on the latest technologies and product enhancements offered by
the Company.

The Company offers, for a fee, a comprehensive education and training
program to its customers' information and technology staff and end-users, as
well as its implementation providers. Classes are

44
<PAGE>
offered through in-house facilities at Company offices in various locations, as
well as on-site training services at customer locations. The Company has also
assisted implementation providers and customers in developing their own in-house
support centers.

COMPETITION

The ERP software market is highly competitive, rapidly changing and affected
by new product introductions and other market activities of industry
participants. The Company competes in the ERP software market primarily on the
basis of functionality, ease of use and implementation, technology, time to
benefit, supplier viability, service and cost. The Company currently competes
primarily with (i) other vendors of software focused on the specific needs of
manufacturing plants and distribution sites of multinational manufacturing
companies, which include Baan, J.D. Edwards and SSA, (ii) smaller independent
companies that have developed or are attempting to develop advanced planning and
scheduling software which complement or compete with ERP or manufacturing
resource planning solutions, (iii) internal development efforts by corporate
information technology departments and (iv) companies offering standardized or
customized products on mainframe and/or mid-range computer systems. The Company
expects that competition for its MFG/PRO software will increase as other large
companies such as Oracle and SAP, as well as other business application software
vendors, enter the market for plant-level ERP solutions. With the Company's
strategic entry into the supply chain management software market, the Company
can expect to meet substantial additional competition from companies presently
serving that market, such as i2, IMI and Manugistics, as well as from broad
based solution providers such as Baan, Oracle, PeopleSoft and SAP that the
Company believes are increasingly focusing on this segment. In addition, certain
competitors, such as Baan, Oracle, PeopleSoft and SAP, have well established
relationships with present or potential customers of the Company. The Company
may also face market resistance from the large installed base of legacy systems
because of the reluctance of these potential customers to commit the time,
effort and resources necessary to convert to an open, client/server-based
software solution. Further, as the client/server market continues to develop,
companies with significantly greater resources than the Company may attempt to
increase their presence in these markets by acquiring or forming strategic
alliances with competitors of the Company. Increased competition is likely to
result in price reductions, reduced operating margins and loss of market share,
any one of which could materially adversely affect the Company's business,
results of operations and financial condition. Many of the Company's present or
future competitors have longer operating histories, significantly greater
financial, technical, marketing and other resources, greater name recognition
and a larger installed base of customers than the Company. As a result, they may
be able to respond more quickly to new or emerging technologies and to changes
in customer requirements, or to devote greater resources to the development,
promotion and sale of their products, than can the Company. There can be no
assurance that the Company will be able to compete successfully with existing or
new competitors or that competition will not have a material adverse effect on
the Company's business, operating results and financial condition.

PROPRIETARY RIGHTS AND LICENSING

45
<PAGE>
provided by the Company. Payment terms are generally 30 days from the date of
shipment. The Company has no patents or pending patent applications. In order to
facilitate the customization required by most of the Company's customers, the
Company generally licenses its MFG/PRO software to end users in both object code
(machine-readable) and source code (human-readable) format. While this practice
facilitates customization, making software available in source code also makes
it easier for third parties to copy or modify the Company's software for
non-permitted purposes. One of the Company's distributors has developed
modifications to the Company's software which it owns jointly with the Company.
The Company has entered into a reciprocal license with this distributor who
markets the product enhancements in conjunction with MFG/PRO software. This or
other distributors or other persons may continue to independently develop a
modified version of the Company's software. The Company seeks to protect its
software, documentation and other written materials under the legal provisions
relating to trade secret, copyright and contract law. The Company's license
agreements generally allow the use of MFG/PRO software solely by the customer
for internal purposes without the right to sublicense or transfer the MFG/PRO
software to third parties. The Company believes that the foregoing measures
afford only limited protection. Despite the Company's efforts, it may be
possible for third parties to copy certain portions of the Company's products or
reverse engineer or obtain and use information that the Company regards as
proprietary. In addition, the laws of certain countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. Accordingly, there can be no assurance that the Company will be able to
protect its proprietary software against unauthorized third-party copying or
use, which could adversely affect the Company's competitive position. Policing
unauthorized use of the Company's products is difficult, and while the Company
is unable to determine the extent to which piracy of its software products
exist, software piracy can be expected to be a problem. Furthermore, there can
be no assurance that the Company's competitors will not independently develop
technology similar to that of the Company.

The Company has in the past and may in the future resell certain software
which it licenses from third parties. In addition, the Company has in the past
and may in the future jointly develop software in which the Company will have
co-ownership or cross-licensing rights. There can be no assurance that these
third-party software arrangements and licenses will continue to be available to
the Company on terms that provide the Company with the third-party software it
requires to provide adequate functionality in its products, on terms that
adequately protect the Company's proprietary rights or on terms that are
commercially favorable to the Company. The loss of or inability to maintain or
obtain any of these software licenses, including a loss as a result of a
third-party infringement claim, could result in delays or reductions in product
shipments until equivalent software, if any, could be identified, licensed and
integrated, which could materially and adversely affect the Company's business,
operating results and financial condition. See "--Products" and "--Research and
Development."

46
<PAGE>
EMPLOYEES

As of April 30, 1997, the Company had 700 full-time employees of which 164
were in research and development, 128 were in customer and product support, 220
were in sales and marketing, and 188 were in general and administration and
other. In addition, the Company contracted with approximately 100 temporary
employees. None of the Company's workers is represented by collective bargaining
agreements with the exception of certain of the employees of the Company's
Netherlands subsidiary who are represented by statutory Works Councils as
required under the laws of The Netherlands. The Company believes that its
employee relations are good. The Company's success depends to a significant
extent upon a limited number of key employees and other members of senior
management of the Company. There can be no assurance that the Company will be
successful in attracting and retaining such personnel, and the failure to
attract and retain such personnel could have a material adverse effect on the
Company's business. See "Risk Factors--Dependence Upon Key Personnel; Need to
Hire Additional Personnel in All Areas."

PROPERTIES

The Company leases facilities to support its operations in several locations
throughout the world. The corporate headquarters are located in Carpinteria,
California in approximately 95,000 square feet of leased space in two facilities
subject to five leases. The leases expire on dates ranging from December 1997 to
December 2001. The Company owns approximately 28 acres and 54,000 square feet of
office space in a neighboring location which also supports portions of its
operations. The Company also owns a 34-acre parcel located in Carpinteria,
California at which it is considering developing additional facilities. Regional
headquarters are located in Mount Laurel, New Jersey, Hoofddorp, The
Netherlands, Hong Kong, China and Sydney, Australia in space covering
approximately 57,000, 16,000, 4,500 and 13,000 square feet and subject to leases
expiring in 2001, 2000, 1998 and 2000, respectively. Satellite offices are
located in the Americas, Europe, Asia and Australia in space covering
approximately 35,000, 15,000, 12,000 and 7,400 square feet and subject to leases
expiring in 2000, 2000, 1999 and 1998, respectively. All of the Company's leases
have been negotiated with independent third parties on an arms length basis, and
the Company believes they are on commercially reasonable terms. Total rent
expense for the year ended January 31, 1997 was $5.9 million. The global
presence of the Company is supported by offices located in the United States,
Canada, Mexico, Brazil, The Netherlands, United Kingdom, France, Germany,
Sweden, Italy, Poland, Australia, Singapore, Japan, Korea, India and China (Hong
Kong and Shanghai). Although the Company has from time to time sought and will
in the future seek new or expanded facilities for existing or additional
regional offices, the Company expects that its current domestic and
international facilities will be sufficient to meet its needs for at least the
next 12 months. See Notes 2 and 8 of Notes to Consolidated Financial Statements.

47
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Set forth below is certain information concerning the directors, executive
officers and other key employees of the Company as of April 30, 1997.

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ------------------------------------------------------- --- --------------------------------------------------
<S> <C> <C>

DIRECTORS AND EXECUTIVE OFFICERS

Pamela M. Lopker....................................... 42 Chairman of the Board and President
Karl F. Lopker......................................... 45 Director, Chief Executive Officer and
Secretary
Evan M. Bishop......................................... 42 Director
Margaret A. Biddison................................... 48 Vice President, Global Marketing
Vince P. Niedzielski................................... 44 Vice President, Development
Dennis R. Raney........................................ 54 Senior Vice President, Finance and
Administration and Chief Financial Officer

KEY EMPLOYEES

John M. Doordan........................................ 49 Vice President, Sales--Business Development
Charles R. Eggerding................................... 41 Vice President, Sales--Automotive
William F. McMenamin................................... 43 Vice President, Sales--Electronics/Industrial
Johannes G. Spruit..................................... 50 Vice President, Sales--Alliances
Gregory M. Turner...................................... 45 Vice President, Sales--Consumer Products
</TABLE>

PAMELA M. LOPKER founded the Company in 1979 and has been its Chairman of
the Board and President since inception. Prior to founding the Company, Ms.
Lopker served as Senior Systems Analyst for Comtek Research from 1977 to 1979.
Ms. Lopker is certified in Production and Inventory Management by the American
Production and Inventory Control Society. Ms. Lopker earned a Bachelor of Arts
degree in Mathematics from the University of California at Santa Barbara.

KARL F. LOPKER has served as Director, Chief Executive Officer and Secretary
since joining the Company in 1981. Mr. Lopker was founder and President of
Deckers Outdoor Corporation from 1973 to 1981, where he currently serves as a
Director. Mr. Lopker is certified in Production and Inventory Management at the
Fellow level by the American Production and Inventory Control Society. Mr.
Lopker studied Electrical Engineering and Computer Science at the University of
California at Santa Barbara. Mr. Lopker and Pamela Lopker are married.

EVAN M. BISHOP has served the Company as a Director since joining QAD in
1981. Mr. Bishop currently also holds the position of Functional
Architect/Manufacturing. Mr. Bishop is certified in Production and Inventory
Management by the American Production and Inventory Control Society. Mr. Bishop
holds a Bachelor of Science degree in Mathematics and Economics from the
University of California at Santa Barbara.

MARGARET A. BIDDISON has served as Vice President, Global Marketing since
joining the Company in 1994. Prior to joining the Company, Ms. Biddison served
from 1993 to 1994 as Vice President, Professional Services at Fourth Shift
Corporation and, from 1983 to 1993, served in numerous capacities for Western
Data Systems. Ms. Biddison holds a Bachelor of Arts degree in Anthropology from
the University of California at Santa Cruz.

VINCE P. NIEDZIELSKI has served as Vice President, Development since joining
the Company in April 1996. Prior to joining the Company, Mr. Niedzielski served
as Vice President, Production and

48
<PAGE>
Development at Candle Corporation from 1984 to 1996. Mr. Niedzielski holds a
Bachelor of Science degree in Mathematics from the University of Scranton.

DENNIS R. RANEY joined the Company in February 1997 as Senior Vice
President, Finance and Administration and Chief Financial Officer. Prior to
joining the Company, Mr. Raney served as the Chief Financial Officer of
California Microwave, Inc. from 1996 to 1997, and from 1995 to 1996, Mr. Raney
served as Chief Financial Officer of General Magic, Inc. Prior to joining
General Magic, Inc., Mr. Raney served as Chief Financial Officer of Bristol
Meyers Squibb's pharmaceutical division from 1993 to 1995. Mr. Raney also held
various positions with Hewlett-Packard Company from 1970 to 1993. Mr. Raney
holds a Masters of Business Administration from the University of Chicago and a
Bachelor of Science degree in Chemical Engineering from the South Dakota School
of Mines and Technology.

JOHN M. DOORDAN was appointed Vice President, Sales--Business Development in
1996. Since joining the Company in 1986, Mr. Doordan has held various executive
sales and management positions in the Company including Asia-Pacific Regional
Manager and Emerging Markets Manager as well as continuous responsibility for
multinational sales management. Mr. Doordan is certified in Production and
Inventory Management by the American Production and Inventory Control Society.
Mr. Doordan earned a Bachelor of Science degree in Industrial Management from
the Massachusetts Institute of Technology, Sloan School of Management.

CHARLES R. EGGERDING was appointed Vice President, Sales--Automotive in
1995. Since joining the Company in 1991, Mr. Eggerding has held various sales
and marketing positions. Since 1994, Mr. Eggerding has been responsible for the
global Automotive group. Mr. Eggerding is certified in Production and Inventory
Management by the American Production and Inventory Control Society. Mr.
Eggerding holds a Bachelor of Arts degree in Business/Political Science from
University of Michigan.

WILLIAM F. MCMENAMIN has served as Vice President,
Sales--Electronics/Industrial since joining the Company in January 1997. Prior
to that time, Mr. McMenamin worked as an independent consultant from 1996 to
1997. From 1995 to 1996, Mr. McMenamin served as Senior Vice President, Field
Operations at Programart Corporation and, from 1994 to 1995, he founded and
served as President and CEO of Qualix Pty. Ltd. From 1989 to 1994, Mr. McMenamin
served as Vice President, Sales and Operations--Americas and Asia Pacific Region
for Candle Corporation.

JOHANNES G. SPRUIT was appointed Vice President, Sales--Alliances in 1996.
Since joining the Company in 1990, Mr. Spruit has held various executive sales
and management positions in the Company, including Global Distributor Manager
and European Regional Manager.

GREGORY M. TURNER was appointed Vice President, Sales--Consumer Products in
1996. Since joining the Company in 1990, Mr. Turner has held various sales and
marketing responsibilities in business development of the Asia/Pacific region.
Mr. Turner holds a Bachelor of Science degree in Engineering from Sydney
University of Technology.

BOARD OF DIRECTORS

The Board of Directors is currently composed of three members. Within 90
days of the completion of the Offering, the Company anticipates expanding the
Board of Directors to five members and appointing two outside directors who will
serve on the Compensation Committee and the Audit Committee. Prior to the
Offering, the Company has not had a Compensation Committee or an Audit
Committee. Currently, each director holds office until the next annual meeting
of the stockholders or until his or her successor is duly elected and qualified.
Commencing with the first annual meeting of stockholders at which QAD has at
least 800 stockholders, the Company's Certificate of Incorporation provides that
the Board of Directors will be divided into three classes, with each class
serving staggered, three-year terms.

Prior to the Offering, directors of the Company have not received
compensation for their services in such capacity. The Company anticipates that,
following the Offering, directors who are employees of the

49
<PAGE>
Company will not be paid any fees or additional compensation (other than expense
reimbursement) for service as members of the Board of Directors or any committee
thereof. The Company will enter into arrangements with respect to fees and other
compensation (including expense reimbursement) for directors who are not
employees of the Company at the time they are selected to serve on the Board. In
addition, directors who are not employees of the Company may annually receive
automatic grants of non-qualified stock options under the Company's 1997 Stock
Incentive Program. See "--Employee Compensation Programs--1997 Stock Incentive
Program." The Company maintains directors' and officers' liability insurance and
its Bylaws provide for indemnification of directors and officers to the fullest
extent permitted by Delaware law. The Company has entered into indemnification
agreements with all of its directors. In addition, the Certificate of
Incorporation limits the personal liability of directors of the Company to the
Company or its stockholders for breaches of the directors' fiduciary duties to
the fullest extent currently permitted by Delaware law. See "Description of
Capital Stock--Certain Anti-Takeover, Limited Liability and Indemnification
Provisions."

COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During the fiscal year ended January 31, 1997, the Company had no
compensation committee or other committee of the Board of Directors performing
similar functions. Decisions concerning compensation of executive officers were
made during such year by the Board of Directors. No interlocking relationship
exists between the Company's Board of Directors and the board of directors or
compensation committee of any other company, nor has any such interlocking
relationship existed in the past.

EXECUTIVE COMPENSATION

The following table sets forth certain information concerning the
compensation earned by the Company's Chief Executive Officer and each of the
other most highly compensated executive officers of the Company (collectively,
the "Named Officers") whose aggregate cash compensation exceeded $100,000 for
services rendered in all capacities to the Company during the fiscal year ended
January 31, 1997.

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION(1) -------------
RESTRICTED
----------------------- STOCK
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) AWARD(S) ($)
- --------------------------------------------------------------------------- ---------- ----------- -------------
<S> <C> <C> <C>
Pamela M. Lopker, Chairman of the Board and President...................... $ 170,236 $ 83,902 $ --
Karl F. Lopker, Chief Executive Officer.................................... 166,561 127,143 --
Margaret A. Biddison, Vice President, Global Marketing..................... 136,660 31,116 952,500(2)
Vince P. Niedzielski, Vice President, Development.......................... 205,857 -- 190,500(2)
</TABLE>

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

(1) No executive officer named in the table above received perquisites or other
personal benefits, securities or property in an amount in excess of the
lesser of $50,000 or 10% of such officer's cash compensation, nor did all
Named Officers together receive such other compensation in excess of the
lesser of $50,000 times the number of such Named Officers or 10% of such
officers' aggregate cash compensation.

(2) The restricted stock granted to Ms. Biddison and Mr. Niedzielski vests
ratably over a five-year period, with the first shares vesting in January
1998.

No stock appreciation rights or stock options were granted to any of the
Named Officers during the fiscal year ended January 31, 1997. No such rights or
options were held by the Named Officers at January 31, 1997.

50
<PAGE>
EMPLOYEE COMPENSATION PROGRAMS

1994 STOCK PLAN

In 1993, the Board of Directors adopted and the stockholders approved the
1994 Stock Ownership Program (the "1994 Stock Plan"). The 1994 Stock Plan is
composed of two stock plans: the 1994 Stock Purchase Plan and the 1994 Stock
Award Plan. The Company authorized and reserved for issuance an aggregate of
4,800,000 shares of its Common Stock under the 1994 Stock Plan.

Employees of the Company are entitled to purchase stock under the 1994 Stock
Plan on a quarterly basis, either through payroll deductions designated by the
employee for a fiscal quarter or by the submission of a request to the Company
under the 1994 Stock Plan. In addition, employees were awarded stock, from time
to time, under the 1994 Stock Plan as part of the incentive portion of their
yearly compensation. All such awards were subject to ratification by the Board
of Directors. Under the 1994 Stock Plan, the Company also permitted shareholders
to sell shares of Common Stock to the Company on any of four predetermined trade
dates each year, at prevailing fair market values determined by an independent
appraisal.

As of April 30, 1997, 2,373,234 shares of the Company's outstanding Common
Stock had been issued under the 1994 Stock Plan. The 1994 Stock Plan will
terminate upon consummation of the Offering. See Note 10 to Notes to
Consolidated Financial Statements.

1997 STOCK INCENTIVE PROGRAM

In May 1997, the Board of Directors adopted and the stockholders approved
the QAD Inc. 1997 Stock Incentive Program (the "1997 Stock Program"), effective
upon consummation of the Offering. Under the 1997 Stock Program, the Board of
Directors, or its designated administrators, has the flexibility to determine
the type and amount of awards to be granted to eligible participants.

PURPOSE, STRUCTURE, AWARDS AND ELIGIBILITY. The 1997 Stock Program is
intended to secure for the Company and its stockholders the benefits arising
from ownership of the Company's Common Stock by individuals employed or retained
by the Company who will be responsible for the future growth of the enterprise.
The 1997 Stock Program is designed to help attract and retain superior personnel
for positions of substantial responsibility with the Company (including advisory
relationships where appropriate), and to provide individuals with an additional
incentive to contribute to the Company's success.

The 1997 Stock Program is composed of seven parts and the Program
Administrators (as defined below) may make the following types of grants under
the 1997 Stock Program, each of which will be an "Award": (i) Incentive Stock
Options ("ISOs") under the Incentive Stock Option Plan (the "Incentive Stock
Plan"); (ii) Nonqualified Stock Options ("NSOs") under the Nonqualified Stock
Option Plan (the "Nonqualified Plan"); (iii) Restricted Shares ("Restricted
Shares") under the Restricted Shares Plan (the "Restricted Plan"); (iv) rights
to purchase stock under the Employee Stock Purchase Plan (the "Purchase Plan");
(v) Stock Appreciation Rights ("SARs") under the Stock Appreciation Rights Plan
(the "SAR Plan"); (vi) grants of options under the Non-Employee Director Stock
Option Plan (the "Directors Plan"); and (vii) Other Stock Rights under the Stock
Rights Plan (the "Stock Rights Plan") which may include the issuance of units
representing the equivalent of shares of Common Stock ("Performance Shares"),
payments of compensation in the form of shares of Common Stock ("Stock
Payments") and rights to receive cash or shares of Common Stock based on the
value of dividends paid with respect to a share of Common Stock ("Dividend
Equivalent Rights"). Officers, key employees, employee directors, consultants
and other independent contractors or agents of the Company or its subsidiaries
who are responsible for or contribute to the management, growth or profitability
of the Company's business will be eligible for selection by the Program
Administrators to participate in the 1997 Stock Program, provided, however, that
ISOs may be granted under the Incentive Stock Plan only to a person who is an
employee of the Company or its subsidiaries.

51
<PAGE>
SHARES SUBJECT TO 1997 STOCK PROGRAM. The Company authorized and reserved
for issuance an aggregate of 4,000,000 shares of its Common Stock under the 1997
Stock Program. The aggregate number of shares of Common Stock which may be
granted through Awards under the 1997 Stock Program, other than Stock Payments
and the purchase of stock under the Purchase Plan, to any employee in any
calendar year may not exceed 400,000 shares. The shares of Common Stock issuable
under the 1997 Stock Program may be authorized but unissued shares, shares
issued and reacquired by the Company or shares purchased by the Company on the
open market. If any of the Awards granted under the 1997 Stock Program expire,
terminate or are forfeited for any reason before they have been exercised,
vested or issued in full, the unused shares subject to those expired, terminated
or forfeited Awards will again be available for purposes of the 1997 Stock
Program.

EFFECTIVE DATE AND DURATION. The Nonqualified Plan, the Restricted Plan,
SAR Plan the Directors Plan and the Stock Rights Plan, became effective upon
their adoption by the Board of Directors of the Company, subject to consummation
of the Offering. The Incentive Stock Plan and the Purchase Plan became effective
upon their adoption by the Board of Directors of the Company and approval of the
1997 Stock Program by a majority of the stockholders of the Company, subject to
consummation of the Offering. The 1997 Stock Program will continue in effect
until May 2007 unless sooner terminated under the general provisions of the 1997
Stock Program.

ADMINISTRATION. The 1997 Stock Program will be administered by the Board of
Directors or by a committee appointed by the Board, consisting of not less than
two directors of the Company who are "non-employee directors" (within the
meaning of SEC Rule 16b-3 promulgated pursuant to the Securities Exchange Act of
1934, as amended), so long as non-employee director administration is required
under Rule 16b-3, and who are "outside directors" (as defined in Section 162(m)
of the Internal Revenue Code of 1986, as amended (the "Code")), so long as
outside directors are required by the Code. Subject to the foregoing
limitations, as applicable, the Board of Directors may from time to time remove
members from the committee, fill all vacancies on the committee, however caused,
and may select one of the members of the committee as its chairman. The members
of the Board of Directors or committee, when acting to administer the 1997 Stock
Program, are referred to as the "Program Administrators." The Program
Administrators may hold meetings at such times and places as they may determine,
will keep minutes of their meetings, and may adopt, amend and revoke rules and
procedures in accordance with the terms of the 1997 Stock Program.

STOCK OPTION GRANTS

The Company has also from time to time granted stock options to employees of
the Company. At April 30, 1997, the Company had stock options outstanding with
respect to 1,061,000 shares of Common Stock with exercise prices ranging from
$0.12 to $15.00 per share and with a weighted average exercise price of $3.00
per share. Such options generally vest over a five-year period.

52
<PAGE>
CERTAIN TRANSACTIONS

In February 1997, the Company loaned $100,000 to Dennis R. Raney in
connection with his employment by the Company. The principal of the loan accrues
interest at an annual rate of 6.38% and principal and interest are payable in
annual installments of $37,674 commencing in February 1998, with all unpaid
principal and interest due in February 2000. One-third of the loan will be
forgiven on each of the first, second and third anniversaries of the date of Mr.
Raney's initial employment with the Company. Such forgiveness schedule is
subject to Mr. Raney's continued employment with the Company. In connection with
his employment, the Company also awarded Mr. Raney 10,000 restricted shares,
granted Mr. Raney options exercisable for 100,000 shares of Common Stock at an
exercise price of $9.53 and agreed to a severence arrangement pursuant to which
Mr. Raney is entitled to receive approximately six months salary upon
involuntary termination without cause.

In 1994, the Company awarded 8,600 restricted shares to Margaret A. Biddison
in connection with her employment agreement. Under the 1994 Stock Plan, Ms.
Biddison was awarded 23,800 and 100,000 restricted shares during the one month
ended January 31, 1996 and the fiscal year ended January 31, 1997, respectively.
Also under the 1994 Stock Plan, Vince P. Niedzielski was awarded 20,000
restricted shares during the fiscal year ended January 31, 1997. See
"Management--Executive Compensation."

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of April 30, 1997 and as adjusted to
reflect the sale of Common Stock offered hereby, by (i) each person who is known
by the Company to own beneficially five percent or more of the Company's Common
Stock prior to the Offering, (ii) each of the Company's directors and Named
Officers and (iii) all current directors and executive officers as a group.

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENTAGE PRIOR PERCENTAGE AFTER
NAME OF BENEFICIAL OWNER OWNED(1) TO THE OFFERING THE OFFERING(1)(2)
- -------------------------------------------------------- -------------------- ------------------- -------------------
<S> <C> <C> <C>
Pamela M. Lopker(3)..................................... 19,000,000 84.4% 67.2%
Karl F. Lopker(3)....................................... 19,000,000 84.4 67.2
Evan M. Bishop.......................................... 816,000 3.6 2.9
Margaret A. Biddison.................................... 128,246 * *
Vince P. Niedzielski.................................... 18,600 * *
All directors and executive
officers as a group (6 persons)....................... 19,972,846 88.7 70.6
</TABLE>

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

* Less than 1%

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable or become exercisable within 60 days following April
30, 1997 are deemed outstanding. Such shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any
other person. Unless otherwise indicated in the footnotes to this table, the
persons and entities named in the table have sole voting and sole investment
power with respect to the shares set forth opposite such stockholder's name.

(2) Assumes no exercise of the U.S. Underwriters' and the Managers'
over-allotment option.

(3) All shares are held jointly by Pamela and Karl Lopker, except that 1,360,184
shares are held in trust for the Lopkers' minor children and 56,000 shares
are held by The Lopker Family Foundation (the "Foundation"). Pamela and Karl
Lopker act as joint trustees of the trust and officers of the Foundation.

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<PAGE>
DESCRIPTION OF CAPITAL STOCK

Upon completion of the Offering, the authorized capital stock of the Company
will consist of 150,000,000 shares of Common Stock, par value $.001 per share,
and 5,000,000 shares of Preferred Stock, par value $.001 per share. As of April
30, 1997, there were 22,512,234 shares of Common Stock outstanding held by 390
stockholders, there were four shares of Class B Common Stock outstanding held by
two stockholders (which shares will automatically convert into Common Stock upon
completion of the Offering) and no shares of Preferred Stock were outstanding.

COMMON STOCK

The holders of Common Stock are entitled to one vote per share for the
election of directors and on all other matters to be voted upon by the
stockholders. Subject to preferences that may be applicable to any outstanding
Preferred Stock, the holders of Common Stock are entitled to receive, when and
if declared by the Board of Directors, out of funds legally available therefor,
any dividends on a pro rata basis. In the event of liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of Preferred Stock, if any, then outstanding. The Common
Stock has no pre-emptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to the Common
Stock. All outstanding shares of Common Stock are fully paid and non-assessable,
and the shares of Common Stock offered by the Company in the Offering will, when
issued, be fully paid and non-assessable.

PREFERRED STOCK

The Board of Directors has the authority to issue the Preferred Stock in one
or more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, liquidation preferences and the number of shares of
stock constituting any series or the designation of such series, without further
vote or action by the Company's stockholders. The issuance of Preferred Stock
may have the effect of delaying, deferring or preventing a change in control of
the Company and may adversely affect the voting and other rights of the holders
of Common Stock. See "Certain Anti-Takeover, Limited Liability and
Indemnification Provisions." At present, the Company has no plan to issue any
shares of Preferred Stock.

CERTAIN ANTI-TAKEOVER, LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS

The Company's Certificate of Incorporation and Bylaws include provisions
that may have the effect of discouraging, delaying or preventing a change in
control of the Company or an unsolicited acquisition proposal that a stockholder
might consider favorable, including, but not limited to, a proposal that might
result in the payment of a premium over the market price for the stock held by
stockholders. These provisions are summarized in the following paragraphs.

CLASSIFIED BOARD OF DIRECTORS. The Certificate of Incorporation and Bylaws
of the Company provide that the Board of Directors shall be classified into
three classes, with each class serving staggered three-year terms upon the first
annual meeting of stockholders at which the Company has at least 800
stockholders, as determined under Section 2115 of the California Corporations
Code. The classification of the Board of Directors has the effect of generally
requiring at least two annual stockholder meetings, instead of one, to replace a
majority of the members of the Board of Directors.

SUPERMAJORITY VOTING. The Certificate of Incorporation requires the
approval of the holders of at least 66 2/3% of the voting power of the then
outstanding capital stock, voting together as a single class, to effect certain
amendments to the Certificate of Incorporation, unless such amendments are
approved by a majority of the directors of the Company not affiliated or
associated with any person, other than Pamela or Karl Lopker, holding (or which
has announced an intention to acquire) 20% or more of the voting power

54
<PAGE>
of the Company's then outstanding capital stock, voting together as a single
class. The Bylaws may be amended by either (a) a majority of the Board of
Directors or (b) the holders of a majority of the Company's voting stock,
provided that certain amendments approved by stockholders require the approval
of at least 66 2/3% of the voting power of the Company's then outstanding
capital stock, voting together as a single class, unless such amendments are
approved by a majority of the directors of the Company not affiliated or
associated with any person, other than Pamela or Karl Lopker, holding (or which
has announced an intention to acquire) 20% or more of the voting power of the
Company's then outstanding capital stock, voting as a single class.

SPECIAL MEETINGS OF STOCKHOLDERS. The Bylaws provide that special meetings
of stockholders of the Company may be called only by the Secretary of the
Company at the request of a majority of the Board of Directors, or by the
Company's Chairman of the Board, President or Chief Executive Officer.

NOTICE PROCEDURES. The Bylaws of the Company establish advance notice
procedures with regard to all stockholder proposals, including proposals
relating to the nomination of candidates for election as directors, the removal
of directors and amendments to the Certificate of Incorporation or Bylaws, to be
brought before meetings of stockholders of the Company. These procedures provide
that notice of such stockholder proposals must be timely given in writing to the
Secretary of the Company prior to the meeting. Generally, to be timely, the
notice must be received by the Secretary of the Company not less than 90 days
prior to the meeting and must contain certain other information as specified in
the Bylaws.

LIMITATION OF DIRECTOR LIABILITY. The Certificate of Incorporation limits
the personal liability of directors of the Company (in their capacity as
directors but not in their capacity as officers) to the Company or its
stockholders to the fullest extent currently permitted by Delaware law.
Specifically, directors of the Company will not be personally liable for
monetary damages for breach of a director's fiduciary duty, except for liability
(i) for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law (the "DGCL"), which relates to unlawful
payments of dividends or unlawful stock repurchases or redemptions or (iv) for
any transaction from which the director derived an improper personal benefit.

INDEMNIFICATION AGREEMENTS. The Bylaws of the Company provide that the
directors, executive officers, employees and agents of the Company may be
indemnified against expenses (including attorneys' fees, judgments, fines and
settlements) and other amounts actually and reasonably incurred in connection
with any proceeding arising out of their status as such, to the fullest extent
permitted by the DGCL. Prior to consummation of the Offering, the Company will
enter into indemnification agreements with each of its directors and executive
officers that will provide for indemnification and expense advancement to the
fullest extent permitted under the DGCL.

SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW

The Company is subject to Section 203 of the DGCL ("Section 203") which,
subject to certain exceptions, prohibits a Delaware corporation from engaging in
any business combination with any interested stockholder for a period of three
years following the date that such stockholder became an interested stockholder,
unless: (i) prior to such time, the Board of Directors of the corporation
approved either the business combination or the transaction that resulted in the
stockholder becoming an interested holder; (ii) upon consummation of the
transaction that resulted in the stockholder becoming an interested stockholder,
the interested stockholder owned at least a 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares owned (a)
by persons who are directors and also officers and (b) by employee stock plans
in which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer; or (iii) at or subsequent to such date, the business combination is
approved by the Board of Directors and authorized at

55
<PAGE>
an annual or special meeting of the stockholders, and not by written consent, by
the affirmative vote of at least 66 2/3% of the outstanding voting stock that is
not owned by the interested stockholder.

Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder, (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder, (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder, (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series, or securities
convertible into the stock of any class or series, of the corporation
beneficially owned by the interested stockholder or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits by or through the corporation. In general,
Section 203 defines an interested stockholder as an entity or person owning 15%
or more of the outstanding voting stock of the corporation or any affiliate or
associate of the corporation who was the owner of 15% or more of the outstanding
voting stock of the corporation at any time within the three-year period
immediately prior to the time in which it is sought to be determined whether
such person is an interested stockholder.

LISTING

The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "QADI."

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is Firstar Bank of
Minnesota, N.A.

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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have outstanding
28,262,234 shares of Common Stock (29,124,734 shares if the U.S. Underwriters'
and the Managers' over-allotment option is exercised in full), assuming no
exercise of options outstanding as of April 30, 1997. Of these shares, the
5,750,000 shares offered hereby (6,612,500 shares if the U.S. Underwriters' and
Managers' over-allotment option is exercised in full) will be freely tradeable
without restriction or further registration under the Securities Act 1933, as
amended (the "Act"), unless held by "affiliates" of the Company as that term is
defined in Rule 144 under the Act ("Rule 144"). The remaining 22,512,234 shares
of Common Stock outstanding upon completion of the Offering are "restricted
securities" as that term is defined in Rule 144.

The directors, executive officers and certain other stockholders of the
Company holding an aggregate of 20,416,172 outstanding shares of Common Stock
and options to purchase 967,000 shares of Common Stock, have agreed pursuant to
Lock-Up Agreements that, for a period of 180 days from the date of this
Prospectus, they will not, without the prior written consent of Smith Barney
Inc., offer, sell, contract to sell, or otherwise dispose of, any shares of
Common Stock or any securities convertible into, or exercisable or exchangeable
for Common Stock, or grant any options or warrants to purchase Common Stock,
except in certain circumstances. The representatives of the Underwriters have
informed the Company that the Underwriters have no current intention to release
shares from the Lock-Up Agreements prior to expiration of the 180-day term of
such agreements. Any request for release would be evaluated by the
representatives of the Underwriters, and the decision whether or not to permit
early release of stock would be made dependent upon the facts and circumstances
existing at the time of the request. Beginning upon expiration of the Lock-Up
Agreements, such shares will be eligible for sale pursuant to Rule 144 or Rule
701 under the Act ("Rule 701") subject to the provisions of such rules and
continued vesting. The remaining 2,096,062 outstanding shares of Common Stock
and options to purchase 94,000 shares of Common Stock are not subject to Lock-Up
Agreements and will become eligible for sale upon completion of the Offering,
subject to the provisions of Rule 144, Rule 701 and continued vesting.
Approximately 714,596 shares of Common Stock and 35,000 shares of Common Stock
subject to exercisable options will be eligible for immediate sale in the public
market as of the date of this Prospectus (the "Effective Date"), none of which
shares will be subject to volume and certain other restriction under Rule 144.
An additional 1,358,330 outstanding shares of Common Stock will be eligible for
sale in the public market 90 days after the Effective Date, of which 1,195,104
outstanding shares will not be subject to volume and certain other restrictions
under Rules 144 and 701. Approximately 20,274,202 shares of Common Stock will
become eligible for sale in the public market 180 days after the Effective Date
upon expiration of the Lock-Up Agreements, subject to volume and certain other
restrictions of Rule 144.

In general, under Rule 144 as currently in effect, a person (or persons
whose stock is aggregated) who has beneficially owned stock for at least one
year (including the holding period of any prior owner except an affiliate from
whom such stock was purchased) is entitled to sell in "broker's transactions" or
to market makers, within any three-month period commencing 90 days after the
date of this Prospectus, a number of shares of stock that does not exceed the
greater of (a) one percent of the number of shares of Common Stock then
outstanding (approximately 283,000 shares immediately after the Offering, or
approximately 291,000 shares if the U.S. Underwriters' and the Managers'
over-allotment option is exercised in full), or (b) the average weekly trading
volume in the Common Stock during the four calendar weeks preceding the required
filing of a Form 144 with respect to such sale. Sales under Rule 144 are
generally subject to the availability of current public information about the
Company. Persons other than affiliates who have beneficially owned such stock
for at least two years are not subject to the notice, manner of sale, volume or
public information requirements and may sell such shares immediately following
the Offering. Under Rule 701, persons who purchase stock upon exercise of
options granted prior to the effective date of the Offering or who purchased
stock from the Company pursuant to a written compensatory benefit plan or
contract are entitled to sell such stock 90 days after the effective date of the
Offering in reliance on Rule 144 without having to comply with the holding
period requirements of Rule 144 and, in the case of

57
<PAGE>
persons who are not affiliates of the Company, without having to comply with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144.

Approximately 30 days after the date of this Prospectus, the Company intends
to file registration statements on Form S-8 covering approximately 644,370
restricted and control shares outstanding and subject to outstanding options
issued under employee benefit plans that are not eligible for resale under Rule
144 or Rule 701 and the shares of Common Stock that have been reserved for
issuance under the 1997 Stock Program, thus permitting the resale of such stock
in the public market without restriction under the Act, subject, however, to
Lock-Up Agreements with respect to such stock.

Prior to the Offering, there has not been any public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect the prevailing market prices and impair the Company's
ability to raise capital through the sale of equity securities.

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<PAGE>
CERTAIN U.S. FEDERAL TAX
CONSIDERATIONS FOR NON-U.S. HOLDERS

This is a general discussion of certain U.S. federal income and estate tax
consequences of the purchase, ownership and disposition of Common Stock by a
"Non-U.S. Holder." A "Non-U.S. Holder" is a person or entity that, for U.S.
federal income tax purposes, is a nonresident alien individual, a foreign
corporation, a foreign partnership, or a nonresident fiduciary of a foreign
estate or trust as such terms are defined in the Internal Revenue Code of 1986,
as amended (the "Code").

This discussion is based on the Code, and administrative interpretations as
of the date hereof, all of which may be changed either retroactively or
prospectively. This discussion does not address all aspects of U.S. federal
income and estate taxation that may be relevant to Non-U.S. Holders in light of
their particular circumstances (including the direct or indirect ownership of
more than five percent of the outstanding Common Stock) and does not address any
tax consequences arising under the laws of any state, local or foreign taxing
jurisdiction.

Treasury Regulations were recently proposed that would, if adopted in their
present form, revise in certain respects the rules applicable to Non-U.S.
Holders of Common Stock (the "Proposed Regulations"). The Proposed Regulations
are generally to be effective with respect to payments made after December 31,
1997. It is not certain whether, or in what form, the Proposed Regulations will
be adopted as final regulations.

The following summary does not constitute, and should not be considered as,
legal or tax advice to prospective investors. Prospective holders should consult
their tax advisers about the particular tax consequences to them of holding and
disposing of Common Stock.

DIVIDENDS

Subject to the discussion below, dividends paid to a Non-U.S. Holder of
Common Stock generally will be subject to withholding tax at a 30% rate or such
lower rate as may be specified by an applicable income tax treaty. For purposes
of determining applicability of withholding tax, including at a reduced rate
under a tax treaty, the Company ordinarily will presume that dividends paid to
an address in a foreign country are paid to a resident of such country absent
actual knowledge that such presumption is not warranted. However, under the
Proposed Regulations which have not yet been put into effect, to claim the
benefits of a tax treaty, an Non-U.S. Holder of Common Stock would be required
to file certain forms.

Dividends paid to a holder with an address within the United States
generally will not be subject to withholding tax, unless the Company has actual
knowledge that the holder is a Non-U.S. Holder. Absent such actual knowledge,
dividends paid to a holder with a U.S. address may be subject to 31% backup
withholding if the holder is not an exempt recipient as defined in Section
6042(b)(2) of the Code (which includes corporations) and fails to provide a
correct tax identification number and other information to the Company.

Upon the filing of an Internal Revenue Service Form 4224 with the Company,
there is no withholding tax on dividends that are effectively connected with the
Non-U.S. Holder's conduct of a trade or business within the United States.
Instead, the effectively connected dividends are subject to regular U.S. income
tax in the same manner as if the Non-U.S. Holder were a resident. Effectively
connected dividends received by a non-U.S. corporation may be subject to an
additional "branch profits tax" at a rate of 30% (or such lower rate as may be
specified by an applicable treaty) of its effectively connected earnings and
profits, subject to certain adjustments.

GAIN ON DISPOSITION

A Non-U.S. Holder generally will not be subject to U.S. federal income tax
with respect to gain realized on a sale or other disposition of Common Stock
unless (i) the gain is effectively connected with a

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<PAGE>
trade or business of such holder in the United States or (ii) in the case of
certain Non-U.S. Holders who are nonresident alien individuals and hold Common
Stock as a capital asset, such individuals are present in the United States for
183 or more days in the taxable year of the disposition.

INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING

If the proceeds of a disposition of Common Stock are paid over by or through
a U.S. office of a broker, the payment is subject to information reporting and
to 31% backup withholding unless the disposing holder certifies as to his name,
address, and non-U.S. status or otherwise establishes an exemption. Generally,
U.S. information reporting and backup withholding will not apply to a payment of
disposition proceeds if the payment is made outside the United States through a
non-U.S. office of a non-U.S. broker. However, U.S. information reporting
requirements (but not backup withholding) will apply to a payment of disposition
proceeds outside the United States if (A) the payment is made through an office
outside the United States of a broker that is either (i) a U.S. person, (ii) a
foreign person which derives 50% or more of its gross income for certain periods
from the conduct of a trade or business in the United States or (iii) a
"controlled foreign corporation" for U.S. federal income tax purposes and (B)
the broker fails to maintain documentary evidence that the holder is a Non-U.S.
Holder and that certain conditions are met, or that the holder otherwise is
entitled to an exemption.

Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to 31% backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the U.S.
Internal Revenue Service.

Generally, the Company must report to the U.S. Internal Revenue Service the
amount of dividends paid, the name and address of the recipient, and the amount,
if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax
treaties or other agreements, the U.S. Internal Revenue Service may make its
reports available to tax authorities in the recipient's country of residence.

FEDERAL ESTATE TAX

An individual Non-U.S. Holder who is treated as the owner of or has made
certain lifetime transfers of an interest in Common Stock will be required to
include the value thereof in his gross estate for U.S. federal estate tax
purposes, and may be subject to U.S. federal estate tax unless an applicable
estate tax treaty provides otherwise.

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<PAGE>
UNDERWRITING

Under the terms and subject to the conditions contained in the U.S.
Underwriting Agreement, each of the underwriters of the U.S. Offering named
below (the "U.S. Underwriters"), for whom Smith Barney Inc., Cowen & Company and
Robertson, Stephens & Company LLC are acting as the representatives (the
"Representatives"), has severally agreed to purchase and the Company has agreed
to sell to each of the U.S. Underwriters, the number of shares of Common Stock
set forth opposite the name of such U.S. Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
- ------------------------------------------ -----------
<S> <C>
Smith Barney Inc.......................... 1,694,000
Cowen & Company........................... 845,500
Robertson, Stephens & Company LLC......... 845,500
Dakin Securities Corporation.............. 65,000
Deutsche Morgan Grenfell Inc.............. 90,000
Houlihan, Lokey, Howard & Zukin Capital,
LP...................................... 65,000
Lehman Brothers Inc....................... 90,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................ 90,000
Montgomery Securities..................... 90,000
J.P. Morgan Securities Inc................ 90,000

<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
- ------------------------------------------ -----------
<S> <C>
Morgan Stanley & Co. Incorporated......... 90,000
Needham & Company, Inc.................... 65,000
Pacific Growth Equities, Inc.............. 65,000
Punk, Ziegel & Company, L.P............... 65,000
The Robinson-Humphrey Company, Inc........ 65,000
Salomon Brothers Inc ..................... 90,000
SoundView Financial Group, Inc............ 65,000
Unterberg Harris.......................... 65,000
Wessels, Arnold & Henderson, L.L.C........ 65,000
-----------
Total................................. 4,600,000
-----------
-----------
</TABLE>

Under the terms and subject to the conditions contained in the International
Underwriting Agreement, each of the managers of the concurrent International
Offering named below (the "Managers"), for whom Smith Barney Inc., Cowen &
Company and Robertson, Stephens & Company LLC are acting as lead managers (the
"Lead Managers"), has severally agreed to purchase, and the Company has agreed
to sell to each Manager, the number of shares of Common Stock set forth opposite
the name of such Manager below:
<TABLE>
<CAPTION>
NUMBER OF
MANAGERS SHARES
- ------------------------------------------ -----------
<S> <C>
Smith Barney Inc.......................... 450,000
Cowen International L.P................... 225,000
Robertson, Stephens & Company LLC......... 225,000
Bayerische Vereinsbank
Aktiengesellschaft...................... 50,000
Robert Fleming & Co. Limited.............. 50,000

<CAPTION>
NUMBER OF
MANAGERS SHARES
- ------------------------------------------ -----------
<S> <C>
Nomura International plc.................. 50,000
Pictet & Cie.............................. 50,000
Westdeutsche Landesbank Girozentrale...... 50,000
-----------
Total................................. 1,150,000
-----------
-----------
</TABLE>

Each of the U.S. Underwriting Agreement and the International Underwriting
Agreement provides that the obligations of the several U.S. Underwriters and the
several Managers to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel
and to certain conditions. The U.S. Underwriters and the Managers are obligated
to take and pay for all shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any such shares are
taken.

The U.S. Underwriters and the Managers (collectively, the "Underwriters")
initially propose to offer part of the shares offered hereby directly to the
public at the public offering price set forth on the cover page of this
Prospectus and part of such shares offered hereby to certain dealers at a price
which represents a concession not in excess of $0.63 per share under the public
offering price. The U.S. Underwriters and the Managers may allow, and such
dealers may reallow, a concession not in excess of $0.10 per share to other U.S.
Underwriters or Managers, respectively, or to certain other dealers. After the
initial public offering, the public offering price and such concessions may be
changed by the Underwriters. The Representatives and the Lead Managers have
advised the Company that the U.S. Underwriters and the Managers do not intend to
confirm any shares to accounts over which they exercise discretionary control.

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<PAGE>
The Company has granted to the Underwriters an option, exercisable at any
time and from time to time during a 30-day period from the date of this
Prospectus, to purchase up to an aggregate 862,500 additional shares of Common
Stock at the public offering price set forth on the cover page of this
Prospectus minus the underwriting discounts and commissions. The Underwriters
may exercise such option solely for the purpose of covering over-allotments, if
any, in connection with the offering of the shares of Common Stock offered
hereby. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares set forth opposite
each Underwriter's name in the preceding table bears to the total number of
shares of Common Stock offered by the Underwriters hereby.

The Company, the U.S. Underwriters and the Managers have agreed to indemnify
each other against certain liabilities, including liabilities under the Act.

Each of the directors and executive officers of the Company, and certain
other stockholders of the Company as designated by Smith Barney Inc. have agreed
that, for a period of 180 days from the date of this Prospectus, they will not,
without the prior written consent of Smith Barney Inc., offer, sell, contract to
sell, or otherwise dispose of, any Common Stock or any securities convertible
into, or exercisable or exchangeable for Common Stock, or grant any options or
warrants to purchase Common Stock, except in certain circumstances.

The U.S. Underwriters and the Managers have entered into an Agreement
Between U.S. Underwriters and Managers pursuant to which each U.S. Underwriter
has agreed that, as part of the distribution of the shares offered in the U.S.
Offering: (i) it is not purchasing any such shares for the account of anyone
other than a U.S. or Canadian Person (as defined below) and (ii) it has not
offered or sold, and will not offer, sell, resell or deliver, directly or
indirectly, any of such shares or distribute any prospectus relating to the U.S.
Offering outside the United States or Canada or to anyone other than a U.S. or
Canadian Person. In addition, each Manager has agreed that as part of the
distribution of the shares offered in the International Offering: (i) it is not
purchasing any such shares for the account of any U.S. or Canadian Person, and
(ii) it has not offered or sold, and will not offer, sell, resell or deliver,
directly or indirectly, any of such shares or distribute any prospectus relating
to the International Offering in the United States or Canada or to any U.S. or
Canadian Person. Each Manager has also agreed that it will offer to sell shares
only in compliance with all relevant requirements of any applicable laws.

The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the U.S. Underwriting Agreement, the
International Underwriting Agreement and the Agreement Between U.S. Underwriters
and Managers, including (i) certain purchases and sales between the U.S.
Underwriters and the Managers, (ii) certain offers, sales, resales, deliveries
or distributions to or through investment advisors or other persons exercising
investment discretion, (iii) purchases, offers or sales by a U.S. Underwriter
who is also acting as a Manager or by a Manager who is also acting as a U.S.
Underwriter, and (iv) other transactions specifically approved by the
Representatives and Lead Managers. As used herein, "U.S. or Canadian Person"
means any resident or national of the United States or Canada, any corporation,
partnership or other entity created or organized in or under the laws of the
United States or Canada or any estate or trust the income of which is subject to
U.S. or Canadian income taxation regardless of the source of its income (other
than the foreign branch of any U.S. or Canadian Person), and includes any U.S.
or Canadian branch of a person other than a U.S. or Canadian Person.

Any offer of shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the relevant province of Canada in
which such offer is made.

Each Manager has represented and agreed that (i) it has not offered or sold
and will not offer or sell in the United Kingdom, by means of any document, any
shares other than to persons whose ordinary business it is to buy or sell shares
or debentures, whether as principal or agent, or in circumstances which do not
constitute an offer to the public within the meaning of the Public Offering of
Securities Regulation 1995, (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the shares in, from, or otherwise involving
the United

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<PAGE>
Kingdom, and (iii) it has only issued or passed on and will only issue or pass
on to any person in the United Kingdom any document received by it in connection
with the issue of the shares if that person is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 or is a person to whom the document may otherwise
lawfully be issued or passed on.

Pursuant to the Agreement Between U.S. Underwriters and Managers, sales may
be made between the U.S. Underwriters and the Managers of such number of shares
of Common Stock as may be mutually agreed. The price of any shares so sold shall
be the public offering price as then in effect for Common Stock being sold by
the U.S. Underwriters and the Managers, less all or any part of the selling
concession, unless otherwise determined by mutual agreement. To the extent that
there are sales between the U.S. Underwriters and the Managers pursuant to the
Agreement Between U.S. Underwriters and Managers, the number of shares initially
available for sale by the U.S. Underwriters and by the Managers may be more or
less than the number of shares appearing on the front cover of this Prospectus.

Purchasers of the Common Stock offered hereby may be required to pay stamp
taxes and other charges in accordance with the laws and practices of the country
of purchase in addition to the offering price set forth on the cover page
hereof.

In addition, Houlihan, Lokey, Howard & Zukin ("Houlihan") will provide the
Company certain financial advisory services in connection with the Offering for
which the Company will pay Houlihan $250,000. The Company has agreed to
indemnify Houlihan against certain claims in connection with Houlihan's
provision of such services.

PRICE OF THE OFFERING

Prior to the Offering, there has been no public market for the Company's
Common Stock. The initial public offering price was negotiated between the
Company and the Representatives. Among the factors considered in determining the
initial public offering price were the history of and prospects for the
Company's business and the industry in which it competes, an assessment of the
Company's management and the present state of the Company's development, the
past and present revenues and earnings of the Company, the prospects for growth
of the Company's revenue and earnings, the current state of the economy in the
United States and the current level of economic activity in the industry in
which the Company competes and in related or comparable industries, and
currently prevailing conditions in the securities markets, including current
market valuations of publicly traded companies which are comparable to the
Company.

The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "QADI." There can be no assurance that an active trading market
will develop for the Common Stock or that the Common Stock will trade in the
public market subsequent to the Offering or at or above the initial price to
public.

The Representatives have advised the Company that pursuant to Regulation M
under the Act, certain persons participating in the Offering may engage in
transactions, including stabilizing bids, syndicate covering transactions and
the imposition of penalty bids which may have the effect of stabilizing or
maintaining the market price of the Common Stock at a level above that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for or
the purchase of the Common Stock on behalf of the Underwriters to reduce a short
position incurred by the Underwriters in connection with the Offering. A
"penalty bid" is an arrangement permitting the Representatives to reclaim the
selling concession otherwise accruing to an Underwriter or syndicate member in
connection with the Offering if the Common Stock originally sold by such
Underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction in stabilization. The Representatives have
advised the Company that such transactions may be effected on the Nasdaq
National Market or otherwise and, if commenced, may be discontinued at any time.

63
<PAGE>
LEGAL MATTERS

Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for the Company by Milbank, Tweed, Hadley & McCloy, Los Angeles,
California, and Nida & Maloney, a Professional Corporation, Santa Barbara,
California. Certain legal matters in connection with the Offering will be passed
upon for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional
Corporation.

EXPERTS

The consolidated financial statements of QAD Inc. at January 31, 1996 and
January 31, 1997 and for each of the years ended December 31, 1994 and 1995, for
the one month period ended January 31, 1996 and for the year ended January 31,
1997 appearing in this Prospectus and the Registration Statement have been
audited by KPMG Peat Marwick LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), 450 Fifth Street, N.W., Washington, D.C. 20549, a Registration
Statement on Form S-1 (Reg. No. 333-28441) (the "Registration Statement") under
the Act with respect to the Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus concerning the contents of any contract
or any other document are not necessarily complete, and, in each instance,
reference is made to the copy of such contract, or other document filed as an
exhibit to the Registration Statement. Each such statement is qualified in all
respects by such reference to such exhibit. A copy of the Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the public reference facilities maintained by the Commission in Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices located at the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois, 60661 and Seven World Trade Center, 13th
Floor, New York, NY 10048, and copies of all or any part of the Registration
Statement may be obtained from such offices after payment of fees prescribed by
the Commission. The Commission maintains a World Wide Web site (http://
www.sec.gov) that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.

64
<PAGE>
QAD INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report............................................................................... F-2

Consolidated Balance Sheets as of January 31, 1996 and 1997 and April 30, 1997 (unaudited)................. F-3

Consolidated Statements of Income for the years ended December 31, 1994 and 1995, the year ended January
31, 1997, the one month ended January 31, 1996 and the three month periods ended April 30, 1996 and 1997
(unaudited).............................................................................................. F-4

Consolidated Statement of Stockholders' Equity for the years ended December 31, 1994 and 1995, the one
month ended January 31, 1996, the year ended January 31, 1997 and quarter ended April 30, 1997
(unaudited).............................................................................................. F-5

Consolidated Statements of Cash Flows for the years ended December 31, 1994 and 1995, the year ended
January 31, 1997, the one month ended January 31, 1996 and three month periods ended April 30, 1996 and
1997 (unaudited)......................................................................................... F-6

Notes to Consolidated Financial Statements................................................................. F-8
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
QAD Inc.:

We have audited the accompanying consolidated balance sheets of QAD Inc. and
subsidiaries as of January 31, 1997 and 1996 and the related consolidated
statements of income, stockholders' equity and cash flows for the years ended
January 31, 1997, December 31, 1995 and December 31, 1994 and the one month
ended January 31, 1996. 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 QAD Inc. and
subsidiaries as of January 31, 1997 and January 31, 1996 and the results of
their operations and their cash flows for the years ended January 31, 1997,
December 31, 1995 and December 31, 1994 and the one month ended January 31, 1996
in conformity with generally accepted accounting principles.

KPMG PEAT MARWICK LLP

Los Angeles, California
April 11, 1997

F-2
<PAGE>
QAD INC.
CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT FOR NUMBER OF SHARES)

<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1996 1997
----------- ----------- APRIL 30,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................................................... $ 1,463 $ 301 $ 1,306
Trade accounts receivable, net of allowances of $2,280, $3,694 and
$3,646 for January 31, 1996, 1997, and April 30, 1997, respectively... 35,236 46,745 43,854
Income tax receivable................................................... -- -- 166
Deferred income taxes................................................... 3,610 4,183 2,702
Other current assets.................................................... 1,741 2,112 4,172
----------- ----------- -----------

Total current assets.................................................. 42,050 53,341 52,200

Property and equipment, net............................................... 19,058 18,071 19,324
Other assets, net......................................................... 2,037 3,051 4,836
Deferred income taxes..................................................... 1,962 2,787 4,833
----------- ----------- -----------
Total assets........................................................ $ 65,107 $ 77,250 $ 81,193
----------- ----------- -----------
----------- ----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current installments of long-term debt................ $ 11,694 $ 8,465 $ 15,143
Accounts payable........................................................ 9,525 12,516 12,238
Accrued expenses........................................................ 5,489 9,626 6,875
Income taxes payable.................................................... 288 741 --
Deferred revenue and deposits........................................... 20,904 28,602 30,160
----------- ----------- -----------

Total current liabilities............................................. 47,900 59,950 64,416

Long-term debt, less current installments............................... 7,097 5,036 4,320
Deferred revenue - noncurrent........................................... 981 991 756
Other deferred liabilities.............................................. -- 379 641
Minority interest....................................................... 106 90 108
Stockholders' equity:
Preferred stock, Authorized 5,000,000 shares; none issued and
outstanding........................................................... -- -- --
Common stock, no par value. Authorized 150,000,000 shares; issued and
outstanding 20,978,754 shares at January 31, 1996, 22,218,572 shares
at January 31, 1997 and 22,512,234 shares at April 30, 1997........... 2,223 5,942 6,554
Retained earnings....................................................... 6,539 7,539 8,099
Receivable from stockholders............................................ (151) (197) (642)
Unearned compensation -- restricted stock............................... -- (2,129) (2,255)
Cumulative foreign currency translation adjustment...................... 412 (351) (804)
----------- ----------- -----------

Total stockholders' equity............................................ 9,023 10,804 10,952
----------- ----------- -----------
Total liabilities and stockholders' equity.......................... $ 65,107 $ 77,250 $ 81,193
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>
QAD INC.
CONSOLIDATED STATEMENTS OF INCOME

(IN THOUSANDS, EXCEPT FOR SHARE DATA)

Other (income) expense:
Interest income......................... (34) (38) (52) -- -- (48)
Interest expense........................ 462 825 1,657 126 429 435
Other................................... (99) 48 (797) (61) (146) (803)
------------ ------------ ----------- ----------- ------------- -------------
Total other (income) expense.......... 329 835 808 65 283 (416)
------------ ------------ ----------- ----------- ------------- -------------

Income (loss) before income taxes......... 3,755 (3,481) 1,514 (3,939) (10,483) 733
Income tax expense (benefit).............. 877 (2,795) 514 (1,078) (3,166) 173
------------ ------------ ----------- ----------- ------------- -------------
Net income (loss)......................... $ 2,878 $ (686) $ 1,000 $ (2,861) $ (7,317) $ 560
------------ ------------ ----------- ----------- ------------- -------------
------------ ------------ ----------- ----------- ------------- -------------
Net income (loss) per share............... $ 0.12 $ (0.03) $ 0.04 $ (0.13) $ (0.33) $ 0.02
------------ ------------ ----------- ----------- ------------- -------------
------------ ------------ ----------- ----------- ------------- -------------
Weighted average number of shares used in
computing net income (loss) per share.... 23,863,862 21,861,196 23,508,558 21,990,986 22,139,278 24,025,515
------------ ------------ ----------- ----------- ------------- -------------
------------ ------------ ----------- ----------- ------------- -------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>
QAD INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1994, DECEMBER 31, 1995, JANUARY 31, 1997,
ONE MONTH ENDED JANUARY 31, 1996 AND QUARTER ENDED APRIL 30, 1997

(IN THOUSANDS, EXCEPT FOR NUMBER OF SHARES)
<TABLE>
<CAPTION>
COMMON STOCK RESTRICTED STOCK
------------------------ RETAINED RECEIVABLE FROM ---------------------
SHARES AMOUNT EARNINGS STOCKHOLDERS SHARES AMOUNT
----------- ----------- ----------- --------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993............... 20,000,000 $ 30 $ 7,208 $ -- -- $ --
Common Stock Issued:
Under stock purchase plan.............. 813,864 1,812 -- -- -- --
Under stock options.................... -- -- -- -- -- --
Pursuant to performance awards......... 59,600 131 -- -- -- --
Common stock repurchases................. (68,606) (168) -- -- -- --
Translation adjustments.................. -- -- -- -- -- --
Net income (loss)........................ -- -- 2,878 -- -- --
----------- ----------- ----------- ----- ---------- ---------
Balance, December 31, 1994............... 20,804,858 1,805 10,086 -- -- --
Common Stock Issued:
Under stock purchase plan.............. 250,750 601 -- -- -- --
Under stock options.................... 1,024,000 74 -- -- -- --
Pursuant to performance awards......... 148,514 336 -- -- -- --
Tax benefit associated with stock option
exercise............................... -- -- -- -- -- --
Common stock repurchases................. (1,262,370) (624) -- -- -- --
Receivable from stockholders............. -- -- -- (151) -- --
Translation adjustments.................. -- -- -- -- -- --
Net income (loss)........................ -- -- (686) -- -- --
----------- ----------- ----------- ----- ---------- ---------
Balance, December 31, 1995............... 20,965,752 2,192 9,400 (151) -- --
Common Stock Issued:
Pursuant to performance awards......... 23,722 57 -- -- -- --
Common stock repurchases................. (10,720) (26) -- -- -- --
Translation adjustments.................. -- -- -- -- -- --
Net income (loss)........................ -- -- (2,861) -- -- --
----------- ----------- ----------- ----- ---------- ---------
Balance, January 31, 1996................ 20,978,754 2,223 6,539 (151) -- --
Common Stock Issued:
Under stock purchase plan.............. 793,438 1,411 -- -- -- --
Under stock options.................... 105,000 185 -- -- -- --
Pursuant to performance awards......... 108,062 256 -- -- -- --
Pursuant to restricted stock awards.... 559,066 2,584 -- -- (559,066) (2,584)
Common stock earned under restricted
stock awards......................... -- -- -- -- 149,954 455
Common stock repurchases................. (325,748) (717) -- -- -- --
Receivable from stockholders............. -- -- -- (46) -- --
Translation adjustments.................. -- -- -- -- -- --
Net income (loss)........................ -- -- 1,000 -- -- --
----------- ----------- ----------- ----- ---------- ---------
Balance, January 31, 1997................ 22,218,572 5,942 7,539 (197) (409,112) (2,129)
Common Stock Issued (unaudited):
Under stock purchase plan.............. 211,760 2,017 -- -- -- --
Under stock options.................... 299,000 709 -- -- -- --
Pursuant to performance awards......... 50,060 431 -- -- -- --
Pursuant to restricted stock awards.... 20,400 194 -- -- (20,400) (194)
Common stock earned under restricted
stock awards......................... -- -- -- -- 16,966 68
Common stock repurchases (unaudited)..... (287,558) (2,739) -- -- -- --
Receivable from stockholders
(unaudited)............................ -- -- -- (445) -- --
Translation adjustments (unaudited)...... -- -- -- -- -- --
Net income (loss) (unaudited)............ -- -- 560 -- -- --
----------- ----------- ----------- ----- ---------- ---------
Balance, April 30, 1997.................. 22,512,234 $ 6,554 $ 8,099 $ (642) (412,546) $ (2,255)
----------- ----------- ----------- ----- ---------- ---------
----------- ----------- ----------- ----- ---------- ---------

<CAPTION>
CUMULATIVE TOTAL
TRANSLATION STOCKHOLDERS'
ACCOUNT EQUITY
------------- -------------
<S> <C> <C>
Balance, December 31, 1993............... $ (140) $ 7,098
Common Stock Issued:
Under stock purchase plan.............. -- 1,812
Under stock options.................... -- --
Pursuant to performance awards......... -- 131
Common stock repurchases................. -- (168)
Translation adjustments.................. 242 242
Net income (loss)........................ -- 2,878
----- -------------
Balance, December 31, 1994............... 102 11,993
Common Stock Issued:
Under stock purchase plan.............. -- 601
Under stock options.................... -- 74
Pursuant to performance awards......... -- 336
Tax benefit associated with stock option
exercise............................... -- --
Common stock repurchases................. -- (624)
Receivable from stockholders............. -- (151)
Translation adjustments.................. 189 189
Net income (loss)........................ -- (686)
----- -------------
Balance, December 31, 1995............... 291 11,732
Common Stock Issued:
Pursuant to performance awards......... -- 57
Common stock repurchases................. -- (26)
Translation adjustments.................. 121 121
Net income (loss)........................ -- (2,861)
----- -------------
Balance, January 31, 1996................ 412 9,023
Common Stock Issued:
Under stock purchase plan.............. -- 1,411
Under stock options.................... -- 185
Pursuant to performance awards......... -- 256
Pursuant to restricted stock awards.... -- --
Common stock earned under restricted
stock awards......................... -- 455
Common stock repurchases................. -- (717)
Receivable from stockholders............. -- (46)
Translation adjustments.................. (763) (763)
Net income (loss)........................ -- 1,000
----- -------------
Balance, January 31, 1997................ (351) 10,804
Common Stock Issued (unaudited):
Under stock purchase plan.............. -- 2,017
Under stock options.................... -- 709
Pursuant to performance awards......... -- 431
Pursuant to restricted stock awards.... -- --
Common stock earned under restricted
stock awards......................... -- 68
Common stock repurchases (unaudited)..... -- (2,739)
Receivable from stockholders
(unaudited)............................ -- (445)
Translation adjustments (unaudited)...... (453) (453)
Net income (loss) (unaudited)............ -- 560
----- -------------
Balance, April 30, 1997.................. $ (804) $ 10,952
----- -------------
----- -------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>
QAD INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
ONE MONTH
YEAR ENDED YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, JANUARY 31, JANUARY 31,
1994 1995 1997 1996
------------ ------------ ----------- ----------- THREE MONTHS THREE MONTHS
ENDED ENDED
APRIL 30, APRIL 30,
1996 1997
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................... $ 2,878 $ (686) $ 1,000 $ (2,861) $ (7,317) $ 560
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization........ 2,664 4,346 5,345 390 1,319 1,583
Provision for doubtful accounts and
sales returns...................... 1,333 945 3,432 (25) 701 585
Loss on disposal of equipment........ -- -- 25 -- -- (11)
Minority interest.................... -- -- (16) 106 (98) 18
Compensation expense pursuant to
stock repurchase................... -- 2,408 -- -- -- --
Compensation expense pursuant to
stock awards....................... 131 336 1,044 57 156 755
Changes in assets and liabilities:
(Increase) decrease in assets:
Trade accounts receivable.......... (8,886) (15,103) (14,941) 5,444 8,180 2,306
Income tax receivable.............. -- (231) -- 231 -- (166)
Deferred income taxes.............. (1,306) (3,780) (1,398) (1,781) (3,576) (565)
Other assets....................... (1,389) (1,929) (2,408) (15) (1,646) (4,221)
Increase (decrease) in liabilities:
Accounts payable................... 3,209 6,283 2,991 (2,816) 2,761 (278)
Accrued expenses................... 1,500 2,236 4,137 (607) (438) (2,751)
Income taxes payable............... 572 (1,192) 453 288 (197) (741)
Deferred revenue and deposits...... 3,340 10,459 7,708 539 229 1,323
Other deferred liabilities......... -- -- 46 -- 19 6
Foreign currency translation
adjustment....................... 242 189 (763) 121 (104) (453)
------------ ------------ ----------- ----------- ------------- -------------
Net cash provided by (used in)
operating activities......... 4,288 4,281 6,655 (929) (11) (2,050)
------------ ------------ ----------- ----------- ------------- -------------
Cash flows from investing activities:
Additions to land and buildings........ (5,819) (2,341) (435) (206) (21) (69)
Purchase of property and equipment (4,028) (7,243) (3,008) (735) (1,153) (2,400)
Proceeds from disposition of property
and equipment........................ 11 117 83 -- -- 20
------------ ------------ ----------- ----------- ------------- -------------
Net cash used in investing
activities................... (9,836) (9,467) (3,360) (941) (1,174) (2,449)
------------ ------------ ----------- ----------- ------------- -------------
</TABLE>

(Continued)

F-6
<PAGE>
QAD INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(IN THOUSANDS)

<TABLE>
<CAPTION>
ONE MONTH THREE MONTHS THREE MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JANUARY 31, JANUARY 31, APRIL 30, APRIL 30,
1994 1995 1997 1996 1996 1997
------------ ------------ ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows from financing activities:
Proceeds from notes payable and
long-term debt....................... $ 22,019 $ 24,654 $ 84,841 $ 4,254 $ 11,365 $ 32,980
Reduction of notes payable and long-
term debt............................ (17,822) (19,555) (90,131) (2,414) (10,252) (27,018)
Issuance of common stock for cash...... 1,812 675 1,596 -- -- 2,726
Repurchase of common stock............. (168) (624) (717) (26) (85) (2,739)
Receivable from stockholders........... -- (151) (46) -- -- (445)
------------ ------------ ----------- ----------- ------------- -------------
Net cash provided by (used in)
financing activities............... 5,841 4,999 (4,457) 1,814 1,028 5,504
------------ ------------ ----------- ----------- ------------- -------------
Net increase (decrease) in cash...... 293 (187) (1,162) (56) (157) 1,005

Cash at beginning of period............ 1,413 1,706 1,463 1,519 1,463 301
------------ ------------ ----------- ----------- ------------- -------------
Cash at end of period.................. $ 1,706 $ 1,519 $ 301 $ 1,463 $ 1,306 $ 1,306
------------ ------------ ----------- ----------- ------------- -------------
------------ ------------ ----------- ----------- ------------- -------------
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest............................. $ 462 $ 824 $ 1,553 $ 99 $ 345 $ 351
Income taxes......................... $ 876 $ 1,087 $ 707 $ 6 $ 508 $ 1,766
------------ ------------ ----------- ----------- ------------- -------------
------------ ------------ ----------- ----------- ------------- -------------
</TABLE>

Supplemental disclosure of noncash investing and financing activities:

During calendar 1994 and 1995, fiscal year ended January 31, 1997 and the one
month ended January 31, 1996, the Company acquired property and equipment under
capital lease obligations aggregating $1,863,517, $1,081,087, $97,200 and
$79,263, respectively.

During calendar 1995, the Company issued a note payable in the amount of
$2,407,788 in connection with the repurchase of common shares.

See accompanying notes to consolidated financial statements.

F-7
<PAGE>
QAD INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(INFORMATION RELATING TO THE THREE MONTHS ENDED
APRIL 30, 1996 AND APRIL 30, 1997 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

The Company is a provider of Enterprise Resource Planning software for
multinational and other large manufacturing companies. The Company's software
solutions are designed to facilitate global management of resources and
information to allow manufacturers to reduce order fulfillment cycle times and
inventories, improve operating efficiencies and measure critical company
performance criteria against defined business plan objectives. The flexibility
of the Company's products also helps manufacturers adapt to growth,
organizational change, business process reengineering, supply chain management
and other challenges.

Effective February 1, 1996, the Company determined that it would change its
reporting period from years ending December 31 to fiscal years ending January
31. Accordingly, the accompanying statements of income, stockholders' equity and
cash flows include results for the one month transition period ending January
31, 1996.

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
QAD Inc. and its majority-owned subsidiaries. The Company also has various
branch offices worldwide. All intercompany accounts and transactions have been
eliminated in consolidation.

INTERIM FINANCIAL INFORMATION

The financial statements as of April 30, 1997 and for the three months ended
April 30, 1996 and 1997 are unaudited but reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of financial position and results of
operations. Operating results for the three months ended April 30, 1997 are not
necessarily indicative of the results that may be expected for the fiscal year
ending January 31, 1998.

CONCENTRATIONS OF CREDIT RISK

Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Company's customer base, and
their dispersion across many different industries and geographic locations
throughout the world. At January 31, 1997 and April 30, 1997, one customer had
an outstanding receivable that constituted 12% and 7% of the Company's net trade
accounts receivable, respectively. There were no other concentrations of such
credit risk for the periods presented.

USE OF 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 disclosures
of contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

F-8
<PAGE>
QAD INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE THREE MONTHS ENDED
APRIL 30, 1996 AND APRIL 30, 1997 IS UNAUDITED)

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

The Company's principal source of software license fee revenue is derived
from licensing MFG/PRO software. Revenues from maintenance and other activities
are generated from maintenance support services, training and consulting and are
billed separately from license revenues. Revenues from software license
agreements, including licenses sold through distributors, are recognized at the
time of shipment, net of any applicable distributor discount, provided there are
no remaining significant obligations to be fulfilled by the Company and
collectibility is probable within a 12-month period from date of shipment. Where
distributors have reproduction rights, revenue is recognized upon notification
of shipment by the distributor. Typically, the Company's software licenses do
not include significant vendor obligations. Where license contracts call for
payment terms in excess of 12 months from date of shipment, revenue is
recognized as payments become due. Maintenance revenues for ongoing customer
support and product updates are recognized ratably over the term of the
maintenance period, which is generally 12 months. Training and consulting
revenues are recognized as the services are performed. Returns and allowances
are estimated and provided for in the period of sale.

Revenue on all sales in which there are outstanding obligations to provide
resources over a period of time, as a component of the sale, is deferred and
recognized as services are provided on a percentage of completion basis. At
December 31, 1995, and January 31, 1997 $2,261,000 and $811,000, respectively,
of revenue, net of related expenses, had been deferred until future periods for
recognition as services are provided. Further, the Company recognizes revenue
consistent with customer payment terms on all sales where extended payment terms
beyond one year are granted. At January 31, 1997, sales contracts totalling
$4,259,000 having payment terms through January 31, 2000 were deferred, to be
recognized as payments become due.

DEPRECIATION AND AMORTIZATION

Depreciation of property and equipment is provided on the straight-line
method over the estimated useful lives of the related assets. Asset lives range
from three to seven years. Leasehold improvements are amortized on a
straight-line basis over the term of the lease or the life of the related
improvements, whichever is shorter.

COMPUTER SOFTWARE COSTS

Pursuant to Statement of Financial Accounting Standards (SFAS) No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," issued by the Financial Accounting Standards Board, the Company
capitalizes software development costs incurred in connection with the
translation of its products into foreign languages once technological
feasibility has been achieved. Capitalized development costs are amortized on a
straight-line basis over three years and charged to cost of revenues. All other
development costs are expensed to research and development as incurred.

F-9
<PAGE>
QAD INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE THREE MONTHS ENDED
APRIL 30, 1996 AND APRIL 30, 1997 IS UNAUDITED)

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

Accrued expenses are as follows:

<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1996 1997
--------- --------- APRIL 30,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued payroll.................................................................. $ 4,982 $ 7,611 $ 5,505
Accrued other.................................................................... 507 2,015 1,370
--------- --------- -----------
$ 5,489 $ 9,626 $ 6,875
--------- --------- -----------
--------- --------- -----------
</TABLE>

INCOME TAXES

The Company provides for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which
employs an asset and liability approach in accounting for income taxes payable
or refundable at the date of the financial statements as a result of all events
that have been recognized in the financial statements and as measured by the
provisions of enacted laws.

COMPUTATION OF NET INCOME (LOSS) PER SHARE

Net income (loss) per share has been computed using the weighted average
number of shares of common stock and common stock equivalents outstanding using
the treasury-stock method summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED ONE MONTH
DECEMBER 31, YEAR ENDED ENDED
-------------------- JANUARY 31, JANUARY 31,
1994 1995 1997 1996
--------- --------- ----------- ----------- THREE MONTHS ENDED
APRIL 30,
------------------------
1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Weighted average shares of common
stock and common stock equivalents
outstanding........................ 23,102,910 21,100,244 22,747,606 21,230,034 21,378,326 23,264,563
Weighted average shares of common
stock and common stock equivalents
issued or to be issued during the
12 months preceding the initial
public offering.................... 760,952 760,952 760,952 760,952 760,952 760,952
--------- --------- ----------- ----------- ----------- -----------
Shares used in income (loss) per
share calculation.................. 23,863,862 21,861,196 23,508,558 21,990,986 22,139,278 24,025,515
--------- --------- ----------- ----------- ----------- -----------
--------- --------- ----------- ----------- ----------- -----------
</TABLE>

Pursuant to the requirements of the Securities and Exchange Commission,
common stock and common stock options issued by the Company during the 12 months
immediately preceding an initial public offering are included in the calculation
of the weighted average shares outstanding for all periods presented using the
treasury-stock method, based on the estimated offering price, for stock options.
The impact of incremental shares arising from options granted within one year of
the initial public offering is included for all periods, including loss periods
where the effect on loss per share is anti-dilutive. Accordingly, weighted
average shares of common stock and common stock equivalents outstanding include

F-10
<PAGE>
QAD INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE THREE MONTHS ENDED
APRIL 30, 1996 AND APRIL 30, 1997 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
760,952 shares as a result of common stock and stock options issued within 12
months of the initial public offering and are shown as outstanding for all
periods presented, including loss periods.

Stock options issued more than 12 months before the initial public offering
date are excluded from the computation for loss periods as their inclusion would
be anti-dilutive.

FOREIGN CURRENCY TRANSLATION

The functional currency of each foreign subsidiary is its own local
currency. Accordingly, in consolidation, assets and liabilities are translated
to U.S. dollars at the exchange rate on the balance sheet date. Resulting
translation adjustments are accumulated as a separate component of stockholders'
equity. Revenues, costs and expenses are translated at average rates for each
month. (Gains) and losses from foreign currency transactions are reflected in
net earnings in the year incurred, classified as "other income expense," and
totaled approximately $343,000, $477,000, $(407,000) and $(34,000) for the years
ended December 31, 1994, December 31, 1995 and January 31, 1997 and the one
month period ended January 31, 1996, respectively. For the three month period
ended April 30, 1997, foreign currency transaction gains included in other
income totalled $430,000.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of the following financial instruments approximate fair
value because of the short maturity of those instruments: accounts receivable,
prepaid expenses and other current assets, accounts payable, accrued expenses,
deferred revenue and deposits.

The carrying value of the Company's obligations under capital leases, notes
payable and long-term debt approximates fair value and was estimated by
discounting the future cash flows of the capital leases, notes payable and
long-term debt at rates currently offered to the Company for similar capital
leases, notes payable and long-term debt of comparable maturities by the
Company's bankers.

LONG-LIVED ASSETS

The Company has adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," during 1995. This statement
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted operating
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Adoption of this statement did not have a material impact on the Company's
financial position, results of operations or liquidity.

ACCOUNTING FOR STOCK OPTIONS

Prior to January 1, 1996, the Company accounted for its stock option grants
in accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense would be recorded on the date of

F-11
<PAGE>
QAD INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE THREE MONTHS ENDED
APRIL 30, 1996 AND APRIL 30, 1997 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option grants
made in 1995, 1996 and future years as if the fair value-based method defined in
SFAS No. 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123.

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Standards Board issued SFAS No. 128,
"Earnings Per Share." SFAS No. 128 specifies new standards designed to improve
the earnings per share ("EPS") information provided in financial statements by
simplifying the existing computational guidelines, `revising the disclosure
requirements and increasing the comparability of EPS data on an international
basis. Some of the changes made to simplify the EPS computations include: (a)
eliminating the presentation of primary EPS and replacing it with basic EPS,
with the principal difference being that common stock equivalents are not
considered in computing basic EPS, (b) eliminating the modified treasury stock
method and the three percent materiality provision and (c) revising the
contingent share provision and the supplemental EPS data requirements. SFAS No.
128 also makes a number of changes to existing disclosure requirements. SFAS No.
128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. The Company has not determined the
impact of the implementation of SFAS No. 128.

F-12
<PAGE>
QAD INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE THREE MONTHS ENDED
APRIL 30, 1996 AND APRIL 30, 1997 IS UNAUDITED)

2. PROPERTY AND EQUIPMENT

Property and equipment is summarized as follows (in thousands):

<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1996 1997
----------- ----------- APRIL 30,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
Land and buildings.................................... $ 8,367 $ 8,802 $ 8,871
Automobiles........................................... 75 71 93
Computer equipment and software....................... 10,628 12,306 14,833
Furniture and office equipment........................ 5,278 6,160 6,403
Leasehold improvements................................ 872 1,032 1,349
Equipment under capital lease......................... 1,884 1,921 1,070
----------- ----------- -----------
27,104 30,292 32,619
Less accumulated depreciation and amortization, which
includes $650, $1,217 and $469 for January 31, 1996,
January 31, 1997 and April 30, 1997, respectively,
for equipment under capital leases.................. (8,046) (12,221) (13,295)
----------- ----------- -----------
Net property and equipment........................ $ 19,058 $ 18,071 $ 19,324
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

Included in land and buildings is capitalized interest aggregating $290,000,
$329,000 and $329,000 as of January 31, 1996, January 31, 1997 and April 30,
1997, respectively.

3. OTHER ASSETS

Other assets at January 31, 1996, January 31, 1997 and April 30, 1997
include capitalized software development costs of $858,000, $1,065,000 and
$1,218,000 (net of $1,671,000, $2,341,000 and $2,511,000 of accumulated
amortization), respectively. Amortization of these costs totaled $550,000,
$694,000, $671,000 and $61,000 during the years ended December 31, 1994,
December 31, 1995 and January 31, 1997 and one month ended January 31, 1996,
respectively. For the interim periods ended April 30, 1996 and 1997, such costs
aggregated $168,000 and $172,000, respectively. Amortization costs are included
in cost of revenues. Software development costs incurred prior to achieving
technological feasibility are expensed as incurred as research and development.
Such costs aggregated $10,618,000, $17,037,000, $25,623,000 and $1,547,000 for
the years ended December 31, 1994, December 31, 1995 and January 31, 1997 and
one month ended January 31, 1996, respectively. For the interim periods ended
April 30, 1996 and 1997, such costs aggregated $5,921,000 and $6,171,000,
respectively.

F-13
<PAGE>
QAD INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE THREE MONTHS ENDED
APRIL 30, 1996 AND APRIL 30, 1997 IS UNAUDITED)

4. NOTES PAYABLE AND LONG-TERM DEBT

Notes payable and long-term debt are summarized as follows (in thousands):

<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1996 1997
----------- ----------- APRIL 30,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
Advances under a $16,000,000 revolving credit agreement with a bank,
secured by substantially all assets and guarantees of certain
stockholders, bearing interest at the highest LIBOR for the period (5.49%
at January 31, 1997) plus 4.875% per annum, expiring July 1997........... $ -- $ 4,349 $ 11,265
Advances under a $15,000,000 line of credit agreement with a bank, secured
by accounts receivable and guarantees of certain stockholders, bearing
interest at the prime rate (8.5% at January 31, 1996) plus .85% per
annum, expiring June 1996................................................ 5,525 -- --
Term notes payable, secured by property and equipment, payable in monthly
installments ranging from $6,276 to $41,667, at interest rates ranging
from 8.29% to 10.365% per annum, expiring from June 1997 to December
1999..................................................................... 5,510 5,258 4,429
Note payable under term portion of credit agreement, secured by real
estate, principal payable commencing August 1996 in monthly installments
of $66,666 plus interest at the highest LIBOR during the month (5.49% at
January 31, 1997) plus 4.875% per annum (to be no less than 8% per
annum), through July 2001................................................ -- 3,600 3,400
Notes payable, secured by real estate, payable in monthly installments
ranging from $10,194 to $30,783, at interest rates ranging from 9.0% to
9.85% per annum, expiring from October 1997 to July 2004................. 4,300 -- --
Term note payable, net of unamortized discount of $91,931 at 9.35% per
annum, unsecured, payable $848,750 on February 29, 1996, $628,750 on May
31, 1996, $628,750 on August 31, 1996 and $408,750 on November 30,
1996..................................................................... 2,423 -- --
Note payable, secured by leasehold improvements, payable in monthly
installments of $681 through February 1998............................... 17 9 7
Capital lease obligations.................................................. 1,016 285 362
----------- ----------- -----------
18,791 13,501 19,463
Less current installments.................................................. (11,694) (8,465) (15,143)
----------- ----------- -----------
$ 7,097 $ 5,036 $ 4,320
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

The Company's revolving credit agreement expires on July 31, 1997, subject
to automatic successive one-year extensions if not terminated by the Company or
the lender 90 days prior to the expiration date. The maximum available amount of
borrowings under the revolving credit agreement is equal to the lesser of $20
million or the sum of a percentage of the Company's accounts receivable, $4
million of which may

F-14
<PAGE>
QAD INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE THREE MONTHS ENDED
APRIL 30, 1996 AND APRIL 30, 1997 IS UNAUDITED)

4. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
be used only for loans secured by real estate owned by the Company. The total
amount of available borrowings under the revolving credit agreement at April 30,
1997 was approximately $20 million. Borrowings under the revolving credit
agreement bear interest, calculated monthly, at an annual rate equal to the
highest LIBOR rate in effect during the month plus 4.875% but in no event less
than 8%. Minimum monthly interest charges are $20,000 (resulting in a rate of
10.565% at April 30, 1997). The Company's revolving credit agreement is
collateralized by a security interest in substantially all of the Company's
assets.

At January 31, 1997, future minimum principal payments of notes payable and
long-term debt are as follows (in thousands):

<TABLE>
<S> <C>
Year ending January 31:
1998....................... $ 8,465
1999....................... 2,615
2000....................... 1,221
2001....................... 800
2002....................... 400
---------
$ 13,501
---------
---------
</TABLE>

5. DEFERRED REVENUE

The Company bills for ongoing maintenance and post-sale customer support
separately from sales of products and records such amounts as deferred revenue
when billed. Deferred revenue aggregated $21,228,000, $29,125,000 and
$30,228,000 at January 31, 1996, January 31, 1997 and April 30, 1997,
respectively. Revenue under maintenance contracts is recognized ratably over the
term of the contract which is typically 12 months.

F-15
<PAGE>
QAD INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE THREE MONTHS ENDED
APRIL 30, 1996 AND APRIL 30, 1997 IS UNAUDITED)

6. INCOME TAXES

Components of income tax expense (benefit) are as follows (in thousands):

<TABLE>
<CAPTION>
ONE MONTH
YEAR ENDED YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, JANUARY 31, JANUARY 31,
1994 1995 1997 1996
------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Current:
Federal................................................. $ 943 $ 371 $ 672 $ (1,402)
State................................................... 313 110 (63) (203)
Foreign................................................. 264 503 227 890
------ ------------ ----- -----------
Total............................................. 1,520 984 836 (715)
------ ------------ ----- -----------
Deferred:
Federal................................................. (562) (1,946) (94) 80
State................................................... (81) (290) (10) 9
Foreign................................................. -- (1,543) (218) (452)
------ ------------ ----- -----------
Total............................................. (643) (3,779) (322) (363)
------ ------------ ----- -----------
$ 877 $ (2,795) $ 514 $ (1,078)
------ ------------ ----- -----------
------ ------------ ----- -----------
</TABLE>

Statement of Financial Accounting Standards No. 109 requires companies to
record deferred tax assets for the benefit to be derived from deductible
temporary differences, net of appropriate valuation reserves to reflect
management estimates of realizability of such deferred tax assets. The tax
effects of

F-16
<PAGE>
QAD INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE THREE MONTHS ENDED
APRIL 30, 1996 AND APRIL 30, 1997 IS UNAUDITED)

6. INCOME TAXES (CONTINUED)
temporary differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities are presented below (in thousands):

<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts............................................................... $ 759 $ 1,387
Accrued vacation...................................................................... 611 524
Alternative minimum tax............................................................... 187 98
Research and development.............................................................. 914 1,217
Foreign tax credits................................................................... -- 778
Long term contract.................................................................... 859 328
Net operating loss carryforwards...................................................... 4,044 5,054
Other................................................................................. 12 34
----------- -----------
7,386 9,420
Less valuation allowance.............................................................. (1,163) (2,081)
----------- -----------
Net deferred tax assets............................................................... 6,223 7,339
Less current portion (net of $95 and $633 valuation allowance, respectively).......... (4,103) (4,655)
----------- -----------
Long-term net deferred tax assets (net of $1,068 and $1,448 valuation allowance,
respectively)..................................................................... $ 2,120 $ 2,684
----------- -----------
----------- -----------
Deferred tax liabilities:
Capitalized translation costs......................................................... $ 343 $ 355
Foreign sales corporation............................................................. 85 --
State income taxes.................................................................... 52 119
Other................................................................................. 13 (2)
Depreciation and amortization......................................................... 158 (103)
----------- -----------
651 369
Less current portion.................................................................. (493) (472)
----------- -----------
Long-term deferred tax liabilities.................................................. $ 158 $ (103)
----------- -----------
----------- -----------
</TABLE>

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible.

For U.S. tax purposes, management has determined that the realization of
recorded deferred tax assets arising in the United States is reasonably assured,
and accordingly, no valuation allowance has been recorded on such items. With
available tax planning strategies and projections of future income over the
periods in which the foreign deferred tax assets are deductible, management
believes it is more likely than not that the Company will realize a portion of
the benefits of these deductible differences on tax returns

F-17
<PAGE>
QAD INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE THREE MONTHS ENDED
APRIL 30, 1996 AND APRIL 30, 1997 IS UNAUDITED)

6. INCOME TAXES (CONTINUED)
filed in foreign jurisdictions. However, there can be no assurance that any
taxable income will be generated in the respective foreign jurisdictions.

The Company's net operating loss carryforward benefits aggregating $5.1
million at January 31, 1997 arise principally from losses incurred by foreign
subsidiaries and expire commencing in 2001.

At January 31, 1996 and January 31, 1997, the valuation allowance
attributable to deferred tax assets was $1,163,000 and $2,081,000, respectively,
an overall increase of $918,000.

Actual income tax expense (benefit) differs from that obtained by applying
the statutory Federal income tax rate to earnings before income taxes as follows
(in thousands):

<TABLE>
<CAPTION>
ONE MONTH
YEAR ENDED YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, JANUARY 31, JANUARY 31,
1994 1995 1997 1996
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Computed expected tax expense (benefit)................... $ 1,277 $ (1,183) $ 515 $ (1,339)
State income taxes, net of Federal income tax benefit..... 153 (209) 91 (236)
Tax expense from foreign operations....................... 385 -- 117 649
Alternative minimum tax ("AMT")........................... -- 182 -- --
Net change in deferred tax assets and liabilities......... (643) (1,856) 918 (87)
Meals and entertainment................................... 232 279 286 9
Foreign sales corporation................................. 242 1,341 (539) --
Research, AMT and foreign tax credits..................... (747) (1,386) (1,208) (174)
Reduction of research and development credits previously
recorded................................................ -- -- 350 94
Other..................................................... (22) 37 (16) 6
------ ------------ ----------- -----------
$ 877 $ (2,795) $ 514 $ (1,078)
------ ------------ ----------- -----------
------ ------------ ----------- -----------
</TABLE>

7. 401(K) PLAN

The Company has a defined contribution 401(k) plan which is available to
U.S. employees after 30 days of employment. Employees may contribute up to the
maximum allowable by the Internal Revenue Code. The Company may make additional
contributions at the discretion of the Board of Directors. Participants are
immediately vested in their employee contributions. Employer contributions vest
over a five-year period. The employer contributions for the years ended December
31, 1994, December 31, 1995 and January 31, 1997 were $391,000, $101,000 and
$422,000, respectively, which are included in general and administrative
expenses in the accompanying consolidated statements of income.

F-18
<PAGE>
QAD INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE THREE MONTHS ENDED
APRIL 30, 1996 AND APRIL 30, 1997 IS UNAUDITED)

8. COMMITMENTS AND CONTINGENCIES

The Company finances equipment under capital leases and leases office
facilities under operating lease agreements expiring through 2002. The present
value of future minimum capital lease payments and future minimum lease payments
under noncancelable operating leases is as follows (in thousands):

<TABLE>
<CAPTION>
OPERATING
CAPITAL LEASES LEASES
----------------- -----------
<S> <C> <C>
Year ending January 31:
1998............................................................... $ 259 $ 4,730
1999............................................................... 40 3,533
2000............................................................... 3 2,450
2001............................................................... -- 1,209
2002............................................................... -- 700
----- -----------
Total minimum lease payments................................. 302 $ 12,622
-----------
-----------
Less amount representing interest at rates ranging from 11% to
14.5%............................................................ (17)
-----
Present value of minimum lease payments...................... $ 285
-----
-----
</TABLE>

Total rent expense for the years ended December 31, 1994, December 31, 1995
and January 31, 1997 and one month ended January 31, 1996 aggregated $3,056,000,
$4,981,000, $5,929,000 and $457,000, respectively.

9. GEOGRAPHIC INFORMATION

The following table shows revenues, operating income (loss) and identifiable
assets by geographic segment (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JANUARY 31,
1994 1995 1997
------------- ------------- -----------
<S> <C> <C> <C>
Revenue:
U.S................................................. $ 36,380 $ 49,955 $ 73,519
Europe.............................................. 18,469 24,619 32,725
Asia/Pacific........................................ 9,320 12,354 15,543
Other............................................... 2,191 3,021 4,657
------------- ------------- -----------
$ 66,360 $ 89,949 $ 126,444
------------- ------------- -----------
------------- ------------- -----------
Operating income (loss):
U.S................................................. $ 5,014 $ 1,094 $ 6,441
Europe.............................................. (341) 1,251 341
Asia/Pacific........................................ (1,142) (5,621) (5,691)
Other............................................... 553 630 1,231
------------- ------------- -----------
$ 4,084 $ (2,646) $ 2,322
------------- ------------- -----------
------------- ------------- -----------
</TABLE>

<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1996 1997
--------------- ---------------
<S> <C> <C>
Identifiable assets:
U.S........................................................ $ 36,661 $ 46,959
Europe..................................................... 17,603 18,691
Asia/Pacific............................................... 9,429 9,226
Other...................................................... 1,414 2,374
------- -------
$ 65,107 $ 77,250
------- -------
------- -------
</TABLE>

F-19
<PAGE>
QAD INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE THREE MONTHS ENDED
APRIL 30, 1996 AND APRIL 30, 1997 IS UNAUDITED)

10. EMPLOYEE STOCK OPTION, PURCHASE PLANS AND RESTRICTED STOCK AWARDS

EMPLOYEE STOCK OPTION AGREEMENTS

The Company has stock option agreements with certain key employees. As of
January 31, 1997 and April 30, 1997, options to purchase 1,121,000 and 1,061,000
shares of common stock had been granted and were outstanding. Outstanding
options generally vest over a five-year period and have contractual lives of 10
years. Transactions in stock options are summarized as follows:

<TABLE>
<CAPTION>
WEIGHTED OPTIONS
SHARES AVERAGE PRICE EXERCISABLE
------------ ------------- ----------
<S> <C> <C> <C>
Outstanding options at December 31, 1993...................... 2,350,000 $ 0.18 1,904,000

Options issued................................................ --
Options exercised............................................. --
Options expired and terminated................................ --
------------
Outstanding options at December 31, 1994...................... 2,350,000 0.18 2,114,000

Options issued................................................ --
Options exercised............................................. (1,024,000) 0.02
Options expired and terminated................................ --
------------
Outstanding options at December 31, 1995...................... 1,326,000 0.31 1,240,000

Options issued................................................ --
Options exercised............................................. --
Options expired and terminated................................ --
------------
Outstanding options at January 31, 1996....................... 1,326,000 0.31 1,240,000

Options issued................................................ --
Options exercised............................................. (105,000) 0.40
Options expired and terminated................................ (100,000) 1.61
------------
Outstanding options at January 31, 1997....................... 1,121,000 0.18 1,121,000

Options issued................................................ 239,000 12.71
Options exercised............................................. (299,000) 0.21
Options expired and terminated................................ --
------------
Outstanding options at April 30, 1997......................... 1,061,000 $ 3.00 822,000
------------
------------
</TABLE>

F-20
<PAGE>
QAD INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE THREE MONTHS ENDED
APRIL 30, 1996 AND APRIL 30, 1997 IS UNAUDITED)

10. EMPLOYEE STOCK OPTION, PURCHASE PLANS AND RESTRICTED STOCK AWARDS
(CONTINUED)

The weighted average remaining contractual life of stock options outstanding
as of April 30, 1997 was as follows:

<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
NUMBER OF OPTIONS WEIGHTED-AVERAGE ------------------------------
OUTSTANDING AT REMAINING CONTRACTUAL WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES APRIL 30, 1997 LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------------------- ------------------ --------------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$0.12..................... 225,000 2.8 $ 0.12 225,000 $ 0.12
0.19..................... 577,000 3.3 0.19 577,000 0.19
0.39..................... 20,000 4.6 0.39 20,000 0.39
9.53..................... 100,000 9.8 9.53 -- --
15.00.................... 139,000 9.8 15.00 -- --
--
---------- ------ ----------- -----
Total................... 1,061,000 4.7 3.00 822,000 $ 0.17
--
--
---------- ------ ----------- -----
---------- ------ ----------- -----
</TABLE>

The Company applies APB Opinion No. 25 in accounting for its option plans
and, accordingly, no compensation cost was recognized as the exercise price of
the stock options equalled the fair value at the grant date. The pro forma
impact of applying SFAS No. 123 is not presented for the years ended December
31, 1995 and January 31, 1997 as SFAS 123 is applicable only to options granted
during fiscal 1995 and later, and all options outstanding as of January 31, 1997
were granted prior to 1995.

During 1995, the Company repurchased 1,000,000 shares issued to an employee
immediately upon exercise of stock options. Accordingly, the Company recorded
compensation expense of $2,408,000 in the accompanying consolidated financial
statements for the year ended December 31, 1995. Additionally, during the year
ended January 31, 1997 certain employees holding vested options with respect to
70,000 shares at an average of $0.27 per share noticed their intention to
terminate employment. The Company determined that it would reacquire the shares
which would be issued to the employees. Accordingly, $648,000 of compensation
expense representing the difference between exercise price and acquisition cost,
has been accrued as compensation expense at January 31, 1997.

1994 STOCK OWNERSHIP PROGRAM

The Company has also established the QAD Inc. 1994 Stock Ownership Program
(the "Plan") covering 4,800,000 shares of its common stock. Subject to certain
limitations, the Plan allows eligible employees to purchase shares of common
stock at the fair market value of the common stock by direct cash payment or at
95% of the fair market value through payroll deduction. The Company has the
right, but not the obligation, to repurchase shares at fair value upon the
termination of employment. During the years ended December 31, 1994, December
31, 1995, and January 31, 1997 and the three months ended April 30, 1997,
813,864, 250,750, 793,438 and 211,760 shares, respectively, were issued under
the Plan at average prices of $2.23, $2.40, $1.78 and $9.53, respectively. No
shares were issued under the Plan in January 1996.

During the year ended January 31, 1997 and the three months ended April 30,
1997, respectively, 559,066 and 20,400 restricted shares of the Company's common
stock were granted to certain employees. The fair market value of shares awarded
was $2,584,000 and $194,000, respectively. These amounts were recorded as
unearned compensation--restricted stock, shown as a separate component of
stockholders'

F-21
<PAGE>
QAD INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE THREE MONTHS ENDED
APRIL 30, 1996 AND APRIL 30, 1997 IS UNAUDITED)

10. EMPLOYEE STOCK OPTION, PURCHASE PLANS AND RESTRICTED STOCK AWARDS
(CONTINUED)
equity. Unearned compensation is being amortized to expense over the periods in
which the restrictions lapse, generally one to three years from date of award.
Such expenses amounted to $788,000 and $324,000 in the year ended January 31,
1997 and the three months ended April 30, 1997, respectively, $333,000 and
$256,000 of which is included in accrued compensation, respectively, and
$455,000 and $68,000 of which has been recorded as a reduction in unearned
compensation--restricted stock as the restricted shares are issued to employees.

During the years ended December 31, 1994, December 31, 1995 and January 31,
1997, and one month ended January 31, 1996, the Company granted 59,600, 148,514,
108,062 and 23,722 unrestricted shares, respectively, to certain employees
having a fair value of $131,000, $336,000, $256,000 and $57,000 at date of
grant, respectively. Compensation expense has been recognized in each respective
period for the fair value of such stock grants. Unrestricted stock grants
aggregating 50,060 shares in the three months ended April 30, 1997 with a value
of $431,000 are included under costs and expenses for the period.

1997 STOCK INCENTIVE PROGRAM (UNAUDITED)

The Company intends to adopt the 1997 Stock Incentive Program (the
"Program"). The Program consists of seven parts:

The first part is the Incentive Stock Option Plan under which are granted
incentive stock options. The second part is the NonQualified Stock Option Plan
under which are granted nonqualified stock options. The third part is the
Restricted Share Plan under which are granted restricted shares of Common Stock.
The fourth part is the Employee Stock Purchase Plan. The fifth part is the
Non-Employee Director Stock Option Plan under which grants of options to
purchase shares of Common Stock may be made to non-employee directors of the
Company. The sixth part is the Stock Appreciation Rights Plan under which SARs
(as defined therein) are granted. The seventh part is the Other Stock Rights
Plan under which (i) units representing the equivalent shares of Common Stock
are granted; (ii) payments of compensation in the form of shares of Common Stock
are granted; and (iii) rights to receive cash or shares of Common Stock based on
the value of dividends paid with respect to a share of Common Stock are granted.
The maximum aggregate number of shares of Common Stock subject to the Program is
4,000,000 shares. The Program will be valid for 10 years from the date of
adoption.

TOTAL COMPENSATION COST RECOGNIZED FOR STOCK-BASED COMPENSATION PLANS

Total compensation cost recognized for stock-based employee compensation
awards was as follows:

<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
---------------------------------------- ENDED
DECEMBER 31, DECEMBER 31, JANUARY 31, APRIL 30,
1994 1995 1997 1997
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Pursuant to performance awards......................... $ 131,000 $ 336,000 $ 256,000 $ 431,000
Pursuant to restricted stock grants.................... -- -- 788,000 324,000
Pursuant to optioned shares repurchased immediately
upon exercise......................................... -- 2,408,000 648,000 --
------------ ------------ ------------ -------------
Total................................................ $ 131,000 $2,744,000 $ 1,692,000 $ 755,000
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
</TABLE>

F-22
<PAGE>
QAD INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION RELATING TO THE THREE MONTHS ENDED
APRIL 30, 1996 AND APRIL 30, 1997 IS UNAUDITED)

10. EMPLOYEE STOCK OPTION, PURCHASE PLANS AND RESTRICTED STOCK AWARDS
(CONTINUED)
During the one month-period ended January 31, 1996 compensation cost
aggregating $57,000 was recognized pursuant to stock performance awards.

RECEIVABLE FROM STOCKHOLDERS

In connection with the 1994 Stock Ownership Program, the Company has
guaranteed indebtedness incurred by certain stockholders to purchase shares with
cash deposited with a lending institution. These amounts are classified as
"Receivable from Stockholders" in the accompanying balance sheets.

11. INVESTMENT

In March 1997, the Company acquired an interest in a high technology company
for an aggregate purchase price of $1.0 million, $400,000 of which had been
advanced at January 31, 1997. The Company has an option to acquire an additional
interest in the business for an aggregate purchase price of $2.0 million, which
option expires no later than September 15, 1997. Should the option be exercised,
the Company will own a 33% interest in the enterprise.

12. SUBSEQUENT EVENT AND PLANNED STOCK SPLIT

Subsequent to January 31, 1997 the Company began efforts to complete an
offering of shares to the public through the filing of a Form S-1 Registration
Statement with the Securities and Exchange Commission. In connection with the
planned public offering, the board of directors has resolved to reincorporate in
the State of Delaware prior to completion of the offering and, further, resolved
to increase the number of authorized shares and split its common shares in a
2-for-1 stock split.

For financial reporting purposes, the stock split has been given effect in
the accompanying consolidated financial statements for all periods presented.

F-23
<PAGE>
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY ANY
OF THE U.S. UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN
THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT
RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT
LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE
DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT
IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 5
Use of Proceeds................................. 20
Dividend Policy................................. 20
Capitalization.................................. 21
Dilution........................................ 22
Selected Consolidated Financial Data............ 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 24
Business........................................ 35
Management...................................... 48
Certain Transactions............................ 53
Principal Stockholders.......................... 53
Description of Capital Stock.................... 54
Shares Eligible for Future Sale................. 57
Certain U.S. Federal Tax Considerations for
Non-U.S. Holders.............................. 59
Underwriting.................................... 61
Legal Matters................................... 64
Experts......................................... 64
Additional Information.......................... 64
Index to Consolidated Financial Statements...... F-1
</TABLE>

UNTIL AUGUST 31, 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

5,750,000 SHARES

[LOGO]

COMMON STOCK

---------

P R O S P E C T U S

AUGUST 6, 1997

---------

SMITH BARNEY INC.
COWEN & COMPANY
ROBERTSON, STEPHENS & COMPANY

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