QUEST SOFTWARE INC, S-1, 1999-06-11

QUEST SOFTWARE INC
S-1, 1999-06-11

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 11, 1999

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

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

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

QUEST SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
CALIFORNIA 7372 33-0231678
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

610 NEWPORT CENTER DRIVE
NEWPORT BEACH, CA 92660
(949) 720-1434
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF THE REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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

MR. VINCENT C. SMITH
CHIEF EXECUTIVE OFFICER
QUEST SOFTWARE, INC.
610 NEWPORT CENTER DRIVE
NEWPORT BEACH, CA 92660
(949) 720-1434
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

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

COPIES TO:

GREG T. WILLIAMS, ESQ. ALAN K. AUSTIN, ESQ.
CHRISTINE P. LE, ESQ. BRIAN C. ERB, ESQ.
PATTY H. LE, ESQ. BRIAN MCDANIEL, ESQ.
BROBECK, PHLEGER & HARRISON LLP WILSON SONSINI GOODRICH & ROSATI
38 TECHNOLOGY DRIVE PROFESSIONAL CORPORATION
IRVINE, CALIFORNIA 92618 650 PAGE MILL ROAD
(949) 790-6300 PALO ALTO, CALIFORNIA 94304
(650) 493-9300

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

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

If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

CALCULATION OF REGISTRATION FEE

<TABLE>
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------
Common Stock........................................... $60,000,000 $16,680.00
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o).

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

================================================================================
<PAGE> 2

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

SUBJECT TO COMPLETION, DATED JUNE 11, 1999

[QUEST SOFTWARE LOGO]

COMMON STOCK

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

Quest Software, Inc. is offering shares of common stock.
This is our initial public offering, and no public market currently exists for
our shares. We have filed an application for the common stock to be quoted on
the Nasdaq National Market under the symbol "QSFT." We anticipate that the
initial public offering price will be between $ and $ per
share.

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

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

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

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to Quest Software, Inc............................. $ $
</TABLE>

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

THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

Quest Software, Inc. has granted the underwriters a 30-day option to
purchase up to an additional shares of our common stock to cover
over-allotments. BancBoston Robertson Stephens Inc. expects to deliver the
shares of common stock to purchasers on , 1999.

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

BANCBOSTON ROBERTSON STEPHENS
DONALDSON, LUFKIN & JENRETTE
CIBC WORLD MARKETS
FAC/EQUITIES

THE DATE OF THIS PROSPECTUS IS , 1999.
<PAGE> 3

Inside Front Cover

[Quest Software Logo]

The Quest Solution.

Quest offers application and information availability software solutions that
enhance the performance and reliability of an organization's e-business,
packaged and custom applications and enable the delivery of information across
the extended enterprise.

[Schematic depiction of enterprise software environment showing the
functionality of and relationships among Quest's products and this underlying
environment.]

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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK. IN THIS PROSPECTUS, REFERENCES TO
"QUEST," "WE," "OUR" AND "US" REFER TO QUEST SOFTWARE, INC., TOGETHER WITH ITS
SUBSIDIARIES.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 4
Risk Factors................................................ 7
You Should Not Rely on Any Forward-Looking Statements
Contained in this Prospectus Because They Are Subject to
Risks and Uncertainties................................... 17
Use of Proceeds............................................. 18
Dividend Policy............................................. 18
Capitalization.............................................. 19
Dilution.................................................... 20
Selected Consolidated Financial Data........................ 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 32
Management.................................................. 46
Certain Transactions........................................ 56
Principal Shareholders...................................... 58
Description of Capital Stock................................ 60
Shares Eligible for Future Sale............................. 62
Underwriting................................................ 64
Legal Matters............................................... 66
Experts..................................................... 66
Additional Information...................................... 66
Index to Consolidated Financial Statements.................. F-1
</TABLE>

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<PAGE> 5

SUMMARY

You should read the following summary together with the more detailed
information and consolidated financial statements and the notes to those
statements appearing elsewhere in this prospectus. This prospectus contains
forward looking statements that involve risks and uncertainties. Our actual
results could differ materially from the results anticipated in these
forward-looking statements as a result of the factors set forth under "Risk
Factors" and elsewhere in this prospectus. We undertake no obligation to update
publicly any forward-looking statements for any reason, even if new information
becomes available or other events occur in the future.

QUEST SOFTWARE, INC.

Organizations are constantly seeking ways to use information technology to
compete more effectively. Today, organizations must deliver relevant information
and provide increasingly sophisticated and time-sensitive services to a rapidly
expanding audience, including employees, customers, suppliers and partners both
inside and outside the traditional enterprise. Many organizations are beginning
to extend their core business processes over the Internet to directly reach a
large number of geographically dispersed end-users. These e-business initiatives
are raising the strategic importance of real-time information and are increasing
the challenges of building and maintaining the systems to effectively manage and
distribute information. As a result, organizations must assure that their
systems provide:

- Application availability -- uninterrupted and high performance access to
applications under widely varying conditions; and

- Information availability -- broad distribution of critical business
information from underlying applications to decision-makers throughout
the extended enterprise.

We offer a family of products that provide both application and information
availability solutions. Our products are designed to work individually and
together to provide immediate and continuous availability of applications and
information. Our application availability products are designed to help ensure
uninterrupted and high performance access to software systems through database
replication, enterprise monitoring, database and application performance
optimization, change management and database programming solutions for
thin-client development. Our information availability products deliver an
enterprise, report-based information management solution that captures, stores,
indexes, prints and archives report data or electronic documents from virtually
any application for instant distribution over intranets or the Internet.

The key elements of our strategy include extending our product leadership,
continuing our focus on the e-business applications market, leveraging our
significant installed base, expanding our sales force and international
distribution channels and extending our existing strategic relationships and
developing new partnerships with leading global systems integrators.

We have thousands of customers across a range of industries including
technology, financial services, manufacturing, healthcare, energy, insurance and
telecommunications. We market and sell our software and services worldwide
through a combination of direct sales and telesales in the United States,
Australia, the United Kingdom and Germany, as well as through resellers and
distributors.

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THE OFFERING

Common stock offered.................. shares

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

Use of proceeds....................... To redeem all outstanding shares of
our Series B Redeemable Preferred
Stock, to repay indebtedness and for
general corporate purposes, including
working capital, expanding our sales
and marketing efforts, product
development, expanding our customer
support organization, possible
acquisitions and capital
expenditures. See "Use of Proceeds."

Proposed Nasdaq National Market
symbol................................ QSFT

The number of shares of common stock to be outstanding after this offering
is based on the actual number of shares outstanding as of March 31, 1999 which
excludes:

- 4,576,125 shares of common stock issuable upon exercise of stock options
outstanding as of June 1, 1999 at a weighted average exercise price of
$1.65 per share;

- 1,500 shares of common stock issued upon exercise of options subsequent
to March 31, 1999;

- 2,923,875 shares of common stock reserved for future issuance under our
stock incentive plan; and

- 600,000 shares of common stock reserved for issuance under our employee
stock purchase plan. See "Capitalization," "Management -- 1999 Stock
Incentive Plan," "-- 1999 Employee Stock Purchase Plan" and note 5 of the
notes to our consolidated financial statements.

CORPORATE INFORMATION

We were incorporated in California in April 1987. Our principal executive
offices are located at 610 Newport Center Drive, Newport Beach, California 92660
and our telephone number is (949) 720-1434. Our Web site is located at
www.quest.com. Information contained on our Web site does not constitute part of
this prospectus.

Except as otherwise noted, all information in this prospectus:

- reflects a three-for-two stock split that was effected in June 1999;

- reflects the issuance of 2,666,667 shares of our Series A Preferred Stock
in April 1999 and the automatic conversion of such shares into 4,000,000
shares of common stock immediately prior to the closing of this offering;
and

- assumes that the underwriters' over-allotment option is not exercised.

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<PAGE> 7

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The pro forma information below gives effect, as of March 31, 1999, to the
receipt of $25.0 million from the issuance of 2,666,667 shares of Series A
Preferred Stock and 1,777,778 shares of Series B Redeemable Preferred Stock in
April 1999, the receipt of $10.0 million in proceeds from the issuance of
long-term debt in April 1999, the repurchase of 14,820,000 shares of our common
stock by us for $35.0 million in April 1999 and the issuance of 4,000,000 shares
of common stock upon the conversion of all outstanding shares of the Series A
Preferred Stock immediately prior to the closing of this offering.

The pro forma as adjusted information below gives effect as of March 31,
1999, to the pro forma adjustment set forth above and our receipt of the
estimated net proceeds of $ from the sale of shares of common
stock offered by us hereby at an assumed initial public offering price of $
per share and the uses of the estimated proceeds therefrom described in "Use of
Proceeds."

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Total revenues......................... $5,686 $9,524 $12,862 $18,315 $34,790 $ 7,043 $12,814
Gross profit........................... 3,461 8,284 10,445 15,036 28,850 5,965 11,250
Income (loss) from operations.......... 37 2,335 (372) 1,448 3,689 1,435 1,416
Net income............................. 17 2,358 16 289 2,346 868 883
Basic and diluted net income per
share................................ $ -- $ 0.12 $ -- $ 0.01 $ 0.05 $ 0.02 $ 0.02
Weighted average common shares
outstanding:
Basic................................ 19,500 19,500 38,350 40,373 44,261 43,497 44,539
Diluted.............................. 19,500 19,500 38,350 40,373 44,559 43,721 45,650
Pro forma basic and diluted net income
per share............................ $ 0.05 $ 0.02
Pro forma weighted average shares
outstanding:
Basic................................ 48,261 48,539
Diluted.............................. 48,559 49,650
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $12,502 $12,502 $
Working capital............................................. 3,309 3,309
Total assets................................................ 22,472 22,472
Long-term debt.............................................. -- 10,000 --
Series B Redeemable Preferred Stock......................... -- 10,000 --
Retained earnings........................................... 4,874 -- --
Total shareholders' equity (deficit)........................ 5,911 (14,089)
</TABLE>

6
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RISK FACTORS

An investment in our shares involves risks and uncertainties. You should
carefully consider the factors described below before making an investment
decision in our securities. In addition, you should keep in mind that the risks
described below are not the only risks that we face. The risks described below
are the risks that we currently believe are material risks of business, the
industry in which we compete and this offering. However, additional risks not
presently known to us, or risks that we currently believe are immaterial, may
also impair our business.

Our business, financial condition and results of operations could be
adversely affected by any of the following risks. If we are adversely affected
by such risks, then the trading price of our common stock could decline, and you
could lose all or part of your investment.

RISKS RELATED TO OUR BUSINESS

OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS, AND, AS A
RESULT, WE MAY FAIL TO MEET EXPECTATIONS OF INVESTORS AND ANALYSTS

Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, including the following:

- variations in demand for our products;

- the size and timing of customer orders;

- increased expenses, whether related to sales and marketing, product
development or administration;

- our ability to attain market acceptance of new products and services and
enhancements to our existing products;

- delays in introducing new products;

- new product introductions by competitors;

- lack of order backlog;

- changes in our pricing policies or the pricing policies of our
competitors;

- costs related to acquisitions of technologies or businesses;

- the timing of releases of new versions of third-party software products
that our products support, including, without limitation, product
releases by Oracle; and

- the amount and timing of expenditures related to expansion of our
operations.

We have difficulty predicting the volume and timing of orders for our
products. In any given quarter, sales of some of our products have involved, and
we expect will continue to involve, large financial commitments from a
relatively small number of customers. The cancellation or deferral of these
large contracts would reduce our revenues, which would adversely affect our
quarterly financial performance. Also, we have often booked a large amount of
our sales in the last month or weeks of each quarter. Accordingly, delays in the
closing of sales near the end of a quarter could cause quarterly revenue to fall
short of anticipated levels. In addition, while a portion of our revenues each
quarter is recognized from previously deferred revenue, our quarterly
performance will depend primarily upon entering into new contracts to generate
revenues for that quarter.

A significant portion of our expenses are fixed in the short term and
cannot be quickly reduced to respond to decreases in revenue. As a result, a
delay in generating or recognizing revenue could cause significant variations in
our operating results from quarter-to-quarter and could result in substantial
operating losses.

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MANY OF OUR PRODUCTS SUPPORT ORACLE'S TECHNOLOGIES AND THEREFORE OUR SUCCESS IS
DEPENDENT IN PART ON ORACLE

We believe that our success has depended in part, and will continue to
depend in part for the foreseeable future, upon our relationship with Oracle and
our status as a complementary software provider for Oracle's database and
application products. Many versions of our principal products, including
SharePlex, SQLab Xpert, and SQL Navigator, are designed specifically to be used
with Oracle databases. Although a number of our products work with other
environments, our competitive advantage consists in substantial part on the
integration between our products and Oracle's products, and our extensive
knowledge of Oracle's technology. Currently, a significant portion of our total
revenues are derived from products that specifically support Oracle-based
products. If Oracle for any reason decides to promote technologies and standards
that are not compatible with our technology, or if Oracle loses market share for
its database products, our business, operating results and financial condition
would be materially adversely affected.

MANY OF OUR PRODUCTS COMPETE WITH PRODUCTS AND FUNCTIONALITY OFFERED BY ORACLE

We currently compete with Oracle in the market for database management
solutions. We expect that Oracle's commitment to and presence in the database
management product market will increase in the future and therefore
substantially increase competitive pressures. We believe that Oracle will
continue to incorporate database management technology into its server software
offerings, possibly at no additional cost to its users. We believe that Oracle
will also continue to enhance its database management technology. Furthermore,
Oracle could attempt to increase its presence in this market by acquiring or
forming strategic alliances with our competitors, and Oracle may be in better
position to withstand and respond to the current factors impacting this
industry. Oracle has a longer operating history, a larger installed base of
customers and substantially greater financial, distribution, marketing and
technical resources than we do. In addition, Oracle has well-established
relationships with many of our present and potential customers. As a result, we
may not be able to compete effectively with Oracle in the future which could
materially adversely affect our business, operating results and financial
condition.

OUR SUCCESS DEPENDS ON OUR ABILITY TO HIRE AND RETAIN QUALIFIED SALES PERSONNEL
AND EXPAND OUR INDIRECT SALES CHANNELS

Our ability to increase revenues in the future substantially depends on the
success of our direct sales force and our success in recruiting, training and
retaining additional direct salespeople. In this regard, we intend to continue
to expand our direct sales and telesales forces. There has in the past been and
there may in the future be a shortage of direct sales personnel with the skills
and expertise necessary to sell our products effectively. Also, it may take our
new sales personnel and sales personnel that we may hire in the future several
months before they become productive. Our business will be harmed if we fail to
continue to hire or retain qualified sales personnel, or if newly hired
salespeople fail to develop the necessary sales skills or develop these skills
more slowly than we anticipate.

In certain international markets we may miss sales opportunities if we are
unable to enter into successful relationships with locally based resellers. In
the future, we intend to augment our current limited indirect sales distribution
methods through additional third-party distribution arrangements and, therefore,
we will likely become more dependent on these type of relationships. There can
be no assurance that we will successfully augment these arrangements or that the
expansion of indirect sales distribution methods will increase revenues.

DIFFICULTIES WE MAY ENCOUNTER MANAGING OUR GROWTH COULD ADVERSELY AFFECT OUR
BUSINESS

We have recently experienced a period of rapid growth in our operations
that has placed and will continue to place a strain on our management,
administrative, operational and financial infrastructure. During this period, we
have experienced an increase in the number of our employees, increasing demands
on our operating and financial systems and personnel, and an expansion in the
geographic coverage of our

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operations. The number of our full-time employees increased from 67 as of
December 31, 1996 to 129 as of December 31, 1997, to 253 as of December 31,
1998, to 307 as of March 31, 1999. Our ability to manage our operations and
growth requires us to continue to improve our operational, financial and
management controls, and reporting systems and procedures. In addition, we will
be required to hire additional management, financial, and sales and marketing
personnel to manage our expanding operations. If we are unable to manage this
growth effectively, our business, operating results and financial condition may
be materially adversely affected.

OUR FUTURE SUCCESS MAY DEPEND ON INCREASED BUSINESS FROM OUR CURRENT CUSTOMERS

Most of our customers initially make a purchase of our products for a
single department or location. Many of these customers may choose not to expand
their use of our products. If we fail to generate expanded business from our
current customers, our business, operating results and financial condition could
be materially adversely affected. In addition, as we deploy new modules and
features for our existing products or introduce new products, our current
customers may choose not to purchase this new functionality or these new
products. Moreover, if customers elect not to renew their maintenance
agreements, our service revenues would be materially adversely affected.

BECAUSE THE MARKET FOR E-BUSINESS SOLUTIONS IS NEW AND EVOLVING, WE CANNOT
ACCURATELY PREDICT THE FUTURE GROWTH RATE OF THIS MARKET OR ITS ULTIMATE SIZE

We are increasingly focusing our selling efforts on providing application
and information availability solutions for e-business applications and we expect
such sales to constitute an increasing portion of our future revenue growth. We
believe that most companies currently are not yet aware of our products and
capabilities within this evolving market, and, as a result, such companies have
not deployed our solutions. While we have devoted significant resources to
promoting awareness of our products and the problems these products address for
this evolving market, these efforts may not be sufficient to build market
awareness of the need for our products. Failure of a significant market for
e-business application and information availability products to develop, or
failure of our products to achieve broad market acceptance, could have a
material adverse effect on our business, operating results and financial
condition.

WE EXPECT TO INCUR SIGNIFICANT INCREASES IN OUR OPERATING EXPENSES IN THE
FORESEEABLE FUTURE

We intend to substantially increase our operating expenses for the
foreseeable future as we:

- increase our sales and marketing activities, including expanding our
direct sales and telesales forces;

- increase our research and development activities;

- expand our general and administrative activities; and

- expand our customer support organizations.

Accordingly, we will be required to significantly increase our revenues in order
to maintain profitability. These expenses will be incurred before we generate
any revenues by this increased spending. If we do not significantly increase
revenues from these efforts, our business and operating results would be
negatively impacted.

IT IS DIFFICULT TO PREDICT THE TIMING OF INDIVIDUAL ORDERS BECAUSE SOME OF OUR
PRODUCTS HAVE A RELATIVELY LONG SALES CYCLE

To date, the sales cycle for Vista Plus and SharePlex have been up to six
months and often require pre-purchase evaluation periods. For example, as part
of our sales effort for Vista Plus, we spend significant time educating our
prospective customers regarding the use and benefits of this product. The
relatively long sales cycles for these products may cause license revenues and
operating results for those products to vary significantly from period to
period.

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ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISRUPTIONS TO OUR
BUSINESS AND DIVERSION OF MANAGEMENT ATTENTION

We have in the past and we expect to continue to make acquisitions of
complementary companies, products or technologies. If we make any acquisitions,
we will be required to assimilate the operations, products and personnel of the
acquired businesses and train, retain and motivate key personnel from the
acquired businesses. We may be unable to maintain uniform standards, controls,
procedures and policies if we fail in these efforts. Similarly, acquisitions may
cause disruptions in our operations and divert management's attention from
day-to-day operations, which could impair our relationships with our current
employees, customers and strategic partners. We may have to incur debt or issue
equity securities to pay for any future acquisitions. The issuance of equity
securities for any acquisition could be substantially dilutive to our
shareholders. In addition, our profitability may suffer because of
acquisition-related costs or amortization costs for acquired goodwill and other
intangible assets. If we are unable to fully integrate acquired businesses,
products or technologies with our existing operations, we may not receive the
intended benefits of acquisition.

OUR INTERNATIONAL OPERATIONS AND OUR PLANNED EXPANSION OF OUR INTERNATIONAL
OPERATIONS EXPOSES US TO CERTAIN RISKS

Substantially all of our current international revenues are derived from
the operations of our three wholly-owned subsidiaries in Australia, the United
Kingdom and Germany. Revenues from licenses and services to customers outside of
North America were $5.8 million in 1998, representing 16.7% of total revenues,
and $2.3 million in the three months ended March 31, 1999, representing 18.2% of
total revenues. As a result, we face increasing risks from doing business on an
international basis, including, among others:

- difficulties in staffing and managing foreign operations;

- longer payment cycles;

- seasonal reductions in business activity in Europe;

- increased financial accounting and reporting burdens and complexities;

- potentially adverse tax consequences;

- delays in localizing our products;

- compliance with a wide variety of complex foreign laws and treaties;

- reduced protection for intellectual property rights in some countries;
and

- licenses, tariffs and other trade barriers.

In addition, because our international subsidiaries conduct business in the
currency of the country in which they operate, we are subject to currency
fluctuations and currency transaction losses or gains which are outside of our
control.

We plan to expand our international operations as part of our business
strategy. The expansion of our existing international operations and entry into
additional international markets will require significant management attention
and financial resources and will place additional burdens on our management,
administrative, operational and financial infrastructure. We cannot be certain
that our investments in establishing facilities in other countries will produce
desired levels of revenue or profitability. In addition, we have sold our
products internationally for only a few years and we have limited experience in
developing localized versions of our products and marketing and distributing
them internationally. As our international operations expand, our exposure to
exchange rate fluctuations will increase as we use an increasing number of
foreign currencies. We have not yet entered into any hedging transactions to
date to mitigate our expense to currency fluctuations.

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OUR FUTURE SUCCESS DEPENDS IN PART ON THE ACCEPTANCE OF OUR VISTA PLUS PRODUCT

Our recent operating results have depended in part upon the commercial
success of our Vista Plus product line and we expect a significant portion of
our licensing revenues for the foreseeable future to come from sales of these
products. As a result, any future growth of Quest for the foreseeable future
will depend on the continued commercial success of these products. Our future
financial performance will also depend in part on the successful development,
introduction and customer acceptance of new and enhanced versions of Vista Plus
products. In the future we may not be successful in marketing our existing
products or any new or enhanced products or services.

SEASONALITY MAY CONTRIBUTE TO FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS

Our business has experienced, and is expected to continue to experience,
seasonal customer buying patterns. In recent years, we have had relatively
stronger demand for our products during the quarters ending December 31 and June
30, and relatively weaker demand in the quarters ending March 31 and September
30. We believe that this pattern will continue. In addition, to the extent
international operations constitute a greater percentage of our revenues in
future periods, we anticipate that demand for our products in Europe will
decline during the summer vacation season.

FAILURE TO DEVELOP STRATEGIC RELATIONSHIPS COULD HARM OUR BUSINESS

Our current collaborative relationships may not prove to be beneficial to
us, and they may not be sustained. We also may not be able to enter into
successful new strategic relationships in the future, which could have a
material adverse effect on our business, operating results and financial
condition. From time to time, we have collaborated with other companies,
including Oracle and certain regional offices of a number of the national
accounting firms that provide system integration services, in areas such as
product development, marketing, distribution and implementation. We could lose
sales opportunities if we fail to work effectively with these parties. Moreover,
we expect that maintaining and enhancing these and other relationships will
become a more meaningful part of our business strategy in the future. However,
many of our current partners are either actual or potential competitors with us.
In addition, many of these third parties also work with competing software
companies and we may not be able to maintain these existing relationships, due
to the fact that these relationships are informal or, if written, are terminable
with little or no notice.

OUR PROPRIETARY RIGHTS MAY BE INADEQUATELY PROTECTED, AND THERE IS RISK OF
INFRINGEMENT CLAIMS IN OUR BUSINESS

Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology. We rely on a combination
of trademark, trade secret, copyright law and contractual restrictions to
protect the proprietary aspects of our technology. We presently have no patents
on our products. We currently hold several trademark registrations and have
numerous trademark applications in the United States and certain foreign
countries. Our trademark applications might not result in the issuance of any
valid trademarks. We seek to protect our source code for our software,
documentation and other written materials under trade secret and copyright laws.
We license our software pursuant to signed or shrinkwrap license agreements,
which impose restrictions on the licensee's ability to utilize the software.
Finally, we seek to avoid disclosure of our intellectual property by requiring
employees and consultants with access to our proprietary information to execute
confidentiality agreements with us and by restricting access to our source code.

Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. In addition, we sell our products
internationally. The laws of many countries do not protect our proprietary
rights to as great an extent as do the laws of the United States. Litigation may
be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets, and to determine the validity and scope of the

11
<PAGE> 13

proprietary rights of others. Any such resulting litigation could result in
substantial costs and diversion of resources and would materially adversely
affect our business, operating results and financial condition.

We cannot assure you that our means of protecting our proprietary rights
will be adequate or that competition will not independently develop similar or
superior technology. Policing unauthorized use of our products is difficult, and
we cannot be certain that the steps we have taken will prevent misappropriation
of our technology, particularly in foreign countries where the laws may not
protect our proprietary rights as fully as in the United States. We also believe
that, because of the rapid rate of technological change in the software
industry, trade secret and copyright protection are less significant than
factors such as the knowledge, ability and experience of our employees, frequent
product enhancements and the timeliness and quality of customer support
services.

Our success and ability to compete are also dependent on our ability to
operate without infringing upon the proprietary rights of others. There can be
no assurance that third parties will not claim infringement by us of their
intellectual property rights. We expect that software product developers will
increasingly be subject to infringement claims as the number of products and
competitors in our industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or require
us to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to us, if at
all. In the event of a successful claim of product infringement against us and
our failure or inability to either license the infringed or similar technology
or develop alternative technology on a timely basis, our business, operating
results and financial condition could be materially adversely affected.

On May 25, 1999, Mobius Management Systems, Inc. filed a lawsuit against us
in the United States District Court for the District of New Jersey. The
complaint alleges, among other things, that we misappropriated unspecified trade
secrets belonging to Mobius. No factual basis was set forth in the complaint in
support of this claim. The suit seeks injunctive relief and unspecified damages.
See "Business -- Legal Proceedings."

OUR BUSINESS WILL SUFFER IF OUR SOFTWARE CONTAINS ERRORS

The software products we offer are inherently complex. Despite testing and
quality control, we cannot be certain that errors will not be found in current
versions, new versions or enhancements of our products after commencement of
commercial shipments. Significant technical challenges also arise with our
products because our customers purchase and deploy our products across a variety
of computer platforms and integrate it with a number of third-party software
applications and databases. If new or existing customers have difficulty
deploying our products or require significant amounts of customer support, our
operating margins could be harmed. Moreover, we could face possible claims and
higher development costs if our software contains undetected errors or if we
fail to meet our customers' expectations. As a result of the foregoing, we could
experience:

- loss of or delay in revenues and loss of market share;

- loss of customers;

- damage to our reputation;

- failure to achieve market acceptance;

- diversion of development resources;

- increased service and warranty costs;

- legal actions by customers against us which could, whether or not
successful, increase costs and distract our management; and

- increased insurance costs.

12
<PAGE> 14

In addition, a product liability claim, whether or not successful, could
harm our business by increasing our costs and distracting our management.

PRODUCT DEVELOPMENT DELAYS COULD HARM OUR BUSINESS

If we fail to release new products and upgrades on time, our business may
suffer one or more of the following consequences:

- customer dissatisfaction;

- cancellation of orders and license agreements;

- negative publicity;

- loss of revenues; or

- slower market acceptance.

WE INCORPORATE SOFTWARE LICENSED FROM THIRD PARTIES INTO SOME OF OUR PRODUCTS
AND ANY SIGNIFICANT INTERRUPTION IN THE AVAILABILITY OF THESE THIRD-PARTY
SOFTWARE PRODUCTS OR DEFECTS IN THESE PRODUCTS COULD HARM OUR BUSINESS

Our SQL Navigator, TOAD and Vista Plus products contain components
developed and maintained by third-party software vendors. We expect that we may
have to incorporate software from third-party vendors in our future products. We
may not be able to replace the functionality provided by the third-party
software currently offered with our products if that software becomes obsolete,
defective or incompatible with future versions of our products or is not
adequately maintained or updated. Any significant interruption in the
availability of these third-party software products or defects in these products
could harm our sales unless and until we can secure an alternative source.

RISKS RELATED TO OUR INDUSTRY

YEAR 2000 ISSUES PRESENT TECHNOLOGICAL RISKS AND COULD CAUSE DISRUPTION TO OUR
BUSINESS

Software that records only the last two digits of the calendar year may not
be able to distinguish whether "00" means 1900 or 2000. This may result in
software failures or the creation of erroneous results. Year 2000-related errors
or defects that affect the operation of our software could result in:

- delay or loss of revenue;

- cancellation of customer contracts;

- diversion of development resources;

- damage to our reputation;

- increased customer support and warranty costs; and

- litigation costs.

We are in the process of commencing our Year 2000 review program for the
hardware, software and systems we use to run our operations. The Year 2000
problem could affect computers, software and other equipment that we use
internally as well as divert management's attention from ordinary business
activities. In addition to computers and related systems, the operation of our
office and facilities equipment, such as fax machines, photocopiers, telephone
switches, security systems, elevators and other common devices may be affected
by the Year 2000 problem. In addition, there can be no assurance that our
suppliers or other third parties that we rely upon will resolve any or all Year
2000 problems with their systems on a timely basis. Because we have not yet
completed our Year 2000 review program, we face uncertainty. Even though we do
not expect our internal Year 2000 compliance efforts to involve significant

13
<PAGE> 15

time and expense based on currently available information, any material,
undetected or uncorrected problem could materially adversely affect our
business, financial condition and operating results.

Success of our Year 2000 compliance efforts may also depend on the success
of our customers in dealing with their Year 2000 issues. Our products are
generally integrated into enterprise systems involving sophisticated hardware
and complex software products which may not be Year 2000 compliant. In addition,
third party applications in which our products are embedded, or for which our
products are separately licensed, may not comply with Year 2000 requirements,
which may have an adverse impact on or demand for our products. In some cases
even certain earlier Year 2000 compliant versions of our software, while
compatible with earlier, non-Year 2000 compliant versions of other software
products with which our software is integrated, are not compatible with certain
more recent Year 2000 compliant versions of such other software providers. While
we do not believe we have any obligation under these circumstances given that
these customers are using older versions of our software products, there can be
no assurance that we will not be subject to claims or complaints by our
customers.

Although we have not been a party to any litigation or arbitration
proceeding to date involving our products or services and related to Year 2000
compliance issues, there can be no assurance that we will not in the future be
required to defend our products or services in such proceedings, or to negotiate
resolutions of claims based on Year 2000 issues. The costs of defending and
resolving Year 2000-related disputes, regardless of the merits of such disputes,
and any liability for Year 2000-related damages, including consequential
damages, would have a material adverse effect on our business, results of
operations and financial condition.

CUSTOMER FOCUS AND SPENDING ON YEAR 2000 REMEDIATION MAKES IT DIFFICULT TO
PREDICT THE BUYING PATTERNS OF OUR CUSTOMERS DURING THE THIRD AND FOURTH
QUARTERS OF 1999

The purchasing patterns of our customers and potential customers based on
Year 2000 issues make it difficult to predict future sales of our products,
especially in the third and fourth quarters of 1999. Many customers may spend
their limited financial and personnel resources remediating Year 2000 problems,
thereby delaying or foregoing purchases of other software products such as ours.
This trend could reduce our revenues in 1999 and 2000. Other companies are
accelerating purchases of software products prior to 2000, causing an increase
in short-term demand which may in turn cause a corresponding decrease in
long-term demand for software products.

OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO ADAPT TO RAPID TECHNOLOGICAL
CHANGE

Our future success will depend on our ability to continue to enhance our
current products and to develop and introduce new products on a timely basis
that keep pace with technological developments and satisfy increasingly
sophisticated customer requirements. Rapid technological change, frequent new
product introductions and enhancements, uncertain product life cycles, changes
in customer demands and evolving industry standards characterize the market for
our products. The introduction of products embodying new technologies and the
emergence of new industry standards can render our existing products obsolete
and unmarketable. As a result of the complexities inherent in today's computing
environments and the performance demanded by customers for embedded databases
and Web-based products, new products and product enhancements can require long
development and testing periods. As a result, significant delays in the general
availability of such new releases or significant problems in the installation or
implementation of such new releases could have a material adverse effect on our
business, operating results and financial condition. We may not be successful
in:

- developing and marketing, on a timely and cost-effective basis, new
products or new product enhancements that respond to technological
change, evolving industry standards or customer requirements;

- avoiding difficulties that could delay or prevent the successful
development, introduction or marketing of these products; or

14
<PAGE> 16

- achieving market acceptance for our new products and product
enhancements.

OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT AND RETAIN PERSONNEL

Our future success depends on the continued service of our executive
officers and other key administrative, sales and marketing and support
personnel, many of whom, including our Chief Financial Officer, have recently
joined our company. In addition, the success of our business is substantially
dependent on the services of our Chief Executive Officer and our President and
Chief Technical Officer. We intend to hire a significant number of additional
sales, support, marketing, administrative and research and development personnel
over at least the next 12 months. Competition for skilled personnel is intense,
and we may not be able to attract, assimilate or retain highly qualified
personnel in the future. Our business may not be able to grow if we cannot
attract qualified personnel. Hiring qualified sales, marketing, administrative,
research and development and customer support personnel, is very competitive in
our industry, particularly in Southern California, where Quest is headquartered.

RISKS RELATED TO THIS OFFERING

WE HAVE SUBSTANTIAL DISCRETION AS TO HOW TO USE THE PROCEEDS FROM THIS OFFERING

Our management has broad discretion as to how to spend a substantial
portion of the proceeds from this offering and may spend these proceeds in ways
with which our shareholders may not agree. We cannot predict that investment of
the proceeds will yield a favorable or any return.

OUR OFFICERS AND DIRECTORS WILL BE ABLE TO EXERT SIGNIFICANT CONTROL ON QUEST
AFTER THIS OFFERING

Executive officers, directors and persons and entities affiliated with them
will, in the aggregate, own approximately % of our outstanding common stock
following this offering. These shareholders, if acting together, would be able
to determine all matters requiring approval by our shareholders, including the
election of directors and the approval of mergers or other business combination
transactions.

THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK, AND WE EXPECT THE PRICE OF
OUR COMMON STOCK TO BE VOLATILE

Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after the offering, and the market price might fall below the initial
public offering price. The initial public offering price may bear no
relationship to the price at which the common stock will trade upon completion
of this offering. The initial public offering price will be determined based on
negotiations between us and the representatives of the underwriters, based on
factors that may not be indicative of future market performance. The market
price of the common stock may fluctuate significantly in response to a number of
factors, some of which are beyond our control, including:

- quarterly variations in our operating results;

- changes in financial estimates by securities analysts;

- changes in market valuation of software and Internet companies;

- announcements by us of significant contracts, acquisitions or capital
commitments;

- failure to complete significant license transactions;

- additions or departures of key personnel;

- any shortfall in revenue or net income or any increase in losses from
levels expected by securities analysts;

- future sales of common stock; and

15
<PAGE> 17

- stock market price and volume fluctuations, which are particularly common
among highly volatile securities of Internet and software companies.

A LARGE NUMBER OF SHARES OF OUR COMMON STOCK WILL BE ELIGIBLE FOR SALE SHORTLY
AFTER THE OFFERING, WHICH COULD RESULT IN A DECLINE IN OUR STOCK PRICE

Sales in the market of a substantial number of shares of common stock after
the offering could adversely affect the market price of our common stock and
could impair our ability to raise capital through the sale of additional equity
securities. On completion of this offering, we will have shares of common
stock outstanding with shares if the underwriters' option to purchase
additional shares is exercised in full. The shares sold in this offering,
which would be shares if the underwriters' option to purchase additional
shares is exercised in full, will be freely tradable without restriction or
further registration under the Federal securities laws unless purchased by our
"affiliates" as that term is defined in Rule 144. The remaining shares of
common stock outstanding on completion of this offering will be "restricted
securities" as that term is defined in Rule 144.

Our stock and option holders are subject to agreements that limit their
ability to sell common stock. These holders cannot sell or otherwise dispose of
any shares of common stock for a period of at least 180 days after the date of
this prospectus without the prior written approval of BancBoston Robertson
Stephens. When these agreements expire, these shares and the shares underlying
the options will become eligible for sale, in some cases only pursuant to the
volume, manner of sale and notice requirements of Rule 144. See "Shares Eligible
for Future Sale" and "Underwriting."

16
<PAGE> 18

YOU SHOULD NOT RELY ON ANY FORWARD-LOOKING STATEMENTS CONTAINED
IN THIS PROSPECTUS BECAUSE THEY ARE SUBJECT TO RISKS AND UNCERTAINTIES

Some of the matters discussed under the captions "Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus include forward-looking
statements. We have based these forward-looking statements on currently
available information and our current beliefs, expectations and projections
about future events, including, among other things,

- successfully implementing our business strategy;

- maintaining and expanding market acceptance of the products we offer; and

- our ability to successfully compete in our marketplace.

In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "potential," "continue," "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions. All forward-looking statements contained herein are subject to
numerous risks and uncertainties. Our actual results and events may vary
significantly from those discussed in the forward-looking statements. These
forward-looking statements are made as of the date of this prospectus, and we
assume no obligation to update them or to explain the reasons why actual results
may differ. In light of these assumptions, risks and uncertainties, the
forward-looking events discussed in this prospectus might not occur.

17
<PAGE> 19

USE OF PROCEEDS

The net proceeds to us from the sale of the shares of common
stock offered hereby are estimated to be approximately $ , or
$ million if the underwriters exercise their over-allotment option in
full, based upon an assumed initial offering price per share of $ and
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us.

We intend to use the net proceeds of this offering:

- to redeem all outstanding shares of our Series B Preferred Stock,
including all accrued dividends thereon, for $10.0 million;

- to repay $10.0 million of outstanding term indebtedness that matures in
May 2002 and bears interest at a rate of 7.75% per annum, and all accrued
and unpaid interest thereon; and

- for other general corporate purposes, including working capital,
expanding our sales and marketing efforts, product development, expanding
our customer support organization, possible acquisitions and capital
expenditures.

The other principal purposes of this offering are to increase our financial
flexibility, create a public market for our common stock, facilitate our future
access to public equity markets and increase our visibility in the marketplace.

As of the date of this prospectus, other than the redemption of the
preferred stock and repayment of indebtedness, we cannot specify with certainty
the particular uses for the net proceeds to be received upon the closing of this
offering. Pending other uses, the net proceeds of this offering will be invested
in short-term, interest-bearing investment-grade instruments.

From time to time, in the ordinary course of business, we evaluate possible
acquisitions of, or investments in, businesses, products and technologies that
are complementary to our business. A portion of the net proceeds may be used to
fund acquisitions or investments. We currently have no formal arrangements,
agreements or understandings, and are not engaged in active negotiations with
respect to such acquisitions or investments.

DIVIDEND POLICY

Prior to our conversion to a C corporation for tax purposes in January
1997, we paid distributions to our S corporation shareholders in amounts
generally consistent with their tax liabilities arising from their allocable
share of S corporation earnings. Since becoming a C corporation, we have not
declared or paid any cash dividends on our common stock and do not expect to do
so in the foreseeable future. We currently intend to retain all available funds
for use in the operation and expansion of our business. Any future determination
to pay dividends will be at the discretion of our board of directors and will
depend on our results of operations, financial conditions, contractual and legal
restrictions and other factors the board deems relevant.

18
<PAGE> 20

CAPITALIZATION

The Actual column in the following table sets forth our actual
capitalization as of March 31, 1999. The Pro Forma column in the following table
gives effect to:

- the receipt of $25.0 million from the issuance and sale of 2,666,667
shares of Series A Preferred Stock and 1,777,778 shares of Series B
Redeemable Preferred Stock in April 1999;

- the conversion of all outstanding shares of our Series A Preferred Stock
into 4,000,000 shares of common stock which will occur immediately prior
to the closing of this offering;

- the issuance of $10.0 million of long-term debt in April 1999; and

- the repurchase of 14,820,000 shares of our common stock by us for $35.0
million in April 1999.

The Pro Forma As Adjusted column in the following table gives effect to the
pro forma adjustments described above and:

- the filing of our Amended and Restated Articles of Incorporation
concurrently with the closing of this offering to provide for authorized
capital stock of 75,000,000 shares of common stock and 5,000,000 shares
of undesignated preferred stock;

- the redemption of all outstanding shares of our Series B Redeemable
Preferred Stock and all accrued dividends thereon for $10.0 million with
a portion of the net proceeds of this offering;

- the repayment of $10.0 million of long-term debt and all accrued and
unpaid interest thereon with a portion of the net proceeds of this
offering; and

- the sale of shares of common stock in this offering at an
initial public offering price of $ per share, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses.

See "Use of Proceeds" and the notes to our consolidated financial
statements. The Pro Forma and Pro Forma As Adjusted information set forth below
should be read in conjunction with our consolidated financial statements and the
notes thereto.

<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt.............................................. $ -- $ 10,000 $ --
------- -------- --------
Series B Redeemable Preferred Stock, no par value, 1,800,000
shares authorized, no shares issued and outstanding actual
and pro forma as adjusted; 1,777,778 shares issued and
outstanding, pro forma.................................... -- 10,000 --
Stockholders' equity (deficit):
Preferred stock, no par value; 5,000,000 shares authorized,
no shares issued or outstanding, pro forma as adjusted.... --
Common stock, no par value; 75,000,000 shares authorized,
44,538,000, 33,721,300 and shares issued and
outstanding, actual, pro forma and pro forma as
adjusted.................................................. 4,243 19,239
Retained earnings........................................... 4,874 -- --
Notes receivable from sale of common stock.................. (3,206) (3,206) (3,206)
Capital distribution in excess of basis in common stock..... -- (30,122) (30,122)
------- -------- --------
Total shareholders' equity (deficit)...................... 5,911 (14,089)
------- -------- --------
Total capitalization...................................... $ 5,911 $ 5,911 $
======= ======== ========
</TABLE>

The information in the table above excludes:

- 4,576,125 shares of common stock issuable upon exercise of stock options
outstanding as of June 1, 1999 at a weighted average exercise price of
$1.65 per share;

- 1,500 shares of common stock issued upon exercise of options subsequent
to March 31, 1999;

- 2,923,875 shares of common stock reserved for future issuance under our
stock incentive plan; and

DILUTION

Our pro forma net tangible book value (deficit) as of March 31, 1999 was
$(14,600,000), or $(.43) per share of common stock. Pro forma net tangible book
value (deficit) per share represents the amount of our total assets reduced by
the amount of our purchased technology and software and total liabilities,
divided by the pro forma number of shares of common stock outstanding after
giving effect to the issuance and conversion of 2,666,667 shares of Series A
Preferred Stock into 4,000,000 shares of common stock and the repurchase of
14,280,000 shares of our common stock in April 1999 for $35.0 million.

After giving effect to the sale of the shares of common
stock offered hereby at an assumed initial public offering price of $ per
share and our receipt of the estimated net proceeds therefrom, our pro forma net
tangible book value as of March 31, 1999 would have been approximately
$ million, or $ per share. This represents an immediate increase in pro
forma net tangible book value of $ per share to existing stockholders and an
immediate dilution in pro forma net tangible book value of $ per share to
new investors. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value (deficit) per share..... $(.43)
Increase per share attributable to new investors..........
-----
Pro forma net tangible book value per share after this
offering..................................................
-----
Dilution per share to new investors......................... $
=====
</TABLE>

The following table summarizes on a pro forma basis, as of March 31, 1999,
the differences between the existing shareholders, as adjusted, and new
investors with respect to the number of shares of common stock purchased from
us, the total consideration paid to us, and the average price per share paid.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.................. 33,721,300 % $19,239,000 % $0.57
New investors..........................
---------- ----- ----------- -----
Totals....................... 100.0% $ 100.0%
========== ===== =========== =====
</TABLE>

The information in the table above excludes:

- 4,576,125 shares of common stock issuable upon exercise of stock options
outstanding as of June 1, 1999 at a weighted average exercise price of
$1.65 per share;

- 1,500 shares of common stock issued upon exercise of options subsequent
to March 31, 1999;

- 2,923,875 shares of common stock reserved for future issuance under our
stock incentive plan; and

The issuance of common stock under our stock plans will result in further
dilution to new investors.

20
<PAGE> 22

SELECTED CONSOLIDATED FINANCIAL DATA

You should read the following selected consolidated financial data in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
related notes thereto appearing elsewhere in this prospectus. The following
selected consolidated statement of operations data for the years ended December
31, 1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999 and
the consolidated balance sheet data at December 31, 1997 and 1998 and March 31,
1999 have been derived from audited and unaudited consolidated financial
statements included elsewhere in this prospectus. The consolidated data
presented below for the year ended December 31, 1995 and at December 31, 1995
and 1996 are derived from audited consolidated financial statements that are not
included in this prospectus. The consolidated data presented below for the year
ended December 31, 1994 and at December 31, 1994 are derived from unaudited
consolidated financial statements that are not included in this prospectus.

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
----------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses..................................... $ 4,835 $ 7,219 $ 9,316 $12,195 $24,901 $ 4,840 $ 9,540
Services..................................... 851 2,305 3,546 6,120 9,889 2,203 3,274
------- ------- ------- ------- ------- ------- -------
Total revenues......................... 5,686 9,524 12,862 18,315 34,790 7,043 12,814
------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Licenses..................................... 99 260 950 1,307 3,433 557 660
Services..................................... 2,126 980 1,467 1,972 2,507 521 904
------- ------- ------- ------- ------- ------- -------
Total cost of revenues................. 2,225 1,240 2,417 3,279 5,940 1,078 1,564
------- ------- ------- ------- ------- ------- -------
Gross profit................................... 3,461 8,284 10,445 15,036 28,850 5,965 11,250
Operating expenses:
Sales and marketing.......................... 672 2,179 4,328 5,845 12,914 2,114 5,544
Research and development..................... 502 1,134 2,995 4,293 6,549 1,470 2,373
General and administrative................... 2,250 2,636 3,494 3,450 5,698 946 1,917
------- ------- ------- ------- ------- ------- -------
Total operating expenses............... 3,424 5,949 10,817 13,588 25,161 4,530 9,834
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations.................. 37 2,335 (372) 1,448 3,689 1,435 1,416
Other income (expense), net.................... 6 51 389 (137) 336 48 112
------- ------- ------- ------- ------- ------- -------
Income before income tax provision............. 43 2,386 17 1,311 4,025 1,483 1,528
Income tax provision(1)........................ 26 28 1 1,022 1,679 615 645
------- ------- ------- ------- ------- ------- -------
Net income..................................... $ 17 $ 2,358 $ 16 $ 289 $ 2,346 $ 868 $ 883
======= ======= ======= ======= ======= ======= =======
Basic and diluted net income per share......... $ -- $ 0.12 $ -- $ 0.01 $ 0.05 $ 0.02 $ 0.02
Weighted average shares outstanding
Basic........................................ 19,500 19,500 38,350 40,373 44,261 43,497 44,539
Diluted...................................... 19,500 19,500 38,350 40,373 44,559 43,721 45,650
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------- MARCH 31,
1994 1995 1996 1997 1998 1999
----------- ------ ------- ------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................... $1,801 $2,709 $ -- $ 2,096 $ 8,981 $12,502
Working capital..................................... 1,158 2,594 553 374 2,771 3,309
Total assets........................................ 4,281 6,171 6,408 9,713 19,645 22,472
Total stockholders' equity.......................... 1,681 2,996 2,429 2,836 5,074 5,911
</TABLE>

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

(1) Does not include pro forma adjustments to reflect the income tax provision
as if we were a C corporation in fiscal years 1994, 1995 and 1996.

21
<PAGE> 23

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

The following Management's Discussion and Analysis of the Financial
Condition and Results of Operations contains forward-looking statements relating
to future events or the future financial performance of Quest, which involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, those set forth under "Risk Factors," "Business"
and elsewhere in this prospectus. See also "You Should Not Rely on any
Forward-Looking Statements Contained in this Prospectus Because they are Subject
to Risks and Uncertainties." The following discussion of our financial condition
and results of operations also should be read in conjunction with the
consolidated financial statements and notes to those statements included
elsewhere in this prospectus.

OVERVIEW

We were incorporated in 1987. At our inception we focused on developing and
marketing software which supported developers and users of Hewlett Packard's HP
3000 proprietary operating system known as MPE. In 1995 Vincent C. Smith joined
us as a director and in 1997 he became our chief executive officer. In 1995, we
began to transition our focus from proprietary MPE technology to open system
technology. Additionally, commencing in 1995, we began extending our Vista Plus
product to open system architectures, and in 1998 we extended Vista Plus to
support the Internet. In 1996 we acquired R*Tech which developed SQLab, our
first product series for Oracle databases. In 1997 we made a number of
additional acquisitions which augmented the product line for managing Oracle
databases including our SQL Navigator, I/Watch and Schema Manager products.
Beginning in late 1997, we also began a major expansion of our research and
development, sales and marketing, and customer support organizations by adding
personnel in all departments, and through an acquisition, the establishment of
operations in Australia and the United Kingdom. Commencing in the second half of
1998 we also introduced several additional products including SharePlex and
SQLab Xpert. In 1998 we also established a direct sales operation in Germany.

We derive our revenues primarily from the sale of software licenses and
related annual maintenance fees. Our total revenues have increased over each of
the past five fiscal years, from $5.7 million in 1994 to $34.8 million in 1998.
Pricing of our software licenses is based on the number of servers, workstations
and/or users of our products. Annual maintenance contracts may be purchased
separately by customers at their discretion.

We recognize software license revenues when a non-cancellable license
agreement has been signed with a customer, the software is shipped, no
significant post delivery vendor obligations remain and collection is deemed
probable. Maintenance revenues are recognized ratably over the contract term,
which is typically one year. Revenues for consulting services are recognized as
such services are performed. See note 1 of the notes to our consolidated
financial statements.

We market our software and services primarily through our direct sales
organization in the United States, the United Kingdom, Germany and Australia.
International revenues from licenses and services sold to customers outside of
North America were $1.3 million in 1996, $1.4 million in 1997, $5.8 million in
1998 and $2.3 million in the three months ended March 31, 1999. We intend to
expand our international sales activities as part of our business strategy. All
of our current international revenues are derived from the operations of our
three wholly-owned subsidiaries in Australia, the United Kingdom and Germany.
Our international subsidiaries conduct business in the currency of the country
in which they operate, exposing us to currency fluctuations and currency
transaction losses or gains which are outside of our control. Historically
fluctuations in foreign currency exchange rates have not had a material effect
on

22
<PAGE> 24

our business. We have not to date conducted any hedging transactions to reduce
our risk to currency fluctuations.

In the development of new products and enhancements of existing products,
the technological feasibility of the software is not established until
substantially all product development is complete. Historically, our software
development costs eligible for capitalization have been insignificant and all
costs related to internal research and development have been expensed as
incurred.

At the time of our incorporation, we elected to be treated as an S
corporation under Subchapter S of the Internal Revenue Code. As an S
corporation, our shareholders were liable for federal income tax liabilities
resulting from our operations. Effective January 1, 1997, we terminated our
status as an S corporation and for all periods thereafter we have been liable
for federal income taxes. Prior to the termination of our S corporation status,
we declared distributions as dividends to shareholders payable in cash in an
amount generally equal to the tax consequence created by our earnings up to the
date of such termination.

RESULTS OF OPERATIONS

The following table sets forth certain consolidated statement of operations
data as a percentage of total revenues for the periods indicated:

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------- ----------------
1996 1997 1998 1998 1999
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses......................................... 72.4% 66.6% 71.6% 68.7% 74.4%
Services......................................... 27.6 33.4 28.4 31.3 25.6
----- ----- ----- ----- -----
Total revenues........................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of revenues:
Licenses......................................... 7.4 7.1 9.9 7.9 5.1
Services......................................... 11.4 10.8 7.2 7.4 7.1
----- ----- ----- ----- -----
Total cost of revenues................... 18.8 17.9 17.1 15.3 12.2
----- ----- ----- ----- -----
Gross profit....................................... 81.2 82.1 82.9 84.7 87.8
Operating expenses:
Sales and marketing.............................. 33.6 31.9 37.1 30.0 43.3
Research and development......................... 23.3 23.5 18.8 20.9 18.5
General and administrative....................... 27.2 18.8 16.4 13.4 14.9
----- ----- ----- ----- -----
Total operating expenses................. 84.1 74.2 72.3 64.3 76.7
----- ----- ----- ----- -----
Income (loss) from operations...................... (2.9) 7.9 10.6 20.4 11.1
Other income (expense), net........................ 3.0 (0.7) 0.9 0.6 0.8
----- ----- ----- ----- -----
Income before income tax provision................. 0.1 7.2 11.5 21.0 11.9
Income tax provision............................... 0.0 5.6 4.8 8.7 5.0
----- ----- ----- ----- -----
Net income......................................... 0.1% 1.6% 6.7% 12.3% 6.9%
===== ===== ===== ===== =====
</TABLE>

THREE MONTHS ENDED MARCH 31, 1998 AND 1999

Revenues

Revenues are derived from the sale of software licenses and related
services. Total revenues were $7.0 million and $12.8 million for the three
months ended March 31, 1998 and 1999, respectively, representing an increase of
$5.8 million, or 82.9%. International revenues accounted for 10.5% and 18.2% of
total revenues for the three months ended March 31, 1998 and 1999, respectively.

Licenses. Licenses were $4.8 million and $9.5 million for the three months
ended March 31, 1998 and 1999, respectively, representing an increase of $4.7
million, or 97.9%. This increase resulted from both an increase in the size of
both the domestic and international sales organizations as well as the
availability

23
<PAGE> 25

of new products. Products available in the first three months of 1999 which were
not available in 1998 included Schema Manager, I/Watch and TOAD along with the
Vista Plus interface module for SAP R/3. Licenses represented 68.7% and 74.4% of
total revenues for the three months ended March 31, 1998 and 1999, respectively.
International licenses represented 10.4% and 19.0% of total licenses in the
three months ended March 31, 1998 and 1999, respectively.

Services. Services were $2.2 million and $3.3 million for the three months
ended March 31, 1998 and 1999, respectively, representing an increase of $1.1
million, or 50.0%. Services consist primarily of annual maintenance fees for
technical support and product enhancements. Maintenance fees are generally
renewable annually at the customer's option and are recognized over the term of
each agreement. The increase in services for the three months ended March 31,
1999 reflected increases in the installed base of customers that purchased
maintenance. Services represented 31.3% and 25.6% of total revenues for the
three months ended March 31, 1998 and 1999, respectively. International services
accounted for 10.8% and 15.6% of services for the three months ended March 31,
1998 and 1999, respectively.

Cost of Revenues

Cost of Licenses. Cost of licenses includes amortization of purchased
technology and software licenses, product media, printing and duplication costs,
and royalties to former owners of acquired technologies. Cost of licenses was
$557,000 and $660,000 for the three months ended March 31, 1998 and 1999,
respectively, representing an increase of $103,000, or 18.5%. This increase was
principally a result of increased product media, printing and duplication costs,
and amortization of purchased technology and software licenses, offset in part
by reduced royalties. Cost of licenses represented 11.6% and 6.9% of license
revenue for the three months ended March 31, 1998 and 1999, respectively. The
decrease as a percentage of license revenue resulted from increased license
revenue without a corresponding increase in amortization of technology rights
and software licenses which do not vary by the number of licenses sold. We do
not expect the cost of licenses to increase as a percentage of licenses based
upon our current amortization projections and existing royalty obligations.

Cost of Services. Cost of services includes salaries and related costs for
customer support personnel. Cost of services was $521,000 and $904,000 for the
three months ended March 31, 1998 and 1999, respectively, representing an
increase of $383,000, or 73.5%. This increase was primarily due to an increase
in the number of customer support personnel to manage and support our growing
customer base as well as the increased number of product offerings. Cost of
services was 23.7% and 27.4% of service revenues for the three months ended
March 31, 1998 and 1999, respectively. We expect the cost of services to
increase in absolute dollars for the foreseeable future as additional customer
support personnel are retained.

Operating Expenses

Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and commissions earned by sales personnel, recruiting costs, trade show
and conference costs, travel and entertainment, and advertising and promotional
expenses. Sales and marketing expenses were $2.1 million and $5.5 million for
the three months ended March 31, 1998 and 1999, respectively, representing an
increase of $3.4 million, or 162.0%. This increase primarily reflects increased
commissions and the rapid expansion of our sales and marketing organization
which we commenced in early 1998, including the costs to recruit and hire sales
personnel. Sales and marketing expenses represented 30.0% and 43.3% of total
revenues for the three months ended March 31, 1998 and 1999, respectively. We
expect that sales and marketing expenses will continue to increase in absolute
dollars for the foreseeable future as commissions increase with expected
increases in revenues and as we continue to expand the size of our sales and
marketing organization.

Research and Development. Research and development expenses consist
primarily of salaries and benefits for software developers, software product
managers and quality assurance personnel and payments to outside software
development contractors. Research and development expenses were $1.5 million and
$2.4 million for the three months ended March 31, 1998 and 1999, respectively,
representing an increase of $900,000, or 60.0%. This increase was primarily
related to an increase in the number of software

24
<PAGE> 26

developers, both in our domestic and Australian development operations. Research
and development costs represented 20.9% and 18.5% of total revenues for the
three months ended March 31, 1998 and 1999, respectively. We expect that
research and development expenses will continue to increase in absolute dollars
for the foreseeable future as additional development personnel are hired.

General and Administrative. General and administrative expenses consist
primarily of salaries, benefits and related costs for our executive, finance,
administrative and information services personnel. General and administrative
expenses were $946,000 and $1.9 million for the three months ended March 31,
1998 and 1999, respectively, representing an increase of $954,000, or 100.8%.
This increase was primarily due to an increase in the number of general and
administrative personnel necessary to support our expanding operations. General
and administrative costs represented 13.4% and 14.9% of total revenues for the
three months ended March 31, 1998 and 1999, respectively. We expect that general
and administrative expenses will continue to increase in absolute dollars for
the foreseeable future as a result of the continued expansion of administrative
staff and expenses associated with being a public company, including annual and
other public reporting costs, directors' and officers' liability insurance
premiums, investor relations programs and professional services fees.

Other Income (Expense), net. Other income (expense), net is comprised of
interest income, interest expense and foreign currency transaction gains and
losses. Other (expense) income, net was $48,000 and $112,000 for the three
months ended March 31, 1998 and 1999, respectively, representing an increase of
$64,000.

Provision for Income Taxes. Provision for income taxes was $615,000 and
$645,000 for the three months ended March 31, 1998 and 1999, respectively,
representing an increase of $30,000. Our effective income tax rate was 41.5% and
42.2% for the three months ended March 31, 1998 and 1999, respectively.

YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

Revenues

Revenues were $12.9 million, $18.3 million and $34.8 million for 1996, 1997
and 1998, respectively, representing increases of $5.4 million, or 41.9%, from
1996 to 1997 and $16.5 million, or 90.2%, from 1997 to 1998. International
revenues accounted for 10.1%, 7.4%, and 16.7% of total revenues for 1996, 1997,
and 1998, respectively. One customer accounted for 12% of total revenues in
1996. No customer accounted for more than 10.0% of total revenues in 1997 or
1998.

Licenses. Licenses were $9.3 million, $12.2 million and $24.9 million in
1996, 1997 and 1998, respectively, representing increases of $2.9 million, or
31.2%, from 1996 to 1997 and $12.7 million, or 104.1%, from 1997 to 1998.
Licenses represented 72.4%, 66.6% and 71.6% of total revenues in 1996, 1997 and
1998, respectively. International licenses accounted for 11.9%, 8.2%, and 18.6%
of total licenses in 1996, 1997, and 1998, respectively. The increase in
licenses from 1996 to 1997 was due to the increase in the size of the domestic
sales organization combined with the availability in 1997 of our SQL Navigator
product. The increase in licenses from 1997 to 1998 was due to the expansion of
our domestic sales organization, a substantial increase in international license
revenue, greater market acceptance of our products for Oracle database market
and the success of our Vista Plus product for the UNIX environment.

Services. Services were $3.5 million, $6.1 million and $9.9 million in
1996, 1997 and 1998, respectively, representing increases of $2.6 million, or
74.3%, from 1996 to 1997 and $3.8 million, or 62.3%, from 1997 to 1998. Services
represented 27.6%, 33.4% and 28.4% of total revenues in 1996, 1997 and 1998,
respectively. The increase in services from 1996 to 1997 and 1997 to 1998
reflects the increase in the number of software licenses sold with maintenance
agreements. International services accounted for 5.6%, 5.8% and 11.9% of total
services in 1996, 1997 and 1998, respectively.

Cost of Revenues

Cost of Licenses. Cost of licenses was $950,000, $1.3 million and $3.4
million in 1996, 1997 and 1998, respectively, representing increases of
$350,000, or 36.8%, from 1996 to 1997 and $2.1 million, or

25
<PAGE> 27

161.5%, from 1997 to 1998. Cost of licenses as a percentage of license revenue
was 10.2%, 10.7% and 13.7% for 1996, 1997 and 1998, respectively. The increase
in cost of licenses as a percentage of license revenue from 1997 to 1998 was
attributable to higher amortization of purchased technology and royalties.

Cost of Services. Cost of services was $1.5 million, $2.0 million and $2.5
million in 1996, 1997 and 1998, respectively, representing increases of
$500,000, or 33.3%, from 1996 to 1997 and $500,000, or 25.0%, from 1997 to 1998.
The increases over these periods were primarily due to an increase in the number
of customer support personnel to service our growing customer and product base.
Cost of services as a percentage of service revenues was 42.9%, 32.8% and 25.3%
for 1996, 1997 and 1998, respectively. The decreases in cost of services as a
percentage of services over these periods were primarily due to economies of
scale realized as a result of our increasing service revenues.

Operating Expenses

Sales and Marketing. Sales and marketing expenses were $4.3 million, $5.8
million and $12.9 million in 1996, 1997 and 1998, respectively, representing
increases of $1.5 million, or 34.8%, from 1996 to 1997 and $7.1 million, or
122.4%, from 1997 to 1998. The increases for these periods primarily reflect our
increasing investment in our sales and marketing organization, which included
significant personnel-related expenses such as salaries, benefits and
commissions, travel and entertainment expenses, and related costs of hiring
sales and marketing management and sales representatives. In addition, we
increase marketing expenses related to advertising, promotion, trade show and
conference activities.

Research and Development. Research and development expenses were $3.0
million, $4.3 million and $6.5 million in 1996, 1997 and 1998, respectively,
representing increases of $1.3 million, or 43.3%, from 1996 to 1997 and $2.2
million, or 51.2%, from 1997 to 1998. The increases for these periods were
primarily related to the increase in the number of software developers and
quality assurance personnel and, to a lesser extent, outside contractors to
support product development activities.

General and Administrative. General and administrative expenses were $3.5
million, $3.5 million and $5.7 million in 1996, 1997 and 1998, respectively,
representing a decrease of $44,000, or 1.3%, from 1996 to 1997 and an increase
of $2.2 million, or 62.9%, from 1997 to 1998. The increase from 1997 to 1998 was
primarily the result of hiring additional finance, executive and administrative
personnel.

Other Income (Expense), net. Other income (expense), net was $389,000 in
1996, $(137,000) in 1997 and $336,000 in 1998, representing a decrease of
$526,000 from 1996 to 1997 and an increase of $473,000 from 1997 to 1998. The
decrease from 1996 to 1997 was due to the loss on the disposal of fixed assets
and other costs associated with Quest International, a subsidiary in the UK
which was put into liquidation. The increase from 1997 to 1998 reflects
increased interest income from higher cash and short-term investments.

Provision for Income Taxes. Provision for income taxes was $1,000, $1.0
million and $1.7 million in 1996, 1997 and 1998, respectively, representing
increases of $999,000, from 1996 to 1997 and $700,000, or 70.0%, from 1997 to
1998. The effective income tax rate was 5.9%, 78.0%, and 41.7% in 1996, 1997 and
1998, respectively. The high effective tax rate in 1997 is attributable to our
election, effective January 1, 1997, to terminate our status as an S corporation
under federal tax regulations which resulted in the establishment of deferred
taxes. See note 4 of the notes to our consolidated financial statements.

Inflation

Inflation has not had a significant effect on our results of operations or
financial position for the years ended December 31, 1996, 1997 and 1998 and the
three months ended March 31, 1998 and 1999.

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<PAGE> 28

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth unaudited consolidated statement of
operations data for the nine quarters in the period ended March 31, 1999, as
well as such data expressed as a percentage of total revenues for the periods
indicated. This data has been derived from our unaudited consolidated financial
statements that have been prepared on the same basis as the audited consolidated
financial statements included in this prospectus, and, in the opinion of our
management, include all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the information when read in conjunction
with the consolidated financial statements and the notes thereto included in
this prospectus. These quarterly results have been in the past and may in the
future be subject to significant fluctuations. As a result, we believe that
results of operations for interim periods should not be relied upon as any
indication of the results to be expected in any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1997 1998 1998 1998 1998 1999
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:

Licenses................... $2,505 $2,737 $3,066 $3,887 $4,840 $4,740 $6,190 $9,131 $9,540
Services................... 1,487 1,563 1,405 1,665 2,203 2,252 2,544 2,890 3,274
------ ------ ------ ------ ------ ------ ------ ------ ------
Total revenues....... 3,992 4,300 4,471 5,552 7,043 6,992 8,734 12,021 12,814
------ ------ ------ ------ ------ ------ ------ ------ ------
Cost of revenues:
Licenses................... 215 183 179 730 557 947 1,081 848 660
Services................... 420 474 500 578 521 523 609 854 904
------ ------ ------ ------ ------ ------ ------ ------ ------
Total cost of
revenues........... 635 657 679 1,308 1,078 1,470 1,690 1,702 1,564
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit................. 3,357 3,643 3,792 4,244 5,965 5,522 7,044 10,319 11,250
Operating expenses:
Sales and marketing........ 1,245 1,265 1,461 1,874 2,114 2,648 3,413 4,740 5,544
Research and development... 856 1,230 1,087 1,120 1,470 1,558 1,579 1,942 2,373
General and
administrative........... 723 849 900 978 946 1,334 1,085 2,333 1,917
------ ------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses........... 2,824 3,344 3,448 3,972 4,530 5,540 6,077 9,015 9,834
------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations................. 533 299 344 272 1,435 (18) 967 1,304 1,416
Other income (expense),
net........................ (84) (62) (9) 18 48 71 106 111 112
------ ------ ------ ------ ------ ------ ------ ------ ------
Income before provision for
income taxes............... 449 237 335 290 1,483 53 1,073 1,415 1,528
Provision for income taxes... 350 183 262 227 615 22 446 596 645 ]
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income................... $ 99 $ 54 $ 73 $ 63 $ 868 $ 31 $ 627 $ 819 $ 883
====== ====== ====== ====== ====== ====== ====== ====== ======
AS A PERCENTAGE OF TOTAL
REVENUES
Revenues:
Licenses................... 62.8% 63.7% 68.6% 70.0% 68.7% 67.8% 70.9% 76.0% 74.4%
Services................... 37.2 36.3 31.4 30.0 31.3 32.2 29.1 24.0 25.6
------ ------ ------ ------ ------ ------ ------ ------ ------
Total revenues....... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------ ------ ------ ------ ------
Cost of revenues:
Licenses................... 5.4 4.3 4.0 13.2 7.9 13.5 12.3 7.1 5.1
Services................... 10.5 11.0 11.2 10.4 7.4 7.5 7.0 7.1 7.1
------ ------ ------ ------ ------ ------ ------ ------ ------
Total cost of
revenues........... 15.9 15.3 15.2 23.6 15.3 21.0 19.3 14.2 12.2
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit................. 84.1 84.7 84.8 76.4 84.7 79.0 80.7 85.8 87.8
Operating expenses:
Sales and marketing........ 31.2 29.4 32.7 33.8 30.0 37.9 39.1 39.4 43.3
Research and development... 21.4 28.6 24.3 20.2 20.9 22.3 18.1 16.2 18.5
General and
administrative........... 18.1 19.8 20.1 17.5 13.4 19.1 12.4 19.4 14.9
------ ------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses........... 70.7 77.8 77.1 71.5 64.3 79.3 69.6 75.0 76.7
------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations................. 13.4 6.9 7.7 4.9 20.4 (0.3) 11.1 10.8 11.1
Other income (expense),
net........................ (2.1) (1.4) (0.2) 0.3 0.6 1.0 1.2 0.9 0.8
Income before provision for
income taxes............... 11.3 5.5 7.5 5.2 21.0 0.7 12.3 11.7 11.9
Provision for income taxes... 8.8 4.3 5.9 4.1 8.7 0.3 5.1 5.0 5.0
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income................... 2.5% 1.2% 1.6% 1.1% 12.3% 0.4% 7.2% 6.7% 6.9%
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>

Our total revenues have increased in each period presented with the
exception of the three months ended June 30, 1998. These increases have been
generally due to increased acceptance of our products and the expansion of our
sales force and increased service revenues as the installed customer base has
grown. Total cost of revenues have also generally increased in absolute dollars
over these periods presented due to increased amortization of purchased
technology and software licenses, royalty costs and an increase in the number of
customer support personnel. Total operating expenses have increased in absolute
dollars in each period presented as we have grown our infrastructure to support
our expanding operations.

27
<PAGE> 29

LIQUIDITY AND CAPITAL RESOURCES

We have funded our business to date primarily from cash generated by our
operations. Our sources of liquidity as of March 31, 1999 consisted principally
of cash and cash equivalents of $12.5 million.

Net cash provided by operating activities was $16,000, $3.6 million and
$8.2 million in 1996, 1997 and 1998, respectively, and $4.4 million for the
three months ended March 31, 1999. The increases in 1997, 1998 and 1999 were
primarily due to increases in net income, depreciation and amortization,
deferred revenue and accrued expenses, offset by increases in accounts
receivable.

Investing activities have consisted of purchases of property and equipment
and the acquisition of technology and software licenses. Capital expenditures
totaled $589,000, $536,000 and $1.2 million in 1996, 1997 and 1998,
respectively, and $652,000 in the three months ended March 31, 1999. Purchases
of technology and software licenses were $769,000, $831,000 and $157,000 in
1996, 1997 and 1998, respectively, and $232,000 for the three months ended March
31, 1999. See note 1 of the notes to our consolidated financial statements.

Financing activities used $1.4 million, $270,000 and $8,000 in 1996, 1997
and 1998, respectively, and generated $2,000 for the three months ended March
31, 1999, and are comprised in 1996 and 1997 primarily of distributions to
shareholders as a result of our status as an S corporation for federal income
tax purposes. In April 1999, we raised $25.0 million through the sale of
preferred stock and an additional $10.0 million in term debt from a commercial
bank in order to purchase shares of common stock from a shareholder and founder
for $35.0 million. See "Certain Transactions" and note 8 of the notes to our
consolidated financial statements.

We believe that the net proceeds from this offering, our existing cash
balances and cash equivalents and cash from operations will be sufficient to
finance our operations through at least the next 12 months. If additional
financing is needed, there can be no assurance that such financing will be
available to us on commercially reasonable terms or at all.

YEAR 2000

Many currently installed computer systems and software products are unable
to distinguish between twentieth century dates and twenty-first century dates
because such systems were developed using two digits rather than four to
determine the applicable year. For example, computer programs that have date-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This error could result in system failures or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities. As a result, many companies' software and computer systems
may need to be upgraded or replaced to comply with such "Year 2000"
requirements.

State of Readiness. Our business is dependent on the operation of numerous
systems that could potentially be affected by Year 2000-related problems. Those
systems include, among others:

- the software products we sell to customers;

- hardware and software systems used by us in our operations, including our
proprietary software systems as well as software supplied by third
parties;

- communications networks such as our client/server network, the Internet
and our private intranet;

- the hardware and software systems of our customers and suppliers;

- non-information technology systems and services, such as utilities,
telephone systems and building systems.

28
<PAGE> 30

We are in the process of commencing a Year 2000 review program for the
hardware, software and systems we depend on to run our operations. The phases of
our Year 2000 program will be as follows:

- assignment of responsibility for issues, such as systems, facilities,
equipment, software and legal audit;

- inventory of all aspects of our operations and relationships subject to
the Year 2000 problem;

- communication as necessary with significant suppliers to determine the
readiness of their products and systems;

- comprehensive analysis, including impact analysis and cost analysis, of
our Year 2000 readiness; and

- testing and remediation.

To date, we have not encountered any material Year 2000 problems with the
hardware and software systems we use in our operations. In the event that any
such third parties' products, services or systems do not meet the Year 2000
requirements on a timely basis, our business could be materially adversely
affected.

Based on our review of the use of dates within our products, each of the
current versions of our products was found to be Year 2000 compliant -- that is,
they are capable of adequately distinguishing 21st century dates from 20th
century dates when used in accordance with the related documentation, and
subject to the Year 2000 compliance of the underlying system of the host machine
and any other software used in conjunction with our products. Earlier versions
of certain of our products and certain other discontinued products were not Year
2000 compliant; however, we currently make available versions of our
non-discontinued software designed to be Year 2000 compliant for customers that
have current maintenance contracts.

Risks. Year 2000-related errors or defects that affect the operation of our
software could result in:

- delay or loss of revenue;

- cancellation of customer contracts;

- diversion of development resources;

- damage to our reputation;

- increased customer support and warranty costs; and

- litigation costs.

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<PAGE> 31

In addition, we believe that purchasing patterns of customers and potential
customers may be affected by Year 2000 issues as companies expend significant
resources to correct or upgrade their current software systems for Year 2000
compliance or defer additional software purchases until after 2000. As a result,
some customers and potential customers may have more limited budgets available
to purchase software products such as those offered by us, and others may choose
to refrain from changes in their information technology environment until after
2000. Still other companies are accelerating purchases of software products
prior to 2000, causing an increase in short-term demand which may, in turn,
cause a corresponding decrease in long-term demand for software products. To the
extent Year 2000 issues cause significant change in, delay in, or cancellation
of, decisions to purchase our products or services, our business could be
materially adversely affected.

Contingency Plan. We could experience material adverse effects on our
business if we fail to identify all Year 2000 dependencies in our systems and in
the systems of our suppliers, customers and financial institutions. Therefore,
we plan to develop contingency plans for continuing operations in the event such
problems arise. We do not presently have a comprehensive contingency plan for
handling Year 2000 problems that are not detected and corrected prior to their
occurrence, but we expect to develop such a plan by the end of the third quarter
of 1999.

Costs. To date, we have not incurred any material costs directly associated
with our Year 2000 compliance efforts, except for compensation expense
associated with our salaried employees who have devoted some of their time to
our Year 2000 assessment and remediation efforts. We do not expect the total
cost of Year 2000 problems to be material to our business, financial condition
and operating results. However, we have not completed our Year 2000
investigation and we will continue to evaluate our products, software provided
by third parties and infrastructure systems that we rely on. Despite our
efforts, we may not identify and remediate all significant Year 2000 problems on
a timely basis, remediation efforts may involve significant time and expense,
and unremediated problems may have a material adverse effect on our business.
See "Risk Factors -- Year 2000 issues present technological risks and could
cause disruption of our business."

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard , or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes methods for
derivative financial instruments and hedging activities related to those
instruments, as well as other hedging activities. Because we do not currently
hold any derivative instruments and do not currently engage in hedging
activities, we expect that the adoption of SFAS No. 133 will not have a material
impact on our financial position or results of operations. We will be required
to implement SFAS No. 133 for the year ending .

In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with respect to Certain Transactions. SOP 98-9
amends SOP 97-2 and SOP 98-4 extending the deferral of the application of
certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. We do not expect the adoption of SOP 98-9 to have a material effect on
our results of operations or financial condition.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DERIVATIVES AND
FINANCIAL INSTRUMENTS

FOREIGN CURRENCY HEDGING INSTRUMENTS

We transact business in various foreign currencies. Accordingly, we are
subject to exposure from adverse movements in foreign currency exchange rates.
This exposure is primarily related to revenues and

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<PAGE> 32

operating expenses in Australia, the United Kingdom and Germany denominated in
the respective local currency.

To date, we have not used hedging contracts to hedge our foreign-currency
fluctuation risks. We will assess the need to utilize financial instruments to
hedge currency exposures on an ongoing basis. We also do not use derivative
financial instruments for speculative trading purposes.

FIXED INCOME INVESTMENTS

Our general investing policy is to limit the risk of principal loss and
ensure the safety of invested funds by limiting market and credit risk. We
currently place our investments in highly liquid money market accounts. All
highly liquid investments with a maturity of three months or less at the date of
purchase are considered to be cash equivalents.

EUROPEAN MONETARY UNION

Within Europe, the European Economic and Monetary Union introduced a new
currency, the euro, on January 1, 1999. The new currency is in response to the
European Union's policy of economic convergence to harmonize trade policy,
eliminate business costs associated with currency exchange and to promote the
free flow of capital, goods and services.

On January 1, 1999, the participating countries adopted the euro as their
local currency, initially available for currency trading on currency exchanges
and non-cash transactions such as banking. The existing local currencies, or
legacy currencies, will remain legal tender through January 1, 2002. Beginning
on January 1, 2002, euro-denominated bills and coins will be issued for cash
transactions. For a period of up to six months from this date, both legacy
currencies and the euro will be legal tender. On or before July 1, 2002, the
participating countries will withdraw all legacy currencies and exclusively use
the euro.

Our transactions are recorded in both U.S. dollars and foreign currencies.
Future transactions may be recorded in the euro. We have not incurred and do not
expect to incur any significant costs from the continued implementation of the
euro. However, the currency risk of the euro could harm our business.

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<PAGE> 33

BUSINESS

This prospectus contains certain forward looking statements within the
meaning of the federal securities laws. Actual results and the timing of certain
events could differ materially from those projected in the forward looking
statements due to a number of factors, including those set forth under "Risk
Factors" and elsewhere in this prospectus.

OVERVIEW

We are a leading provider of application and information availability
software solutions that enhance the performance and reliability of an
organization's e-business, packaged and custom applications and enable the
delivery of information across the extended enterprise. Our application
availability products are designed to help ensure uninterrupted and high
performance access to software systems through database replication, enterprise
monitoring, database and application performance optimization, change management
and database programming solutions for thin-client development. Our information
availability products deliver an enterprise, report-based information management
solution that captures, manages and distributes report data or electronic
documents from virtually any application for instant distribution over intranets
or the Internet.

INDUSTRY BACKGROUND

Organizations are constantly seeking ways to use information technology to
gain competitive advantages. To compete more effectively, organizations must
deliver relevant information and provide increasingly sophisticated and
time-sensitive services to a rapidly expanding audience, including employees,
customers, suppliers and partners both inside and outside of the traditional
enterprise. Today, a growing number of organizations are using the Internet to
conduct business electronically. In embracing this e-business model, enterprises
are attempting to maximize the value of their information technology
infrastructure as they extend their core business processes over the Internet to
directly reach a large number of geographically dispersed end-users. The
fundamental changes brought on by the increasing reliance on information
technology, including today's rapidly expanding e-business initiatives, are
introducing new complexities and transforming business practices:

- Decisions need to be made in real-time by personnel at all levels both
inside and outside the enterprise;

- Users demand relevant information immediately and without interruption,
and have increasingly high expectations regarding response time;

- New software applications must be developed, and existing applications
need to be extended over the Internet; and

- Organizations must deploy new applications and technologies at an
increasingly rapid pace.

Underlying each of these requirements is the importance of effective
management and distribution of information. While raising the strategic
importance of real-time, dynamic information, today's e-business initiatives
have heightened the challenges of developing and managing the systems to deliver
it. For example, if an electronic commerce application fails, the relationship
between the organization and the customer is jeopardized, giving new meaning to
the term "mission critical." As a result, organizations must assure that their
systems provide:

- Application availability -- uninterrupted and high performance access to
applications under widely varying conditions; and

- Information availability -- broad distribution of critical business
information from underlying applications to decision makers throughout
the extended enterprise.

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Application Availability

The challenge of today's competitive environment is to provide users with
the ability to immediately execute transactions and access information, without
regard to the underlying complexities inherent in the disparate systems that run
business applications. Since the emergence of e-business has allowed consumers
to directly communicate with an organization's systems, it is more important
than ever before to maximize application performance and minimize downtime.
Furthermore, as e-business, enterprise resource planning and other packaged
applications are deployed to a wider audience, rapid and unpredictable spikes in
the number of users can dramatically increase the likelihood of performance
degradation and system failure. Not only must organizations have adequate
back-up systems in place, but they also need solutions that will enable them to
proactively monitor, identify and resolve issues that can adversely affect
application. performance. Finally, to ensure true application availability,
organizations need solutions that will enable them to quickly and accurately
develop and deploy new applications and modifications to existing applications.

Information Availability

In addition to assuring the availability of applications, the imperatives
of e-business require organizations to make the strategic information within
these applications readily available to the users who need it. The Internet has
created a platform for distributing critical, dynamic business information, such
as inventory levels, requisitions, billing statements, manufacturing data and
sales reports to a broad range of employees, partners and suppliers, many of
whom may be located in geographically remote locations and connected through
multiple, non-integrated systems. Organizations must be able to leverage this
platform to reach customers and provide 24x7x365 access to valuable information,
including customer support and current account information. The challenge,
however, is effectively extracting, publishing and disseminating large volumes
of information to thousands of employees, customers, partners and suppliers over
the Internet without massive amounts of application reengineering.

Need for a Comprehensive Solution

The effectiveness of an organization's information delivery system is
dependent on its application availability environment. A user's ability to
access information is linked to the performance and reliability of the
underlying application. Historically, organizations have relied on a combination
of manual processes and a heterogeneous assortment of software tools to manage
the performance and reliability of their application infrastructure and to
enable the distribution of information throughout the enterprise. However, the
requirements of today's e-business initiatives have stretched the capabilities
of these traditional solutions. This dynamic environment has created the need
for a comprehensive solution that will address the breadth of these application
and information availability requirements:

- Deliver data from multiple, heterogeneous sources, scale to thousands of
users and deliver information across all environments, quickly and
cost-effectively;

- Provide high performance and reliability for 24x7x365 access, and
minimize the strain on existing systems and personnel;

- Be easy to use and deploy without requiring in-depth technical expertise;

- Adapt to accommodate rapidly changing business needs;

- Provide an architecture to realize immediate value for Web-based
applications; and

- Address these requirements across the entire Web, application and
database environments.

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THE QUEST SOLUTION

Quest offers application and information availability software solutions
that enhance the performance and reliability of e-business, packaged and custom
applications and enable the delivery of information across the extended
enterprise. Key elements of our solution include:

Assure Application Availability

We offer a family of products that enhance the reliability and performance
of software applications. Our application availability products enable the
development of efficient and reliable thin-client applications; accurately
deploy database and application changes; provide replication solutions for
fail-over capability, data distribution and load balancing; and proactively
monitor, diagnose and resolve database and system performance issues before they
are noticed by the end-user. Our products are designed to maintain the
continuous availability of applications to the enterprise, not only in terms of
uptime, but also in terms of providing adequate performance under a wide range
of operating conditions. As a result, information technology personnel are able
to efficiently and proactively enhance the performance and reliability of
critical business applications.

Extend the Reach of Information

We enable enterprises to deliver information internally and externally via
the Internet to reach employees, customers and partners throughout large and
geographically dispersed organizations. Our Web-based information availability
solutions enable access to a greater number of users, minimize the delay in
publishing information and reduce manual printing and delivery costs associated
with paper-based report distribution. For example, these solutions can integrate
with corporate portals to allow for delivery of personalized information to a
user's desktop through a Web browser. We optimize the storage and distribution
of information by publishing information once from disparate applications to a
centralized repository. This repository serves as a common platform to capture
and distribute information without taxing the application systems or the
network. Our solution is designed to empower decision-makers by providing
relevant, dynamic information, more quickly and more cost-effectively than
previously possible.

Leverage the Web

Our products allow organizations to leverage the functionality and
flexibility of the Internet to address the high-performance demands of
e-business environments. Specifically, our products are designed to adapt to the
varying bandwidth and response times encountered on the Internet with efficient
and fault-tolerant architectures; employ Java-based interfaces to deliver
transparent Web access to business information; and ensure the security and
integrity of Web-based access to applications.

Maximize Investment in Existing Technology

We enable organizations to enhance the capabilities and extend the benefits
of their existing information technology infrastructure. Our products enable
existing packaged and custom applications to reach throughout and beyond the
enterprise without requiring re-engineering. Additionally, we enable our
customers to improve the reliability and performance of existing information
technology infrastructure to cost-effectively and predictability support the
increasing number of users and large volumes of transactions required by today's
e-business applications.

Easy to Deploy and Use

Our products are easy to deploy and use, thereby minimizing implementation,
training and support costs. We designed our products to be installed quickly by
the customer, typically without the need for on-site assistance. Our products
contain specific integration modules for SAP R/3, PeopleSoft and Oracle
Financials, enabling rapid deployment in these environments, minimizing the need
for customization and reducing ongoing maintenance requirements.

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Architected to Scale

Our products are well-suited for large, enterprise-wide deployments. We
designed our products to effectively scale when implemented in large and rapidly
expanding environments without compromising system performance. Our products
support heterogeneous networks, manage large quantities of information and
support thousands of users while at the same time minimizing the consumption of
network and computing resources. Our Java user interfaces significantly reduce
the need for client-side software management, effectively leveraging today's
thin-client networks.

STRATEGY

Our objective is to become the leading provider of application and
information availability solutions to enable organizations to deliver relevant
information and provide sophisticated services to employees, customers,
suppliers and partners both inside and outside of the traditional enterprise.
Key elements of our strategy include:

Extend Product Leadership

We offer a family of products that work together to provide application and
information availability solutions capable of meeting today's performance
requirements. We believe our family of application availability products
provides the most thorough and efficient approach to optimizing the performance
and availability of e-business, packaged and custom applications. We also
believe that we offer the leading Web-based information availability software
solutions. We intend to advance our product leadership by investing
significantly in research and development and by acquiring and integrating
complementary products and technologies. We intend to strengthen and expand our
offerings of integration software for leading packaged applications. Our
flexible and open architecture allows for the integration of new modules that
enhance our current solutions and add new e-business functionality, such as
electronic bill presentment. We plan to augment our existing application
availability solutions with capabilities to monitor and maintain the underlying
infrastructure of e-business applications. For example, we plan to introduce a
product that manages and optimizes the performance of Web application servers.

Focus on E-Business Applications Market

We believe that both recent and expected growth in e-business applications
have created strong demand for our application and information availability
products. We intend to capitalize on this opportunity by actively marketing our
products to companies with strong e-business initiatives. In addition to
developing new e-business applications, organizations are attempting to improve
the e-business functionality of their enterprise applications by extending them
over the Internet. For example, according to AMR Research, a leading enterprise
application market analysis firm, over $39 billion was spent on enterprise
resource planning software since 1995. As a result, we believe a significant
market opportunity exists to help organizations leverage these investments by
incorporating new e-business functionality into these systems. We believe that
our products will be used as a key component of the infrastructure for emerging
e-business applications.

Leverage our Significant Installed Base of Customers

We have an installed base of thousands of customers that we believe
provides us with a significant opportunity for additional sales of current and
future products, as well as ongoing maintenance revenues. A majority of our
customers have purchased only one or a few of our products or use our products
in specific business-units or locations. We believe that we can sell more deeply
into our installed customer base by expanding these departmental deployments
into enterprise-wide implementations as well as by cross-selling additional
products and services.

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Expand our Sales Force and Distribution Channels

We market and sell our products worldwide primarily though a direct sales
and telesales force. We believe that our direct sales approach allows us to
achieve better control of the sales process and respond more quickly to customer
needs while maintaining an efficient sales model. We are continuing to expand
our direct sales efforts both domestically and internationally. Sales outside of
North America represented approximately 17% of total revenue in 1998, and we
believe that there is significant untapped demand for our software products
internationally. We intend to continue to expand our direct sales staff and
increase the number of sales offices internationally, and, to a lesser extent,
develop alliances with international distributors.

Extend Strategic Integrator Relationships

We intend to increase the value of our solutions to customers by offering
additional and improved consulting and implementation services for our
enterprise-level software solutions. Specifically, we plan to extend our
existing strategic relationships and develop new partnerships with leading
global systems integrators who specialize in implementing enterprise software
solutions that support e-business and packaged application software. We believe
that these relationships will both facilitate the successful enterprise
deployment of our products and generate additional product sales opportunities.

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PRODUCTS

Our products are designed to work individually and together to provide
immediate and continuous availability of applications and information, both of
which are critical as enterprises rapidly extend their information technology
infrastructure. Our products and their functionality are summarized below:

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
<C> <S> <C>
INFORMATION AVAILABILITY
- ------------------------------------------------------------------------------------------------------------
VISTA PLUS Captures, manages and distributes report-based information
through an enterprise report and document repository.
- ------------------------------------------------------------------------------------------------------------
VISTA PLUS E-PURPOSING MODULE Extends information delivery across the Internet by
providing global delivery of time-sensitive documents,
electronic bill and statement presentment without requiring
application changes.
- ------------------------------------------------------------------------------------------------------------
VISTA PLUS INTERFACE MODULES FOR SAP Provides rapid installation and continuous synchronization
R/3, PEOPLESOFT, AND ORACLE of users, groups, authorization profiles and report
APPLICATIONS information from ERP systems to Vista Plus.
- ------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
<C> <S> <C>
APPLICATION AVAILABILITY
- ------------------------------------------------------------------------------------------------------------
DATABASE REPLICATION
- ------------------------------------------------------------------------------------------------------------
SHAREPLEX(R) REPLICATION Replicates high volumes of data from Oracle databases to
improve performance and manage future growth.
- ------------------------------------------------------------------------------------------------------------
ENTERPRISE MONITORING
- ------------------------------------------------------------------------------------------------------------
I/WATCH Offers a centralized console for monitoring, alerting,
diagnosing and resolving problems in databases, operating
systems and applications.
- ------------------------------------------------------------------------------------------------------------
DATABASE AND APPLICATION PERFORMANCE
- ------------------------------------------------------------------------------------------------------------
INSTANCE MONITOR A real-time monitoring and diagnostic tool featuring visual
representation of database process flows.
- ------------------------------------------------------------------------------------------------------------
SQLAB XPERT Identifies and resolves database resource consumption
problems caused by poorly performing application code by
recommending optimal tuning scenarios.
- ------------------------------------------------------------------------------------------------------------
SPACE MANAGER Reorganizes database objects and performs capacity planning
to improve performance and manage future growth.
- ------------------------------------------------------------------------------------------------------------
APPLICATION CHANGE MANAGEMENT
- ------------------------------------------------------------------------------------------------------------
SCHEMA MANAGER Manages database change and migration from development
through production by providing comprehensive schema
versioning, auditing and rollback capabilities.
- ------------------------------------------------------------------------------------------------------------
DATA MANAGER Builds test databases, deploys reference data to production
during software rollouts, extracts data for data warehouses
or reporting databases, and purges or archives production
data that is not needed on-line.
- ------------------------------------------------------------------------------------------------------------
SQL IMPACT Manages interdependencies between database objects and
application source code, providing detailed impact analysis,
documentation and auditing.
- ------------------------------------------------------------------------------------------------------------
SQL NAVIGATOR AND TOAD Server-side database development and management solutions
with optional add-on modules available for debugging, SQL
tuning with expert advice and integrated code libraries for
rapid development.
- ------------------------------------------------------------------------------------------------------------
</TABLE>

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INFORMATION AVAILABILITY

Vista Plus. Our Vista Plus products deliver the benefits of enabling
Web-based access to existing information and applications without a complex
development or deployment effort. Vista Plus is an enterprise, report-based
information management solution that captures, stores, indexes, prints and
archives report data or electronic documents from virtually any application.
Vista Plus maintains a repository of this output for instant distribution over a
heterogeneous, widely distributed network, including the Internet, with our
sophisticated Java or Windows-based clients. By storing output from applications
in its repository, Vista Plus also eliminates the processing needed to rerun
reports, and its report mining capabilities provide users access to information
without burdening the primary systems.

Vista Plus enables real-time access to business-critical information at any
time, even if the source application is not accessible. Vista Plus provides
drill-down from summary to detailed information, data extraction, hyperlinks to
navigate between related information and numerous print and electronic
distribution functions with no application changes, delivering immediate
benefits throughout the enterprise. The robust security model built into Vista
ensures that only authorized users gain access to data. The Vista Plus
e-purposing engine further extends information availability by transforming
production reports into a series of personalized emails, PDF files or HTML pages
for Internet distribution of statements such as invoices, purchase orders and
financial statements. As a result, the data that is delivered to end users
contains relevant information in a familiar and highly usable format.

APPLICATION AVAILABILITY

We provide a broad range of products that together provide a comprehensive
application availability solution. Our products encompass the areas of database
replication, enterprise monitoring, database performance and monitoring,
application and database change management, and database programming
environments. Integration between these components significantly enhances the
value of each solution by increasing user productivity and delivering otherwise
unavailable functionality.

Database Replication

SharePlex. SharePlex replicates high volumes of data from an Oracle
database to one or more other databases. Replication is accomplished in
real-time with very little overhead to critical application servers. Secondary
systems can then be used for offloading non-critical processing, thus preserving
desired OLTP and Web server performance, as well as providing a back-up system
for reporting and fail-over. SharePlex also supports wide-area networks without
the need for expensive high bandwidth data links.

Enterprise Monitoring

I/Watch. I/Watch offers a central console for monitoring databases,
operating systems and applications and alerts the operations staff of problems
as they develop. I/Watch is easy to deploy and consumes relatively few system
resources. I/Watch detects system and application failures, and allows
operations staff to watch for developing problems over a large network of
systems. I/Watch can alert and automatically respond with appropriate measures
to resource problems. I/Watch provides an intuitive, graphical interface that
clearly shows where problems are occurring and supports drill-downs from summary
to detailed information for diagnosing and resolving issues. I/Watch allows for
the mining of previously monitored time periods to help pinpoint the root cause
of problems. I/Watch is fully customizable and can be further extended by
plugging in one or more optional knowledge cartridges, which provide monitoring
solutions for other specific services in the enterprise, including market
leading ERP packages and other Quest products.

Database and Application Performance

Instance Monitor. Instance Monitor is a real-time monitoring and
diagnostic tool featuring visual representations of process flows within the
database. Instance Monitor's unique user-interface design displays a
comprehensive diagram of a database's internal workings and the flow of
information within the
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<PAGE> 40

database. Instance Monitor tracks database performance in real-time, identifies
potential bottlenecks and provides detailed expert advice to help resolve
problems as they occur.

SQLab Xpert. SQLab Xpert automatically locates and highlights poorly
written database application code. It provides expert advice to help both novice
and seasoned developers and administrators quickly find solutions to difficult
performance problems.

Space Manager. Space Manager addresses the complex issues of physical data
management to help keep application performance at peak levels. As database
structures are modified to accommodate application changes and growth,
performance begins to degrade due to poor physical organization of information
within the database. Space Manager is designed to perform this necessary
maintenance as well as assist in planning for future growth in storage
requirements.

Application Change Management

SQL Impact. SQL Impact scans application code and stores it in its
repository. If a change is needed to any object in a database, SQL Impact
determines which programs and specific lines of code will be affected, reducing
the likelihood of overlooking required application changes.

Schema Manager. Schema Manager automatically determines the differences
between a development and production database and can synchronize the databases
automatically. Schema Manager packages all of the changes needed for a new
application deployment, checks to make sure the changes will not fail in the
production environment, and implements the changes. Its auditing capability
documents all database changes, allowing the immediate rollback of a change if
required.

Data Manager. Data Manager deploys and transforms data when new
applications are rolled out, for example, storing or changing reference data
such as sales tax tables and control information. Data Manager also creates test
databases for developers, eliminating the need to use a full copy of a
production database which can be impractical due to its large size.

Database Programming

SQL Navigator and TOAD enable development of server side code for
databases, a key component of thin-client development. SQL Navigator and TOAD
allow developers to rapidly and accurately develop and tune applications.
Providing similar functionality, these two products incorporate different user
interfaces that increase their appeal to a broader spectrum of developers and
database administrators. They integrate with our other application availability
products, enabling developers to check and correct the performance of their code
before it is put into production.

CUSTOMERS AND CASE STUDIES

Our software products are licensed to customers worldwide to provide a wide
range of application and availability solutions. Our products have been sold to
thousands of corporations, governmental agencies and other organizations
worldwide. One customer accounted for 12% of total revenues in 1996. In 1997,
1998 and the first three months of 1999, no customer accounted for more than 10%
of our total revenues.

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<PAGE> 41

A sampling of customers who have purchased at least $100,000 of software
licenses since January 1, 1996 includes:

<TABLE>
<S> <C> <C>
TECHNOLOGY ENERGY MANUFACTURING
3Com Detroit Edison 3M
Applied Materials FirstEnergy Corp. American Cynamid
Computer Sciences Corp. Pennsylvania Power & Light Boeing
Dell Computer PG&E Texas Management General Electric Plastics
Diamond Multimedia Shell Services International Gulf States Steel
Earthlink Sun Chemical Honeywell
Imation Valero Energy Johnson Controls
Merisel FINANCIAL SERVICES Koch Industries
Micro Warehouse Lockheed Martin
Micron Electronics ADP Rockwell
NCR AIG Marketing Rogers Tool Works
Oracle American United Life Sara Lee Hosiery
Smith-Gardner & Associates Ceridian Tax Service Smuckers
Sony Chase Manhattan Mortgage Weyerhaeuser
Sun Microsystems Credit Suisse/First Boston OTHER
Tandy Corporation Fidelity Investments
HEALTHCARE/PHARMACEUTICAL First National Bank Chicago American Home Shield
Mercury Insurance Group Andersen Consulting
3M Health Information Systems Nations Bank Aramark
Acuson Wellington Management Bausch & Lomb Worldwide
AVMED Health Plan Wells Fargo Carlson Companies
Blue Cross-Blue Shield (FL) TELECOMMUNICATIONS Dun & Bradstreet Info. Systems
Cardinal Health Earth Tech
GE Medical Systems Air Touch Communications Hertz
Harvard Pilgrim Health Care AT&T JC Penney
Hoechst Marion Roussel British Telecom Pepsi-Cola
Merck Lucent Technologies Southwest Airlines
Partners Health Plan MCI System House Time
Qualmed Rohm Corporation United Space Alliance
US Surgical Southwestern Bell Mobile University of Michigan
Communications Yamaha
TCI Communications
Williams Information Services
</TABLE>

The following case studies illustrate how selected customers are using
Quest products to ensure high application and information availability across
their increasingly heterogeneous and distributed networks. These case studies
are based on information supplied by our customers. We believe the information
supplied by our customers is accurate in all material respects.

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<PAGE> 42

EarthLink

EarthLink is the world's largest independent Internet service provider,
with a full range of innovative access and hosting solutions used by hundreds of
thousands of individuals and businesses every day. Running on Oracle databases,
EarthLink needed a better way to diagnose and address day-to-day application
availability and management issues. EarthLink selected a number of our
application availability products to satisfy their requirements. To manage their
applications, EarthLink uses I/Watch and Instance Monitor for database
monitoring, diagnostics and resolution. These products, along with SQLab Xpert,
enable the information technology personnel of EarthLink to perform 'targeted
tuning' with intelligent tuning recommendations that optimize the performance of
the databases. Due to the growth and the dynamic nature of the ISP business,
downtime would be catastrophic. Space Manager provides EarthLink with a
comprehensive solution for database reorganization and capacity planning for
application availability through preventative maintenance, problem detection and
resolution across all databases.

NCR

NCR provides integrated software, consulting services and hardware
solutions for businesses. NCR runs Oracle in a multi-platform environment with a
combination of applications, including Oracle Financials, PeopleSoft and other
internally developed solutions. NCR employs over 300 servers worldwide and
executes mission-critical data transfers. This complexity required a controlled
application development and deployment environment. Our change management
products allow NCR to facilitate the identification, migration and deployment of
critical database changes required to achieve database synchronicity across the
extended enterprise. NCR uses SQL Impact to identify the interdependencies
between application source code and the database objects. NCR uses Schema
Manager to synchronize and migrate schema changes between development and
production databases. In addition, they use SQLab Tuner to tune complex queries
and SQL Navigator for server-side development and debugging. According to NCR,
as a result of implementing our products, it was able to realize a reduction in
processing time and an increase in productivity by improving code integrity and
reducing the development effort.

Royal Automobile Club

The RAC provides roadside assistance 24 hours a day, seven days a week in
the United Kingdom. Availability of member services is crucial to the RAC,
therefore they needed a data replication solution to guarantee availability of
member information in the event of a system failure. Their key requirements in
selecting a replication solution were reliability, ease of implementation and
minimized disruption to the existing production environment. The RAC chose
SharePlex because of its ease of implementation and maintenance, high
performance replication availability and ability to interface with existing
applications. The RAC expects to expand its use of SharePlex in the future for
load balancing and scalability testing.

SALES, MARKETING AND DISTRIBUTION

We market and sell our products worldwide through a combination of direct
sales and telesales forces and, to a lesser extent, resellers and distributors.
Our domestic sales organization is headquartered in Newport Beach, California.
We have additional sales offices located in the metropolitan areas of Atlanta,
Boston, Chicago, Dallas, Detroit, New York, Raleigh, San Francisco and
Washington D.C. We also have international sales offices in the metropolitan
areas of Frankfurt, London and Melbourne. We are continuing to expand our sales
organization and establish additional sales offices domestically and
internationally. We also sell certain of our products through our Web site,
which allows our customers to conveniently download our products for evaluation
and direct purchase.

Our sales and marketing approach is designed to help customers understand
both the business and technical benefits of our products. Accordingly, we
complement the efforts of our sales organization with a pre-sale customer
support organization that is responsible for addressing technical questions
related to our products. The sales team for each customer is responsible for
maintaining appropriate contacts with key information technology personnel who
have planning and purchasing responsibility within the customer's organization.
Since a number of our products affect systems and employees throughout the
enterprise, our sales effort typically

41
<PAGE> 43

involves technology presentations and pilot implementations, and many times
involves numerous decision makers. As a result, a key feature of our sales
effort is to establish relationships at all appropriate levels in our customers'
organizations. While the sales cycle varies substantially from customer to
customer, the typical sales cycle for our Vista Plus and SharePlex products has
ranged from three to six months.

Focusing on our target markets, our marketing efforts are designed to
create awareness for our products and generate sales leads. To achieve these
goals, we engage in a variety of marketing activities, including seminars, trade
shows, direct mailings and print and Web-based advertising. In addition, we have
recently expanded our marketing staff and intend to commence an ongoing public
relations program that will include establishing and maintaining relationships
with key trade press, business press and industry analysts. We also intend to
initiate a customer advisory council which will provide a communication channel
for regular feedback from key customers to facilitate the design of products to
meet the expanding requirements of our target market.

CUSTOMER SERVICE AND SUPPORT

A high level of customer service and support is critical to the successful
marketing and sale of our products and the development of long-term customer
relationships. Our customer support group provides technical support to our
customers under support agreements entered into at the time of the initial sale.
Our base level of e-mail-, Internet-, fax-, and telephone-based support includes
assistance with installation, configuration and initial set-up of our products;
ongoing support during normal business hours; and software maintenance and
upgrade releases. For an additional fee, we provide support on a 24x7x365 basis
as well as training and other services.

Customer support is provided domestically through our offices in Newport
Beach and internationally through our offices in Europe and Australia. We plan
to hire additional support personnel and, as needed, establish additional
support sites domestically and internationally to meet our customers' needs.
Furthermore, we plan to extend our existing strategic partnerships and develop
new partnerships with leading systems integrators to provide implementation
guidance, assistance with configuration and initial set-up of applications.

RESEARCH AND DEVELOPMENT

We believe that strong research and product development capabilities are
essential to enhancing our core technologies and developing additional products
that offer maximum value and ease of use. We have invested significant time and
resources in creating a structured process for undertaking product development
projects. This process is designed to provide the proper framework for defining
and addressing the steps, tasks and activities required to bring product
concepts and development projects to market successfully. A significant portion
of our development effort is conducted in Melbourne, Australia. We have actively
recruited key software engineers and developers with expertise in the areas of
Oracle technologies, SQL Server, Java, Microsoft development technologies, ERP
systems and document management. Our engineers include several of the industry's
leading database management authorities. Complementing these individuals, our
senior management has extensive background in the database, network
infrastructure and enterprise and system software industries.

Our research and development efforts focus on designing and developing
reliable, easy to install and use products that solve application and
information availability problems for our customers. Since our inception in
1987, we have made substantial investments in research and development through
both internal development and technology acquisitions. Our products utilize a
number of advanced technologies including the log analysis component of
SharePlex that allows quick and accurate determination of the database
structural and data changes with minimal overhead. Another example is our Vista
Plus product line which contains highly sophisticated postscript and PCL parsing
technology that allows these products to understand complex output data streams,
enabling search, transformation and extraction from highly graphical output.

42
<PAGE> 44

COMPETITION

The market for application and information availability solutions is
emerging rapidly, and, as a result, is intensely competitive and characterized
by rapidly changing technology and evolving standards. We expect competition to
continue to increase both from existing competitors and new market entrants. We
believe that our ability to effectively compete depends on many factors,
including:

- the ease of use, performance, features, price and reliability of our
products as compared to those of our competitors;

- the timing and market acceptance of new products and enhancements to
existing products developed by us and our competitors;

- the quality of our customer support; and

- the effectiveness of our sales and marketing efforts.

Companies currently offering competitive products vary in the scope and
breadth of the products and services offered and include: (1) providers of
enterprise report management products such as Actuate, Computer Associates,
Mobius, and IBM; (2) providers of hardware and software replication tools such
as EMC and Veritas; and (3) providers of database and database management
products such as BMC, Compuware, Oracle, and Platinum Technology.

Many of our competitors and potential competitors have greater name
recognition, a larger installed customer base company-wide and significantly
greater financial, technical, marketing, and other resources than we do. Our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or devote greater resources to the
development, promotion and sale of their products than we can. In addition,
because there are relatively low barriers to entry in the software market, we
may encounter additional competition as other established and emerging companies
enter our field and introduce new products and technologies.

In addition, providers of database solutions such as Oracle and Microsoft
currently produce database management tools and may in the future enhance their
products to include functionality that is currently provided by our products.
The inclusion of the functionality of our software as standard features of the
underlying database solution or application supported by our products could
render our products obsolete and unmarketable, particularly if the quality of
such functionality were comparable to that of our products. Even if the
functionality provided as standard features by these system providers is more
limited than that of our software, there can be no assurance that a significant
number of customers would not elect to accept more limited functionality in lieu
of purchasing additional software. Moreover, there is substantial risk that the
mere announcements of competing products by large competitors such as Oracle
could result in the delay or cancellation of customer orders for our products in
anticipation of the introduction of such new products.

In addition to the competition that we may face because of the internal
development efforts of our competitors, current and potential competitors may
make strategic acquisitions or establish cooperative relationships among
themselves or with third parties, thereby increasing their ability to address
the needs of our current or prospective customers. Accordingly, it is possible
that new competitors or alliances among current and new competitors may emerge
and rapidly gain significant market share. Such competition could also
materially adversely affect our ability to sell our products or to obtain
maintenance and support renewals for existing licenses on terms favorable to us.

There can be no assurance that we will be able to compete successfully
against current and future competitors. Increased competition could result in
price reductions, fewer customer orders, reduced gross margins and loss of
market share, any of which could materially affect our business, operating
results or financial condition.

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<PAGE> 45

PROPRIETARY RIGHTS

We cannot assure you that our means of protecting our proprietary rights
will be adequate or that competition will not independently develop similar or
superior technology. We also believe that, because of the rapid rate of
technological change in the software industry, trade secret and copyright
protection are less significant than factors such as the knowledge, ability and
experience of our employees, frequent product enhancements and the timeliness
and quality of customer support services.

Our success and ability to compete are also dependent on our ability to
operate without infringing upon the proprietary rights of others. We are not
aware that we are infringing any proprietary rights of third parties. There can
be no assurance, however, that third parties will not claim infringement by us
of their intellectual property rights. We expect that software product
developers will increasingly be subject to infringement claims as the number of
products and competitors in our industry segment grows and the functionality of
products in different industry segments overlaps. Any such claims, with or
without merit, could be time consuming to defend, result in costly litigation,
divert management's attention and resources, cause product shipment delays or
require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
us, if at all. In the event of a successful claim of product infringement
against us and our failure or inability to either license the infringed or
similar technology or develop alternative technology on a timely basis, our
business, operating results and financial condition could be materially
adversely affected.

SharePlex is a registered trademark owned by us. This prospectus also makes
reference to the other trademarks that we own, some of which we are seeking
registration for, and to trademarks of other companies.

EMPLOYEES

As of March 31, 1999, we employed 307 full-time employees, including 149 in
sales and marketing, 93 in research and development, 28 in customer service and
support and 37 in general and administrative. We believe that our future success
will depend in large part upon our continuing ability to attract and retain
highly skilled managerial, sales, marketing, customer support and research and
development personnel. Like other software companies, we face intense
competition for such personnel, and we have at times experienced and continue to
experience difficulty in recruiting qualified personnel. There can be no
assurance that we will be successful in attracting, assimilating and retaining
other qualified personnel in the future. We are not subject to any collective
bargaining agreement and we believe that our relationships with our employees
are good.
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<PAGE> 46

FACILITIES

Our principal administrative, sales, marketing, support and research and
development facility is currently located in approximately 33,000 square feet of
space in Newport Beach, California. We intend to relocate our headquarters in
Newport Beach to a leased facility in nearby Irvine, California, consisting of
approximately 67,000 square feet of office space. The new facility will be under
a five-year lease and will have an option to renew for an additional five-year
term.

We also lease sales offices in the metropolitan areas of Atlanta, Boston,
Chicago, Dallas, Detroit, New York, Raleigh, San Francisco, and Washington, D.C.
Our German subsidiary currently operates from two facilities in Frankfurt and
Dusseldorf. Our Australian subsidiary operates from two leased facilities in
Melbourne which total approximately 10,000 square feet. Our UK subsidiary leases
a 5,300 square-foot office in the London metropolitan area.

LEGAL PROCEEDINGS

On May 25, 1999, Mobius Management Systems, Inc., filed a complaint in the
United States District Court for the District of New Jersey (Mobius Management
Systems, Inc. v. Quest Software, Inc., Case No. 99-2337). The complaint alleges
that we published three advertisements that were false and misleading and
therefore in violation of the Lanham Act and common law, and that we
misappropriated unspecified trade secrets belonging to Mobius. The complaint
seeks injunctive relief and unspecified damages. No factual basis was set forth
in the complaint in support of Mobius' misappropriation of trade secrets claim.
We intend to defend this action vigorously, and, based on the complaint and the
facts underlying the complaint of which we are currently aware, we do not
believe that this lawsuit will have a material adverse effect on our business,
results of operations or financial condition; however, it is too early to
determine the ultimate outcome of the lawsuit.

In the normal course of business, we are subject to various other legal
matters. While the results of litigation and claims cannot be predicted with
certainty, we believe that the final outcome of these other matters will not
have a material adverse effect on our business, operating results or financial
condition.

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<PAGE> 47

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information regarding our executive
officers and directors as of June 10, 1999:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Vincent C. Smith....................... 35 Chief Executive Officer and Chairman of the Board
David M. Doyle(2)...................... 38 President, Secretary and Director
John J. Laskey......................... 49 Chief Financial Officer and Vice President, Finance
Eyal M. Aronoff........................ 35 Vice President, Technology and Engineering
Douglas F. Garn........................ 40 Vice President, Worldwide Sales
Carla S. Fitzgerald.................... 34 Vice President, Marketing
Terence J. Mullin...................... 44 Vice President, Output Management Business Unit
Charles C. Ramsey...................... 45 Vice President, International Sales
Raymond J. Lane(1)..................... 52 Director
Doran G. Machin(2)..................... 45 Director
Jerry Murdock, Jr.(1)(2)............... 41 Director
</TABLE>

- -------------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee

Set forth below is certain information regarding the business experience
during the past five years of each of the above-named persons.

Vincent C. Smith has served as our Chief Executive Officer since 1997 and a
director since 1995. Mr. Smith became Chairman of the Board in 1998. In 1994,
Mr. Smith was Director of Open Systems at BMC Software, where he managed its
sales operations. From 1992 to 1994, Mr. Smith co-founded Patrol Software North
America and served as its Vice President of Worldwide Sales and Marketing.
Patrol Software merged with BMC in 1994. Mr. Smith worked at Oracle Corporation
from 1987 to 1992 in a variety of sales management positions. Mr. Smith received
his B.S. degree in Computer Science with a minor in Economics from University of
Delaware.

David M. Doyle is our President, Secretary, founder and a director. Mr.
Doyle has been President and a director since the formation of Quest in 1987 and
has been our Secretary since June 1999. Mr. Doyle was the primary designer and
developer of our products during the initial four years after the founding of
Quest. Prior to the founding of Quest, Mr. Doyle served as a consultant to a
variety of industries, specializing in the areas of system design and
application performance. Mr. Doyle studied Information and Computer Sciences at
University of California, Irvine.

John J. Laskey is our Chief Financial Officer and Vice President, Finance.
Mr. Laskey has held these positions since October 1998. From June 1995 to
October 1998, Mr. Laskey served as the Chief Financial Officer and Vice
President, Finance of Continuus Software Corporation, a provider of software
change management solutions. From April to June 1995, Mr. Laskey was the Chief
Financial Officer and Vice President, Finance of StarBase Corporation. From
September 1986 to April 1995, Mr. Laskey worked at FileNet Corporation as Vice
President, Finance and Principal Accounting Officer. Mr. Laskey received his
B.S. degree in Electrical Engineering from University of Illinois and his M.B.A.
from Loyola University of Chicago.

Eyal M. Aronoff has been our Vice President of Technology and Engineering
since March 1996, when we acquired R*Tech Systems, Inc., a database management
company. Mr. Aronoff founded R*Tech Systems in 1992 and served as its President
from 1992 to 1996. Prior to this, Mr. Aronoff worked for John Bryce Ltd., an
Oracle distributor in Israel, attended school and served in the Israeli Defense
Force. Mr. Aronoff received a B.A. degree in computer science and chemistry from
Bar-Ilan University Ramat-Gan, Israel.

46
<PAGE> 48

Douglas F. Garn is the Vice President of Worldwide Sales. Mr. Garn has held
this position since January 1998. From March 1996 to January 1998, Mr. Garn was
Vice President of North American Sales for Peregrine Systems, Inc. From July
1995 until April 1996, Mr. Garn was Vice President of Sales with Syntax, Inc., a
networking software company. From November 1993 until July 1995, Mr. Garn was
Regional Sales Manager with BMC. Mr. Garn holds a B.S. in Marketing from
University of Southern California.

Carla S. Fitzgerald is our Vice President, Marketing. Ms. Fitzgerald has
held this position since February 1999. From November 1988 to February 1999, Ms.
Fitzgerald worked for Computer Associates International, where she most recently
served as Vice President, Global Technology Delivery Services. Ms. Fitzgerald
received her B.A. in Economics and Computer Studies from Claremont McKenna
College.

Terence J. Mullin has been our Vice President of Output Management Business
Unit since August 1998. Prior to joining Quest, Mr. Mullin was the Vice
President of Marketing and Business Development of Clarion Corporation of
America's Advanced Technology Division. Prior to that time, Mr. Mullin was the
vice president of marketing and business development for NetSoft/NetManage.
Prior to his employment with NetSoft/NetManage, Mr. Mullin held the position of
strategic planner of Internet technologies at FileNet Corporation, in addition
to holding several positions within Product Marketing.

Charles C. Ramsey is our Vice President of International Sales. Mr. Ramsey
heads up the expansion of our international direct-sales and support teams and
will complete the development of a worldwide channel organization. Prior to
joining Quest, Mr. Ramsey was a sales manager for IBM. He also held a sales
management position at Ziff-Davis Market Intelligence, where he specialized in
customer relations.

Raymond J. Lane has served as a member of our board since June 1999. Mr.
Lane has been the president and chief operating officer of Oracle Corporation
since January 1997 and has been a director of Oracle since June 1995.
Previously, Mr. Lane served as the executive vice president of Worldwide
Operations for Oracle from October 1993 to January 1997. Mr. Lane served as a
senior vice president of Oracle USA from June 1992 to October 1993. Before
joining Oracle, Mr. Lane served as senior vice president and managing partner of
the Worldwide Information Technology Group at Booz, Allen & Hamilton from July
1986 to May 1992. He served on the Booz, Allen & Hamilton Executive Committee
and its Board of Directors from April 1987 to May 1992. Mr. Lane is also a
member of the Board of Trustees of Carnegie Mellon University. Mr. Lane received
his B.S. in Math from West Virginia University.

Doran G. Machin has served as a director since 1987. Mr. Machin was also
our Secretary and Executive Vice President from 1987 through April, 1999. Prior
to 1987, Mr. Machin was employed as an independent computer consultant, worked
for Hewlett-Packard and American Data Industries. Mr. Machin attended Cerritos
College and California State University, Fullerton.

Jerry Murdock, Jr. has served as a member of our board since April 1999.
Since 1995, Mr. Murdock has been employed by InSight Capital Partners, an
investment firm which he co-founded in that year. From 1987 to 1995, Mr. Murdock
was President of Aspen Technology Group, a consulting firm which he founded in
1987. Mr. Murdock has a degree in Political Science from San Diego State
University. Mr. Murdock is a member of the boards of directors of several
private technology companies.

BOARD OF DIRECTORS AND COMMITTEES

We have established an audit committee composed of Messrs. Doyle, Machin
and Murdock. Messrs. Machin and Murdock are independent directors. This
committee reviews and supervises our financial controls, including the selection
of our auditors, reviews the books and accounts, meets with our officers
regarding our financial controls, acts upon recommendations of auditors and
takes further actions as the audit committee deems necessary to complete an
audit of our books and accounts, as well as other matters which may come before
it or as directed by the board.

We have established a compensation committee, which reviews and approves
the compensation and benefits for our executive officers, administers our stock
plans and performs other duties as may from time to time be determined by the
board. The compensation committee is currently comprised of Messrs. Lane and
Murdock.

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<PAGE> 49

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

We did not have a Compensation Committee for 1998. In 1998, all decisions
regarding executive compensation were made by our board of directors. We created
our compensation committee in June 1999.

In April 1999, we purchased an aggregate of 14,820,000 shares of our common
stock for a total purchase price of $35.0 million from trusts established by Mr.
Machin, one of the founders and a director of Quest. In addition, we entered
into a severance agreement with Mr. Machin pursuant to which we agreed to pay
him an annual fee of $200,000 per year from 1999 to 2001, pay him medical
benefits and provide for his use of a company car and related car expenses. Mr.
Machin currently owns no shares of our capital stock.

No interlocking relationship exists between any of our executive officers
or any member of our compensation committee and any member of any other
company's board of directors or compensation committee.

DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS

Directors receive no cash remuneration for serving on the board of
directors or any committee thereof. Non-employee directors are reimbursed for
reasonable expenses incurred by them in attending board and committee meetings.
Non-employee board members are also eligible for option grants pursuant to the
provisions of the automatic option grant program under our 1999 Stock Incentive
Plan. See "-- 1999 Stock Incentive Plan."

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<PAGE> 50

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth for the year ended December 31, 1998, all
compensation received for services rendered to Quest in all capacities by our
chief executive officer and each of the other four most highly compensated
executive officers whose salary and bonus exceeded $100,000 in 1998. These
officers are referred to in this prospectus as the "Named Executive Officers."
No individual who would otherwise have been includable in such table on the
basis of salary and bonus earned during 1998 has resigned or otherwise
terminated his employment during 1998. The compensation table excludes other
compensation in the form of perquisites and other personal benefits that
constitutes the lesser of $50,000 or 10% of the total annual salary and bonus
earned by each of the Named Executive Officers in 1998.

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------- ------------------
SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION(1) SALARY($) BONUS($) UNDERLYING OPTIONS COMPENSATION ($)
- ------------------------------ --------- -------- ------------------ ----------------
<S> <C> <C> <C> <C>
Vincent C. Smith...................... 191,666 175,000 -- --
Chief Executive Officer
David M. Doyle........................ 200,000 175,000 -- --
President
Doran G. Machin....................... 200,000 -- -- $25,081(2)
Secretary
Eyal M. Aronoff....................... 191,931 -- 39,000 --
Vice President, Technology and
Engineering
Douglas F. Garn....................... 184,510 125,000 576,000 --
Vice President, Worldwide Sales
</TABLE>

- -------------------------
(1) Mr. Machin resigned from his position as Secretary in April 1999.

(2) Includes matching contributions under our 401(k) Plan and expenses paid by
us for Mr. Machin's car and the automobile insurance thereon.

49
<PAGE> 51

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth certain information with respect to stock
options granted to each of the Named Executive Officers in 1998, including the
potential realizable value over the ten-year term of the options, based on
assumed rates of stock appreciation of 5% and 10%, compounded annually. These
assumed rates of appreciation comply with the rules of the Commission and do not
represent our estimate of future stock price. Actual gains, if any, on stock
option exercises will be dependent on the future performance of our common
stock. No stock appreciation rights were granted to the Named Executive Officers
during 1998.

<TABLE>
<CAPTION>
OPTIONS GRANTS IN 1998
-------------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTION TERM ($)(4)
OPTIONS EMPLOYEES IN PER-SHARE EXPIRATION ------------------------
NAME GRANTED(#)(1) 1998 (%)(2) ($)(3) DATE 5% 10%
---- ------------- ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Vincent C. Smith..... -- -- -- -- -- --
David M. Doyle....... -- -- -- -- -- --
Doran G. Machin...... -- -- -- -- -- --
Eyal M. Aronoff...... 24,000 * $1.00 6/23/08 $ 9,770 $ 22,769
15,000 * 1.17 10/1/08 7,144 16,650
Douglas F. Garn(5)... 450,000 13.3% 1.00 6/23/08 183,195 426,922
126,000 3.7 1.00 7/1/08 51,294 119,538
</TABLE>

- -------------------------
* Less than one percent.

(1) Each option listed in the table was granted under our 1998 Stock
Option/Stock Issuance Plan, the predecessor plan to our 1999 Stock Incentive
Plan, and represents the right to purchase one share of common stock. Except
as otherwise indicated, the options shown in this table are all nonqualified
stock options. These options vest as follows: (1) 20% upon the completion of
one year of employment, (2) 13% upon the completion of each of the next five
six-month periods of employment, and (3) 15% upon the completion of the
sixth six-month period. To the extent not already exercisable, all of these
options will become exercisable in the event of a merger in which more than
50% of our outstanding securities are transferred to persons different from
those persons who are our shareholders prior to the merger or upon the sale
of substantially all our assets in complete liquidation or dissolution. This
acceleration feature does not apply in the event that the options are
assumed by the successor corporation in the merger or are replaced with a
cash incentive program.

(2) During 1998 we granted options to purchase up to an aggregate of 3,332,700
shares of common stock.

(3) All options were granted at an exercise price equal to the fair market value
of our common stock on the date of grant, as determined by our board of
directors.

(4) Potential realizable values are net of exercise price, but before the
payment of taxes associated with exercise. Amounts represent hypothetical
gains that could be achieved for the respective options if exercised at the
end of the option term. The 5% and 10% assumed annual rates of compounded
stock price appreciation are mandated by rules of the Commission and do not
represent our estimate or projection of our future common stock prices.
These amounts represent certain assumed rates of appreciation in the value
of our common stock from the exercise price of such options (which was equal
to the fair market value of the common stock on the date of grant as
determined by our board of directors), as determined by our board of
directors. Actual gains, if any, on stock option exercises are dependent on
the future performance of the common stock and overall stock market
conditions. The amounts reflected in the table may not necessarily be
achieved.

(5) Of the 450,000 options, 300,000 are incentive stock options.

50
<PAGE> 52

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES

The following table sets forth the number and value of shares of common
stock underlying the unexercised options held by the Named Executive Officers.
No options were exercised during 1998.

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY
DECEMBER 31, 1998 OPTIONS AT DECEMBER 31, 1998
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Vincent C. Smith........................... -- -- -- --
David M. Doyle............................. -- -- -- --
Doran G. Machin............................ -- -- -- --
Eyal M. Aronoff............................ -- 39,000 --
Douglas F. Garn............................ -- 576,000 --
</TABLE>

There was no public trading market for our common stock as of December 31,
1998. Accordingly, these values have been calculated on the basis of the initial
public offering price of $ per share, less the applicable exercise price per
share, multiplied by the number of shares underlying such options.

1999 STOCK INCENTIVE PLAN

Introduction. Our 1999 Stock Incentive Plan is intended to serve as the
successor equity incentive program to our 1998 Stock Option/Stock Issuance Plan.
The 1999 Stock Incentive Plan was adopted by the board and subsequently approved
by the shareholders in June 1999. The 1999 Stock Incentive Plan will become
effective upon the effective date of this offering. At that time, all
outstanding options under our predecessor plan will be incorporated into the
1999 Stock Incentive Plan, and no further option grants will be made under the
predecessor plan. The incorporated options will continue to be governed by their
existing terms, unless the plan administrator elects to extend one or more
features of the 1999 Incentive Plan to those options. Except as otherwise noted
below, the incorporated options have substantially the same terms as will be in
effect for grants made under the Discretionary Option Grant Program of the 1999
Stock Incentive Plan.

Share Reserve. 7,498,500 shares of common stock have been authorized for
issuance under the 1999 Stock Incentive Plan. This share reserve consists of the
number of shares that remain available for issuance under the predecessor plan
and shares of common stock subject to outstanding options thereunder. No
participant in the 1999 Stock Incentive Plan may be granted stock options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 500,000 shares of common stock in total per calendar year.

Programs. The 1999 Stock Incentive Plan is divided into five separate
programs:

- the discretionary option grant program under which eligible individuals
in Quest's employ may be granted options to purchase shares of common
stock at an exercise price not less than 100% of the fair market value of
those shares on the grant date;

- the stock issuance program under which such individuals may be issued
shares of common stock directly, through the purchase of such shares at a
price not less than 100% of their fair market value at the time of
issuance or as a bonus tied to the performance of services;

- the salary investment option grant program which may, at the plan
administrator's discretion, be activated for one or more calendar years
and, if so activated, will allow executive officers and other highly
compensated employees the opportunity to apply a portion of their base
salary to the acquisition of special below-market stock option grants;

- the automatic option grant program under which option grants will
automatically be made at periodic intervals to eligible non-employee
board members to purchase shares of common stock at an exercise price
equal to 100% of the fair market value of those shares on the grant date;
and

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<PAGE> 53

- the director fee option grant program which may, in the plan
administrator's discretion, be activated for one or more calendar years
and, if so activated, will allow non-employee board members the
opportunity to apply a portion of the annual retainer fee otherwise
payable to them in cash each year to the acquisition of special
below-market option grants.

Administration. The discretionary option grant program and the stock
issuance program will be administered by the compensation committee of the board
of directors. This committee will determine which eligible individuals are to
receive option grants or stock issuances under those programs, the time or times
when such option grants or stock issuances are to be made, the number of shares
subject to each such grant or issuance, the status of any granted option as
either an incentive stock option or a non-statutory stock option under the
Federal tax laws, the vesting schedule to be in effect for the option grant or
stock issuance and the maximum term for which any granted option is to remain
outstanding. The compensation committee will also have the authority to select
the executive officers and other highly compensated employees who may
participate in the salary investment option grant program in the event that
program is activated for one or more calendar years.

Plan Features. Our 1999 Stock Incentive Plan will include the following
features:

- The exercise price for any options granted under the plan may be paid in
cash or in shares of common stock valued at fair market value on the
exercise date. The option may also be exercised through a same-day sale
program without any cash outlay by the optionee.

- The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program in return for the
grant of new options for the same or different number of option shares
with an exercise price per share based upon the fair market value of our
common stock on the new grant date.

- Stock appreciation rights may be issued under the discretionary option
grant program. Such rights will provide the holders with the election to
surrender their outstanding options for an appreciation distribution from
us equal to the fair market value of the vested shares of common stock
subject to the surrendered option less the exercise price payable for
those shares. We may make the payment in cash or in shares of common
stock.

Change in Control. The 1999 Stock Incentive Plan will include the
following change in control provisions which may result in the accelerated
vesting of outstanding option grants and stock issuances:

- In the event that Quest is acquired by merger or asset sale or a
board-approved sale of more than fifty percent of the outstanding stock
by our shareholders, each outstanding option under the discretionary
option grant program which is not assumed or continued by the successor
corporation will immediately become exercisable for all the option
shares, and all unvested shares will immediately vest, except to the
extent we repurchase rights with respect to those shares are to be
assigned to the successor corporation.

- The plan administrator will have complete discretion to grant one or more
options which will become exercisable for all the option shares in the
event those options are assumed in the acquisition but the optionee's
service with us or the acquiring entity is subsequently terminated. The
vesting of outstanding shares under the Stock Incentive Plan may be
accelerated upon similar terms and conditions.

- The plan administrator may also grant options which will immediately vest
upon our acquisition by another entity, whether or not those options are
assumed by the successor corporation.

- The plan administrator may grant options and structure repurchase rights
so that the shares subject to those options or repurchase rights will
immediately vest in connection with a successful tender offer for more
than fifty percent (50%) of the outstanding voting stock or a change in
the majority of our board of directors through one or more contested
elections. Such accelerated vesting may occur either at the time of such
transaction or upon the subsequent termination of the individual's
service.
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<PAGE> 54

Salary Investment Option Grant Program. In the event the compensation
committee decides to put this program into effect for one or more calendar
years, each of our executive officers and other highly compensated employees
selected for participation may elect to reduce his or her base salary for that
calendar year by a specified dollar amount not less than $10,000 nor more than
$75,000. Each selected individual who makes such an election will automatically
be granted, on the first trading day in January of the calendar year for which
that salary reduction is to be in effect, an option to purchase that number of
shares of common stock determined by dividing the salary reduction amount by
two-thirds of the fair market value per share of common stock on the grant date.
The option will be exercisable at a price per share equal to one-third of the
fair market value of the option shares on the grant date. As a result, the total
spread on the option shares at the time of grant (the fair market value of the
option shares on the grant date less the aggregate exercise price payable for
those shares) will be equal to the amount of salary invested in that option. The
option will vest and become exercisable in a series of twelve (12) equal monthly
installments over the calendar year for which the salary reduction is to be in
effect and will be subject to full and immediate vesting upon certain changes in
the ownership or control of Quest.

Automatic Option Grant Program. Each individual who first becomes a
non-employee board member at any time after the completion of this offering will
automatically receive an option grant for 25,000 shares on the date such
individual joins the board, provided such individual has not been in the prior
employ of Quest. In addition, on the date of each annual shareholders meeting
held after the completion of this offering, each non-employee board member who
is to continue to serve as a non-employee board member will automatically be
granted an option to purchase 7,500 shares of common stock, provided such
individual has served on the board for at least six months.

Each automatic grant will have a term of ten years, subject to earlier
termination following the optionee's cessation of board service. The initial
25,000 share option will be immediately exercisable for all of the option
shares; however, any unvested shares purchased under the option will be subject
to repurchase by us, at the exercise price paid per share, should the optionee
cease board service prior to vesting in those shares. The shares subject to each
25,000 share automatic option grant will vest over a four (4) year period in
successive equal annual installments upon the individual's completion of each
year of board service over the four (4) year period measured from the option
grant date. However, the shares subject to each automatic grant will immediately
vest in full upon certain changes in control or ownership of Quest or upon the
optionee's death or disability while a board member. Each 7,500 share automatic
option grant will be immediately exercisable and fully vested on the option
date.

Director Fee Option Grant Program. If this program is put into effect in
the future, then each non-employee board member may elect to apply all or a
portion of any annual retainer fee otherwise payable in cash to the acquisition
of a below-market option grant. The option grant will automatically be made on
the first trading day in January in the year for which the retainer fee would
otherwise be payable in cash. The option will have an exercise price per share
equal to one-third of the fair market value of the option shares on the grant
date, and the number of shares subject to the option will be determined by
dividing the amount of the retainer fee applied to the program by two-thirds of
the fair market value per share of common stock on the grant date. As a result,
the option will be structured so that the fair market value of the option shares
on the grant date less the aggregate exercise price payable for those shares
will be equal to the portion of the retainer fee invested in that option. The
option will become exercisable in a series of twelve (12) equal monthly
installments over the calendar year for which the election is to be in effect.
However, the option will become immediately exercisable for all the option
shares upon certain changes in the ownership or control of Quest or the death or
disability of the optionee while serving as a board member.

Limited Stock Appreciation Rights. Limited stock appreciation rights will
automatically be included as part of each grant made under the automatic option
grant, salary investment option grant and director fee option grant programs and
may be granted to one or more of our officers as part of their option grants
under the discretionary option grant program. Options with such a limited stock
appreciation right may be surrendered to Quest upon the successful completion of
a hostile tender offer for more than 50% of the Quest Software outstanding
voting stock. In return for the surrendered option, the optionee will be
entitled
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<PAGE> 55

to a cash distribution from us in an amount per surrendered option share based
on the highest price per share of common stock paid in connection with the
tender offer.

Amendment. The board may amend or modify the 1999 Stock Incentive Plan at
any time, subject to any required shareholder approval. The 1999 Stock Incentive
Plan will terminate no later than June 9, 2009.

1999 EMPLOYEE STOCK PURCHASE PLAN

Introduction. The 1999 Employee Stock Purchase Plan was adopted by the
board and approved by the shareholders in June 1999 and will become effective
immediately upon the execution of the underwriting agreement for this offering.
The 1999 Employee Stock Purchase Plan is designed to allow our eligible
employees and the employees of our participating subsidiaries to purchase shares
of common stock, at semi-annual intervals, through their periodic payroll
deductions under the 1999 Employee Stock Purchase Plan.

Share Reserve. 600,000 shares of common stock will initially be reserved
for issuance.

Purchase Periods. The plan will have a series of successive purchase
periods, each with a maximum duration of six months. The initial purchase period
will begin on the date of the underwriting agreement for this offering covered
by this prospectus is signed and will end on the last business day in January
2000. Thereafter, purchase periods will run for the first business day in
February to the last business day in July each year, and for the first business
day in August to the last business day in January of the following year.

Eligible Employees. Individuals who are scheduled to work more than 20
hours per week for more than 5 calendar months per year on the start date of any
purchase period may join the plan on such start date.

Payroll Deductions. A participant may contribute up to 15% of his or her
cash earnings, and the accumulated payroll deductions will be applied to the
purchase of shares on each semi-annual purchase date. The purchase price per
share will be equal to 85% of the fair market value of the common stock on the
start date of the purchase period or, if lower, the fair market value on the
semi-annual purchase date. Semi-annual purchase dates will occur on the last
business day of January and July each year. In no event, however, may any
participant purchase more than 600 shares on any semi-annual purchase date.

Change in Control. In the event Quest is acquired by merger or asset sale,
all outstanding purchase rights will automatically be exercised immediately
prior to the effective date of the acquisition. The purchase price will be equal
to 85% of the fair market value per share of common stock on the participant's
entry date into the offering period in which such acquisition occurs or, if
lower, the fair market value per share of common stock immediately prior to such
acquisition.

Termination/Amendment. The 1999 Employee Stock Purchase Plan will
terminate on the last business day of July 2009. The board may at any time
alter, suspend or discontinue the plan. However, certain amendments to the plan
may require shareholder approval.

LIMITATION OF LIABILITY AND INDEMNIFICATION

Our Amended and Restated Articles of Incorporation limit the personal
liability of our directors for monetary damages to the fullest extent permitted
by the California General Corporation Law. Under California law, a director's
liability to a company or its shareholders may not be limited:

- for acts or omissions that involve intentional misconduct or a knowing
and culpable violation of law;

- for acts or omissions that a director believes to be contrary to the best
interests of the company or its shareholders or that involve the absence
of good faith on the part of the director;

- for any transaction from which a director derived an improper personal
benefit;

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<PAGE> 56

- for acts or omissions that show a reckless disregard for the director's
duty to the company or its shareholders in circumstances in which the
director was aware, or should have been aware, in the ordinary course of
performing the director's duties, of a risk of serious injury to the
company or its shareholders;

- for acts or omissions that constitute an unexcused pattern of inattention
that amounts to an abdication of the director's duty to the company or
its shareholders;

- under Section 310 of the California General Corporation Law concerning
contacts or transactions between the company and a director; or

- under Section 316 of the California General Corporation Law concerning
directors' liability for improper dividends, loans and guarantees.

The limitation of liability does not affect the availability of injunctions and
other equitable remedies available to our shareholders for any violation by a
director of the director's fiduciary duty to us or our shareholders.

Our Articles of Incorporation also include an authorization for us to
indemnify our "agents" (as defined in Section 317 of the California General
Corporation Law) through bylaw provisions, by agreement or otherwise, to the
fullest extent permitted by law. Pursuant to this provision, our Amended and
Restated Bylaws provide for indemnification of our directors, officers and
employees. In addition, we may, at our discretion, provide indemnification to
persons whom we are not obligated to indemnify. The Amended and Restated Bylaws
also allow us to enter into indemnity agreements with individual directors,
officers, employees and other agents. Indemnity agreements have been entered
into with all directors and certain executive officers and provide the maximum
indemnification permitted by law. We also currently maintain directors' and
officers' liability insurance. These agreements, together with our Amended and
Restated Bylaws and Amended and Restated Articles of Incorporation, may require
us, among other things, to indemnify our directors and executive officers (other
than for liability resulting from willful misconduct of a culpable nature), and
to advance expenses to them as they are incurred, provided that they undertake
to repay the amount advanced if it is ultimately determined by a court that they
are not entitled to indemnification. Section 317 of the California General
Corporation Law and our Amended and Restated Bylaws and our indemnification
agreements make provision for the indemnification of officers, directors and
other corporate agents in terms sufficiently broad to indemnify such persons,
under certain circumstances, for liabilities (including reimbursement of
expenses incurred) arising under the Securities Act. We are not currently aware
of any pending litigation or proceeding involving any of our directors,
officers, employees or agents in which indemnification will be required or
permitted. Moreover, we are not currently aware of any threatened litigation or
proceeding that might result in a claim for such indemnification. We believe
that the foregoing indemnification provisions and agreements are necessary to
attract and retain qualified persons as directors and executive officers.

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<PAGE> 57

CERTAIN TRANSACTIONS

SALES OF PREFERRED STOCK

In April 1999, we sold an aggregate of 1,688,889 shares of our Series A
Preferred Stock at a price of $5.625 per share to investors affiliated with
InSight Capital Partners. Mr. Murdock, a director of Quest, is a General Partner
of InSight Capital Partners. In April 1999 we also sold 977,778 shares of Series
A Preferred Stock and 1,777,778 shares of our Series B Redeemable Preferred
Stock to UBS Capital LLC at a price of $5.625 per share. We intend to use
approximately $10.0 million of the net proceeds of this offering to redeem the
Series B Redeemable Preferred Stock, including all accrued, cumulative dividends
thereon. See "Use of Proceeds."

The following table summarizes the shares of preferred stock purchased by
our executive officers, directors and five percent shareholders and persons
associated with them since January 1996. The number of total shares on an
as-converted basis reflects the current 1-for-1.5 conversion ratio for each
share of Series A Preferred Stock.

<TABLE>
<CAPTION>
SERIES B
SERIES A REDEEMABLE TOTAL SHARES ON AN
PREFERRED PREFERRED AS-CONVERTED AGGREGATE
INVESTOR STOCK STOCK(1) BASIS(1) CONSIDERATION
- -------- --------- ---------- ------------------ -------------
<S> <C> <C> <C> <C>
Entities affiliated with InSight
Capital Partners(2)................. 1,688,889 -- 2,533,333 $ 9,500,000
UBS Capital LLC....................... 977,778 1,777,778 1,466,667 15,500,000
</TABLE>

- -------------------------
(1) The Series B Redeemable Preferred Stock is convertible into Series A
Preferred Stock in certain circumstances.

(2) Includes shares held by InSight Capital Partners II, L.P., InSight Capital
Partners (Cayman) II, L.P. and WI Software Investors LLC.

Holders of shares of our Series A Preferred Stock, including the common
stock issuable upon the conversion of those shares, are entitled to certain
registration rights with respect to the common stock issuable upon conversion
thereof. See "Description of Capital Stock -- Registration Rights."

REPURCHASE OF SHARES FROM AND SEVERANCE PAYMENTS TO DIRECTOR

In April 1999 we purchased an aggregate of 14,820,000 shares of our common
stock for a total purchase price of $35.0 million from trusts established by Mr.
Machin, one of the founders and a director of Quest. In addition, we entered
into a severance agreement with Mr. Machin to pay him an annual fee of $200,000
per year from 1999 to 2001 and to provide for his use of a company car, related
car expenses and medical benefits. Currently, Mr. Machin does not own any shares
of our capital stock.

ACQUISITION OF R*TECH SYSTEMS, INC. AND SALE OF STOCK TO OFFICER

In March 1996, we acquired R*Tech Systems, Inc., the sole shareholder of
which was Mr. Aronoff, our current Vice President, Engineering and Technology,
through a merger of R*Tech with and into Quest. In the merger Quest issued
1,950,000 shares of common stock to Mr. Aronoff. Mr. Aronoff also entered into
an employment agreement with us for a term of 24 months, under which he received
an annual salary of $85,000, the right to receive commissions on the sale of
certain products, the right to receive bonus payments of up to $400,000 upon the
achievement of specified performance milestones, and an option to purchase up to
2.5% of our outstanding capital stock.

In April 1998, Mr. Aronoff purchased 975,000 shares of common stock for a
total purchase price of $750,000, for which Mr. Aronoff executed a promissory
note and agreed to cancel the option to purchase shares of our common stock that
he received in May 1996. The note has a term of four years, bears interest at
the rate of 5.7% per annum, and up to 25% of the original principal amount of
the note may be prepaid in each year of the four-year term. Until such time as
the note or any part thereof is repaid, we

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<PAGE> 58

have the right to repurchase from Mr. Aronoff at the original cost all or a
portion of the 975,000 shares equal to the unpaid portion of the principal
amount of the note at the time Mr. Aronoff's services with Quest are terminated.
The entire amount due under the note may be prepaid upon a sale or merger of
Quest or at any time Mr. Smith no longer serves as our chief executive officer.

Mr. Aronoff's two-year employment agreement expired in March 1998.

SALE OF COMMON STOCK TO MR. SMITH

In October 1997, we sold to Mr. Smith, our Chief Executive Officer,
3,900,000 shares of common stock for aggregate consideration of $2.2 million.
Mr. Smith executed a promissory note for the purchase price. This note is due
and payable on April 1, 2002 and bears interest at a rate of 6.2%. This note is
also secured in part by the 3,900,000 shares of common stock.

TRANSACTIONS WITH DIRECTORS AND OFFICERS

In June 1998, we granted options to two of our officers, Eyal Aronoff and
Douglas Garn, to purchase 24,000 and 450,000 shares of our common stock,
respectively, at an exercise price of $1.00 per share. In July 1998, we granted
options to Mr. Garn and Terence Mullin and Charles Ramsey, officers, to purchase
126,000, 75,000 and 150,000 shares of our common stock, respectively, at an
exercise price of $1.00. In October 1998, we granted options to Mr. Aronoff and
to John Laskey, an officer, to purchase 15,000 and 180,000 shares of our common
stock, respectively, at an exercise price of $1.17 per share. In December 1998,
we granted options to purchase 120,000 shares of our common stock at an exercise
price of $2.37 per share to Carla Fitzgerald, an officer.

In January 1999, we granted options to purchase 30,000 and 15,000 shares of
our common stock at an exercise price of $2.37 per share to Mr. Mullin and Mr.
Ramsey, respectively. In June 1999, we granted options to purchase 35,000 shares
of our common stock at an exercise price of $7.50 per share to Raymond Lane, one
of our directors.

OTHER RELATED PARTY TRANSACTIONS

We have entered into an indemnification agreement with certain of our
executive officers and our directors containing provisions that may require us,
among other things, to indemnify our officers and our directors against certain
liabilities that may arise by reason of their status or service as officers or
directors, other than liabilities arising from willful misconduct of a culpable
nature, and to advance expenses incurred as a result of any proceeding against
them as to which they could be indemnified. See "Management -- Limitation of
Liability and Indemnification."

We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been otherwise obtained from
unaffiliated third parties. All future transactions, including loans, if any,
between us and our officers, directors and principal shareholders and their
affiliates and any transactions between us and any entity with which our
officers, directors or principal shareholders are affiliated will be approved by
a majority of the board of directors, including a majority of the independent
and disinterested outside directors of the board of directors and will be on
terms no less favorable to us than could be obtained from unaffiliated third
parties.

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<PAGE> 59

PRINCIPAL SHAREHOLDERS

The table below sets forth information regarding the beneficial ownership
of our common stock as of June 1, 1999 by the following individuals or groups:

- each person or entity who is known by Quest to own beneficially more than
five percent of our outstanding common stock;

- each of the Named Executive Officers;

- each director; and

- all directors and executive officers as a group, which for us is eleven
persons.

Applicable percentage ownership in the following table is based on the
number of shares of common stock outstanding as of June 1, 1999, as adjusted to
reflect (1) a three-for-two stock split that was effected in June 1999, (2) the
conversion of all outstanding shares of our Series A Preferred Stock into
4,000,000 shares of common stock, and (3) the redemption for cash of all
outstanding shares of our Series B Redeemable Preferred Stock, and assumes no
exercise of the underwriters' over-allotment option.

Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. The number of shares beneficially owned and the percentage of shares
beneficially owned are based on 33,721,300 shares of common stock outstanding as
of June 1, 1999 and shares of common stock outstanding upon consummation
of this offering. Shares of common stock subject to options currently
exercisable or exercisable within 60 days of June 1, 1999 are deemed to be
outstanding and to be beneficially owned by the person holding these options for
the purpose of computing the number of shares beneficially owned and the
percentage of the person or entity holding these securities, but are not deemed
outstanding for the purpose of computing the percentage ownership of any other
person or entity. Unless otherwise indicated, the principal address of each of
the shareholders below is c/o Quest Software, Inc., 610 Newport Center Drive,
Newport Beach, California 92660.

<TABLE>
<CAPTION>
PERCENTAGE OF CLASS
NUMBER OF SHARES -------------------
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE AFTER
- ------------------------ ------------------ ------- ------
<S> <C> <C> <C>
Vincent C. Smith(1)........................................ 18,257,500 54.1%
David M. Doyle............................................. 7,397,100 21.9%
Eyal M. Aronoff(2)......................................... 2,932,920 8.7%
Jerry Murdock(3)........................................... 2,798,533 8.3%
c/o InSight Capital Partners
122 East 42nd Street
New York, NY 10168
InSight Capital Partners II, L.P.(4)....................... 2,533,333 7.5%
InSight Capital Partners
122 East 42nd Street
New York, NY 10168
UBS Capital LLC(5)......................................... 1,466,667 4.3%
299 Park Avenue
34th Floor
New York, NY 10171
Douglas F. Garn(6)......................................... 173,700 *
Raymond J. Lane............................................ 50,000 *
Doran G. Machin............................................ -- --
All executive officers and directors as a group (11
persons)(7).............................................. 31,692,253 93.3%
</TABLE>

- -------------------------
* Less than one percent.

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<PAGE> 60

(1) Includes 11,700 shares held in the name of McNair Smith and 11,700 shares
held in the name of McKenzie Smith, Mr. Smith's minor children. Mr. Smith
disclaims beneficial ownership of the shares held in the names of his minor
children.

(2) Includes 4,224 shares held in the name of Aely Sollie Aronoff and 17,223
shares held in the name of Leya Jullie Aronoff, Mr. Aronoff's minor
children. Also includes 7,920 shares issuable upon the exercise of stock
options that are exercisable within 60 days of June 1, 1999.

(3) Includes 265,200 shares of common stock owned directly by Mr. Murdock. Also
includes 800,000 shares held by InSight Capital Partners II, L.P., 88,889
shares held by InSight Capital Partners (Cayman) II, L.P., and 800,000
shares held by WI Software Investors LLC., which will be converted into
2,533,333 shares of common stock immediately prior to the closing of this
offering. Mr. Murdock is a General Partner of InSight Capital Partners and a
director of Quest. Mr. Murdock disclaims beneficial ownership of the shares
held by InSight Capital Partners II, L.P., InSight Capital Partners (Cayman)
II, L.P., and WI Software Investors LLC, except to the extent of his
indirect pecuniary interests therein.

(4) Includes 88,889 shares of Series A Preferred Stock held by InSight Capital
Partners (Cayman) II, L.P., 800,000 shares of Series A Preferred Stock held
by InSight Capital Partners II, L.P., and 800,000 shares of Series A
Preferred Stock held by WI Software Investors LLC, which shares will be
converted into an aggregate of 2,533,333 shares of common stock immediately
prior to the closing of this offering.

(5) Includes 977,778 shares of Series A Preferred Stock, which shares will be
converted into 1,466,667 shares of common stock immediately prior to the
closing of this offering.

(6) Consists of 173,700 shares issuable upon the exercise of stock options that
are exercisable within 60 days of June 1, 1999.

(7) Includes 264,120 shares issuable upon the exercise of stock options that are
exercisable within 60 days of June 1, 1999. See Notes 2 and 6.

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DESCRIPTION OF CAPITAL STOCK

Upon the completion of this offering, the authorized capital stock of Quest
will consist of 75,000,000 shares of common stock and 5,000,000 shares of
undesignated preferred stock. The following description of our capital stock is
subject to and qualified by our Amended and Restated Articles of Incorporation
and Bylaws and by the provisions of applicable California law. Copies of the
Amended and Restated Articles of Incorporation and Bylaws have been filed as
exhibits to the registration statement of which this prospectus is a part.

COMMON STOCK

As of June 1, 1999, there were 33,721,300 shares of common stock
outstanding held of record by 24 shareholders, and options to purchase an
aggregate of 4,576,125 shares of common stock were also outstanding. There will
be shares of common stock outstanding (assuming no exercise of the
underwriters' option to purchase additional shares, exercise of outstanding
options under the stock plans after June 1, 1999 or exercise of warrants
outstanding after the closing of this offering) after giving effect to the sale
of the shares of common stock to the public offered in this prospectus.

The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to preferences that may be
applicable to any outstanding preferred stock that may come into existence, the
holders of common stock are entitled to receive ratably those dividends, if any,
as may be declared from time to time by the board of directors out of funds
legally available for dividends. See "Dividend Policy." In the event of our
liquidation, dissolution or winding up, 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 then outstanding, if any. The
common stock has no preemptive 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
nonassessable, and the shares of common stock to be outstanding upon completion
of this offering will be fully paid and nonassessable.

PREFERRED STOCK

Upon the closing of this offering, our board of directors will be
authorized, without further shareholder approval, to issue from time to time up
to an aggregate of 5,000,000 shares of preferred stock in one or more series and
to fix or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each such series thereof, including
the dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices,
liquidation preferences and the number of shares constituting any series or
designations of such series. We have no present plans to issue any shares of
preferred stock. The rights of the holders of common stock will be subject to,
and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. Any series of preferred stock may
possess voting, dividend, liquidation and redemption rights superior to that of
the common stock. Issuance of a new series of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of entrenching our board of directors
and making it more difficult for a third party to acquire, or discourage a third
party from acquiring, a majority of our outstanding voting stock. We have no
present plans to issue any shares of or designate any series of preferred stock.

We believe that the ability to issue preferred stock without the expense
and delay of a special shareholders' meeting will provide us with increased
flexibility in structuring possible future financings and acquisitions, and in
meeting other corporate needs that might arise. This also permits the board of
directors to issue preferred stock containing terms which could impede the
completion of a takeover attempt, subject to certain limitations imposed by the
securities laws. The board of directors will make any determination to issue
such shares based on its judgment as to the best interests of Quest and our
shareholders at the time of issuance. This could discourage an acquisition
attempt or other transaction

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<PAGE> 62

which shareholders might believe to be in their best interests or in which they
might receive a premium for their stock over the then market price of the stock.

REGISTRATION RIGHTS

Upon completion of this offering, the holders of an aggregate of
approximately 4,000,000 shares of common stock will be entitled to certain
rights with respect to the registration of such shares under the Securities Act.
Under the terms of the registration rights agreements, if we propose to register
any of our securities under the Securities Act, either for our own account or
for the account of other security holders exercising registration rights, these
holders are entitled to notice of such registration and are entitled to include
shares of common stock in the registration. The rights are subject to conditions
and limitations, among them the right of the underwriters of an offering subject
to the registration to limit the number of shares included in such registration.
Holders of these rights may also require us to file a registration statement
under the Securities Act at our expense with respect to their shares of common
stock, and we are required to use our best efforts to effect such registration,
subject to certain conditions and limitations. Furthermore, shareholders with
registration rights may require us to file additional registration statements on
Form S-3, subject to conditions and limitations.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the common stock is U.S. Stock
Transfer Corporation.

LISTING

Application has been made for listing the common stock on the Nasdaq
National Market under the trading symbol "QSFT."

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<PAGE> 63

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has not been any public market for our common
stock. Future sales of substantial amounts of common stock, including shares
issued upon exercise of outstanding options or warrants, in the public market
could adversely affect prevailing market prices from time to time. Furthermore,
since only a limited number of shares will be available for sale shortly after
this offering because of certain contractual and legal restrictions on resale,
as described below, sales of substantial amount of common stock in the public
market after the restrictions lapse could adversely affect the prevailing market
price and our ability to raise equity capital in the future.

Upon completion of this offering, we will have shares of common
stock outstanding assuming the issuance of shares of common stock
offered, no exercise of the underwriters' over-allotment option and no exercise
of outstanding stock options after , 1999. Of the total outstanding
shares of common stock, the shares sold in this offering will be
freely tradable without restriction or further registration under the Securities
Act, except that any shares purchased by our "affiliates," as that term is
defined in Rule 144 under the Securities Act, may generally only be sold
pursuant to an effective registration statement under the Securities Act or in
compliance with the limitations of Rule 144 as described below.

The remaining shares of common stock are "restricted securities"
as that term is defined in Rule 144. Of the total number of restricted
securities, will be available for sale in the public market following
the expiration of the 180 day lock-up agreement further described below.

Beginning six months after the date of this prospectus the holders of
restricted shares are entitled to certain rights with respect to
registration of these shares for sale in the public market. Registration of such
shares under the Securities Act would result in such shares becoming freely
tradeable without restriction under the Securities Act, except for shares
purchased by our affiliates, immediately upon the effectiveness of such
registration. If these holders sell in the public market these sales would have
a material adverse effect on the market price of the common stock.

Quest, our officers, directors, shareholders, and most of our optionholders
have entered into contractual "lock-up" agreements generally providing that,
subject to certain limited exceptions, they will not offer, pledge, sell, offer
to sell, contract to sell, sell any option or contract to purchase, purchase any
option to sell, grant any option, right or warrant to purchase, or otherwise
transfer or dispose of, directly or indirectly, any of the shares of common
stock or any securities convertible into, or exercisable or exchangeable for,
common stock owned by them, or enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of the common stock, for a period of 180 days after the date of this
prospectus, without the prior written consent of BancBoston Robertson Stephens,
except that we may, without such consent, grant options and sell shares pursuant
to our stock plans. BancBoston Robertson Stephens may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up agreements. BancBoston Robertson Stephens currently has no
plans to release any portion of the securities subject to lock-up agreements.
When determining whether or not to release shares from the lock-up agreements,
BancBoston Robertson Stephens will consider, among other factors, the
shareholder's reasons for requesting the release, the number of shares for which
the release is being requested and market conditions at the time. Following the
expiration of the 180-day lock-up period, the restricted securities will be
available for sale in the public market subject to compliance with Rule 144 or
Rule 701.

In general, under Rule 144 as currently in effect, any affiliate of ours or
a person (or persons whose shares are aggregated) who has beneficially owned
restricted shares for at least one year, (including the holding period of any
prior owner other than a person who may be deemed an affiliate of ours) is
entitled to sell within any three-month period a number of shares of common
stock that does not exceed the greater of 1% of the then-outstanding shares of
common stock (approximately shares after giving effect to this
offering) and the average weekly trading volume of the common stock on the
Nasdaq National Market during the four calendar weeks preceding the filing of a
Form 144 notice with respect to this sale. Sales under Rule 144 of the
Securities Act are subject to certain restrictions relating to manner
62
<PAGE> 64

of sale, notice and the availability of current public information about us.
Under Rule 144(k), a person who is not an affiliate of ours at any time during
the 90 days preceding a sale, and who has beneficially owned shares for at least
two years (including the holding period of any prior owner other than a person
who may be deemed an affiliate of ours), would be entitled to sell these shares
immediately following this offering without regard to the volume limitations,
manner of sale provisions or notice or other requirements of Rule 144 of the
Securities Act. However, the transfer agent may require an opinion of counsel
that a proposed sale of shares comes within the terms of Rule 144 of the
Securities Act prior to effecting a transfer of these shares.

We are unable to estimate the number of shares that will be sold under Rule
144, as this will depend on the market price for our common stock, the personal
circumstances of the sellers and other factors. Prior to this offering, there
has been no public market for our common stock, and there can be no assurance
that a significant public market for our common stock will develop or be
sustained after this offering. Any future sale of substantial amounts of common
stock in the open market may adversely affect the market price of the common
stock offered hereby.

We have filed, as of the date of this prospectus, Form S-8 registration
statement under the Securities Act to register all shares of common stock
issuable under the 1999 Stock Incentive Plan, and shares of common stock
issuable under the Employee Stock Purchase Plan. Such registration statements
became effective immediately upon filing, and shares covered by those
registration statements will thereupon be eligible for sale in the public
markets, subject to any lock-up agreements applicable thereto and Rule 144
limitations applicable to affiliates. See "Management -- 1999 Stock Incentive
Plan," "Description of Capital Stock -- Registration Rights" and "Underwriting."

63
<PAGE> 65

UNDERWRITING

The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Donaldson, Lufkin & Jenrette Securities
Corporation, CIBC World Markets Corp. and FAC/Equities, a division of First
Albany Corporation (the "Representatives"), have severally agreed with us,
subject to the terms and conditions set forth in the underwriting agreement, to
purchase from us the number of shares of common stock set forth opposite their
names below. The underwriters are committed to purchase and pay for all such
shares if any are purchased.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
BancBoston Robertson Stephens Inc. .........................
Donaldson, Lufkin & Jenrette Securities Corporation ........
CIBC World Markets Corp. ...................................
First Albany Corporation....................................

--------
Total.............................................
========
</TABLE>

We have been advised by the Representatives that the underwriters propose
to offer the shares of common stock to the public at the initial public offering
price set forth on the cover page of this prospectus and to certain dealers at
such price less a concession of not in excess of $ per share, of which
$ may be reallowed to other dealers. After the initial public offering,
the public offering price, concession and reallowance to dealers may be reduced
by the Representatives. No such reduction shall change the amount of proceeds to
be received by us as set forth on the cover page of this prospectus. The common
stock is offered by the underwriters as stated herein, subject to receipt and
acceptance by them and subject to their right to reject any order in whole or in
part.

The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.

Over-Allotment Option

We have granted to the underwriters an option, exercisable during the
30-day period after the date of this prospectus, to purchase up to
additional shares of common stock at the same price per share as we will receive
for the shares that the underwriters have agreed to purchase. To the
extent that the underwriters exercise this option, each of the underwriters will
have a firm commitment to purchase approximately the same percentage of such
additional shares that the number of shares of common stock to be purchased by
it shown in the above table represents as a percentage of the shares
offered hereby. If purchased, such additional shares will be sold by the
underwriters on the same terms as those on which the shares are being
sold. We will be obligated, pursuant to the option, to sell shares to the extent
the option is exercised. The underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the shares of common stock
offered hereby. If such option is exercised in full, the total public offering
price, underwriting discounts and commissions and proceeds to us will be
$ , $ and $ , respectively.

Indemnity

The underwriting agreement contains covenants of indemnity among the
underwriters and us against certain civil liabilities, including liabilities
under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.

64
<PAGE> 66

Lock-Up Agreements

Each of our executive officers, directors and shareholders and
substantially all of optionholders have agreed with the Representatives, for a
period of 180 days after the date of this prospectus, subject to certain
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to any shares of common stock,
any options or warrants to purchase any shares of common stock, or any
securities convertible into or exchangeable for shares of common stock owned as
of the date of this prospectus or, with certain exceptions, thereafter acquired
directly by such holders or with respect to which they have or hereafter acquire
the power of disposition, without the prior written consent of BancBoston
Robertson Stephens. However, BancBoston Robertson Stephens may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to the lock-up agreements. There are no agreements between
the Representatives and any of our shareholders providing consent by the
Representatives to the sale of shares prior to the expiration of the period of
180 days after this prospectus.

Future Sales

In addition, we have agreed that during the period of 180 days after this
prospectus, we will not, subject to certain exceptions, without the prior
written consent of BancBoston Robertson Stephens:

- Consent to the disposition of any shares held by shareholders prior to
the expiration of the period of 180 days after this prospectus; or

- Issue, sell, contract to sell or otherwise dispose of, any shares of
common stock, any options or warrants to purchase any shares of common
stock or any securities convertible into, exercisable for or exchangeable
for shares of common stock.

No Prior Public Market

Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the common stock
offered hereby will be determined through negotiations between us and the
representatives. Among the factors to be considered in such negotiations are
prevailing market conditions, certain of our financial information, market
valuations of other companies that we and the Representatives believe to be
comparable to us, estimates of our business potential, the present state of our
development and other factors deemed relevant.

Stabilization

The Representatives have advised us that, pursuant to Regulation M under
the Securities Act, certain persons participating in this offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or the
imposition of penalty bids, that 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 for the purpose
of fixing or maintaining the price of the common stock. A "syndicate covering
transaction" is the 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 this 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 this offering if the common
stock originally sold by such underwriter or syndicate member is purchased by
the Representatives in a syndicate covering transaction and has therefore not
been effectively placed by such underwriter or syndicate member. The
Representatives have advised us that such transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.

65
<PAGE> 67

LEGAL MATTERS

The validity of the common stock offered will be passed upon for us by
Brobeck, Phleger & Harrison LLP, Irvine, California. Certain legal matters in
connection with the offering will be passed upon for the underwriters by Wilson
Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California.

EXPERTS

The Consolidated Financial Statements and related financial schedule as of
December 31, 1997 and 1998 and for each of the three years in the period ended
December 31, 1998 included in this prospectus and registration statement have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports, which we have included in this prospectus and registration statement
and are given upon the authority of Deloitte & Touche LLP as experts in
accounting and auditing.

ADDITIONAL INFORMATION

We have filed with the Securities and Exchange Commission, Washington, D.C.
20549 (the "Commission"), under the Securities Act, as amended, a registration
statement on Form S-1 relating to the common stock offered. This prospectus does
not contain all of the information set forth in the registration statement and
its exhibits and schedules. For further information with respect to us and the
shares we are offering pursuant to this prospectus you should refer to the
registration statement, including its exhibits and schedules. Statements
contained in this prospectus as to the contents of any contract, agreement or
other document referred to are not necessarily complete, and you should refer to
the copy of that contract or other document filed as an exhibit to the
registration statement or any other document. You may inspect a copy of the
registration statement without charge at the Public Reference Section of the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 or at
the Commission's regional offices at 5670 Wilshire Boulevard, 11th Floor, Los
Angeles, California 90036. The Commission maintains an Internet site that
contains reports, proxy information statements and other information regarding
registrants that file electronically with the Commission. The Commission's World
Wide Web address is www.sec.gov.

We intend to furnish holders of our common stock with annual reports
containing, among other information, audited consolidated financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited condensed financial information for the first three
quarters of each fiscal year. We intend to furnish these other reports as we may
determine or as may be required by law.

66
<PAGE> 68

QUEST SOFTWARE, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1997, 1998
and March 31, 1999 (Unaudited)............................ F-3
Consolidated Statements of Operations for the Years ended
December 31, 1996, 1997 and 1998 and the Three Months
ended March 31, 1998 and 1999 (Unaudited)................. F-4
Consolidated Statements of Shareholders' Equity for the
Years ended December 31, 1996, 1997 and 1998 and the Three
Months ended March 31, 1999 (Unaudited)................... F-5
Consolidated Statements of Cash Flows for the Years ended
December 31, 1996, 1997 and 1998 and the Three Months
ended March 31, 1998 and 1999 (Unaudited)................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 69

INDEPENDENT AUDITORS' REPORT

The Shareholders and Board of Directors
Quest Software, Inc.

We have audited the accompanying consolidated balance sheets of Quest
Software, Inc. and subsidiaries (the Company) as of December 31, 1997 and 1998,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our 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, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Quest Software,
Inc. and its subsidiaries at December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.

Costa Mesa, California
June 9, 1999 (except for paragraph 3
of note 1 and the 1999 Stock Incentive
Plan and 1999 Employee Stock Purchase Plan
described in note 5 as to which the date
is June , 1999)

The accompanying consolidated financial statements include the effect of
the amendment to the Company's Articles of Incorporation and the adoption of the
1999 Stock Incentive Plan and the 1999 Employee Stock Purchase Plan anticipated
to be effective prior to the closing of this offering. The above opinion is in
the form which will be signed by Deloitte & Touche LLP upon consummation of the
items described in note 1 and note 5 of the notes to the consolidated financial
statements and assuming that from June 9, 1999 to the effective date of such
items, no other events have occurred that would affect the accompanying
consolidated financial statements and notes thereto.

Deloitte & Touche LLP
Costa Mesa, California
June 11, 1999

F-2
<PAGE> 70

QUEST SOFTWARE, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1997 1998 1999
------ ------- ------------
(UNAUDITED)

<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $2,096 $ 8,981 $12,502
Accounts receivable, net of allowance for doubtful
accounts and sales returns of $783 (1997), $1,052
(1998) and $1,016 (1999)............................... 4,815 7,443 6,551
Income taxes receivable................................... 122 -- --
Prepaid expenses and other current assets................. 100 720 619
Deferred income taxes..................................... -- 198 198
------ ------- -------
Total current assets................................. 7,133 17,342 19,870
Property and equipment:
Furniture and fixtures.................................... 397 596 806
Machinery and equipment................................... 140 270 303
Computer equipment........................................ 1,001 1,711 1,992
Computer software......................................... 186 315 389
Leasehold improvements.................................... 56 109 163
------ ------- -------
1,780 3,001 3,653
Less accumulated depreciation and amortization.............. (857) (1,613) (1,976)
------ ------- -------
Property and equipment, net................................. 923 1,388 1,677
Purchased technology and software licenses, net............. 1,531 527 511
Deferred income taxes....................................... -- 267 267
Other assets................................................ 126 121 147
------ ------- -------
$9,713 $19,645 $22,472
====== ======= =======
</TABLE>

<TABLE>
<CAPTION>
PRO FORMA
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 527 $ 1,468 $ 1,511
Accrued compensation...................................... 775 1,937 2,560
Other accrued expenses.................................... 1,170 2,243 2,188
Deferred support revenue.................................. 4,005 7,298 8,420
Deferred license revenue.................................. 282 1,625 1,882
------ ------- -------
Total current liabilities............................. 6,759 14,571 16,561
Deferred income taxes....................................... 118 -- --
Bank loan payable........................................... $ 10,000
Series B Redeemable Preferred Stock -- no par value, 1,800
shares authorized, none issued and outstanding, 1,778
shares issued and outstanding pro forma................... 10,000
Commitments and contingencies (Note 6)
Shareholders' equity:
Preferred stock -- no par value, 5,000 shares authorized;
no shares issued or outstanding
Common stock -- no par value, 75,000 shares authorized;
43,497, 44,538, and 44,540 shares issued and outstanding
at December 31, 1997 and 1998, and March 31, 1999,
respectively, 33,721 shares issued and outstanding, pro
forma................................................... 3,425 4,241 4,243 19,239
Retained earnings........................................... 1,645 3,991 4,874 --
Notes receivable from sale of common stock.................. (2,234) (3,158) (3,206) (3,206)
Capital distribution in excess of basis in common stock..... (30,122)
------ ------- ------- --------
Total shareholders' equity (deficit).................. 2,836 5,074 5,911 $(14,089)
------ ------- ------- ========
$9,713 $19,645 $22,472
====== ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.
F-3
<PAGE> 71

QUEST SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses............................... $ 9,316 $12,195 $24,901 $ 4,840 $ 9,540
Services............................... 3,546 6,120 9,889 2,203 3,274
------- ------- ------- ------- -------
Total revenues.................... 12,862 18,315 34,790 7,043 12,814
Cost of revenues:
Licenses............................... 950 1,307 3,433 557 660
Services............................... 1,467 1,972 2,507 521 904
------- ------- ------- ------- -------
Total cost of revenues............ 2,417 3,279 5,940 1,078 1,564
------- ------- ------- ------- -------
Gross profit............................. 10,445 15,036 28,850 5,965 11,250
Operating expenses:
Sales and marketing.................... 4,328 5,845 12,914 2,114 5,544
Research and development............... 2,995 4,293 6,549 1,470 2,373
General and administrative............. 3,494 3,450 5,698 946 1,917
------- ------- ------- ------- -------
Total operating expenses.......... 10,817 13,588 25,161 4,530 9,834
------- ------- ------- ------- -------
Income (loss) from operations............ (372) 1,448 3,689 1,435 1,416
Other income (expense), net.............. 389 (137) 336 48 112
------- ------- ------- ------- -------
Income before income tax provision....... 17 1,311 4,025 1,483 1,528
Income tax provision..................... 1 1,022 1,679 615 645
------- ------- ------- ------- -------
Net income............................... $ 16 $ 289 $ 2,346 $ 868 $ 883
======= ======= ======= ======= =======
Basic and diluted net income per share... $ -- $ .01 $ 0.05 $ 0.02 $ 0.02
Weighted Average Basic Shares
Outstanding............................ 38,350 40,373 44,261 43,497 44,539
Weighted Average Diluted Shares
Outstanding............................ 38,350 40,373 44,559 43,721 45,650
Pro forma basic and diluted net income
per share.............................. $ .05 $ .02
Pro forma weighted average basic shares
outstanding............................ 48,261 48,539
Pro forma weighted average diluted shares
outstanding............................ 48,559 49,650
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 72

QUEST SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
NOTE
COMMON STOCK RECEIVABLE TOTAL
--------------- RETAINED FROM SHAREHOLDERS'
SHARES AMOUNT EARNINGS SHAREHOLDER EQUITY
------ ------ -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1996.............................. 37,050 $ 35 $ 2,961 $ -- $ 2,996
Issuance of common stock.............................. 1,950 777 -- -- 777
Net income............................................ -- -- 16 -- 16
Distributions paid.................................... -- -- (1,360) -- (1,360)
------ ------ ------- ------- -------
BALANCE, December 31, 1996............................ 39,000 812 1,617 -- 2,429
Issuance of common stock.............................. 597 413 -- -- 413
Note receivable from shareholder for purchase of
common stock........................................ 3,900 2,200 -- (2,200)
Accrued interest receivable from shareholder.......... -- -- -- (34) (34)
Net income............................................ -- -- 289 -- 289
Distributions paid.................................... -- -- (261) -- (261)
------ ------ ------- ------- -------
BALANCE, December 31, 1997............................ 43,497 3,425 1,645 (2,234) 2,836
Issuance of common stock.............................. 66 66 -- -- 66
Note receivable from shareholder for purchase of
common stock........................................ 975 750 -- (750) --
Accrued interest receivable from shareholders......... -- -- -- (174) (174)
Net income............................................ -- -- 2,346 -- 2,346
------ ------ ------- ------- -------
BALANCE, December 31, 1998............................ 44,538 4,241 3,991 (3,158) 5,074
------ ------ ------- ------- -------
Unaudited:
Exercise of stock options............................. 2 2 -- -- 2
Accrued interest receivable from shareholders......... -- -- -- (48) (48)
Net income............................................ -- -- 883 -- 883
------ ------ ------- ------- -------
BALANCE, March 31, 1999............................... 44,540 $4,243 $ 4,874 $(3,206) $ 5,911
====== ====== ======= ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 73

QUEST SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 16 $ 289 $ 2,346 $ 868 $ 883
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization....................... 743 964 1,893 404 611
Loss from disposal of property and equipment........ 25 52 -- -- --
Accrued interest from shareholders.................. -- (34) (174) (32) (48)
Deferred income taxes............................... -- 178 (643) -- --
Changes in assets and liabilities, net of effects of
acquisitions:
Accounts receivable.............................. (1,051) (683) (2,628) (198) 892
Income taxes receivable.......................... -- (122) 122 (14) --
Prepaid expenses and other current assets........ (363) 282 (620) (175) 101
Other assets..................................... (131) 38 5 5 (26)
Accounts payable................................. 263 113 941 (235) 43
Bank overdraft................................... 393 (393) -- -- --
Accrued compensation............................. (703) 108 1,162 290 623
Other accrued expenses........................... 119 881 1,141 573 (55)
Deferred revenue................................. 705 1,960 4,636 57 1,379
------- ------- ------- ------ -------
Net cash provided by operating activities........ 16 3,633 8,181 1,543 4,403
Cash flows from investing activities:
Purchases of property and equipment..................... (589) (536) (1,231) (351) (652)
Purchases of software licenses.......................... -- (831) (57) -- (232)
Cash received (paid) for acquisitions................... (769) 100 -- -- --
------- ------- ------- ------ -------
Net cash used in investing activities............ (1,358) (1,267) (1,288) (351) (884)
Cash flows from financing activities:
Distributions to stockholders........................... (1,360) (261) -- -- --
Proceeds from the exercise of stock options............. -- -- -- -- 2
Repayment of note payable to related party.............. (7) (9) (8) -- --
------- ------- ------- ------ -------
Net cash (provided by) used in financing
activities..................................... (1,367) (270) (8) -- 2
------- ------- ------- ------ -------
Net increase (decrease) in cash and cash equivalents...... $(2,709) $ 2,096 $ 6,885 $1,192 $ 3,521
Cash and cash equivalents, beginning of period............ 2,709 2,096 2,096 8,981
------- ------- ------- ------ -------
Cash and cash equivalents, end of period.................. $ -- $ 2,096 $ 8,981 $3,288 $12,502
======= ======= ======= ====== =======
Supplemental disclosures of consolidated cash flow
information:
Cash paid during the year for:
Interest.............................................. $ 2 $ 8 $ 1 $ -- $ --
======= ======= ======= ====== =======
Income taxes.......................................... $ 28 $ 938 $ 2,054 $ 12 $ 85
======= ======= ======= ====== =======
Supplemental schedule of noncash investing and financing
activities:
Note receivable from shareholders for purchase of common
stock................................................. $ 2,200 $ 750
======= =======
Accrued interest receivable from shareholders........... $ 34 $ 174 $ 48
======= ======= =======
</TABLE>

See Note 2 for details of assets acquired and liabilities assumed in
purchase transactions.

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 74

QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations -- Quest Software Inc., a California corporation, (the
"Parent") and its subsidiaries (collectively the "Company") is a leading
provider of application and information availability software solutions that
enhance the performance and reliability of an organization's e-business,
packaged and custom applications and enable the delivery of information across
the extended enterprise. The Company also provides consulting, training, and
support services to its customers. The accompanying consolidated financial
statements include the accounts of the Parent and its wholly owned subsidiaries
in Australia, the United Kingdom, and Germany, and a majority-owned subsidiary
in the United Kingdom. All significant intercompany transactions and balances
have been eliminated in consolidation.

Unaudited Information -- The information set forth in these consolidated
financial statements as of March 31, 1999 and for the three months ended March
31, 1998 and March 31, 1999 is unaudited and reflects all adjustments,
consisting only of normal recurring adjustments, that, in the opinion of
management, are necessary to present fairly the financial position and results
of operations of the Company for the period. Results of operations for the
interim periods are not necessarily indicative of the results of operations for
the full fiscal year.

Stock Split -- On June 23, 1998, the Company's Board of Directors approved
and effected a 1,300-for-1 stock split of the Company's common stock, and on
March 10, 1999, the Company's Board of Directors approved and effected a 2-for-1
stock split. On June 4, 1999, in connection with a proposed public offering of
the Company's common stock, the Company's Board of Directors approved and
effected a 3-for-2 stock split of the Company's common stock. Concurrently with
the closing of the Company's proposed initial public offering, the Company will
file amended Articles of Incorporation to provide for the issuance of up to
5,000 shares of undesignated preferred stock. Such amendment will be effective
upon the completion of the Company's proposed initial public offering. All
share, per share and conversion amounts relating to common stock, preferred
stock, and stock options included in the accompanying consolidated financial
statements and footnotes have been restated to reflect the stock splits and
amendments to the articles of incorporation for all periods presented.

Foreign Currency Translation -- In accordance with Statement of Financial
Accounting Standards (SFAS) No. 52, Foreign Currency Translation, the United
States dollar is considered to be the functional currency for the Company's
foreign subsidiaries, as such subsidiaries act as sales offices for the Parent.
Therefore, gains or losses from translation adjustments are included in other
income in the Company's consolidated statements of operations. Translation
adjustments were not material for the years ended December 31, 1996, 1997, and
1998, and the three months ended March 31, 1998 and 1999. However, due to the
increase in international operations, the Company's results of operations could
be impacted in the future.

Fair Value of Financial Instruments -- The Company's consolidated balance
sheets include the following financial instruments: cash, accounts receivable,
notes receivable, accounts payable, and accrued liabilities. The Company
considers the carrying value of cash, accounts receivable, accounts payable, and
accrued liabilities in the financial statements to approximate fair value for
these financial instruments because of the relatively short period of time
between origination of the instruments and their expected realization. Based on
borrowing rates currently available, the fair value of the notes receivable from
the sale of common stock at December 31, 1998 and March 31, 1999 was
approximately $3,290 and $3,371, respectively.

Cash and Cash Equivalents -- Cash equivalents include short-term, highly
liquid investments with original maturities of three months or less.

Accounts Receivable -- The Company sells and/or licenses its products and
services to various companies across several industries. The Company performs
ongoing credit evaluations of its customers

F-7
<PAGE> 75
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

and generally does not require collateral. The Company maintains reserves for
potential credit losses and sales returns. Such losses have been within
management's expectations.

Property and Equipment -- Property and equipment are stated at cost.
Depreciation and amortization are provided using the straight-line method over
the estimated useful lives ranging from three to seven years. Leasehold
improvements are amortized over the shorter of the estimated useful lives of the
improvements or the term of the related lease. Repair and maintenance costs are
expensed as incurred.

Long-Lived Assets -- The Company accounts for the impairment and
disposition of long-lived assets in accordance with SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
In accordance with SFAS No. 121, long-lived assets to be held are reviewed for
events or changes in circumstances which indicate that their carrying value may
not be recoverable. The Company periodically reviews the carrying value of
long-lived assets to determine whether or not an impairment to such value has
occurred. At December 31, 1998 and March 31, 1999, there was no impairment of
long-lived assets.

Purchased Technology and Software Licenses -- Purchased technology is
recorded at cost and amortized using the straight-line method over the estimated
useful life of three years. Accumulated amortization was $916, $1,483, and
$1,599 at December 31, 1997 and 1998, and March 31, 1999, respectively. Software
licenses are recorded at cost and are amortized over the shorter of the
estimated useful lives of the related products or the term of the license.
Accumulated amortization was $90, $644, and $775 at December 31, 1997 and 1998,
and March 31, 1999, respectively. The net carrying amount of purchased
technology and software licenses was considered recoverable at December 31, 1998
and March 31, 1999, based on the undiscounted future cash flows expected to be
realized from continued sales of the related software products.

Other Assets -- Other assets include amounts receivable related to a
settlement agreement the Company entered into with a former employee. Under the
terms of the settlement agreement, the Company received a lump-sum payment
totaling $220 in January 1997, and a promissory note providing for 40 monthly
payments of $4 each commencing March 1, 1997. Approximately $63 and $53 of the
settlement receivable is recorded in other current assets in the accompanying
consolidated financial statements at December 31, 1998 and March 31, 1999,
respectively.

Revenue Recognition -- During October 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Position (SOP) 97-2, Software Revenue
Recognition, which provides guidance in recognizing revenue on software
transactions. SOP 97-2 is effective for transactions entered into in fiscal
years beginning after December 15, 1997, and supersedes SOP 91-1. The Company
adopted this statement, as amended, for the year ended December 31, 1998 and
such adoption did not have any impact on the Company's results of operations..

Software Licenses, Services, and Post-Contract Customer Support -- Revenues
from sales of software licenses, which generally do not contain multiple
elements, are recognized upon shipment of the related product if the
requirements of SOP 97-2, as amended, are met. If the requirements of SOP 97-2
including evidence of an arrangement, customer acceptance, a fixed or
determinable fee, collectibility or vendor specific objective evidence about the
value of an element are not met at the date of shipment, revenue recognition is
deferred until such items are known or resolved. Revenue from service and
post-contract customer support is deferred and recognized ratably over the term
of the contract.

Software Development Costs -- Costs incurred in the research and
development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. After technological feasibility is established, any additional
costs are capitalized in accordance with SFAS No. 86, Accounting for the Costs
of Computer Software to Be Sold, Leased or Otherwise Marketed. Because the
Company believes that its current process for developing
F-8
<PAGE> 76
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

software is essentially completed concurrently with the establishment of
technical feasibility, no software development costs have been capitalized as of
December 31, 1997, 1998 and March 31, 1999.

Income Taxes -- The Company accounts for its income taxes under the
provisions of SFAS No. 109, Accounting for Income Taxes. Deferred taxes on
income result from temporary differences between the reporting of income for
financial statements and tax reporting purposes. Prior to January 1, 1997, the
Company elected to be treated as an S corporation under the provisions of
subchapter S of the Internal Revenue Code and California Revenue and Taxation
Code. Accordingly, the provision for income taxes for the year ended December
31, 1996, is computed by applying the California franchise tax rate for S
corporations of 1.5% to the Company's pretax earnings. Effective January 1,
1997, the Company converted to a C corporation and became subject to regular
federal and state income taxes on an ongoing basis.

Stock-Based Compensation -- The Company accounts for stock-based awards to
employees, using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.

Net Income Per Share and Pro Forma Net Income Per Share -- The Company
computes net income per share in accordance with SFAS No. 128, Earnings per
Share. Basic earnings per share is computed by dividing net income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution of
securities by including other common stock equivalents, including stock options,
in the weighted average number of common shares outstanding for a period, if
dilutive.

Pro forma basic earnings per share are based upon the weighted average
number of common shares outstanding and the pro forma effect of the conversion
of all outstanding shares of Series A preferred stock into common stock (Note
8). Pro forma diluted earnings per share is based upon the weighted average
number of common and common equivalent shares for each period presented and the
pro forma effect of the conversion of all outstanding shares of Series A
preferred stock into common stock. Common equivalent shares include stock
options using the treasury stock method.

The table below sets forth the reconciliation of the numerators and
denominators of the earnings per share calculation:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Shares used in computing basic net income
per share.............................. 38,350 40,373 44,261 43,497 44,539
Dilutive effect of stock options......... -- -- 298 224 1,111
------- ------- ------- ------- -------
Shares used in computing diluted net
income per share....................... 38,350 40,373 44,559 43,721 45,650
======= ======= =======
Conversion of Series A Preferred Stock... 4,000 4,000
------- -------
Shares used in computing proforma basic
and diluted net income per share....... 48,559 49,650
======= =======
</TABLE>

Pro Forma Information -- The Company is preparing for an initial public
offering of its common stock which, upon completion, will result in the
conversion of all outstanding shares of Series A preferred stock issued in April
1999 into shares of common stock (Note 8). The accompanying pro forma
information, which is unaudited, gives effect to the conversion of all
outstanding shares of preferred stock into common stock immediately prior to the
closing of the offering and the repurchase of common stock

F-9
<PAGE> 77
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

by the Company from a shareholder described in Note 9. The excess of the
repurchase price of $35,000 over the original cost of the shares at March 31,
1999 has been recorded as a capital distribution in excess of the basis of such
common stock.

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

Risks and Uncertainties -- The Company is subject to risks and
uncertainties in the normal course of business including customer acceptance of
its products, rapid technological changes, delays in introducing and market
acceptance of new products, competition, e-business developments, the impact of
the year 2000, international expansion, ability to attract and retain qualified
personnel, ability to protect its intellectual property, and other matters
inherent in the software industry.

NEW ACCOUNTING PRONOUNCEMENTS:

For the year ended December 31, 1998, the Company adopted SFAS No. 130,
Reporting Comprehensive Income. There was no difference between the net income
and the comprehensive net income for the years ended December 31, 1996, 1997 and
1998 and the three months ended March 31, 1998 and 1999.

The Company has adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. In accordance with SFAS No. 131, the Company
has disclosed in Note 7 certain information about operating segments and certain
information about the Company's revenue types, geographic areas to which the
Company sells its products, and major customers.

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which the Company is required to adopt
effective in its fiscal year 2000. SFAS No. 133 will require the Company to
record all derivatives on the balance sheet at fair value. The Company does not
currently engage in hedging activities but will continue to evaluate the effects
of adopting SFAS No. 133.

2. ACQUISITIONS

On March 1, 1996, the Company acquired the net assets of R*Tech Systems,
Inc. (R*Tech) pursuant to a merger agreement. The Company agreed to pay $650
cash and issued 1,950 shares of the Company's common stock, valued at $777, in
exchange for 100% of R*Tech's common stock. At the closing date, $520 cash was
paid to the seller, with the remaining $130 withheld by the Company to be paid
one year after the closing date, provided that the seller performed certain
obligations under the indemnification provisions in the agreement. In March 1997
approximately $96 was paid to the seller as final consideration for the
acquisition. The acquisition was accounted for under the purchase method of
accounting and the purchase was allocated $1,386 to technology rights based upon
the estimated fair values at the date of acquisition, $75 to other assets
acquired and $34 to liabilities assumed. R*Tech's operating results have been
included in the Company's consolidated financial statements from the date of
acquisition.

On April 12, 1996, through a majority-owned subsidiary in the United
Kingdom, the Company acquired certain net assets of System Software
International Limited (SSI). The acquisition was accounted for under the
purchase method of accounting and the purchase price of approximately $119 was
allocated to net assets of $30 and goodwill of $89. At December 31, 1996,
expected future undiscounted cash flows from SSI did not support the
recoverability of the goodwill resulting in the write-off of the remaining
unamortized balance. In March 1997 the Company elected to discontinue funding
the
F-10
<PAGE> 78
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

subsidiary, and in July 1997 commenced liquidation proceedings. At December 31,
1998 and March 31, 1999, the subsidiary was not conducting operations and the
liquidation process was not completed. The Company does not expect to incur a
material loss as a result of the liquidation of the subsidiary.

On May 1, 1997, the Company entered into an agreement to acquire the net
assets of Common Sense Computing Pty. Ltd. (CSC) for 663 shares of the Company's
common stock. At the closing date, 597 shares valued at $413 were issued to the
seller, with the remaining 66 shares to be issued in June 1998, provided that
the seller performed certain obligations under the indemnification provisions in
the agreement. The acquisition was accounted for under the purchase method of
accounting and the purchase price was allocated $320 to technology rights based
upon the estimated fair value at the date of acquisition $53 to property, plant
and equipment, $100 to cash and $60 to liabilities assumed. CSC's operating
results have been included in the Company's financial statements from the date
of acquisition. On June 15, 1998, the remaining 66 shares of common stock were
issued resulting in an allocation of an additional $66 to technology rights,
based on the fair market value of the Company's common stock at the time of
issuance.

3. RELATED-PARTY TRANSACTIONS

In 1994, the Company borrowed $32 from a shareholder for the purchase of
certain fixed assets. The note payable bears interest at 8.5% per annum, payable
monthly, and requires monthly principal and interest payments of $1 through
December 31, 1999. Approximately $8 and $7 were included in other accrued
expenses in the accompanying consolidated financial statements representing the
remaining outstanding note payable balance at December 31, 1998 and March 31,
1999, respectively.

During 1997 the Company received a note receivable from an officer of the
Company for the purchase of 3,900 shares of the Company's common stock at $.56
per share. The note receivable plus accrued interest is due April 2002 and bears
interest at 6.2%. The note receivable and accrued interest is secured by the
common stock.

During 1998, the Company received a note receivable from another officer of
the Company for the purchase of 975 shares of the Company's common stock at $.77
per share. The note receivable plus accrued interest is due April 2003 and bears
interest at 5.7%. Up to 25% of the unpaid principal and accrued interest may be
repaid in each year during the four-year term of the note. The Company has the
option to repurchase any shares at the original issuance price associated with
the unpaid principal balance if the officer ceases to be employed by the
Company. All of the outstanding unpaid principal and interest may be prepaid at
any time when the current Chief Executive Officer of the Company ceases to be
employed or immediately prior to a sale of substantially all of the assets of
the Company or a merger in which the Company is not the surviving entity. The
note receivable and accrued interest is secured by the common stock.

F-11
<PAGE> 79
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. INCOME TAXES

The provision for income taxes consists of the following for the years
ended December 31:

<TABLE>
<CAPTION>
1996 1997 1998
---- ------ ------
<S> <C> <C> <C>
Current:
Federal.......................................... $-- $1,359 $1,819
State............................................ 1 102 425
Foreign.......................................... -- -- 78
--- ------ ------
1 1,461 2,322
Deferred:
Federal.......................................... -- (360) (568)
State............................................ -- (79) (75)
Foreign.......................................... -- (85) (165)
--- ------ ------
-- (524) (808)
Change in valuation allowance...................... -- 85 165
--- ------ ------
Total income tax provision......................... $ 1 $1,022 $1,679
=== ====== ======
</TABLE>

The reconciliation of income tax expense computed at U.S. federal statutory
rates to income tax expense for the years ended December 31, 1997 and 1998, is
as follows:

<TABLE>
<CAPTION>
1997 1998
----- ----
<S> <C> <C>
Tax at U.S. federal statutory rates......................... 35.0% 35.0%
State taxes................................................. 2.0 5.7
Recording of deferred income tax liabilities in connection
with the conversion to a C corporation.................... 45.2 --
Foreign losses without benefit.............................. 6.2 6.0
Research and development credits............................ (10.4) (4.6)
Other....................................................... -- (0.4)
----- ----
78.0% 41.7%
===== ====
</TABLE>

Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax

F-12
<PAGE> 80
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

purposes. Significant components of the Company's deferred taxes as of December
31, 1997 and 1998, are as follows:

<TABLE>
<CAPTION>
1997 1998
----- ------
<S> <C> <C>
Deferred tax assets:
Accounts receivable and sales returns reserves........... $ 249 $ 313
Accrued liabilities...................................... 72 165
Research and development credits......................... 64 --
Foreign net operating loss carryforwards................. 134 250
Intangible assets........................................ (172) 264
Other.................................................... -- 56
----- ------
Total gross deferred assets................................ 347 1,048
Deferred tax liabilities:
Cash to accrual adjustment............................... (440) (301)
State taxes.............................................. -- (32)
----- ------
Total gross deferred liabilities........................... (440) (333)
Valuation allowance........................................ (85) (250)
----- ------
Net deferred income taxes.................................. $(178) $ 465
===== ======
Less current portion....................................... 60 (198)
----- ------
$(118) $ 267
===== ======
</TABLE>

The Company has foreign net operating loss carryforwards of approximately
$735 which will reduce foreign income tax expense when realized.

Prior to January 1, 1997, the Company elected to be treated as an S
corporation under the provisions of subchapter S of the Internal Revenue Code
and California Revenue and Taxation Code. Accordingly, the provisions for income
taxes for the year ended December 31, 1996, are computed by applying the
California franchise tax rate for S corporations of 1.5%. Effective January 1,
1997, the Company converted to a C corporation and became subject to regular
federal and state income taxes on an ongoing basis. As a result, the Company
recorded $617 of net deferred income tax liabilities on January 1, 1997.

Total cash distributions charged against retained earnings include payments
of $1,360 and $261 in 1996 and 1997, respectively, made to the Company's
shareholders.

5. STOCK OPTION PLANS

The Company entered into an agreement with a key employee in July 1995
under which options to purchase common stock were to be granted for up to 5% of
the Company's common stock upon the attainment of certain growth levels in net
sales and net income through fiscal year 1998. The employee was terminated in
June 1997 and all outstanding options were canceled.

In connection with the acquisition of R*Tech (Note 2), the Company entered
into an employment agreement with the president of R*Tech under which options to
purchase up to 2.5% of the Company's outstanding common stock at $0.77 per share
were granted. The agreement provided for issuance of additional common shares to
the individual in the event the Company issued common shares to employees,
subject to limitations as defined in the agreement. In connection with the
issuance of 975 shares of common stock to this individual in 1998 (Note 3), the
option was cancelled.

F-13
<PAGE> 81
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In May 1998, the Company adopted the 1998 Stock Option/Stock Issuance Plan
(the Plan). Under the terms of the Plan, options to purchase 7,500 shares of the
Company's common stock were reserved for issuance to employees, directors, and
consultants.

1999 STOCK INCENTIVE PLAN

The 1999 Stock Incentive Plan is intended to serve as the successor equity
incentive program to the 1998 Stock Option/Stock Issuance Plan. The 1999 Stock
Incentive Plan was adopted by the board and subsequently approved by the
shareholders in June 1999 and will become effective upon the effective date of
the Company's initial public offering. At that time, all outstanding options
under the 1998 plan will be incorporated into the 1999 Stock Incentive Plan, and
no further option grants will be made under the 1998 plan. The incorporated
options will continue to be governed by their existing terms, unless the plan
administrator elects to extend one or more features of the 1999 Incentive Plan
to those options. Except as otherwise noted below, the incorporated options have
substantially the same terms as will be in effect for grants made under the
Discretionary Option Grant Program of the 1999 Stock Incentive Plan.

Share Reserve. 7,499 shares of common stock have been authorized for
issuance under the 1999 Stock Incentive Plan. The share reserve consists of the
number of shares that remain available for issuance under the 1998 plan and
shares of common stock subject to outstanding options thereunder. No participant
in the 1999 Stock Incentive Plan may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances for more than
500,000 shares of common stock in total per calendar year.

Programs. The 1999 Stock Incentive Plan is divided into five separate
programs:

- the discretionary option grant program under which eligible individuals
may be granted options to purchase shares of common stock at an exercise
price not less than 100% of the fair market value of those shares on the
grant date;

- the stock issuance program under which individuals may be issued shares
of common stock directly, through the purchase of such shares at a price
not less than 100% of their fair market value at the time of issuance or
as a bonus tied to the performance of services;

Administration. The discretionary option grant program and the stock
issuance program will be administered by the compensation committee of the board
of directors.

Plan Features. The 1999 Stock Incentive Plan will include the following
features:

F-14
<PAGE> 82
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- Stock appreciation rights may be issued under the discretionary option
grant program. Such rights will provide the holders with the election to
surrender their outstanding options for an appreciation distribution from
the Company equal to the fair market value of the vested shares of common
stock subject to the surrendered option less the exercise price payable
for those shares. Payment can be made in cash or in shares of common
stock.

Change in Control. The 1999 Stock Incentive Plan includes the following
change in control provisions which may result in the accelerated vesting of
outstanding option grants and stock issuances:

- In the event that the Company is acquired by merger or asset sale or a
board-approved sale of more than fifty percent of the then outstanding
stock, each outstanding option under the discretionary option grant
program which is not assumed or continued by the successor corporation
will immediately become exercisable for all the option shares, and all
unvested shares will immediately vest, except to the extent the Company's
repurchase rights with respect to those shares are assigned to the
successor corporation.

- The plan administrator will have complete discretion to grant one or more
options which will become exercisable for all the option shares in the
event those options are assumed in an acquisition but the optionee's
service with the Company or the acquiring entity is subsequently
terminated. The vesting of outstanding shares under the Stock Incentive
Plan may be accelerated upon similar terms and conditions.

- The plan administrator may also grant options which will immediately vest
upon our acquisition by another entity, whether or not those options are
assumed by the successor corporation.

F-15
<PAGE> 83
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Automatic Option Grant Program. Each individual who first becomes a
non-employee board member at any time after the completion of this offering will
automatically receive an option grant for 25,000 shares on the date such
individual joins the board, provided such individual has not been in the prior
employ of the Company. In addition, on the date of each annual shareholders
meeting held after the completion of this offering, each non-employee board
member who is to continue to serve as a non-employee board member will
automatically be granted an option to purchase 7,500 shares of common stock,
provided such individual has served on the board for at least six months.

Director Fee Option Grant Program. If this program is put into effect,
then each non-employee board member may elect to apply all or a portion of any
annual retainer fee otherwise payable in cash to the acquisition of a
below-market option grant. The option grant will automatically be made on the
first trading day in January in the year for which the retainer fee would
otherwise be payable in cash. The option will have an exercise price per share
equal to one-third of the fair market value of the option shares on the grant
date, and the number of shares subject to the option will be determined by
dividing the amount of the retainer fee applied to the program by two-thirds of
the fair market value per share of common stock on the grant date. As a result,
the option will be structured so that the fair market value of the option shares
on the grant date less the aggregate exercise price payable for those shares
will be equal to the portion of the retainer fee invested in that option. The
option will become exercisable in a series of twelve (12) equal monthly
installments over the calendar year for which the election is to be in effect.
However, the option will become immediately exercisable for all the option
shares upon certain changes in the ownership or control or the death or
disability of the optionee while serving as a board member.

Limited Stock Appreciation Rights. Limited stock appreciation rights will
automatically be included as part of each grant made under the automatic option
grant, salary investment option grant and director fee option grant programs and
may be granted to one or more of our officers as part of their option grants
under the discretionary option grant program. Options with such a limited stock
appreciation right may be surrendered to the Company upon the successful
completion of a hostile tender offer for more than 50% of the Company's
outstanding voting stock. In return for the surrendered option, the optionee
will be entitled to a cash distribution from us in an amount per surrendered
option share based on the highest price per share of common stock paid in
connection with the tender offer.

1999 EMPLOYEE STOCK PURCHASE PLAN

Introduction. The 1999 Employee Stock Purchase Plan was adopted by the
board and approved by the shareholders in June 1999 and will become effective
immediately upon the effective date of the Company's initial public offering.
The 1999 Employee Stock Purchase Plan is designed to allow eligible

F-16
<PAGE> 84
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

employees and the employees of participating subsidiaries to purchase shares of
common stock, at semi-annual intervals, through their periodic payroll
deductions.

Share Reserve. 600,000 shares of common stock will initially be reserved
for issuance.

Purchase Periods. The plan will have a series of successive purchase
periods, each with a maximum duration for six months. The initial purchase
period will begin on the date of the underwriting agreement for this offering
covered by this prospectus is signed and will end on the last business day in
2000. Thereafter, purchase periods will run for the first business day in
February to the last business day in July each year, and for the first business
day in August to the last business day in January of the following year.

Payroll Deductions. A participant may contribute up to 15% of their cash
earnings, and the accumulated payroll deductions will be applied to the purchase
of shares on each semi-annual purchase date. The purchase price per share will
be equal to 85% the fair market value of the common stock on the start date of
the purchase period or, if lower, the fair market value on the semi-annual
purchase date. Semi-annual purchase dates will occur on the last business day of
January and July each year. In no event, however, may any participant purchase
more than 600 shares on any semi-annual purchase date.

In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. As permitted by SFAS No. 123, the Company has chosen to continue
to account for its stock-based compensation plans under APB Opinion No. 25 and
provide the expanded disclosures specified in SFAS No. 123.

Compensation costs would not have significantly changed net income or net
income per share in fiscal 1996 and 1997. Had compensation cost been determined
using the provisions of SFAS No. 123, the Company's net income would have been
decreased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ---------
<S> <C> <C>
Net income:
As reported............................................... $2,346 $ 883
====== =====
Pro forma................................................. $2,177 $ 725
====== =====
Basic and diluted net income per share:
As reported............................................... $ 0.05 $0.02
====== =====
Pro forma................................................. $ 0.05 $0.01
====== =====
</TABLE>

F-17
<PAGE> 85
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For purposes of estimating the compensation cost of the Company's option
grants in accordance with SFAS No. 123, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model,
with the following weighted average assumptions used for grants in the years
1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999: expected
volatility of zero; risk-free interest rates of 6%; and expected lives of ten
years.

A summary of the status of the Plans is presented below:

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------------------------------------- -------------------------------------
1996 1997 1998 1998 1999
----------------- ----------------- ----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
period.................. 556 $0.40 1,531 $0.64 975 $0.77 975 $0.77 3,367 $1.19
Granted................... 975 $0.77 -- $ -- 3,383 $1.19 -- $ -- 797 $2.37
Exercised................. -- $ -- -- $ -- -- $ -- -- $ -- (2) $1.00
Canceled.................. -- $ -- (556) $0.40 (991) $0.77 -- $ -- (32) $1.10
----- ----- ----- --- -----
Balance, end of period.... 1,531 $0.64 975 $0.77 3,367 $1.19 975 $0.77 4,130 $1.42
Weighted average fair
value of options granted
during the year......... $0.00 -- $0.53 -- $1.09
===== ===== ===== ===== =====
</TABLE>

The following tables summarize information about stock options outstanding
as of December 31, 1998 and March 31, 1999:

<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.00 -- 1.15........................... 2,271 9.5 $1.00 12 $1.00
1.16 -- 2.00........................... 713 9.8 1.17 -- --
2.01 -- 2.37........................... 383 9.9 2.37 -- --
----- --
3,367 12
===== ==
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1999
-------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.00 -- 1.15........................... 2,250 9.3 $1.00 239 $1.00
1.16 -- 2.00........................... 701 9.5 1.17 -- --
2.00 -- 2.37........................... 1,179 9.7 2.37 -- --
----- ---
4,130 239
===== ===
</TABLE>

From April 1, 1999 to June 4, 1999, the Company issued options to purchase
448 shares of common stock at $3.77 per share and options to purchase 1.5 shares
of common stock at $1.00 per share were exercised.

F-18
<PAGE> 86
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. COMMITMENTS AND CONTINGENCIES

The Company leases its office facilities and certain equipment under
various operating leases. Total rent expense was $456, $732, $1,038, $159, and
$280, for the years ended December 31, 1997, 1998, and 1999, and the three
months ended March 31, 1998 and 1999, respectively.

Minimum lease commitments under noncancelable operating leases at December
31, 1998, are as follows:

<TABLE>
<S> <C>
Year ending December 31:
1999.............................................. $1,107
2000.............................................. 683
2001.............................................. 79
2002.............................................. 20
------
$1,889
======
</TABLE>

The Company maintains a profit-sharing plan covering substantially all
employees. Quarterly contributions may be made by the Company based upon
employee salaries. The Company did not contribute to the plan for the year ended
December 31, 1996. Effective January 1, 1997, the Company amended and restated
the profit sharing plan to include a 401(k) plan. The Company contributed $134,
$466, $92, and $255 to the amended plan for the years ended December 31, 1997
and 1998 and the three months ended March 31, 1998 and 1999, respectively.

On May 25, 1999, Mobius Management Systems, Inc., filed a complaint in the
United States District Court for the District of New Jersey (Mobius Management
Systems, Inc. v. Quest Software, Inc., Case No. 99-2337). The complaint alleges
that the Company published three advertisements that were false and misleading
and therefore in violation of the Lanham Act and common law, and that the
Company misappropriated unspecified trade secrets belonging to Mobius. The
complaint seeks injunctive relief and unspecified damages. No factual basis was
set forth in the complaint in support of Mobius' misappropriation of trade
secrets claim. The Company intends to defend this action vigorously, and, based
on the complaint and the facts underlying the complaint of which the Company is
currently aware, the Company does not believe that this lawsuit will have a
material adverse effect on its business, results of operations or financial
position; however, it is too early to determine the ultimate outcome of the
lawsuit.

The Company is involved in other various claims and legal actions arising
in the ordinary course of business. The litigation process is inherently
uncertain and it is possible that the resolution of such claims and legal
actions may adversely affect the Company. However, it is the opinion of
management, upon the advice of legal counsel, that the ultimate disposition of
these matters will not materially affect the Company's results of operations or
financial position.

7. GEOGRAPHIC INFORMATION AND CONCENTRATION OF CREDIT RISK

Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
Company's chief operating decision maker, or decision making group, in deciding
how to allocate resources and in assessing performance. The operating segments
of the Company are managed separately because each segment represents a
strategic business unit that offers different products or services.

The Company's reportable operating segments include Licenses and Services.
The Software Licenses operating segment develops and markets the Company's
software products. The Services segment provides after-sale support for software
products and fee-based training and consulting services related to the Company's
products.

F-19
<PAGE> 87
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company does not separately allocate operating expenses to these
segments, nor does it allocate specific assets to these segments. Therefore,
segment information reported includes only revenues, cost of sales and gross
profit.

Operating segment data for the three years in the period ended December 31,
1998 and the three months ended March 31, 1998 and 1999 was as follows:

<TABLE>
<CAPTION>
LICENSES SERVICES TOTAL
-------- -------- -------
<S> <C> <C> <C>
Year ended December 31, 1996:
Revenues.................................................. $ 9,316 $ 3,546 $12,862
Cost of revenues.......................................... 950 1,467 2,417
------- ------- -------
Gross profit........................................... $ 8,366 $ 2,079 $10,445
======= ======= =======
Year ended December 31, 1997:
Revenues.................................................. $12,195 $ 6,120 $18,315
Cost of revenues.......................................... 1,307 1,972 3,279
------- ------- -------
Gross profit........................................... $10,888 $ 4,148 $15,036
======= ======= =======
Year ended December 31, 1998:
Revenues.................................................. $24,901 $ 9,889 $34,790
Cost of revenues.......................................... 3,433 2,507 5,940
------- ------- -------
Gross profit........................................... $21,468 $ 7,382 $28,850
======= ======= =======
Three months ended March 31, 1998:
Revenues.................................................. $ 4,840 $ 2,203 $ 7,043
Cost of revenues.......................................... 557 521 1,078
------- ------- -------
Gross profit........................................... $ 4,283 $ 1,682 $ 5,965
======= ======= =======

Three months ended March 31, 1999:
Revenues.................................................. $ 9,540 $ 3,274 $12,814
Cost of revenues.......................................... 660 904 1,564
------- ------- -------
Gross profit........................................... $ 8,880 $ 2,370 $11,250
======= ======= =======
</TABLE>

F-20
<PAGE> 88
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenues are attributed to geographic areas based on the location of the
entity to which the products or services were sold. Revenues, gross profit,
income (loss) from operations and assets concerning principal geographic areas
in which the Company operates are as follows:

<TABLE>
<CAPTION>
NORTH
AMERICA INTERNATIONAL ELIMINATIONS TOTAL
------- ------------- ------------ -------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Revenues..................................... $11,687 $1,136 $ 39 $12,862
Gross profit................................. 9,435 971 39 10,445
Loss from operations......................... (396) (266) 290 (372)
Assets....................................... 6,165 451 (208) 6,408

Year ended December 31, 1997:
Revenues..................................... $17,511 $1,261 $ (457) $18,315
Gross profit................................. 14,413 1,075 (452) 15,036
Income (loss) from operations................ 1,533 (339) 254 1,448
Assets....................................... 9,431 1,118 (836) 9,713

Year ended December 31, 1998:
Revenues..................................... $32,189 $4,172 $(1,571) $34,790
Gross profit................................. 26,594 3,840 (1,584) 28,850
Income (loss) from operations................ 3,839 (252) 102 3,689
Assets....................................... 16,352 3,914 (621) 19,645

Three months ended March 31, 1998:
Revenues..................................... $ 6,664 $ 593 $ (214) $ 7,043
Gross profit................................. 5,632 512 (179) 5,965
Income (loss) from operations................ 1,477 (7) (35) 1,435
Assets....................................... 10,483 1,411 (660) 11,234

Three months ended March 31, 1999:
Revenues..................................... $11,461 $1,780 $ (427) $12,814
Gross profit................................. 9,993 1,688 (431) 11,250
Income (loss) from operations................ 1,193 115 108 1,416
Assets....................................... 18,409 4,567 (504) 22,472
</TABLE>

During the year ended December 31, 1996, sales to a single customer
accounted for approximately 12.0% of total revenue for the year. In fiscal 1997
and 1998 and the three months ended March 31, 1998 and 1999, no single customer
accounted for 10% or more of total revenue.

8. SUBSEQUENT EVENT

On April 1999, the Company repurchased and cancelled 14,820 shares of
common stock from a shareholder of the Company at a price of $2.36 per share.
The Company also entered into a severance agreement with the shareholder whereby
the shareholder will receive $200 per year through 2001 and provides for use of
a company car and related expenses and medical benefits. Such costs have been
recorded in April 1999.

In April 1999, the Company issued 2,667 shares of Series A Preferred Stock
(Series A) for $15,000 and 1,778 shares of Series B Redeemable Preferred stock
(Series B) for $10,000. Additionally, the Company borrowed $10,000 under a term
note with a bank. The borrowings under the term note are secured by
substantially all assets of the Company, bears interest, at the Company's
option, at either the

F-21
<PAGE> 89
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

bank's prime rate or at the LIBOR rate plus a maximum of 2.75% per annum,
requires monthly interest payments commencing June 1, 1999, and principal is
payable in 24 monthly installments of $417 commencing June 1, 2000. All unpaid
principal and interest is due on May 1, 2002. The loan contains covenants
relating to certain financial statement amounts related to tangible net worth,
cash flow from operations and a debt to cash flow from operations and quick
ratios.

Series A shares are convertible at the holder's option into shares of
common stock, based on the conversion ratio defined in the agreement. The
conversion ratio may be adjusted from time to time in the event of certain
diluting events, as defined. Conversion is automatic in the event of a public
offering of the Company's common stock, that meets certain specified criteria
initially at a rate of 1.5 shares of common stock for each share of preferred
stock. Additionally, the holders of not less than a majority of the Series A
shares have the right to redeem the Series A shares for cash in two equal
installments due on April 30, 2006 and 2007, respectively. The redemption price
is determined on each date by the then-applicable liquidation preference. Upon
the election of not less than a majority of the Series A holders to redeem the
Series A shares, all Series A shares will be redeemed. Dividends on Series A are
cumulative and the dividend rate is 8% per share per annum. Series A
shareholders have the right to elect one director and have veto rights over
certain management decisions. In the event of liquidation, dissolution or
winding up of the Company, each Series A shareholder has a liquidation
preference equal to $5.625 per share, plus an amount equal to all accrued but
unpaid dividends, with respect to such shares plus an amount equal to a prorated
dividend from the last dividend payment date to the date fixed for liquidation,
dissolution, or winding up.

Series B shares are convertible into shares of Series A shares one year
after the issuance of the Series B shares at the holder's option based on the
ratio defined in the agreement. If the Series A shares have not been converted
into common stock, Series B shares are convertible into shares of Series A
preferred stock at the Company's option prior to the one year anniversary of the
date of issuance of the Series B shares. The conversion ratio may be adjusted
from time to time in the event of certain diluting events, as defined. Dividends
on Series B are cumulative and may be declared at the discretion of the Board of
Directors. The dividend rate is 18% per share per annum. Series B shareholders
do not have voting rights with the exception of the redemption provisions
discussed below. In the event of liquidation, dissolution or winding up of the
Company, each Series B shareholder has a liquidation preference equal to $5.625
per share, plus an amount equal to all accrued but unpaid dividends, with
respect to such shares plus an amount equal to a prorated dividend from the last
dividend payment date to the date fixed for liquidation, dissolution, or winding
up. Additionally, the holders of the Series B shares and the Company have the
right to redeem the Series B shares for cash at any time one year following the
issuance of the Series B shares, or, if earlier, upon consummation of an initial
public offering. The redemption price is determined on the redemption date by
the then applicable liquidation preference.

* * * * * *

F-22
<PAGE> 90

Inside Back Cover

[Background consists of the names of certain Quest customers]

The 24x7 "instant on", "zero latency," "webified" enterprise becomes the
standard. Computing infrastructure availability becomes the most important
success measure.

Between 1998 and 2004, continuous restructuring of markets, value chains and
enterprises will drive a 500% increase in the demand for rapid development and
modification of information technology application and infrastructure.

Traditionally, availability investments were made only for high-end OLTP
applications. With expansion of business critical applications and data, high
availability has gone from niche to mainstream.

Market analysis excerpts from Gartner Group, Stamford, Connecticut.
<PAGE> 91

[QUEST SOFTWARE LOGO]
<PAGE> 92

SUBJECT TO COMPLETION, DATED JUNE 11, 1999

[QUEST SOFTWARE LOGO]

COMMON STOCK

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

INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
----------------------------------

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

BANCBOSTON ROBERTSON STEPHENS INTERNATIONAL LIMITED
DONALDSON, LUFKIN & JENRETTE
CIBC WORLD MARKETS
FAC/EQUITIES

THE DATE OF THIS PROSPECTUS IS , 1999.
<PAGE> 93

UNDERWRITING

The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens International Limited, Donaldson, Lufkin &
Jenrette Securities Corporation, CIBC World Markets Corp. and FAC/Equities, a
division of First Albany Corporation (the "Representatives"), have severally
agreed with us, subject to the terms and conditions set forth in the
underwriting agreement, to purchase from us the number of shares of common stock
set forth opposite their names below. The underwriters are committed to purchase
and pay for all such shares if any are purchased.

<TABLE>
<CAPTION>
INTERNATIONAL UNDERWRITER
- -------------------------
<S> <C>
BancBoston Robertson Stephens International Limited.........
Donaldson, Lufkin & Jenrette International..................
CIBC World Markets International Limited....................
--------
Total.............................................
========
</TABLE>

The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.

Over-Allotment Option

Indemnity

63
<PAGE> 94

Lock-Up Agreements

Each of our executive officers, directors and shareholders and
substantially all of optionholders have agreed with the Representatives, for a
period of 180 days after the date of this prospectus, subject to certain
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to any shares of common stock,
any options or warrants to purchase any shares of common stock, or any
securities convertible into or exchangeable for shares of common stock owned as
of the date of this prospectus or, with certain exceptions, thereafter acquired
directly by such holders or with respect to which they have or hereafter acquire
the power of disposition, without the prior written consent of BancBoston
Robertson Stephens International Limited. However, BancBoston Robertson Stephens
International Limited may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to the lock-up
agreements. There are no agreements between the Representatives and any of our
shareholders providing consent by the Representatives to the sale of shares
prior to the expiration of the period of 180 days after this prospectus.

Future Sales

In addition, we have agreed that during the period of 180 days after this
prospectus, we will not, subject to certain exceptions, without the prior
written consent of BancBoston Robertson Stephens International Limited:

- Consent to the disposition of any shares held by shareholders prior to
the expiration of the period of 180 days after this prospectus; or

No Prior Public Market

Stabilization

64
<PAGE> 95

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fees.

<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 16,680
NASD Filing Fee............................................. 6,500
Nasdaq National Market Listing Fee.......................... *
Printing and Engraving Expenses............................. *
Legal Fees and Expenses..................................... *
Accounting Fees and Expenses................................ *
Blue Sky Fees and Expenses.................................. *
Transfer Agent Fees......................................... *
Miscellaneous............................................... *
--------
Total............................................. $ *
========
</TABLE>

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

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Registrant's Amended and Restated Articles of Incorporation limit the
personal liability of its directors for monetary damages to the fullest extent
permitted by the California General Corporation Law (the "California Law").
Under the California Law, a director's liability to a company or its
shareholders may not be limited (1) for acts or omissions that involve
intentional misconduct or a knowing and culpable violation of law, (2) for acts
or omissions that a director believes to be contrary to the best interest of the
Registrant or its shareholders or that involve the absence of good faith on the
part of the director, (3) for any transaction from which a director derived an
improper personal benefit, (4) for acts or omissions that show a reckless
disregard for the director's duty to the Registrant or its shareholders in
circumstances in which the director was aware, or should have been aware, in the
ordinary course of performing a director's duties, of a risk of a serious injury
to the Registrant or its shareholders, (5) for acts or omissions that constitute
an unexcused pattern of inattention that amounts to an abdication of the
director's duty to the Registrant or its shareholders, (6) under Section 310 of
the California Law concerning contacts or transactions between the Registrant
and a director, or (7) under Section 316 of the California Law concerning
directors' liability for improper dividends, loans and guarantees. The
limitation of liability does not affect the availability of injunctions and
other equitable remedies available to the Registrant's shareholders for any
violation by a director of the director's fiduciary duty to the Registrant or
its shareholders.

The Registrant's Articles of Incorporation also include an authorization
for the Registrant to indemnify its "agents" (as defined in Section 317 of the
California Law), through bylaw provisions, by agreement or otherwise, to the
fullest extent permitted by law. Pursuant to this provision, the Registrant's
Bylaws provide for indemnification of the Registrant's directors, officers and
employees. In addition, the Registrant, at its discretion, may provide
indemnification to persons whom the Registrant is not obligated to indemnify.
The Bylaws also allow the Registrant to enter into indemnity agreements with
individual directors, officers, employees and other agents. These indemnity
agreements have been entered into with all directors and executive officers and
provide the maximum indemnification permitted by law. These agreements, together
with the Registrant's Bylaws and Articles of Incorporation, may require the
Registrant, among other things, to indemnify these directors or executive
officers (other than for liability resulting from willful misconduct of a
culpable nature), to advance expenses to them as they are incurred,
II-1
<PAGE> 96

provided that they undertake to repay the amount advanced if it is ultimately
determined by a court that they are not entitled to indemnification, and to
obtain directors' and officers' insurance if available on reasonable terms.
Section 317 of the California Law and the Registrant's Bylaws make provision for
the indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons, under certain circumstances, for
liabilities (including reimbursement of expense incurred) arising under the
Securities Act. The Registrant currently maintains directors' and officers'
liability insurance.

There is no pending litigation or proceeding involving any director,
officer, employee or agent of the Registrant in which indemnification will be
required or permitted. Moreover, the Registrant is not aware of any threatened
litigation or proceeding that might result in a claim for such indemnification.
The Registrant believes that the foregoing indemnification provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers. The Underwriting Agreement (the form of which is filed
as Exhibit 1.1 hereto) provides for indemnification by the Underwriters of the
Registrant and its officers and directors, and by the Registrant of the
Underwriters, for certain liabilities arising under the Securities Act or
otherwise.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

During the past three years, the Registrant has issued unregistered
securities to a limited number of persons as described below:

1. In March 1996, the Registrant issued 1,950,000 shares of common stock
to Eyal M. Aronoff in connection with the Registrant's purchase of
R*Tech Systems, Inc.

2. In May 1997, the Registrant issued 663,000 shares of common stock to
the former shareholders of Common Sense Computing Pty. Ltd. in
connection with the Registrant's acquisition of Common Sense Computing.

3. In October 1997, the Registrant sold to Vincent C. Smith, the
Registrant's Chief Executive Officer, 3,900,000 shares of common stock
for aggregate consideration of $2,200,000. Mr. Smith executed a
promissory note for the purchase price. This note has a term of five
years and bears interest at 6.2%. This note is also secured, in part,
by the 3,900,000 shares of common stock purchased from the Registrant.

4. In April 1998, the Registrant sold an aggregate of 975,000 shares of
common stock for an aggregate purchase price of $750,000, for which Mr.
Aronoff executed a promissory note and agreed to cancel an option to
purchase up to 2.5% of the outstanding capital stock of the Registrant.
The note has a term of four years, bears interest at the rate of 5.7%
per annum, and up to 25% of the original principal amount of the note
may be prepaid in each year of the four-year term.

5. In April 1999, the Registrant sold an aggregate of 888,889 shares of
its Series A Preferred Stock at a price of $5.625 per share to InSight
Capital Partners II, L.P. and InSight Capital Partners (Cayman) II,
L.P. Each share of Series A Preferred Stock will convert into one and
one-half shares of common stock upon the closing of this offering.

6. In April 1999, the Registrant sold an aggregate of 800,000 shares of
its Series A Preferred Stock at a price of $5.625 per share to WI
Software Investors LLC. Each share of Series A Preferred Stock will
convert into one and one-half shares of common stock upon the closing
of this offering.

7. In April 1999, the Registrant sold an aggregate of 977,778 shares of
its Series A Preferred Stock and 1,777,778 shares of its Series B
Redeemable Preferred Stock, each at a price of $5.625 per share, to UBS
Capital LLC. Each share of Series A Preferred Stock will convert into
one and one-half shares of common stock and each share of Series B
Preferred Stock will be redeemed upon the closing of this offering.

II-2
<PAGE> 97

8. Since June, 1998, the Registrant has granted stock options to purchase
common stock under individual stock option agreements and the 1998
Stock Option/Stock Issuance Plan to eligible officers, directors,
consultants and employees of the Registrant as described in the
prospectus.

None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and the Registrant believes
that each transaction was exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated
thereunder or Rule 701 pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients in such
transaction represented their intention to acquire the securities for investment
only and not with a view to or for sale in connection with any distribution
thereof, and appropriate legends were affixed to the share certificates and
instruments issued in such transactions. All recipients had adequate access,
through their relationships with the Registrant, to information about the
Registrant.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Second Amended and Restated Articles of Incorporation.
3.2* Second Amended and Restated Bylaws.
4.1* Form of Registrant's Specimen Common Stock Certificate.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1* Registrant's 1998 Stock Option/Stock Issuance Plan.
10.2* Registrant's 1999 Stock Incentive Plan.
10.3* Registrant's 1999 Employee Stock Purchase Plan.
10.4 Form of Directors' and Officers' Indemnification Agreement.
10.5 Securities Purchase Agreement, dated as of April 21, 1999,
by and among Quest Software, Inc. and InSight Capital
Partners II, L.P., InSight Capital Partners (Cayman) II,
L.P., UBS Capital LLC, and WI Software Investors LLC.
10.6 Investors' Rights Agreement dated as of April 21, 1999 among
Quest Software, Inc. and InSight Capital Partners II, L.P.,
InSight Capital Partners (Cayman) II, L.P., UBS Capital LLC,
and WI Software Investors LLC.
10.7* Agreement, dated February 19, 1999, between Quest Software,
Inc. and INSO.
10.8* OEM Agreement, dated March 3, 1998, by and between Quest
Software, Inc. and Artifex Software Inc.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2* Consent of Brobeck, Phleger & Harrison LLP (Included in
Exhibit 5.1 hereto).
24.1 Power of Attorney (Included on signature pages hereto).
27.1 Financial Data Schedule (In EDGAR format only).
</TABLE>

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

(B) FINANCIAL STATEMENT SCHEDULE

II-3
<PAGE> 98

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNT

<TABLE>
<CAPTION>
BALANCE AT CHARGES, BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts and sales
returns......................................... $129 $ 417 $ -- $ 546
Year ended December 31, 1997:
Allowance for doubtful accounts and sales
returns......................................... $546 $ 584 $(347) $ 783
Year ended December 31, 1998:
Allowance for doubtful accounts and sales
returns......................................... $783 $1,116 $(847) $1,052
</TABLE>

ITEM 17. UNDERTAKINGS

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

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

The undersigned Registrant hereby undertakes:

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

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

II-4
<PAGE> 99

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Newport Beach, State of California, on this 11th day
of June, 1999.

QUEST SOFTWARE, INC.

By: /s/ VINCENT C. SMITH
------------------------------------
Vincent C. Smith
Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints, jointly and severally, Vincent C. Smith,
David M. Doyle and John J. Laskey, and each one of them, his true and lawful
attorneys-in-fact and agents, each with full power of substitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and to sign any registration statement for the same offering covered by this
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) promulgated under the Securities Act of 1933, as amended, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming that each of said attorneys-in-fact and agents or any of them, or his
or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.

IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the persons whose signatures
appear below, which persons have signed such Registration Statement in the
capacities and on the dates indicated:

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

/s/ VINCENT C. SMITH Chief Executive Officer (principal June 11, 1999
- --------------------------------------------------- executive officer) and Chairman
Vincent C. Smith of the Board

/s/ DAVID M. DOYLE President, Secretary and Director June 11, 1999
- ---------------------------------------------------
David M. Doyle

/s/ JOHN J. LASKEY Chief Financial Officer (principal June 11, 1999
- --------------------------------------------------- financial and accounting officer)
John J. Laskey and Vice President, Finance

/s/ DORAN G. MACHIN Director June 11, 1999
- ---------------------------------------------------
Doran G. Machin
</TABLE>
<PAGE> 100

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<C> <S> <C>
/s/ JERRY MURDOCK, JR. Director June 11, 1999
- ---------------------------------------------------
Jerry Murdock, Jr.

/s/ RAYMOND J. LANE Director June 11, 1999
- ---------------------------------------------------
Raymond J. Lane
</TABLE>
<PAGE> 101

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Second Amended and Restated Articles of Incorporation.
3.2* Second Amended and Restated Bylaws.
4.1* Form of Registrant's Specimen Common Stock Certificate.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1* Registrant's 1998 Stock Option/Stock Issuance Plan.
10.2* Registrant's 1999 Stock Incentive Plan.
10.3* Registrant's 1999 Employee Stock Purchase Plan.
10.4 Form of Directors' and Officers' Indemnification Agreement.
10.5 Securities Purchase Agreement, dated as of April 21, 1999,
by and among Quest Software, Inc. and InSight Capital
Partners II, L.P., InSight Capital Partners (Cayman) II,
L.P., UBS Capital LLC, and WI Software Investors LLC.
10.6 Investors' Rights Agreement dated as of April 21, 1999 among
Quest Software, Inc. and InSight Capital Partners II, L.P.,
InSight Capital Partners (Cayman) II, L.P., UBS Capital LLC,
and WI Software Investors LLC.
10.7* Agreement, dated February 19, 1999, between Quest Software,
Inc. and INSO.
10.8* OEM Agreement, dated March 3, 1998, by and between Quest
Software, Inc. and Artifex Software Inc.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2* Consent of Brobeck, Phleger & Harrison LLP (Included in
Exhibit 5.1 hereto).
24.1 Power of Attorney (Included on signature pages hereto).
27.1 Financial Data Schedule (In EDGAR format only).
</TABLE>

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

<PAGE> 1
EXHIBIT 10.4

INDEMNIFICATION AGREEMENT

THIS AGREEMENT (this "Agreement"), is made and entered into as of this
_____ day of ______________, 1999, between Quest Software, Inc., a California
corporation (the "Corporation"), and ____________________ ("Indemnitee").

WHEREAS, Indemnitee, as a member of the Board of Directors and/or an
officer of the Corporation, performs a valuable service in such capacity for the
Corporation;

WHEREAS, the Articles of Incorporation and Bylaws of the Corporation
authorize and permit contracts between the Corporation and a member of its Board
of Directors or officers with respect to indemnification of such individuals;

WHEREAS, in accordance with the authorization as provided by the
California General Corporation Law, as amended ("Code"), the Corporation may
purchase and maintain a policy or policies of Directors' and Officers' Liability
Insurance ("D & O Insurance"), covering certain liabilities which may be
incurred by Indemnitee in his or her performance as a director or officer of the
Corporation;

WHEREAS, as a result of developments affecting the terms, scope and
availability of D & O Insurance there exists general uncertainty as to the
extent of protection afforded members of the Board of Directors and officers of
the Corporation by such D & O Insurance and by statutory and bylaw
indemnification provisions; and

WHEREAS, in recognition of past services and in order to induce
Indemnitee to continue to serve as an officer and/or a director of the
Corporation, the Corporation has determined and agreed to enter into this
Agreement with Indemnitee.

NOW, THEREFORE, in consideration of Indemnitee's service as a director
and/or officer, the parties hereto agree as follows:

1. Indemnity of Indemnitee. The Corporation hereby agrees to hold
harmless and indemnify Indemnitee to the fullest extent authorized or permitted
by the provisions of the Code, as it may be amended from time to time.

2. Additional Indemnity. Subject only to the limitations set forth in
Section 3 hereof, the Corporation hereby further agrees to hold harmless and
indemnify Indemnitee:

a. against any and all expenses (including attorneys' fees), witness
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by Indemnitee in connection with any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (including an action by or in the right of the Corporation) to
which Indemnitee is, was, or at any time becomes a party, or is threatened to be
made a party, by reason of the fact that Indemnitee is, was, or at any time
becomes a director, officer, employee or agent of the Corporation, or is or was
serving or at any time serves at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise; and

<PAGE> 2

b. otherwise to the fullest extent as may be provided to Indemnitee
by the Corporation under the Articles of Incorporation of the Corporation and
the Code.

3. Limitations on Additional Indemnity.

a. No indemnity pursuant to Section 2 hereof shall be paid by the
Corporation for any of the following:

(i) except to the extent the aggregate of losses to be indemnified
thereunder exceeds the sum of such losses for which Indemnitee is indemnified
pursuant to Section 1 hereof or pursuant to any D & O Insurance purchased and
maintained by the Corporation;

(ii) in respect to remuneration paid to Indemnitee if it shall be
determined by a final judgment or other final adjudication that such
remuneration was in violation of law;

(iii) on account of Indemnitee's acts or omissions that involve
intentional misconduct or a knowing and culpable violation of law;

(iv) on account of any action, claim or proceeding initiated by
Indemnitee unless such action, claim or proceeding was authorized in the
specific case by action of the Board of Directors;

(v) on account of Indemnitee's conduct which is the subject of an
action, suit or proceeding described in Section 7(c)(ii) hereof; or

(vi) if a final decision by a Court having jurisdiction in the
matter shall determine that such indemnification is not lawful (and, in this
respect, both the Corporation and Indemnitee have been advised that the
Securities and Exchange Commission believes that indemnification for liabilities
arising under the federal securities laws is against public policy and is,
therefore, unenforceable and that claims for indemnification should be submitted
to appropriate courts for adjudication).

b. In addition to those limitations set forth above in paragraph (a)
of this Section 3, no indemnity pursuant to Section 2 hereof in an action by or
in the right of the Corporation shall be paid by the Corporation for any of the
following:

(i) on account of acts or omissions that Indemnitee believes to be
contrary to the best interests of the Corporation or its shareholders or that
involve the absence of good faith on the part of Indemnitee;

(ii) with respect to any transaction from which Indemnitee derived
an improper personal benefit;

(iii) on account of acts or omissions that show a reckless
disregard for Indemnitee's duty to the Corporation or its shareholders in
circumstances in which

<PAGE> 3

Indemnitee was aware, or should have been aware, in the ordinary course of
performing such Indemnitee's duties, of a risk of serious injury to the
Corporation or its shareholders;

(iv) on account of acts or omissions that constitute an unexcused
pattern of inattention that amounts to an abdication of Indemnitee's duty to the
corporation or its shareholders;

(v) to the extent prohibited by Section 310 of the California
Corporations Code, "Contracts In Which Indemnitee Has Material Financial
Interest";

(vi) to the extent prohibited by Section 316 of the California
Corporations Code, "Corporate Actions Subjecting Directors To Joint And Several
Liability" (for prohibited distributions, loans and guarantees);

(vii) in respect of any claim, issue or matter as to which
Indemnitee shall have been adjudged to be liable to the Corporation in the
performance of Indemnitee's duty to the Corporation and its shareholders, unless
and only to the extent that the court in which such proceeding is or was pending
shall determine upon application that, in view of all the circumstances of the
case, Indemnitee is fairly and reasonably entitled to indemnity for expenses and
then only to the extent that the court shall determine;

(viii) of amounts paid in settling or otherwise disposing of a
pending action without court approval; or

(ix) of expenses incurred in defending a pending action which is
settled or otherwise disposed of without court approval.

4. Contribution. If the indemnification provided in Sections 1 and 2
hereof is unavailable and may not be paid to Indemnitee by reason of a Court
decision described in subsection 3(a)(vi) hereof based on grounds other than any
of those set forth in subsections 3(a)(ii) through (v) hereof or in subsections
3(b)(i) through (vi) hereof, then in respect of any threatened, pending or
completed action, suit or proceeding in which the Corporation is jointly liable
with Indemnitee (or would be if joined in such action, suit or proceeding), the
Corporation shall contribute to the amount of expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred and paid or payable by Indemnitee in such proportion as is appropriate
to reflect (i) the relative benefits received by the Corporation on the one hand
and Indemnitee on the other hand from the transaction from which such action,
suit or proceeding arose, and (ii) the relative fault of the Corporation on the
one hand and of Indemnitee on the other hand in connection with the events which
resulted in such expenses, judgments, fines or settlement amounts, as well as
any other relevant equitable considerations. The relative fault of the
Corporation on the one hand and of Indemnitee on the other hand shall be
determined by reference to, among other things, the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent the
circumstances resulting in such expenses, judgments, fines or settlement
amounts. The Corporation agrees that it would not be just and equitable if
contribution pursuant to this Section 4 were determined by pro rata allocation
or any other method of allocation which does not take account of the foregoing
equitable considerations.

<PAGE> 4

5. Continuation of Obligations. All agreements and obligations of the
Corporation contained herein shall continue during the period Indemnitee is a
director, officer, employee or agent of the Corporation (or is or was serving at
the request of the Corporation as a director, officer employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise) and shall continue thereafter so long as Indemnitee shall be
subject to any possible claim or threatened, pending or completed action, suit
or proceeding, whether civil, criminal or investigative, by reason of the fact
that Indemnitee was an officer or director of the Corporation or serving in any
other capacity referred to herein.

6. Notification and Defense of Claim. Not later than thirty (30) days
after receipt by Indemnitee of notice of the commencement of any action, suit or
proceeding, Indemnitee will, if a claim in respect thereof is to be made against
the Corporation under this Agreement, notify the Corporation of the commencement
thereof; but the omission so to notify the Corporation will not relieve it from
any liability which it may have to Indemnitee otherwise than under this
Agreement. With respect to any such action, suit or proceeding as to which
Indemnitee notifies the Corporation of the commencement thereof:

a. the Corporation will be entitled to participate therein at its own
expense;

b. except as otherwise provided below, to the extent that it may
wish, the Corporation jointly with any other indemnifying party similarly
notified will be entitled to assume the defense thereof, with counsel reasonably
satisfactory to Indemnitee. After notice from the Corporation to Indemnitee of
its election to assume the defense thereof, the Corporation will not be liable
to Indemnitee under this Agreement for any legal or other expenses subsequently
incurred by Indemnitee in connection with the defense thereof other than
reasonable costs of investigation or as otherwise provided below. Indemnitee
shall have the right to employ its counsel in such action, suit or proceeding
but the fees and expenses of such counsel incurred after notice from the
Corporation of its assumption of the defense thereof shall be at the expense of
Indemnitee unless (i) the employment of counsel by Indemnitee has been
authorized by the Corporation, (ii) Indemnitee shall have reasonably concluded
that there may be a conflict of interest between the Corporation and Indemnitee
in the conduct of the defense of such action or (iii) the Corporation shall not
in fact have employed counsel to assume the defense of such action, in each of
which cases the fees and expenses of Indemnitee's separate counsel shall be at
the expense of the Corporation. The Corporation shall not be entitled to assume
the defense of any action, suit or proceeding brought by or on behalf of the
Corporation or as to which Indemnitee shall have made the conclusion provided
for in (ii) above; and

c. the Corporation shall not be liable to indemnify Indemnitee under
this Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. The Corporation shall be permitted to
settle any action except that it shall not settle any action or claim in any
manner which would impose any penalty or limitation on Indemnitee without
Indemnitee's written consent. Neither the Corporation nor Indemnitee will
unreasonably withhold its consent to any proposed settlement.

<PAGE> 5

7. Advancement and Repayment of Expenses.

a. In the event that Indemnitee employs his own counsel pursuant to
Section 6(b)(i) through (iii) above, the Corporation shall advance to
Indemnitee, prior to any final disposition of any threatened or pending action,
suit or proceeding, whether civil, criminal, administrative or investigative,
any and all reasonable expenses (including legal fees and expenses) incurred in
investigating or defending any such action, suit or proceeding within ten (10)
days after receiving copies of invoices presented to Indemnitee for such
expenses; and

b. Indemnitee agrees that Indemnitee will reimburse the Corporation
for all reasonable expenses paid by the Corporation in defending any civil or
criminal action, suit or proceeding against Indemnitee in the event and only to
the extent it shall be ultimately determined by a final judicial decision (from
which there is no right of appeal) that Indemnitee is not entitled, under
applicable law, the Bylaws, this Agreement or otherwise, to be indemnified by
the Corporation for such expenses.

c. Notwithstanding the foregoing, the Corporation shall not be
required to advance such expenses to Indemnitee if Indemnitee (i) commences any
action, suit or proceeding as a plaintiff unless such advance is specifically
approved by a majority of the Board of Directors or (ii) is a party to an
action, suit or proceeding brought by the Corporation and approved by a majority
of the Board of Directors which alleges willful misappropriation of corporate
assets by Indemnitee, disclosure of confidential information in violation of
Indemnitee's fiduciary or contractual obligations to the Corporation, or any
other willful and deliberate breach in bad faith of Indemnitee's duty to the
Corporation or its shareholders.

8. Indemnification for Expenses of a Witness. Notwithstanding any other
provision of this Agreement, to the extent that Indemnitee is, by reason of his
position as an officer and/or director of the Corporation, called as a witness
in any action, suit or proceeding to which Indemnitee is not a party, he shall
be indemnified against all expenses actually and reasonably incurred by him or
on his behalf in connection therewith.

9. Enforcement. In the event Indemnitee is required to bring any action
to enforce rights or to collect moneys due under this Agreement and is
successful in such action, the Corporation shall reimburse Indemnitee for all of
Indemnitee's reasonable fees and expenses in bringing and pursuing such action.

10. Subrogation. In the event of payment under this Agreement, the
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all documents required and
shall do all acts that may be necessary to secure such rights and to enable the
Corporation effectively to bring suit to enforce such rights.

11. Non-Exclusivity of Rights. The rights conferred on Indemnitee by
this Agreement shall not be exclusive of any other right which Indemnitee may
have or hereafter acquire under any statute, provision of the Corporation's
Articles of Incorporation or Bylaws, agreement, vote of shareholders or
directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office.

<PAGE> 6

12. Survival of Rights. The rights conferred on Indemnitee by this
Agreement shall continue after Indemnitee has ceased to be a director, officer,
employee or other agent of the Corporation and shall inure to the benefit of
Indemnitee's heirs, executors and administrators.

13. Severability. Each of the provisions of this Agreement is a separate
and distinct agreement and independent of the others, so that if any provision
hereof shall be held to be invalid or unenforceable for any reason, such
invalidity or unenforceability shall not affect the validity or enforceability
of the other provisions hereof.

14. Governing Law. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of California.

15. Binding Effect. This Agreement shall be binding upon Indemnitee and
upon the Corporation, its successors and assigns, and shall inure to the benefit
of Indemnitee, his heirs, personal representatives and assigns and to the
benefit of the Corporation, its successors and assigns.

16. Amendment and Termination. No amendment, modification, termination
or cancellation of this Agreement shall be effective unless in writing signed by
both parties hereto.

<PAGE> 7

IN WITNESS WHEREOF, the parties hereto have executed this
Indemnification Agreement on and as of the day and year first above written.

QUEST SOFTWARE, INC.

By
----------------------------------
Name:
Title:

INDEMNITEE

-------------------------------------
Name:

<PAGE> 1

EXHIBIT 10.5

QUEST SOFTWARE, INC.

SECURITIES PURCHASE AGREEMENT

DATED AS OF

APRIL 21, 1999

<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<S> <C> <C> <C>
1. Purchase and Sale of Securities.....................................1

1.1. Sale and Issuance of Securities............................1
1.2. Closing....................................................1

2. Representations and Warranties of the Company.......................1

2.1. Organization, Good Standing and Qualification..............1
2.2. Capitalization.............................................2
2.3. Subsidiaries...............................................3
2.4. Authorization..............................................3
2.5. Valid Issuance of Series A Stock and Series B Stock........3
2.6. Governmental Consents......................................3
2.7. Offering...................................................4
2.8. Litigation.................................................4
2.9. Proprietary Information and Invention Agreements...........4
2.10. Patents and Trademarks.....................................4
2.11. Compliance.................................................5
2.12. Agreements.................................................6
2.13. Related-Party Transactions.................................6
2.14. Permits....................................................6
2.15. Manufacturing and Marketing Rights.........................7
2.16. Disclosure.................................................7
2.17. Registration Rights........................................7
2.18. Corporate Documents........................................7
2.19. Title to Property and Assets...............................7
2.20. Financial Statements.......................................7
2.21. Changes....................................................8
2.22. Tax Returns, Payments and Elections........................9
2.23. Insurance..................................................9
2.24. Compliance with ERISA; Benefit Plans.......................9
2.25. No Brokers.................................................9
2.26. Minute Books...............................................9
2.27. Labor Agreements and Actions...............................9
2.28. Real Property Holding Company.............................10
2.29. Use of Proceeds...........................................10

3. Representations and Warranties of the Investor.....................10

3.1. Organization, Good Standing and Qualification.............10
3.2. Authorization.............................................10
3.3. Purchase Entirely for Own Account.........................10
3.4. Disclosure of Information.................................10
3.5. Investment Experience.....................................11
3.6. Accredited Investor.......................................11
3.7. Restricted Securities.....................................11
</TABLE>

i
<PAGE> 3

TABLE OF CONTENTS (Continued)

<TABLE>
<S> <C> <C> <C>
3.8. Further Limitations on Disposition........................11
3.9. Legends...................................................12

4. Conditions of Investors' Obligations at Closing....................12

4.1. Representations and Warranties............................12
4.2. Performance...............................................12
4.3. Compliance Certificate....................................12
4.4. Amended and Restated Articles Effective...................12
4.5. Proceedings and Documents.................................13
4.6. Proprietary Information and Inventions Agreement..........13
4.7. Board of Directors........................................13
4.8. Opinion of Company Counsel................................13
4.9. Investors' Rights Agreement and Shareholders Agreement....13
4.10. Financial Statements......................................13
4.11. Common Stock Purchase Agreement...........................13

5. Conditions of the Company's Obligations at Closing.................14

5.1. Representations and Warranties............................14
5.2. Payment of Purchase Price.................................14
5.3. Qualifications............................................14
5.4. Amended and Restated Articles Effective...................14
5.5. Investors' Rights Agreement and Shareholders Agreement....14

6. Miscellaneous......................................................14

6.1. Survival of Warranties....................................14
6.2. Successors and Assigns....................................14
6.3. Disclosure................................................14
6.4. Governing Law.............................................15
6.5. Counterparts..............................................15
6.6. Titles and Subtitles......................................15
6.7. Notices...................................................15
6.8. Finder's Fee..............................................15
6.9. Expenses..................................................15
6.10. Amendments and Waivers....................................15
6.11. Severability..............................................16
6.12. Aggregation of Stock......................................16
6.13. Entire Agreement..........................................16
6.14. Remedies..................................................16
6.15. Key-Man Insurance.........................................16
</TABLE>

ii
<PAGE> 4

TABLE OF CONTENTS (Continued)

Exhibits
- --------

Exhibit A Amended and Restated Articles
Exhibit B Schedule of Investors
Exhibit C Schedule of Exceptions
Exhibit D Investors' Rights Agreement
Exhibit E Shareholders Agreement
Exhibit G Form of Common Stock Repurchase Agreement
Exhibit H Opinion of Counsel for Company

iii
<PAGE> 5

SECURITIES PURCHASE AGREEMENT

THIS SECURITIES PURCHASE AGREEMENT (this "Agreement") is made
as of the 21st day of April, 1999, by and among Quest Software, Inc., a
California corporation (the "Company") and the Investors listed on the schedule
of purchasers attached hereto (each an "Investor" and collectively, the
"Investors").

THE PARTIES HEREBY AGREE AS FOLLOWS:

1. Purchase and Sale of Securities.

1.1. Sale and Issuance of Securities.

(a) The Company shall adopt and file with the Secretary of State
of the State of California on or before the Closing (as hereinafter defined) an
Amended and Restated Articles of Incorporation in the form attached hereto as
Exhibit A (the "Amended and Restated Articles").

(b) Subject to the terms and conditions of this Agreement, each
Investor agrees, severally and not jointly, to purchase at the Closing, and the
Company agrees, in consideration for the payment by each Investor at the
Closing, to issue and sell to each Investor at the Closing, that number of
shares of the Series A Preferred Stock (the "Series A Stock"), the Series B
Redeemable Preferred Stock ("the Series B Stock" and collectively, the
"Securities"), set forth opposite each Investor's name on Exhibit B hereto for
the purchase price set forth thereon. The total aggregate purchase price paid by
each Investor shall hereinafter be referred to as the "Purchase Price."

1.2. Closing

(a) The purchase and sale of the Securities shall take place at
the offices of Brobeck, Phleger & Harrison LLP, Two Embarcadero Place, 2200 Geng
Road, Palo Alto, CA 94303, at 10:00 a.m. (California time) on the first
practicable date after all of the conditions set forth in Sections 4 and 5
hereof have been met, or at such other time and place as the Company and the
Investors mutually agree upon in writing (which time and place are designated as
the "Closing"). At the Closing, the Company shall deliver to each Investor a
certificate or certificates representing the Securities that such Investor is
purchasing against payment of the Purchase Price therefor by check or wire
transfer.

2. Representations and Warranties of the Company. As of the date hereof,
the Company, except as set forth in the Schedule of Exceptions attached to this
Agreement as Exhibit C (the "Schedule of Exceptions"), which exceptions shall be
deemed to be representations and warranties as if made hereunder, hereby
represents and warrants to each Investor that:

2.1. Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has all requisite corporate power
and authority to carry on its

<PAGE> 6

business as now conducted and as proposed to be conducted. The Company has not
received any written notice that any of its Subsidiaries (as defined below) is
not in good standing. The Company is duly qualified to transact business and is
in good standing in each jurisdiction in which the failure to so qualify would
have a material adverse effect on the business, properties, assets, results of
operations or financial condition of the Company and its Subsidiaries taken as a
whole (a "Material Adverse Effect").

2.2. Capitalization. The authorized capital of the Company will
consist at Closing, of:

(a) Preferred Stock. Six Million Three Hundred Thousand
(6,300,000) shares of preferred stock, no par value per share (the "Preferred
Stock"), of which Four Million Five Hundred Thousand (4,500,000) shall have been
designated as Series A Preferred Stock and of which One Million Eight Hundred
Thousand (1,800,000) shall have been designated as Series B Redeemable Preferred
Stock (the "Series B Stock"). The rights, privileges and preferences of the
Series A Stock and the Series B Stock will be as stated in the Company's Amended
and Restated Articles.

(b) Common Stock. Fifty Million (50,000,000) shares of common
stock, no par value per share (the "Common Stock"), of which Twenty-Nine Million
Six Hundred Ninety-Two Thousand (29,692,000) are issued and outstanding.

(c) The issued and outstanding shares of Common Stock are owned
by the shareholders in the numbers specified in Section 2.2(c) to the Schedule
of Exceptions. Section 2.2(c) to the Schedule of Exceptions also sets forth the
number of shares of Common Stock underlying all outstanding options, warrants
and other convertible securities of the Company, including without limitation
under the Option Plan (as hereinafter defined).

(d) All shares of Common Stock issued by the Company to date have
been duly and validly authorized and issued, fully paid and nonassessable, and
all such shares were issued in accordance with the registration or qualification
provisions of the Securities Act of 1933, as amended (the "Securities Act"), and
all applicable state securities laws or pursuant to valid exemptions therefrom.

(e) Except for (A) the conversion privileges of the Series A
Stock to be issued under this Agreement (including without limitation upon
conversion of the Series B Preferred Stock), (B) the rights provided in the
Investors' Rights Agreement to be entered into simultaneously with this
Agreement by and between the Company and the Investors, in the form attached
hereto as Exhibit D (the "Investors' Rights Agreement") and the Shareholders
Agreement to be entered into simultaneously with this Agreement by and between
the Company, certain shareholders of the Company and the Investors, in the form
attached hereto as Exhibit E (the "Shareholders Agreement") and (C) the Five
Million (5,000,000) shares of Common Stock reserved for issuance upon exercise
of options granted or to be granted in the future under the Company's stock
option plan (the "Option Plan"), there are not outstanding any options,
warrants, rights (including conversion or preemptive rights), instruments or
agreements for the purchase or acquisition from the Company of any shares of its
capital stock or any securities exercisable, convertible or exchangeable for or
into shares of its capital stock and (y) there is no

<PAGE> 7

agreement, restriction or encumbrance (including without limitation a right of
first refusal, right of first offer, proxy or voting agreement) with respect to
the sale or voting of any shares of capital stock of the Company (whether
outstanding or issuable upon conversion or exercise of outstanding securities).

2.3. Subsidiaries. Except for the subsidiaries of the Company
identified in Section 2.3 to the Schedule of Exceptions (the "Subsidiaries"),
the Company does not presently own or control, directly or indirectly, any
interest in any other corporation, association, or other business entity. Except
for the subsidiary of the Company identified in Section 2.3 to the Schedule of
Exceptions, none of the Subsidiaries accounted for in excess of ten percent
(10%) of the Company's revenues or total assets in the last fiscal year. Section
2.3 to the Schedule of Exceptions correctly sets forth the authorized and
outstanding capital stock of each Subsidiary and the beneficial owners of all
such equity interests. The Company is not a participant in any joint venture,
partnership, or similar arrangement.

2.4. Authorization. All corporate action on the part of the Company,
its officers, directors and shareholders necessary for the authorization,
execution and delivery of this Agreement, the Shareholders Agreement and the
Investors' Rights Agreement, the performance of all obligations of the Company
hereunder and thereunder, and the authorization, issuance (or reservation for
issuance), sale and delivery of the Series A Stock (including without limitation
the Series A Stock issuable upon conversion of the Series B Stock); and the
Series B Stock being sold hereunder and the Common Stock issuable upon
conversion of the Series A Stock has been taken or will be taken prior to the
Closing, as appropriate. This Agreement, the Shareholders Agreement and the
Investors' Rights Agreement each constitute valid and legally binding
obligations of the Company, enforceable in accordance with their respective
terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief or other equitable
remedies and (iii) to the extent the indemnification provisions contained in the
Investors' Rights Agreement may be limited by applicable federal or state
securities laws.

2.5. Valid Issuance of Series A Stock and Series B Stock. The Series A
Stock and the Series B Stock being purchased by the Investor hereunder, when
issued, sold and delivered in accordance with the terms of this Agreement for
the consideration expressed herein, will be duly and validly issued, fully paid
and nonassessable, and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement, the Shareholders Agreement and
the Investors' Rights Agreement and under applicable state and federal
securities laws. The Series A Stock issuable upon conversion of the Series B
Stock, and the Common Stock issuable upon conversion of the Series A Stock has
been duly and validly reserved for issuance and, upon issuance, will be duly and
validly issued, fully paid and nonassessable, and will be free of restrictions
on transfer other than restrictions on transfer under this Agreement, the
Shareholders' Agreement, or the Investors' Rights Agreement.

2.6. Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except (i) the filing of the

<PAGE> 8

Amended and Restated Articles with the Secretary of State of the State of
California and (ii) the filing of a Notice of Transaction pursuant to Section
25102(f) of the California Corporate Securities Law of 1968, as amended, and the
rules thereunder, or such other post-closing filings as may be required under
applicable state securities laws, which filings will be timely made within the
applicable periods therefor.

2.7. Offering. Subject in part to the truth and accuracy of each
Investor's representations set forth in Section 3 of this Agreement, the offer,
sale and issuance of the Series A Stock and the Series B Stock and the
conversion of the Series A Stock into Common Stock and the conversion of the
Series B Stock into Series A Stock, are exempt from the registration
requirements of the Securities Act, and neither the Company nor any authorized
agent acting on its behalf will take any action hereafter that would reasonably
be expected to cause the loss of such exemption.

2.8. Litigation. Except as set forth in Section 2.8 to the Schedule of
Exceptions, there is no action, suit, proceeding, claim or investigation pending
or, to the Company's knowledge, currently threatened against the Company that
questions the validity of this Agreement, the Shareholders Agreement or the
Investors' Rights Agreement, or the right of the Company to enter into such
agreements, or to consummate the transactions contemplated hereby or thereby, or
that might result, either individually or in the aggregate, in any Material
Adverse Effect. The foregoing includes, without limitation, actions, suits,
proceedings, claims or investigations pending or threatened involving the prior
employment of any of the Company's employees, their use in connection with the
Company's business of any information or techniques allegedly proprietary to any
of their former employers, or their obligations under any agreements with prior
employers and product return, warranty or liability matters. The Company is not
a party or subject to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality. There is no action,
suit, proceeding, claim or investigation by the Company to its knowledge
currently pending or that the Company intends to initiate.

2.9. Proprietary Information and Invention Agreements. Each U.S.
employee, officer and consultant of the Company has executed a Proprietary
Information and Inventions Agreement in the form provided to the Investors,
except to the extent that any failure to execute such a Proprietary Information
and Inventions Agreement will not result in a Material Adverse Effect. To the
Company's knowledge, but without having conducted any special investigation or
inquiry, none of the Company's employees, officers or consultants are in
violation thereof, and the Company will use its best efforts to prevent any such
violation.

2.10. Patents and Trademarks. The Company has sufficient title and
ownership of, or has a currently valid license to, all patents, trademarks,
service marks, trade names, copyrights, licenses, information, proprietary
rights and processes necessary for its business as now conducted and as
currently proposed to be conducted (collectively, the "Rights"). Section 2.10 to
the Schedule of Exceptions sets forth a complete and accurate list of the
Rights. Except as set forth in Section 2.10 to the Schedule of Exceptions, all
of the patents, trademark and service mark registrations, and copyright
registrations listed in Section 2.10 are valid and in full force, are held of
record in the name of the Company, and to the Company's knowledge, are not the
subject of any cancellation, reexamination opposition, extension of time to
oppose,

<PAGE> 9

interference, rejection, refusal to register or any other proceeding challenging
their extent or validity. The Rights do not conflict with or infringe upon the
rights of any third party. There are no outstanding options, licenses, or
agreements of any kind relating to the foregoing, nor is the Company or any
Subsidiary bound by or a party to any options, licenses or agreements of any
kind with respect to the patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses, information, proprietary rights and
processes of any other person or entity. The Company is not aware that it has
violated or, by conducting its business as proposed, would violate any of the
patents, trademarks, service marks, trade names, copyrights, trade secrets,
licenses, information, proprietary rights or processes rights of any other
person or entity. To the Company's knowledge, but without having conducted any
special investigation or inquiry, none of the Company's or any Subsidiary's
employees is obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any order, writ,
injunction, judgment or decree of any court or administrative agency that would
interfere with the promotion of the interests of the Company or any Subsidiary
or that would conflict with the Company's and the Subsidiaries' business as
currently proposed to be conducted. Except as set forth in Section 2.10 to the
Schedule of Exceptions, all software owned, licensed or used in and which is
material to the Company's business is Year 2000 Compliant. As used herein, "Year
2000 Compliant" shall mean with respect to any such software, the ability of
such software to perform the following date/time-related functions: (i)
consistently and properly interpret, calculate, manipulate, store and exchange
date/time data from, into, and between the twentieth and twenty-first centuries,
including, without limitation the years 1999 and 2000 and any leap year
calculations; (ii) function accurately in accordance with the documentation
relating to the applicable software and without interruption before, during and
after January 1, 2000, without any change in operations associated with the
advent of the new century; (iii) respond to a two-digit date input in a way that
resolves any ambiguity as to the century; and (iv) store and provide output of
date information in ways that are unambiguous as to century.

2.11. Compliance. The Company is not in violation or default of any
provision of its Amended and Restated Articles or Bylaws, each as amended to
date, or of any instrument, judgment, order, writ, decree, contract, agreement
or understanding to which it is a party or by which it is bound, and except for
violations that individually or in the aggregate would not have a Material
Adverse Effect, the Company, and to its actual knowledge, without independent
investigation, each of the Subsidiaries, is in compliance with all federal,
state, local or foreign statute, rule or regulation (including without
limitation those relating to environmental, occupational, health and safety
matters) applicable to the Company or any Subsidiary. The execution, delivery
and performance of this Agreement, the Shareholders Agreement and the Investors'
Rights Agreement, and the consummation of the transactions contemplated hereby
and thereby, will not result in (i) any violation or default of any provision of
its Amended and Restated Articles or Bylaws, (ii) any conflict with or
constitute, with or without the passage of time and giving of notice, either a
default under any instrument, judgment, order, writ, decree, contract, agreement
or understanding to which the Company is a party or by which it is bound, (iii)
an event that results in the creation of any lien, charge or encumbrance upon
any assets of the Company or the suspension, revocation, impairment, forfeiture,
or nonrenewal of any permit, license, authorization, or approval applicable to
the Company, its business prospects or operations or any of its assets or
properties, except for such lien, change or encumbrance which does not
individually, or in the aggregate, have a Material Adverse Effect, or (iv) any
violation

<PAGE> 10

or conflict with any provision of any federal or state statute, rule or
regulation applicable to the Company.

2.12. Agreements.

(a) Except as set forth in Section 2.12 to the Schedule of
Exceptions and for agreements explicitly contemplated hereby and by the
Investors' Rights Agreement and the Shareholders Agreement, there are no
agreements, understandings or proposed transactions between the Company and any
of its officers, directors, affiliates, or any affiliate thereof.

(b) Except as set forth in Section 2.12 to the Schedule of
Exceptions, there are no agreements, understandings, instruments, contracts,
proposed transactions, judgments, orders, writs or decrees to which the Company
or if applicable, in clauses (i) through (vii) below, any Subsidiary is a party
or by which it is bound that would reasonably be expected to involve (i)
obligations (contingent or otherwise) of, or payments to, or by, the Company or
any Subsidiary in excess of Five Hundred Thousand Dollars ($500,000), or (ii)
the purchase or sale of the Rights by or from the Company, or (iii) the license
of the Rights by or from the Company or any Subsidiary outside of the ordinary
course of business, (iv) the lease of real property, (v) employment of any
officer or key employee of the Company, or (vi) provisions restricting or
affecting the development, manufacture, distribution or provision of the
Company's products or services, or (vii) indemnification by the Company with
respect to infringements of proprietary rights outside of the ordinary course of
business. Copies of all such agreements, understandings, instruments, contracts,
proposed transactions, judgments, orders, writs or decrees have been provided to
the Investor. For the purposes of this subsection, all indebtedness,
liabilities, agreements, understandings, instruments, contracts and proposed
transactions involving the same person or entity (including persons or entities
the Company has reason to believe are affiliated therewith) shall be aggregated
for the purpose of meeting the individual minimum dollar amounts of such
subsections.

2.13. Related-Party Transactions. To the Company's knowledge, no
employee, officer, director or shareholder of the Company has any direct or
indirect ownership interest in any firm or corporation with which the Company is
affiliated or with which the Company has a business relationship, or any firm or
corporation which competes with the Company, except that employees, officers
and/or directors of the Company, or any members of their immediate families, may
own up to three percent (3%) of the outstanding stock of publicly traded
companies which may compete with the Company. Except as set forth in Section
2.13 to the Schedule of Exceptions, no officer, director, or any member of their
immediate families, or shareholder, is, indirectly, interested in any contract,
including without limitation with respect to indebtedness, with the Company
(other than such contracts as relate to any such person's ownership of capital
stock or other securities of the Company).

2.14. Permits. The Company has all franchises, permits, licenses, and
any similar authority necessary for the conduct of its business as now being
conducted by it or as proposed to be conducted by it, the lack of which could
have a Material Adverse Effect. The Company is not in default in any material
respect under any of such franchises, permits, licenses, or other similar
authority.

<PAGE> 11

2.15. Manufacturing and Marketing Rights. Except as set forth in
Section 2.15 to the Schedule of Exceptions, neither the Company nor any
Subsidiary has granted rights to manufacture, produce, assemble, license,
market, or sell its products to any other person and is not bound by any
agreement that affects the Company's or such Subsidiary's exclusive right to
develop, manufacture, assemble, distribute, market or sell its products.

2.16. Disclosure. The Company has fully provided each Investor, either
directly or through special counsel to the Investors, with all the information
that such Investor has requested for deciding whether to purchase the Series A
Stock and the Series B Stock and all information that the Company believes is
reasonably necessary to enable such Investor to make such decision. Neither this
Agreement, the Shareholders Agreement, the Investors' Rights Agreement, nor any
exhibit or schedule hereto or thereto contains any untrue statement of a
material fact or omits to state a material fact necessary to make the statements
herein or therein not misleading; provided, however, that the Company makes no
such representation or warranty with regard to information contained in this
Agreement, the Shareholders Agreement, the Investors' Rights Agreement nor any
exhibit or schedule hereto or thereto which was furnished to the Company by the
Investors.

2.17. Registration Rights. Except as provided in the Investors'
Rights Agreement, the Company has not granted or agreed to grant any
registration rights to any person or entity.

2.18. Corporate Documents. The Amended and Restated Articles and
Bylaws, each as amended to date, of the Company are in the form previously
provided to the Investor and the special counsel to the Investor.

2.19. Title to Property and Assets. The Company has valid and
marketable title to all of its property (whether personal, real or fixed) and
assets free and clear of all mortgages, liens, loans and encumbrances, except
such encumbrances and liens that arise in the ordinary course of business and do
not materially impair the Company's ownership or use of such property or assets.
With respect to the property and assets it leases, the Company is in compliance
with such leases and, to the best of its knowledge, holds a valid leasehold
interest free of any liens, claims or encumbrances.

2.20. Financial Statements. The Company has delivered to special
counsel for the Investors its audited consolidated financial statements (balance
sheet and profit and loss statement, statement of shareholders' equity and
statement of cash flows) as at, and for the fiscal year ended December 31, 1997
(the "Audited Financial Statements") and its unaudited consolidated financial
statements as at and for the fiscal year ended December 31, 1998 (the "Unaudited
Financials" and together with the Audited Financial Statement, the "Financial
Statement"). The Financial Statements have been prepared in accordance with
generally accepted accounting principles applied on a basis consistent with past
practices, except that the Unaudited Financials do not contain footnotes. The
Financial Statements are correct and complete in all material respects and
fairly present the financial condition and results of operations of the Company
and its Subsidiaries as of the date, and for the period, indicated therein,
subject in the case of the Unaudited Financials to normal year-end audit
adjustments. Except as set forth in the Financial Statements, neither the
Company nor any Subsidiary has any

<PAGE> 12

material liability, contingent or otherwise, other than (i) liabilities incurred
in the ordinary course of business subsequent to December 31, 1998, and (ii)
obligations under contracts and commitments incurred in the ordinary course of
business and not required under generally accepted accounting principles to be
reflected in the Financial Statements, which, in both cases, individually or in
the aggregate, are not material to the financial condition or results of
operations of the Company or any Subsidiary. Except as disclosed in the
Financial Statements, the Company nor any Subsidiary is a guarantor or
indemnitor of any indebtedness of any other person, firm or corporation.

2.21. Changes. Since December 31, 1998, there has not been:

(a) any Material Adverse Change from that reflected in the
Financial Statements;

(b) any damage, destruction or loss, whether or not covered by
insurance, which has had a Material Adverse Effect;

(d) any termination of, or material change or amendment to, a
material contract or arrangement by which the Company or any of its assets or
properties is bound or subject;

(e) any sale, assignment or transfer of any Rights;

(f) any mortgage, pledge, transfer of a security interest in, or
lien created by the Company, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable;

(g) any material change in any compensation arrangement or
agreement with any employee, officer, director or stockholder;

(h) any loans or guaranties made by the Company to or for the
benefit of its employees, stockholders, officers or directors, or any members of
their immediate families, other than travel advances made in the ordinary course
of business.

(i) any resignation or termination of employment of any key
officer or key employee of the Company or any Subsidiary; and the Company, to
the best of its knowledge, does not know of the impending resignation or
termination of employment of any such officer or employee;

(j) receipt of notice that there has been a loss of, or a
material order cancellation by, any major customer or supplier of the Company;

(k) any declaration, setting aside or payment or other
distribution in respect of any of the Company's capital stock, or any direct or
indirect redemption, purchase or other acquisition of any such stock by the
Company;

<PAGE> 13

(l) to the best of the Company's knowledge, any other event or
condition that reasonably would be expected to have a Material Adverse Effect,
or

(m) any agreement or commitment by the Company to do any of the
things described in this Section 2.21.

2.22. Tax Returns, Payments and Elections. The Company has timely
filed all tax returns and reports as are required by law. These returns and
reports are true and correct in all material respects. The Company has paid all
taxes and other assessments due, except those contested by it in good faith. The
provision for taxes shown in the Financial Statements is adequate for taxes due
or accrued as of the date thereof. Since the date of the Financial Statements,
the Company has made adequate provisions on its books of account for all taxes,
assessments and governmental charges with respect to its businesses, properties
and operations for such period. The Company has never had any tax deficiency
proposed or assessed against it and has not executed any waiver of any statute
of limitations on the assessment or collection of any tax or governmental
charge. None of the Company's federal income tax returns and none of its state
income or franchise tax or sales or use tax returns has been audited by
governmental authorities The Company has withheld or collected from each payment
made to each of its employees, the amount of all taxes required to be withheld
or collected therefrom, and has paid the same to the proper tax receiving
officers or authorized depositaries.

2.23. Insurance. The Company and its Subsidiaries have in full force
and effect and will maintain policies of insurance, including, but not limited
to, fire, casualty, workmen's compensation and umbrella insurance policies in
such amounts and covering such risks as is reasonably prudent for companies
similarly situated.

2.24. Compliance with ERISA; Benefit Plans. The Company does not have
any Employee Benefit Plan as defined in the Employment Retirement Income
Security Act of 1976, as amended ("ERISA"), other than a 401(k) plan (the
"Plan"). The Plan has been managed in accordance with it terms and, in all
material respects, with the provisions of ERISA.

2.25. No Brokers. The Company is not obligated for the payment of any
brokerage fees, agents' fees, commissions or finders' fees or the expenses of
any investment banker, broker or finder in connection with the origin,
negotiation or execution of this Agreement, the Shareholders Agreement or the
Investors' Rights Agreement, or in connection with any transaction contemplated
hereby or thereby.

2.26. Minute Books. The minute books of the Company provided to the
Investor contain a complete summary of all meetings of directors and
shareholders since the time of incorporation and reflect all transactions
referred to in such minutes accurately in all material respects.

2.27. Labor Agreements and Actions. The Company is not bound by or
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the best of the
Company's knowledge, has sought to represent any of the employees,
representatives or agents of the Company. There is no strike or other labor
dispute

<PAGE> 14

involving the Company pending, or to the best of the Company's knowledge,
threatened, that could have a Material Adverse Effect.

2.28. Real Property Holding Company. The Company is not a real
property holding company within the meaning of Section 897 of the Code.

2.29. Use of Proceeds. The Company will use the proceeds from this
Agreement to repurchase from a founder (or his affiliates) Nine Million Eight
Hundred Eighty Thousand (9,880,000) shares of its Common Stock for an aggregate
purchase price of $3.5425 per share pursuant to the terms and conditions of a
Common Stock Repurchase Agreement, form of which is attached hereto as Exhibit
G.

3. Representations and Warranties of the Investor. Each Investor, severally
but not jointly, hereby represents and warrants to the Company that:

3.1. Organization, Good Standing and Qualification. Each Investor is
an entity duly organized under the laws of the jurisdiction of its organization
and has all requisite power and authority to carry on its business as now
conducted. The principal place of business of each Investor is set out on the
signature pages hereof.

3.2. Authorization. Such Investor has full power and authority to
enter into this Agreement, the Shareholders Agreement and the Investors' Rights
Agreement, and each such agreement constitutes a valid and legally binding
obligation, enforceable in accordance with its terms, except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of
general application affecting enforcement of creditors' rights generally, (ii)
as limited by laws relating to the availability of specific performance,
injunctive relief, or other equitable remedies, and (iii) to the extent the
indemnification provisions contained in the Investors' Rights Agreement may be
limited by applicable federal or state securities laws.

3.3. Purchase Entirely for Own Account. This Agreement is made with
such Investor in reliance upon such Investor's representation to the Company,
which by such Investor's execution of this Agreement such Investor hereby
confirms, that the Series A Stock and the Series B Stock to be received by such
Investor, the Series A Stock issuable upon conversion of the Series B Stock and
the Common Stock issuable upon conversion of the Series A Stock, will be
acquired for investment for such Investor's own account, not as a nominee or
agent, and not with a view to the resale or distribution of any part thereof,
and that each Investor has no present intention of selling, granting any
participation in, or otherwise distributing the same. By executing this
Agreement, each Investor further represents that each Investor does not have any
contract, undertaking, agreement or arrangement with any person or entity to
sell, transfer or grant participations to such person or entity or to any third
person or entity, with respect to any of the Series A Stock, the Series B Stock,
the Series A Stock issuable upon conversion of the Series B Stock or the Common
Stock issuable upon conversion of the Series A Stock.

3.4. Disclosure of Information. Such Investor has had an opportunity
to ask questions and receive answers from the Company regarding the terms and
conditions of the offering of the Series A Stock and the Series B Stock and the
business, properties and financial

<PAGE> 15

condition of the Company. All such questions posed to the Company have been
answered to the satisfaction of the Investor. The foregoing, however, does not
limit or modify the representations and warranties of the Company in Section 2
of this Agreement, any remedy of the Investors under this Agreement or the right
of the Investor to rely thereon.

3.5. Investment Experience. Such Investor is an investor in securities
of companies in the Company's industry and at the Company's stage of development
and acknowledges that it is able to fend for itself, can bear the economic risk
of its investment, and has such knowledge and experience in financial or
business matters that it is capable of evaluating the merits and risks of the
investment in the Series A Stock and the Series B Stock. Each Investor also
represents it has not been organized solely for the purpose of acquiring the
Series A Stock and the Series B Stock.

3.6. Accredited Investor. Such Investor is an "accredited investor"
within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of
Regulation D promulgated under the Securities Act, as presently in effect.

3.7. Restricted Securities. Such Investor understands that the Series
A Stock and the Series B Stock it is purchasing and the shares of Common Stock
into which the Series A Stock are convertible, are characterized as "restricted
securities" under the federal securities laws inasmuch as they are being
acquired from the Company in a transaction not involving a public offering and
that under such laws and applicable regulations such securities may be resold
without registration under the Securities Act, only in certain limited
circumstances. In this connection, such Investor represents that it is familiar
with SEC Rule 144, as presently in effect, and understands the resale
limitations imposed thereby and by the Securities Act.

3.8. Further Limitations on Disposition. Without in any way limiting
the representations set forth above and any restrictions set forth in the
Shareholders Agreement or Investors' Rights Agreement, such Investor further
agrees not to make any disposition of all or any portion of the shares of the
Series A Stock, the Series B Stock or the shares of Common Stock issuable upon
conversion of the Series A Stock, unless and until the transferee has agreed in
writing for the benefit of the Company to be bound by this Section 3, the
Shareholders Agreement and the Investors' Rights Agreement, provided and to the
extent this Section and such agreement are then applicable, and:

(a) There is then in effect a registration statement under the
Securities Act and under applicable state securities laws covering such proposed
disposition and such disposition is made in accordance with such registration
statement; or

(b) (i) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii)
such Investor shall have furnished the Company with an opinion of counsel,
reasonably satisfactory to the Company, that such disposition will not require
registration of such shares under the Securities Act or under applicable state
securities laws.

<PAGE> 16

(c) Notwithstanding the provisions of paragraphs (A) and (B)
above, no such registration statement or opinion of counsel shall be necessary
for a transfer by an Investor that is a partnership to a partner of such
partnership or a retired partner of such partnership who retires after the date
hereof, or to the estate of any such partner or retired partner or the transfer
by gift, will or intestate succession of any partner to his or her spouse or to
the siblings, lineal descendants or ancestors of such partner or his or her
spouse, by an Investor that is a limited liability corporation ("LLC") to a
member of such LLC or by any Investor to a person or entity that controls, is
controlled by or is under common control with such Investor; if in any such case
the transferee agrees in writing to be subject to the terms hereof to the same
extent as if he or she were an original Investor hereunder.

3.9. Legends. It is understood that the certificates evidencing the
shares of Series A Stock, the shares of Series B Stock and the shares of Common
Stock issuable upon conversion of the Series A Stock, may bear one or all of the
following legends:

(a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF (i) AN EFFECTIVE REGISTRATION
STATEMENT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT, OR (ii) AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED."

(b) Any legend required by the laws of any jurisdiction including
any legend required by any state or "blue sky" securities laws.

4. Conditions of Investors' Obligations at Closing. The obligations of the
Investor under Section 1.1(b) of this Agreement are subject to the fulfillment
on or before the Closing of each of the following conditions, the waiver of
which shall not be effective against any Investor who does not consent in
writing thereto:

4.1. Representations and Warranties. The representations and
warranties of the Company contained in Section 2 shall be true, in all respects,
on and as of the Closing with the same effect as though such representations and
warranties had been made on and as of the date of such Closing.

4.2. Performance. The Company shall have performed and complied with
all agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Closing.

4.3. Compliance Certificate. The President of the Company shall
deliver to each Investor at the Closing a certificate stating that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled and stating
that there shall have been no Material Adverse Change since the date of the
Financial Statements.

4.4. Amended and Restated Articles Effective. The Amended and Restated
Articles shall have been duly adopted by the Company by all necessary corporate
action of its

<PAGE> 17

Board of Directors and shareholders, and shall have been duly filed with, and
accepted by, the Secretary of State of the State of California.

4.5. Proceedings and Documents. All corporate proceedings in
connection with the transactions contemplated at the Closing shall be reasonably
satisfactory in form and substance to Investor' special counsel, and such
counsel shall have received all such counterpart original and certified or other
copies of such documents. Such documents shall consist of the following:

(a) Certified Charter Documents. A copy of the Amended and
Restated Articles and the Bylaws of the Company (as amended through the date of
the Closing), certified by an officer of the Company to be true, complete and
correct copies thereof as of the Closing.

(b) Certified Corporate Actions. A copy of the resolutions of the
Board of Directors and the Company's shareholders evidencing the approval of the
Amended and Restated Articles, the execution of this Agreement, the Shareholders
Agreement and the Investors' Rights Agreement (including any agreements which
are exhibits thereto), the reservation of shares of Series A Stock issuable upon
conversion of the Series B Stock, the reservation of shares of Common Stock
issuable upon conversion of the shares of Series A Stock (including without
limitation Series A Stock issuable upon conversion of the Series B Stock) to be
issued pursuant to this Agreement and the taking of other actions related to the
sale and issuance of the Company's Series A Stock and the Series B Stock,
certified by an officer of the Company to be a true, complete and correct copy
thereof.

4.6. Proprietary Information and Inventions Agreement.. Each employee
of and consultant to the Company shall have entered into a Proprietary
Information and Inventions Agreement in the form previously provided to special
counsel for the Investor.

4.7. Board of Directors. Contingent upon the Closing, the directors of
the Company shall be David Doyle, Vinnie Smith, Doran Machin, Jerry Murdoch and
one vacancy.

4.8. Opinion of Company Counsel. Each Investor shall have received
from Brobeck, Phleger & Harrison LLP, counsel to the Company, an opinion, dated
as of the Closing, in the form attached hereto as Exhibit H.

4.9. Investors' Rights Agreement and Shareholders Agreement. The
Company shall have entered into the Investors' Rights Agreement and Shareholders
Agreement in the forms attached hereto as Exhibit B and Exhibit E, respectively.

4.10. Financial Statements. The Investor shall have received the
Financial Statements.

4.11. Common Stock Purchase Agreement. The Common Stock Purchase
Agreement dated April 20, 1999 between Doran Machin, MFH-1 and the Company shall
have been duly executed and delivered by each party thereto.

<PAGE> 18

5. Conditions of the Company's Obligations at Closing. The obligations of
the Company to any Investor under this Agreement are subject to the fulfillment
on or before the Closing of each of the following conditions by each Investor:

5.1. Representations and Warranties. The representations and
warranties of the Investor contained in Section 3 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the Closing.

5.2. Payment of Purchase Price. Each Investor shall have delivered the
Purchase Price specified in Section 1.1.

5.3. Qualifications. All authorizations, approvals, or permits, if
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Series A Stock and the Series B Stock pursuant to this Agreement shall be
duly obtained and effective as of the Closing.

5.4. Amended and Restated Articles Effective. The Amended and Restated
Articles shall have been duly adopted by the Company by all necessary corporate
action of its Board of Directors and shareholders, and shall have been duly
filed with, and accepted by, the Secretary of State of the State of California.

5.5. Investors' Rights Agreement and Shareholders Agreement. Each
Investor shall have entered into the Investors' Rights Agreement and
Shareholders Agreement in the forms attached hereto as Exhibit B and Exhibit E,
respectively.

6. Miscellaneous

6.1. Survival of Warranties. The representations and warranties of the
Company and each Investor contained in or made pursuant to this Agreement shall
survive the execution and delivery of this Agreement for a period of twelve (12)
months from the date hereof (provided that (a) the representations and
warranties of the Company in Sections 2.22 and 2.24 shall survive until the date
which is 60 days after the expiration of the statute of limitations applicable
to such matters, (b) the representations and warranties of the Company in
Sections 2.2 and 2.5 shall survive in perpetuity) and shall in no way be
affected by any investigation of the subject matter thereof made by or on behalf
of the Investors or the Company.

6.2. Successors and Assigns. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Shares of the Series A Stock or the Series B Stock). Nothing
in this Agreement, express or implied, is intended to confer upon any party
other than the parties hereto or their respective successors and assigns any
rights, remedies, obligations, or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.

6.3. Disclosure. Except as otherwise required by law, the Investors
and the Company agree that they shall make no written or other public
disclosures regarding this transaction or regarding the parties hereto to any
individual or organization without the prior

<PAGE> 19

written consent of the other parties hereto, which consent shall not be
unreasonably withheld, or as required by applicable law.

6.4. Governing Law. This Agreement shall be governed by and construed
under the laws of the State of California, exclusive of the provisions thereof
governing conflicts of laws.

6.5. Counterparts. This Agreement may be executed in two (2) or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

6.6. Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.

6.7. Notices. Any notice, request, demand or other communication
required or permitted hereunder shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified, upon the
date of transmittal of services via telecopy to the party to whom notice is
being given, or on the fifth (5th) day after deposit in the United States Post
Office, by registered or certified mail, with postage and fees prepaid and
addressed to the other party hereto at his or her address hereinafter shown
below his or her signature or at such other address as such party may designate
by ten (10) days' advance written notice to the other party hereto.

6.8. Finder's Fee. Each party hereto agrees to indemnify and to hold
harmless each other party hereto from any liability for any commission or
compensation in the nature of a finders' fee (and the costs and expenses of
defending against such liability or asserted liability) for which such party or
any of its officers, partners, employees, or representatives is responsible.

6.9. Expenses. Each of the parties shall pay all costs and expenses
incurred or to be incurred by it in negotiating, executing, delivering and
preparing the agreements and in closing and carrying out the transactions
contemplated hereby and thereby. Notwithstanding the foregoing, the Company
shall be responsible and shall pay for the first Thirty Five Thousand Dollars
($35,000) of the fees and expenses of special counsel for the Investor. If any
action at law or in equity is necessary to enforce or interpret the terms of
this Agreement, the Investors' Rights Agreement or the Amended and Restated
Articles, the prevailing party shall be entitled to reasonable attorney's fees,
costs and necessary disbursements in addition to any other relief to which such
party may be entitled.

6.10. Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of (i) the Company, (ii) the
holders of a majority of the Series A Stock, excluding shares of Series A Stock
issued upon conversion of shares of Series B Stock, (or, if there shall be no
such Series A Stock outstanding, a majority of the Common Stock issued upon
conversion of such Series A Stock) and (iii) the holders of a majority of the
Series B Stock (or, if there shall be no such Series B Stock outstanding, a
majority of the Series A stock issued upon conversion of the Series B

<PAGE> 20

Stock, or, if there shall be no such shares of Series A Stock outstanding, a
majority of the shares of Common Stock issued upon conversion of such Series A
Stock) as of the date of the amendment of waiver. Any amendment or waiver
effected in accordance with this paragraph shall be binding upon each holder of
any securities purchased under the Securities Purchase Agreement then
outstanding, each future holder of all such securities, and the Company.

6.11. Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.

6.12. Aggregation of Stock. All shares of the Series A Stock or Series
B Stock held or acquired by affiliated entities or persons shall be aggregated
together for the purpose of determining the availability of any rights under
this Agreement, the Investors' Rights Agreement or the Shareholders Agreement.

6.13. Entire Agreement. This Agreement, the Amended and Restated
Articles, the Investors' Rights Agreement, the Shareholders Agreement, and the
Common Stock Re-Purchase Agreement and the documents to which the Investor and
the Company are parties constitute the entire agreement among the parties and no
party shall be liable or bound to any other party in any manner by any
warranties, representations, or covenants except as specifically set forth
herein or therein.

6.14. Remedies. In case any one or more of the representations,
warranties, covenants and/or agreements set forth in this Agreement shall have
been breached by the Company, an Investor may proceed to protect and enforce its
rights either by suit in equity and/or by action at law, including, but not
limited to, an action for damages as a result of any such untruth, inaccuracy or
breach and/or an action for specific performance of any such covenant or
agreement contained in this Agreement.

6.15. Key-Man Insurance. Following the Closing, the Company shall use
its best efforts to obtain, as beneficiary, key-man life insurance with respect
to Vincent C. Smith in an insured amount of no less than $3,000,000; provided,
however, that in no event shall the date on which the Company obtains such
insurance exceed forty five (45) days from the date hereof.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

<PAGE> 21

IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.

QUEST SOFTWARE, INC.

By:
---------------------------------------------
Name: Vinny Smith
Its: Chief Executive Officer

Address:
610 Newport Center Drive
Newport Beach, CA 92660

INSIGHT CAPITAL PARTNERS II, L.P.
By: Insight Venture Associates II, LLC
Its General Partner

By:
---------------------------------------------
Name: Jeffrey Horing
Its: Managing Member

INSIGHT CAPITAL PARTNERS (CAYMAN) II, L.P.
By: Insight Venture Associates II, LLC
Its General Partner

By:
---------------------------------------------
Name: Jeffrey Horing
Its: Managing Member

UBS CAPITAL II LLC

By:
---------------------------------------------
Name:
Title:

[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]

<PAGE> 22

WI SOFTWARE INVESTORS LLC

By:
---------------------------------------------
Name:
Title:

[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]

<PAGE> 23

EXHIBIT A

AMENDED AND RESTATED ARTICLES

SEE TAB 8

<PAGE> 24

EXHIBIT B

SCHEDULE OF INVESTORS

<TABLE>
<CAPTION>
Investor Name and Purchase Price
- -------- Type of Securities --------------
------------------
<S> <C> <C>
Insight Capital 800,000 Shares $ 4,500,000
Partners II, L.P. of Series A Preferred Stock

Insight Capital 88,889 Shares $ 500,000
Partners (Cayman) II, L.P. of Series A Preferred Stock

UBS Capital LLC 977,778 Shares of $ 5,500,000
Series A Preferred
Stock

1,777,778 Shares of $10,000,000
Series B Redeemable
Preferred Stock

WI Software Investors LLC 800,000 Shares of $ 4,500,000
Series A Preferred Stock
TOTAL
-----

TOTAL SERIES A: 2,666,667 shares $25,000,000
--------------

TOTAL SERIES B: 1,777,778 shares
REDEEMABLE
----------
</TABLE>

<PAGE> 25

EXHIBIT C

SCHEDULE OF EXCEPTIONS

SEE TAB 2

<PAGE> 26

EXHIBIT D

INVESTORS' RIGHTS AGREEMENT

SEE TAB 3

<PAGE> 27

EXHIBIT E

SHAREHOLDERS AGREEMENT

SEE TAB 4

<PAGE> 28

EXHIBIT F

FORM OF COMMON STOCK RE-PURCHASE AGREEMENT

INTENTIONALLY OMITTED

<PAGE> 29

EXHIBIT G

OPINION OF COUNSEL FOR THE COMPANY

SEE TAB 12

<PAGE> 1
EXHIBIT 10.6

QUEST SOFTWARE, INC.

INVESTORS' RIGHTS AGREEMENT
DATED AS OF

APRIL 21, 1999

<PAGE> 2

INVESTORS' RIGHTS AGREEMENT

THIS INVESTORS' RIGHTS AGREEMENT (this "Agreement") is made as of the
21st day of April 1999, by and between Quest Software, Inc., a California
corporation (the "Company") and the Investors listed on the Schedule of
Investors attached as Exhibit B to the Securities Purchase Agreement (as defined
herein) ("each an "Investor" and together the "Investors").

RECITALS

WHEREAS, the Company, and the Investors are parties to the Securities
Purchase Agreement of even date herewith (the "Securities Purchase Agreement");
and

WHEREAS, in order to induce the Company to enter into the Securities
Purchase Agreement and to induce the Investors to invest funds in the Company
pursuant to the Securities Purchase Agreement, the Investors and the Company
hereby agree that this Agreement shall govern the rights of the Investors to
cause the Company to register shares of the Company's Common Stock (the "Common
Stock") issuable upon conversion of its Series A Preferred Stock (the "Series A
Stock") as set forth herein.

NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:

1. Registration Rights. The Company covenants and agrees as follows:

1.1 Definitions. For purposes of this Section 1:

(a) The term "Form S-3" means such form under the Securities Act
as in effect on the date hereof or any registration form under the Securities
Act subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company
with the SEC.

(b) The term "Holder" means any person owning or having the right
to acquire Registrable Securities or any assignee thereof in accordance with
Section 1.12 hereof.

(c) The term "Initial Public Offering" shall mean the closing of
the sale of securities pursuant to an effective registration statement filed by
the Company under the Securities Act (as hereinafter defined) in connection with
a firm commitment underwritten offering of its securities to the general public.

(d) The term "1934 Act" shall mean the Securities Exchange Act of
1934, as amended.

(e) The terms "register," "registered," and "registration" refer
to a registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act, and the declaration or
ordering of effectiveness of such registration statement or document.

<PAGE> 3

(f) The term "Registrable Securities" means the Common Stock
issuable or issued upon conversion of the Series A Stock (including without
limitation shares of Series A Stock issuable upon conversion of the Company's
Series B Redeemable Preferred Stock) sold and issued to the Investors pursuant
to the Securities Purchase Agreement.

(g) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities.

(h) The term "SEC" shall mean the Securities and Exchange
Commission.

(i) The term "Securities Act" means the Securities Act of 1933,
as amended.

1.2 Demand Registration Rights.

(a) If the Company shall receive at any time after the earlier of
(i) the effective date of the first registration statement for an Initial Public
Offering of securities of the Company (other than a registration statement
relating either to the sale of securities to employees of the Company pursuant
to a stock option, stock purchase or similar plan or a SEC Rule 145 transaction)
or (ii) three (3) years from the date hereof, a written request from Holders of
at least 40% of the Registrable Securities that the Company file a registration
statement under the Securities Act covering the registration of Registrable
Securities then outstanding, then the Company shall:

(i) within ten (10) days of the receipt thereof, give written
notice of such request to all Holders; and

(ii) use its best efforts to effect, as soon as practicable
and in any event within ninety (90) days of the receipt of such request, the
registration under the Securities Act of all Registrable Securities which the
Holders request to be registered (within twenty (20) days of the mailing of such
notice by the Company in accordance with Section 4.5) subject to the limitations
of Section 1.2(b).

(b) If the Holders initiating the registration request hereunder
(the "Initiating Holders") intend to distribute the Registrable Securities
covered by their request by means of an underwriting, they shall so advise the
Company as a part of their request made pursuant to Section 1.2(a) and the
Company shall include such information in the written notice referred to in
Section 1.2(a). The underwriter will be selected by a majority in interest of
the Initiating Holders and shall be reasonably acceptable to the Company. In
such event, the right of any Holder to include his Registrable Securities in
such registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting (unless otherwise mutually agreed by a majority in interest of the
Initiating Holders and such Holder) to the extent provided herein. All Holders
proposing to distribute their securities through such underwriting shall
(together with the Company as

<PAGE> 4

provided in Section 1.4(e)) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for such underwriting.
Notwithstanding any other provision of this Section 1.2, if the underwriter
advises the Initiating Holders in writing that marketing factors require a
limitation of the number of shares to be underwritten, then the Initiating
Holders shall so advise all Holders of Registrable Securities which would
otherwise be underwritten pursuant hereto, and the number of shares of
Registrable Securities that may be included in the underwriting shall be
allocated among all Holders thereof, including the Initiating Holders, in
proportion (as nearly as practicable) to the amount of Registrable Securities of
the Company owned by each Holder; provided, however, that the number of shares
of Registrable Securities to be included in such underwriting shall not be
reduced unless all other securities are first entirely excluded from the
underwriting.

(c) Notwithstanding the foregoing, if the Company shall furnish
to Holders requesting a registration statement pursuant to this Section 1.2 a
certificate signed by the Chief Executive Officer of the Company stating that in
the good faith judgment of the Board of Directors of the Company it would be
materially detrimental to the Company and its Shareholders for such registration
statement to be filed and it is therefore necessary to defer the filing of such
registration statement, the Company shall have the right to defer taking action
with respect to such filing for a period of not more than ninety (90) days after
receipt of the request of the Initiating Holders; provided, however, that the
Company may not utilize this right more than twice in any twelve month period.

(d) In addition, the Company shall not be obligated to effect, or
to take any action to effect, any registration pursuant to this Section 1.2:

(i) After the Company has effected two (2) registrations
pursuant to this Section 1.2 and such registrations have been declared or
ordered effective;

(ii) During the period starting with the date Ninety (90)
days prior to the Company's good faith estimate of the date of filing of, and
ending on a date Ninety (90) days after the effective date of, a registration
subject to Section 1.3 hereof; provided that the Company is actively employing
in good faith all reasonable efforts to cause such registration statement to
become effective; or

(iii) If the Initiating Holders propose to dispose of shares
of Registrable Securities that may be immediately registered on Form S-3
pursuant to a request made pursuant to Section 1.11 below.

1.3 Company Registration. If the Company at any time proposes to
register (including for this purpose a registration effected by the Company for
shareholders other than the Holders) any of its stock or other securities under
the Securities Act in connection with the public offering of such securities
solely for cash (other than an Initial Public Offering that does not include a
sale of shares other than by the Company or a registration statement relating
either to the sale of securities to employees of the Company pursuant to a stock
option, stock purchase or similar plan or a SEC Rule 145 transaction), the
Company shall, at such time, promptly give each Holder at least thirty (30) days
written notice of such registration. Upon the written request of each Holder
given within twenty (20) days after receipt of such notice by the Holder in

<PAGE> 5

accordance with Section 3.5, the Company shall, subject to the provisions of
Section 1.7, cause to be registered under the Securities Act all of the
Registrable Securities that each such Holder has requested to be registered.

1.4 Obligations of the Company. Whenever required under this Section
1 to effect the registration of any Registrable Securities, the Company shall,
as expeditiously as reasonably possible:

(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities registered thereunder, keep such
registration statement effective for a period of up to One Hundred Eighty (180)
days; provided, however, that (i) such One Hundred Eighty (180) day period shall
be extended for a period of time equal to the period the Holder refrains from
selling any securities included in such registration at the request of an
underwriter of Common Stock (or other securities) of the Company; and (ii) in
the case of any registration of Registrable Securities on Form S-3 which are
intended to be offered on a continuous or delayed basis, such One Hundred Eighty
(180) day period shall be extended, if necessary, to keep the registration
statement effective until all such Registrable Securities are sold, provided
that Rule 415, or any successor rule under the Securities Act, permits an
offering on a continuous or delayed basis, and provided further that applicable
rules under the Securities Act governing the obligation to file a post-effective
amendment permit, in lieu of filing a post-effective amendment which (I)
includes any prospectus required by Section 10(a)(3) of the Securities Act or
(II) reflects facts or events representing a material or fundamental change in
the information set forth in the registration statement, the incorporation by
reference of information required to be included in (I) and (II) above to be
contained in periodic reports filed pursuant to Section 13 or 15(d) of the 1934
Act in the registration statement.

(b) Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement.

(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.

(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders;
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions, unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act.

(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the

<PAGE> 6

managing underwriter of such offering. Each Holder participating in such
underwriting shall also enter into and perform its obligations under such an
agreement.

(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.

(g) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed, or if such securities are not already so
listed, on NASDAQ (or, if such listing is not permitted under the rules of
NASDAQ, on a securities exchange reasonably designated by a majority of the
holders of such Registrable Securities).

(h) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.

(i) Furnish, at the request of any Holder requesting registration
of Registrable Securities pursuant to this Section 1, on the date that such
Registrable Securities are delivered to the underwriters for sale in connection
with a registration pursuant to this Section 1, if such securities are being
sold through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, in form and
substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities, and (ii) a letter dated such date, from
the independent certified public accountants of the Company, in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities.

1.5 Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 1 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
Securities.

1.6 Expenses of Registration. All expenses (other than underwriting
discounts and commissions relating solely to Registrable Securities so
registered) incurred in connection with registrations, filings or qualifications
pursuant to Section 1.2, Section 1.3 or Section 1.11 (which right may be
assigned as provided in Section 1.12), including (without limitation) all
registration, filing and qualification fees, printers' and accounting fees, fees
and disbursements

<PAGE> 7

of counsel for the Company (including without limitation fees and disbursements
of a single counsel for the selling Holders) shall be borne by the Company.

1.7 Underwriting Requirements. In connection with any offering
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 1.3 to include any of the Holders'
securities in such underwriting unless such Holders accept the terms of the
underwriting as agreed upon between the Company and the underwriters selected by
the Company (or by other persons entitled to select the underwriters), and then
only in such quantity as the underwriters determine in their sole discretion
will not jeopardize the success of the offering by the Company. If the total
amount of securities, including Registrable Securities, requested by
shareholders to be included in such offering exceeds the amount of securities
sold other than by the Company that the underwriters determine in their sole
discretion is compatible with the success of the offering, then the Company
shall be required to include in the offering only that number of such
securities, including Registrable Securities, which the underwriters determine
in their sole discretion will not jeopardize the success of the offering (the
securities so included to be apportioned pro rata among the selling Holders
according to the total amount of securities entitled to be included therein
owned by each selling Holder or in such other proportions as shall mutually be
agreed to by such selling Holders), notwithstanding the foregoing, in no event
shall any Registrable Securities be excluded from such offering, unless all
other securities being offered, other than those being offered by the Company,
are first excluded from such offering. For purposes of the preceding
parenthetical concerning apportionment, for any selling Holder which is a holder
of Registrable Securities and which is a partnership, corporation or limited
liability company, the partners, retired partners, shareholders and members of
such holder, or the estates and family members of any such partners and retired
partners and any trusts for the benefit of any of the foregoing persons shall be
deemed to be a single "selling Holder", and any pro-rata reduction with respect
to such "selling Holder" shall be based upon the aggregate amount of shares
carrying registration rights owned by all entities and individuals included in
such "selling Holder", as defined in this sentence.

1.8 Delay of Registration. No Holder shall have any right to obtain
or seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 1.

1.9 Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 1:

(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, any underwriter (as defined in the Securities
Act) for such Holder and each person, if any, who controls such Holder or
underwriter within the meaning of the Securities Act or the 1934 Act, against
any losses, claims, damages, or liabilities (joint or several) to which they may
become subject under the Securities Act, the 1934 Act or other federal or state
law, insofar as such losses, claims, damages, or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively, a "Violation"): (i) any untrue statement
or alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (ii) the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to

<PAGE> 8

make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the 1934 Act or any state securities law, and the Company will pay to each such
Holder, underwriter or controlling person, as incurred, any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided, however,
that the indemnity agreement contained in this Section 1.9(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability, or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any such
case for any such loss, claim, damage, liability, or action to the extent that
it arises out of or is based upon a Violation which occurs in reliance upon and
in conformity with written information furnished expressly for use in connection
with such registration by such Holder, underwriter or controlling person.

(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Securities Act, any underwriter,
any other Holder selling securities in such registration statement and any
controlling person of any such underwriter or other Holder, against any losses,
claims, damages, or liabilities (joint or several) to which any of the foregoing
persons may become subject, under the Securities Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration; and each such
Holder will pay, as incurred, any legal or other expenses reasonably incurred by
any person intended to be indemnified pursuant to this Section 1.9(b), in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this Section 1.9(b) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Holder (which consent shall not be unreasonably withheld);
provided, that, in no event shall any indemnity under this Section 1.9(b) exceed
the net proceeds from the offering received by such Holder.

(c) Promptly after receipt by an indemnified party under this
Section 1.9 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.9, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if materially prejudicial to its

<PAGE> 9

ability to defend such action, shall relieve such indemnifying party, to the
extent of such prejudice, of any liability to the indemnified party for any
losses, claims, damages or liabilities for which indemnification would otherwise
be available under this Section 1.9, but the omission so to deliver written
notice to the indemnifying party will not relieve it of any liability that it
may have to any indemnified party otherwise than under this Section 1.9.

(d) If the indemnification provided for in this Section 1.9 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage, or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.

(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.

(f) The obligations of the Company and Holders under this Section
1.9 shall survive the completion of any offering of Registrable Securities in a
registration statement under this Section 1, and otherwise.

1.10 Reports Under Securities Exchange Act of 1934. With a view to
making available to the Holders the benefits of Rule 144 promulgated under the
Securities Act and any other rule or regulation of the SEC that may at any time
permit a Holder to sell securities of the Company to the public without
registration or pursuant to a registration on Form S-3, the Company agrees to:

(a) make and keep public information available, as those terms
are understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public;

(b) take such action, including the voluntary registration of its
Common Stock under Section 12 of the 1934 Act, as is necessary to enable the
Holders to utilize Form S-3 for the sale of their Registrable Securities, such
action to be taken as soon as practicable after the end of the fiscal year in
which the first registration statement filed by the Company for the offering of
its securities to the general public is declared effective;

<PAGE> 10

(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the 1934 Act; and

(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144 (at
any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Securities Act and the 1934
Act (at any time after it has become subject to such reporting requirements), or
that it qualifies as a registrant whose securities may be resold pursuant to
Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent
annual or quarterly report of the Company and such other reports and documents
so filed by the Company, and (iii) such other information as may be reasonably
requested in availing any Holder of any rule or regulation of the SEC which
permits the selling of any such securities without registration or pursuant to
such form.

1.11 Form S-3 Registration. In case the Company shall receive from
any Holder or Holders a written request or requests that the Company effect a
registration on Form S-3 and any related qualification or compliance with
respect to all or a part of the Registrable Securities owned by such Holder or
Holders, the Company will:

(a) promptly give at least twenty (20) days written notice of the
proposed registration, and any related qualification or compliance, to all other
Holders; and

(b) as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Holder's or
Holders' Registrable Securities as are specified in such request, together with
all or such portion of the Registrable Securities of any other Holder or Holders
joining in such request as are specified in a written request given within
fifteen (15) days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this Section 1.11: (1) if
Form S-3 is not available for such offering by the Holders; (2) if the Holders,
together with the holders of any other securities of the Company entitled to
inclusion in such registration, propose to sell Registrable Securities and such
other securities (if any) at an aggregate price to the public (net of any
underwriters' discounts or commissions) of less than Five Hundred Thousand
Dollars ($500,000); (3) if the Company shall furnish to the Holders a
certificate signed by the Chief Executive Officer of the Company stating that in
the good faith judgment of the Board of Directors of the Company, it would be
materially detrimental to the Company and its Shareholders for such Form S-3
Registration to be effected at such time, in which event the Company shall have
the right to defer the filing of the Form S-3 registration statement for a
period of not more than ninety (90) days after receipt of the request of the
Holder or Holders under this Section 1.11; provided, however, that the Company
shall not utilize this right more than twice in any twelve (12) month period;
(4) if the Company has, within the twelve (12) month period preceding the date
of such request, already effected two (2) registrations on Form S-3 for the
Holders pursuant to this Section 1.11; or (5) in any particular jurisdiction in
which the Company would be required to qualify to do business or to execute a
general consent to service of process in effecting such registration,
qualification or compliance.

<PAGE> 11

(c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. All expenses incurred in connection with a
registration requested pursuant to Section 1.11, including (without limitation)
all registration, filing, qualification, printer's and accounting fees and the
reasonable fees and disbursements of counsel for the selling Holder or Holders
and counsel for the Company, but excluding any underwriters' discounts or
commissions associated with Registrable Securities, shall be borne by the
Company. Registrations effected pursuant to this Section 1.11 shall not be
counted as demands for registration or registrations effected pursuant to
Sections 1.2 or 1.3, respectively.

1.12 Assignment of Registration Rights. The rights to cause the
Company to register Registrable Securities pursuant to this Section 1 may be
assigned (but only with all related obligations) by a Holder to a transferee or
assignee of such securities, provided: (a) the Company is, within a reasonable
time after such transfer, furnished with written notice of the name and address
of such transferee or assignee and the securities with respect to which such
registration rights are being assigned; (b) such transferee or assignee agrees
in writing to be bound by and subject to the terms and conditions of this
Agreement, including without limitation the provisions of Section 1.13 below;
(c) such assignment shall be effective only if immediately following such
transfer the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act and (d) such transferee or
assignee acquires at least 25% of such Holders shares of Registrable Securities.

1.13 "Market Stand-Off" Agreement. Each Investor hereby agrees that,
during the period of duration specified by the Company and an underwriter of
common stock or other securities of the Company, following the date of a sale to
the public pursuant to a registration statement of the Company filed under the
Securities Act, it shall not, to the extent requested by the Company and such
underwriter, directly or indirectly sell, offer to sell, contract to sell
(including, without limitation, any short sale), grant any option to purchase or
otherwise transfer or dispose of (other than to donees who agree to be similarly
bound) any securities of the Company held by it at any time during such period
except common stock included in such registration; provided, however, that:

(a) all officers, directors and ten percent (10%) or greater
stockholders of the Company (whether or not pursuant to this Agreement) enter
into similar agreements; and

(b) such market stand-off time period shall not exceed one
hundred eighty (180) days in the case of the Company's Initial Public Offering,
and shall not exceed ninety (90) days in all other registrations.

In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Investor (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period.

Notwithstanding the foregoing, the obligations described in this Section
1.13 shall not apply to a registration relating solely to employee benefit plans
on Form S-8 or similar forms

<PAGE> 12

which may be promulgated in the future, or a registration relating solely to a
SEC Rule 145 transaction on Form S-4 or similar forms which may be promulgated
in the future.

2. Covenants of the Company.

2.1 Pre-emptive Rights. For so long as shares of the Series A Stock
or the Series B Stock remain outstanding, the Company hereby grants the
Investors pre-emptive rights with respect to future sales of equity securities
by the Company. Each time the Company offers any shares of, or securities
convertible into or exercisable for any shares of, any class of its capital
stock ("Shares"), the Company shall make an offering of such Shares to the
Investor in accordance with the following provisions:

(a) The Company shall deliver a notice by certified mail
("Notice") to the Investors stating (i) that the Company is offering such
Shares, (ii) the number of such Shares to be offered and (iii) the price and
terms, if any, upon which it proposes to offer such Shares.

(b) Within twenty (20) days after receipt of the Notice, the
Investors may elect to purchase or obtain, at the price and on the terms
specified in the Notice, up to that portion of such Shares which equals the
proportion that the number of shares of Common Stock issued and held, or
issuable upon conversion of the Series A Stock, then held, by such Investor
bears to the total number of shares of Common Stock issued and outstanding and
issuable upon the conversion of the Series A Stock then outstanding (the "Pro
Rata Share"); provided, however that if the issuance of such Shares is at a
price of less than $5.625 per share (subject to adjustment after the date hereof
for stock splits, dividends, reclassifications and the like), such Investors may
elect to purchase or obtain, at the price and on the terms specified in the
Notice, up to twice such Investor's Pro Rata Share.

(c) Notwithstanding the foregoing, if the Shares to be issued by
the Company are an equity security, the proceeds of which will be used by the
Company to redeem the Redeemable Preferred Stock purchased by the Investors
under the Securities Purchase Agreement, in lieu of the rights granted in
subsection (b) above, the Investors shall have the right to purchase or obtain,
at the price and on the terms specified in the Notice, up to twice such
Investors Pro Rata Share.

(d) Thereafter, the Company may, during the six (6) month period
following the expiration of the period provided in Section 2.1(b) hereof, offer
the remaining unsubscribed portion of such Shares to any person or persons at a
price not less than, and upon terms no more favorable to the offeree than those
specified in the Notice. If the Company does not enter into an agreement for the
sale of the Shares within such period, or if such agreement is not consummated
within six (6) months of the execution thereof, the right provided hereunder
shall be deemed to be revived and such Shares shall not be offered unless first
reoffered to the Investor in accordance herewith.

(e) The pre-emptive rights in this Section 2.1 shall not be
applicable (i) to the issuance or sale of shares of Common Stock (or options or
warrants therefor) to service providers of the Company for the primary purpose
of soliciting or retaining their employment, or otherwise providing compensation
to such person, provided that such issuance or sale is

<PAGE> 13

consummated pursuant to the terms of a stock option plan or other equity
incentive program approved by the Board of Directors, and provided that the
Company has not issued to Vincent Smith and David Doyle, in any twelve (12)
month period, the lesser of (A) 3% of the outstanding Common Stock of the
Company or (B) an amount equal to the industry standard for officers of
similarly situated companies, and provided further, that each service provider
of the Company executes an agreement, in the form of an option agreement, in
form and substance reasonably satisfactory to the Board of Directors of the
Company, (ii) with respect to, or after consummation of, a firm commitment
public offering by the Company pursuant to an effective registration statement
under the Securities Act of 1933, as amended, provided, that such registration
statement covers the offer and sale of Common Stock of which the aggregate net
proceeds after deducting underwriting discounts and commissions attributable to
sales for the account of the Corporation exceed $25,000,000 at a per share price
to public (as set forth in the final prospectus in connection with such public
offering) equal to at least $8 (subject to adjustment for stock splits,
combinations, stock dividends or recapitalizations), (iii) to the issuance of
securities pursuant to the conversion or exercise of convertible or exercisable
securities, (iv) to the issuance of securities in connection with a bona fide
business acquisition of or by the Company, whether by merger, consolidation,
sale of assets, sale or exchange of stock or otherwise, (v) to the issuance of
stock, warrants or other securities or rights to persons or entities with which
the Company has business relationships, provided such issuances are for other
than primarily equity financing purposes, that such issuances are not to
affiliates of the Company and that at the time of any such issuance, the
aggregate of such issuances and similar issuances in the preceeding twelve (12)
month period do not exceed 2% of the then outstanding Common Stock of the
Company (assuming full conversion and exercise of all convertible and
exercisable securities) and (vi) warrants issued to persons or entities that are
not affiliates of the Company and in connection with a bona-fide debt financing,
joint venture, strategic development agreement, lease line or credit arrangement
or bank financing approved by the Board of Directors.

(f) The pre-emptive rights set forth in this Section 2.1 may not
be assigned or transferred, except that (i) such right is assignable by each
Holder to any wholly-owned subsidiary or parent of, or to any corporation or
entity that is, within the meaning of the Securities Act, controlling,
controlled by or under common control with, any such Holder, and (ii) such right
is assignable between and among any of the Holders.

2.2 Delivery of Financial Statements. The Company shall deliver to
each Investor:

(a) as soon as practicable, but in any event within one hundred
twenty (120) days after the end of each fiscal year of the Company, an income
statement for such fiscal year, a balance sheet of the Company, statement of
shareholders' equity as of the end of such year and a statement of cash flows
for such year, audited and prepared in accordance with generally accepted
accounting principles;

(b) as soon as practicable, but in any event within forty-five
(45) days after the end of each of the first three (3) quarters of each fiscal
year of the Company, an unaudited profit or loss statement, a statement of cash
flows schedule for such fiscal quarter, an unaudited balance sheet and a
statement of shareholder's equity as of the end of such fiscal quarter;

<PAGE> 14

(c) as soon as practicable, but in any event sixty (60) days
after the end of each fiscal year, beginning with the fiscal year ending
December 31, 1999, a budget and business plan for the next fiscal year, prepared
on a quarterly basis, including balance sheets and a statement of cash flows for
such months and, as soon as prepared, any other budgets or revised budgets
prepared by the Company; and

(d) such other information relating to the financial condition,
business, prospects or corporate affairs of the Company as the Investor or any
assignee of the Investor may from time to time request, provided, however, that
the Company shall not be obligated under this subsection (d) or any other
subsection of Section 2.2 to provide information which it deems in good faith to
be a trade secret or similar confidential information.

(e) Each Investor hereby agrees to hold in confidence and trust
and not to misuse or disclose any confidential information of the Company,
including the financial statements referred to in this Section 2.2
("Confidentially Disclosed Information"), without the prior written consent of
the Company; provided, however that an Investor shall not be required to obtain
the prior written consent of the Company to distribute the Confidentially
Disclosed Information to any affiliate of limited partner of such Investor
provided that such affiliate or limited partner has agreed to hold such
information in the same manner as set forth in this paragraph (e).

2.3 Termination of Information Covenants. The covenants set forth in
Section 2.2 shall terminate as to Investor and be of no further force or effect
upon either (a) the sale of securities pursuant to a registration statement
filed by the Company under the Securities Act in connection with the Initial
Public Offering or (b) the date on which 25% of the Series A Stock ceases to be
outstanding.

3. Miscellaneous.

3.1 Successors and Assigns. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Securities). Nothing in this Agreement, express or implied,
is intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.

3.2 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of California, exclusive of the provisions thereof
governing conflicts of laws.

3.3 Counterparts. This Agreement may be executed in two (2) or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

3.4 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.

<PAGE> 15

3.5 Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties.

3.6 Expenses. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.

3.7 Amendments and Waivers. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively), only
with the written consent of (i) the Company, (ii) the holders of a majority of
the Series A Stock, excluding shares of Series A Stock issued upon conversion of
shares of Series B Stock, (or, if there shall be no such Series A Stock
outstanding, a majority of the Common Stock issued upon conversion of such
Series A Stock, and (iii) the holders of a majority of the Series B Stock (or,
if there shall be no Series B Stock outstanding, a majority of the Series A
Stock issued upon conversion of the Series B Stock, or, if there shall be no
such shares of Series A Stock outstanding, a majority of the shares of Common
Stock issued upon conversion of such Series A Stock) as of the date of the
amendment or waiver. Any amendment or waiver effected in accordance with this
paragraph shall be binding upon each holder of any securities purchased under
the Securities Purchase Agreement then outstanding, each future holder of all
such securities, and the Company.

3.8 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.

3.9 Aggregation of Stock. All shares of Series A Stock, Series B
Stock and Common Stock issued or issuable upon conversion of the Series A Stock
held or acquired by affiliated entities or persons shall be aggregated together
for the purpose of determining the availability of any rights under this
Agreement.

3.10 Entire Agreement. This Agreement and the documents referred to
herein constitute the entire agreement among the parties with regard to the
subjects hereof and thereof.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

<PAGE> 16

IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.

QUEST SOFTWARE, INC.

By:
---------------------------------
Name: Vinny Smith
Its: Chief Executive Officer

Address:
610 Newport Center Drive
Newport Beach, CA 92660

INSIGHT CAPITAL PARTNERS II, L.P.
By: Insight Venture Associates II, LLC
Its General Partner

By:
---------------------------------
Name: Jeffrey Horing
Its: Managing Member

INSIGHT CAPITAL PARTNERS (CAYMAN)
II, L.P.
By: Insight Venture Associates II, LLC
Its General Partner

By:
---------------------------------
Name: Jeffrey Horing
Its: Managing Member

UBS CAPITAL II LLC

By:
---------------------------------
Name:
Title:

[SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT]

<PAGE> 17

WI SOFTWARE INVESTORS LLC

By:
---------------------------------
Name:
Title:

[SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT]

<PAGE> 1

EXHIBIT 21.1

<TABLE>
<CAPTION>
JURISDICTION OF
NAME ORGANIZATION
- ---- ---------------
<S> <C>
Common Sense Computing (U.K.) Ltd. U.K.
Quest Software GmbH Germany
Quest Software Pty Ltd. Australia
Quest Software Company Ltd. Ireland
Quest Software Israel Ltd. Israel
Quest Software Foreign Sales Corporation Barbados
Quest Software International Ltd. U.K.
</TABLE>

<PAGE> 1

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE

To the Board of Directors and Stockholders of
Quest Software, Inc. and subsidiaries

We consent to the use in this Registration Statement of Quest Software, Inc. and
subsidiaries on Form S-1 of our report dated June 9, 1999, (except for
paragraphs 3 of note 1 and the 1999 Stock Incentive Plan and 1999 Employee Stock
Purchase Plan described in note 5 as to which the date is June , 1999)
appearing in the Prospectus, which is a part of this Registration Statement, and
to the reference to us under the heading "Experts" in such Prospectus.

Our audits of the financial statements referred to in our aforementioned report
also included the financial statement schedule of Quest Software, Inc. and
subsidiaries, listed in Item 16. This financial statement schedule is the
responsibility of the Corporation's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.

Costa Mesa, California
June , 1999

The above consent is in the form which will be signed by Deloitte & Touche
LLP upon the consummation of the items described in notes 1 and 5 of the notes
to the consolidated financial statements and assuming that from June 9, 1999 to
the effective date of such items, no other events have occurred that would
affect the accompanying consolidated financial statements and notes thereto.

Deloitte & Touche LLP
Costa Mesa, California
June 11, 1999

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 12,502,000
<SECURITIES> 0
<RECEIVABLES> 7,567,000
<ALLOWANCES> 1,016,000
<INVENTORY> 0
<CURRENT-ASSETS> 19,870,000
<PP&E> 3,653,000
<DEPRECIATION> 1,976,000
<TOTAL-ASSETS> 22,472,000
<CURRENT-LIABILITIES> 16,561,000
<BONDS> 0
0
0
<COMMON> 4,243,000
<OTHER-SE> 1,668,000
<TOTAL-LIABILITY-AND-EQUITY> 22,472,000
<SALES> 9,540,000
<TOTAL-REVENUES> 12,814,000
<CGS> 660,000
<TOTAL-COSTS> 1,564,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,528,000
<INCOME-TAX> 645,000
<INCOME-CONTINUING> 883,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 883,000
<EPS-BASIC> .02
<EPS-DILUTED> .02

</TABLE>