QUEST SOFTWARE INC, 424B1, 1999-08-13

QUEST SOFTWARE INC
424B1, 1999-08-13
PREPACKAGED SOFTWARE

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<PAGE> 1

This filing is made
pursuant to Rule
424(b)(1) under the
Securities Act of 1933
in connection with
Registration No.
333-80543

[Quest Software Logo]

4,400,000 SHARES

COMMON STOCK
----------------------------------

Quest Software, Inc. is offering 4,400,000 shares of common stock. This is
our initial public offering and no public market currently exists for our
shares. Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "QSFT."

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

INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.

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<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public Offering Price....................................... $14.00 $61,600,000
Underwriting Discounts and Commissions...................... $ 0.98 $ 4,312,000
Proceeds to Quest Software, Inc............................. $13.02 $57,288,000
</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.

We have granted the underwriters a 30-day option to purchase up to an
additional 660,000 shares of common stock to cover any over-allotments. We have
requested that the underwriters reserve up to 12% of the shares of common stock
for sale at the initial public offering price to individuals designated by us.
BancBoston Robertson Stephens Inc. expects to deliver the shares of common stock
to purchasers on August 18, 1999.

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

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

THE DATE OF THIS PROSPECTUS IS AUGUST 13, 1999.
<PAGE> 2

Inside Front Cover

[QUEST SOFTWARE LOGO]

The Quest Solution.

Quest offers both application and information availability solutions that
enhance the performance and reliability of e-business, enterprise and custom
applications and facilitate the delivery of information across the entire
enterprise.

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

[Three columns of text at the bottom of the page. The first column is entitled
"Development -- Deployment" and reads, "Integrated products that aid in the
rapid development, testing and automated deployment of Internet software
applications in quickly changing, mission-critical environments." The second
column is entitled "Production Management" and reads, "Software solutions
designed to maintain high performance and provide constant access to critical
business applications, as well as monitoring these systems to detect and correct
problems before they impact users." The third column is entitled "Information
Delivery" and reads, "An output management system that captures and delivers
reports and data from nearly any software application for immediate and secure
distribution to information consumers within an organization or over the
Internet."]

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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.

UNTIL SEPTEMBER 7, 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION
TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENT OR SUBSCRIPTIONS.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 4
Risk Factors................................................ 7
Information Regarding Forward-Looking Statements............ 15
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Dilution.................................................... 18
Selected Consolidated Financial Data........................ 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Business.................................................... 30
Management.................................................. 44
Certain Transactions........................................ 54
Principal Shareholders...................................... 56
Description of Capital Stock................................ 58
Shares Eligible for Future Sale............................. 60
Underwriting................................................ 62
Legal Matters............................................... 64
Experts..................................................... 64
Additional Information...................................... 64
Index to Consolidated Financial Statements.................. F-1
</TABLE>

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<PAGE> 4

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.

QUEST SOFTWARE, INC.

Organizations are constantly seeking ways to use information and 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 business over the Internet to directly reach a
large number of geographically dispersed end-users. These initiatives, commonly
referred to as e-business, 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 entire 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 by utilizing a
number of integrated products that tune the performance and monitor the
operation of applications and the underlying database which stores an
enterprise's critical information. Other primary components of our application
availability solution include our database products that maintain a real-time
copy of a database for offloading critical systems and assuring high
availability, as well as our products that manage the complex and error-prone
process of development and deployment of rapidly changing applications. 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.................. 4,400,000 shares

Common stock to be outstanding after
this offering......................... 38,124,600 shares

Use of proceeds....................... We intend to use the net proceeds as
follows:

- $10.6 million to redeem all
outstanding shares of our Series B
Redeemable Preferred Stock;

- $10.0 million to repay
indebtedness; and

- the balance 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.

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 June 30, 1999 which
excludes:

- 4,578,875 shares of common stock issuable upon exercise of stock options
outstanding as of June 30, 1999, at a weighted average exercise price of
$1.88 per share;

- 15,438 shares of common stock issued upon the exercise of options in July
1999;

- 2,914,525 shares of common stock reserved for future issuance under our
stock incentive plans; 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 7 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 automatic conversion of our Series A Preferred Stock 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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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following table should be read with the consolidated financial
statements and notes thereto appearing elsewhere in this prospectus. The pro
forma information gives effect, as of June 30, 1999, to the issuance of
4,000,000 shares of common stock upon the conversion of all outstanding shares
of our Series A Preferred Stock immediately prior to the closing of this
offering. The pro forma as adjusted information reflects the conversion of the
Series A Preferred Stock and our receipt of the estimated net proceeds from the
sale of 4,400,000 shares of our common stock offered by us hereby at the initial
public offering price of $14.00 per share and the applications of the estimated
proceeds described in "Use of Proceeds."

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------- -----------------
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 $14,035 $28,289
Gross profit........................... 3,461 8,284 10,445 15,036 28,850 11,487 25,147
Income (loss) from operations.......... 37 2,335 (372) 1,448 3,689 1,417 2,191
Net income............................. 17 2,358 16 289 2,346 899 1,314
Net income applicable to common
shareholders......................... 974
Net income per share:
Basic................................ $ -- $ 0.12 $ -- $ 0.01 $ 0.05 $ 0.02 $ 0.03
Diluted.............................. $ -- $ 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 43,990 38,809
Diluted.............................. 19,500 19,500 38,350 40,617 44,459 43,990 43,580
Pro forma basic and diluted net income
per share............................ $ 0.05 $ 0.02
Pro forma weighted average shares
outstanding:
Basic................................ 48,261 42,809
Diluted.............................. 48,459 45,016
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1999
-----------------------
PRO FORMA
PRO FORMA AS ADJUSTED
--------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $11,777 $47,475
Working capital............................................. 3,151 38,849
Total assets................................................ 27,468 63,166
Long-term debt.............................................. 10,000 --
Series B Redeemable Preferred Stock......................... 10,340 --
Retained earnings (deficit)................................. 31 (269)
Total shareholders' equity (deficit)........................ (13,751) 42,287
</TABLE>

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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. 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.

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, CAUSING OUR
STOCK PRICE TO FLUCTUATE OR DECLINE

Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors. These factors include the following:

- the size and timing of customer orders. See "-- The size and timing of
our customer orders may vary significantly from quarter to quarter which
could cause fluctuations in our revenues."

- 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.

See "-- Customer focus and spending on Year 2000 remediation make it
difficult to predict the buying patterns of our customers during the third and
fourth quarters of 1999."

THE SIZE AND TIMING OF OUR CUSTOMER ORDERS MAY VARY SIGNIFICANTLY FROM QUARTER
TO QUARTER WHICH COULD CAUSE FLUCTUATIONS IN OUR REVENUES

In any given quarter, sales of some of our products have involved large
financial commitments from a relatively small number of customers, and
cancellation or deferral of these large contracts would reduce our revenues. In
addition, the sales cycles for Vista Plus and SharePlex have been up to six
months and often require pre-purchase evaluation periods and customer education.
These relatively long sales cycles may cause significant periodic variation in
our license revenues. Also, we have often booked a large amount of our sales in
the last month or weeks of each quarter and delays in the closing of sales near
the end of a quarter could cause quarterly revenue to fall short of anticipated
levels. Finally, 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.

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MANY OF OUR PRODUCTS ARE DEPENDENT ON ORACLE'S TECHNOLOGIES AND IF ORACLE'S
TECHNOLOGIES LOSE MARKET SHARE OR BECOME INCOMPATIBLE WITH OUR PRODUCTS, THE
DEMAND FOR OUR PRODUCTS COULD SUFFER

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 ARE VULNERABLE TO DIRECT COMPETITION FROM 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. See "Business -- Competition."

OUR ABILITY TO INCREASE OUR REVENUES DEPENDS ON OUR ABILITY TO EXPAND OUR
INDIRECT SALES CHANNELS

Our ability to increase revenues in the future substantially depends on our
ability to expand our indirect sales channel.

In certain domestic and 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.

OUR PAST AND FUTURE GROWTH MAY STRAIN OUR MANAGEMENT, ADMINISTRATIVE,
OPERATIONAL AND FINANCIAL INFRASTRUCTURE

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 operations. The number of our full-time employees
increased from 66 as of December 31, 1996 to 123 as of December 31, 1997, to 257
as of December 31, 1998, to 415 as of June 30, 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

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unable to manage this growth effectively, our business, operating results and
financial condition may be materially adversely affected.

WE MAY NOT GENERATE INCREASED BUSINESS FROM OUR CURRENT CUSTOMERS WHICH COULD
SLOW OUR REVENUE GROWTH IN THE FUTURE

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, WHICH MAY AFFECT OUR FUTURE PROFITABILITY

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.

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

We have in the past made 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
subject us to liabilities and risks that are not known or identifiable at the
time of the acquisition or 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

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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. In consummating acquisitions, we are also subject to
risks of entering geographic and business markets in which we have no or limited
prior experience. 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 $6.2 million in the six months ended June 30, 1999, representing 22.0% 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.

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

Our operating results for the six months ended June 30, 1999 were dependent
in part upon the commercial success of our Vista Plus product line and we expect
a significant portion, but not a majority, 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.

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FAILURE TO DEVELOP STRATEGIC RELATIONSHIPS COULD HARM OUR BUSINESS BY DENYING US
SELLING OPPORTUNITIES AND OTHER BENEFITS

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 Hewlett-Packard and 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 OR INDEPENDENT DEVELOPMENT OF COMPETING TECHNOLOGY THAT
COULD HARM OUR COMPETITIVE POSITION

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. 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 proprietary rights of others. Any such
resulting litigation could result in substantial costs and diversion of
resources.

Our means of protecting our proprietary rights may prove to be inadequate
and competitors may 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. Third parties
may claim infringement by us of their intellectual property rights. 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, we may incur substantial licensing
fees, be liable for infringement damage, or be unable to market our products.

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. The suit seeks injunctive relief and unspecified
damages. See "Business -- Legal Proceedings" and "Business -- Proprietary
Rights."

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

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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.

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

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 REDUCE THE DEMAND FOR, OR
PREVENT THE SHIPPING OF, OUR PRODUCTS

Our SQL Navigator, TOAD and Vista Plus products contain components
developed and maintained by third-party software vendors. For example, we
incorporate software licensed from Inso Corporation and Artifex Software into
add-on options for our Vista Plus products. 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. Although we believe there
are adequate alternate sources for the technology licensed to us by Inso and
Artifex, such alternate sources may not provide us with the same functionality
as that currently provided to us. Further, we may experience a delay in
obtaining an alternate source for the file viewing technology licensed to us by
Inso if our license with Inso becomes unavailable for any reason.

RISKS RELATED TO OUR INDUSTRY

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

We are in the process of our Year 2000 review program for the systems we
use to run our business. The Year 2000 problem could affect these systems
causing a disruption in our business as well as divert management's attention
from ordinary business activities. In addition, there can be no assurance that
third parties that we rely upon for services will resolve their Year 2000
problems. If our present efforts to address Year 2000 issues are not successful,
or if third parties upon which we rely to conduct our business do not
successfully address such issues, our business, operating results and financial
condition would be materially adversely affected. We are unable to reasonably
estimate the duration and extent of any such unanticipated interruption to our
business caused by the Year 2000, or quantify the effect it may have on our
future operating results. We have not yet developed a comprehensive contingency
plan to address these issues but we intend to continue developing such a plan,
to the extent possible, throughout 1999. Please

12
<PAGE> 13

refer to our discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000" for further information.

Quest believes that the following consequences are possible in a
"reasonable worst case" Year 2000 scenario:

- costly business disputes and claims for pricing adjustments, damages,
product returns and warranty obligations related to our products, any of
which could cause a delay in receipt of revenues from our customers;

- a significant number of operational inconveniences and inefficiencies for
Quest and its customers that will divert management's time and attention;
and

- Year 2000 non-compliance by third parties that would disrupt, reduce or
eliminate for a period of time the ability of our customers to purchase
our products, thereby reducing our revenues.

CUSTOMER FOCUS AND SPENDING ON YEAR 2000 REMEDIATION MAKE 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.

THE DEMAND FOR OUR PRODUCTS 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

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

WE MAY NOT BE ABLE 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

13
<PAGE> 14

and development personnel over at least the next 12 months. There has in the
past been and there may in the future be a shortage of personnel that possess
the technical background necessary to sell, support and develop our products
effectively. 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

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 80% 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

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

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

THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK, AND THE OFFERING PRICE OF
THE COMMON STOCK MAY BE UNRELATED TO THE TRADING PRICE

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 has been determined based on
negotiations between us and the representatives of the underwriters, based on
factors that may not be indicative of future market performance.

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. Based on the shares of common stock outstanding as of June 30, 1999,
on completion of this offering, we will have 38,124,600 shares of common stock
outstanding, or
14
<PAGE> 15

38,784,600 shares if the underwriters' option to purchase additional shares is
exercised in full. The 4,400,000 shares sold in this offering, which would be
5,060,000 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 33,724,600
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 substantially all of our 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."

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

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. In light
of these assumptions, risks and uncertainties, the forward-looking events
discussed in this prospectus might not occur.

15
<PAGE> 16

USE OF PROCEEDS

The net proceeds to us from the sale of the 4,400,000 shares of common
stock offered hereby will be approximately $56.3 million, based upon the initial
public offering price per share of $14.00 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 $10.6 million;

- to repay $10.0 million of outstanding term indebtedness that matures in
May 2002 and bears interest at the prime rate, 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 proceeds from the issuance of the Series B Preferred Stock and the
$10.0 million of term indebtedness in April 1999 originally financed a portion
of our repurchase of the 14,820,000 shares of our common stock held by Doran
Machin, one of our co-founders. The total purchase price for Mr. Machin's shares
was $35.0 million.

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.

16
<PAGE> 17

CAPITALIZATION

The Actual column in the following table sets forth our actual
capitalization as of June 30, 1999.

The Pro Forma column in the following table gives effect to 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 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 $10.6 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 4,400,000 shares of common stock in this offering at the
initial public offering price of $14.00 per share and the application of
the estimated net proceeds therefrom.

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>
JUNE 30, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt.............................................. $ 10,000 $ 10,000 $ --
-------- -------- --------
Series A Redeemable Preferred Stock, no par value, 2,666,667
shares authorized, 2,666,667 shares issued and outstanding
actual and pro forma, no shares issued or outstanding pro
forma as adjusted......................................... 15,000 -- --
Series B Redeemable Preferred Stock, no par value, 1,800,000
shares authorized; 1,777,778 shares issued and
outstanding, pro forma; no shares issued and outstanding,
pro forma as adjusted..................................... 10,340 10,340 --
Shareholders' 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,
29,724,600, 33,724,600 and 38,124,600 shares issued and
outstanding, actual, pro forma and pro forma as
adjusted.................................................. 4,306 19,306 75,644
Retained earnings (deficit)................................. 31 31 (269)
Notes receivable from sale of common stock.................. (3,024) (3,024) (3,024)
Capital distribution in excess of basis in common stock..... (30,064) (30,064) (30,064)
-------- -------- --------
Total shareholders' equity (deficit)...................... (28,751) (13,751) 42,287
-------- -------- --------
Total capitalization...................................... $ 6,589 $ 6,589 $ 42,287
======== ======== ========
</TABLE>

The information in the table above excludes:

- 4,578,875 shares of common stock issuable upon exercise of stock options
outstanding as of June 30, 1999 at a weighted average exercise price of
$1.88 per share;

- 15,438 shares of common stock issued upon the exercise of options in July
1999;

- 2,914,525 shares of common stock reserved for future issuance under our
stock incentive plans; and

17
<PAGE> 18

DILUTION

Our pro forma net tangible book value (deficit) as of June 30, 1999 was
$(14,127,000), or $(0.42) 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 our Series A
Preferred Stock into 4,000,000 shares of common stock.

After giving effect to the sale of the 4,400,000 shares of common stock
offered hereby at the initial public offering price of $14.00 per share and our
receipt of the estimated net proceeds therefrom, our pro forma net tangible book
value as of June 30, 1999 would have been approximately $41,911,000, or $1.10
per share. This represents an immediate increase in pro forma net tangible book
value of $1.52 per share to existing shareholders and an immediate dilution in
pro forma net tangible book value of $12.90 per share to new investors. The
following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $14.00
Pro forma net tangible book value (deficit) per share..... $(0.42)
Increase per share attributable to new investors.......... 1.52
------
Pro forma net tangible book value per share after this
offering.................................................. 1.10
------
Dilution per share to new investors......................... $12.90
======
</TABLE>

The following table summarizes on a pro forma basis, as of June 30, 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.................. 33,724,600 88.5% $19,249,000 24% $ 0.57
New investors.......................... 4,400,000 11.5 61,600,000 76 $14.00
---------- ----- ----------- -----
Totals....................... 38,124,600 100.0% $80,849,000 100.0%
========== ===== =========== =====
</TABLE>

The information in the table above excludes:

- 4,578,875 shares of common stock issuable upon exercise of stock options
outstanding as of June 30, 1999 at a weighted average exercise price of
$1.88 per share;

- 15,438 shares of common stock issued upon the exercise of options in July
1999;

- 2,914,525 shares of common stock reserved for future issuance under our
stock incentive plans; and

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

18
<PAGE> 19

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 six months ended June 30, 1998 and 1999 and the
consolidated balance sheet data at December 31, 1997 and 1998 and June 30, 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. The data
presented below do 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.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- -----------------
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 $12,158 $24,901 $ 9,580 $21,365
Services..................................... 851 2,305 3,546 6,157 9,889 4,455 6,924
------- ------- ------- ------- ------- ------- -------
Total revenues......................... 5,686 9,524 12,862 18,315 34,790 14,035 28,289
------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Licenses..................................... 99 260 950 1,307 3,433 1,504 1,404
Services..................................... 2,126 980 1,467 1,972 2,507 1,044 1,738
------- ------- ------- ------- ------- ------- -------
Total cost of revenues................. 2,225 1,240 2,417 3,279 5,940 2,548 3,142
------- ------- ------- ------- ------- ------- -------
Gross profit................................... 3,461 8,284 10,445 15,036 28,850 11,487 25,147
Operating expenses:
Sales and marketing.......................... 672 2,179 4,328 5,845 11,836 4,371 12,158
Research and development..................... 502 1,134 2,995 4,293 8,047 3,629 6,034
General and administrative................... 2,250 2,636 3,494 3,450 5,278 2,070 3,989
Compensation and other costs................. -- -- -- -- -- -- 775
------- ------- ------- ------- ------- ------- -------
Total operating expenses............... 3,424 5,949 10,817 13,588 25,161 10,070 22,956
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations.................. 37 2,335 (372) 1,448 3,689 1,417 2,191
Other income (expense), net.................... 6 51 389 (137) 336 119 82
------- ------- ------- ------- ------- ------- -------
Income before income tax provision............. 43 2,386 17 1,311 4,025 1,536 2,273
Income tax provision........................... 26 28 1 1,022 1,679 637 959
------- ------- ------- ------- ------- ------- -------
Net income..................................... $ 17 $ 2,358 $ 16 $ 289 $ 2,346 $ 899 1,314
======= ======= ======= ======= ======= =======
Preferred stock dividends...................... 340
-------
Net income applicable to common shareholders... $ 974
=======
Net income per share:
Basic........................................ $ -- $ 0.12 $ -- $ 0.01 $ 0.05 $ 0.02 $ 0.03
Diluted...................................... $ -- $ 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 43,990 38,809
Diluted...................................... 19,500 19,500 38,350 40,617 44,459 43,990 43,580
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------- JUNE 30,
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 $11,777
Working capital..................................... 1,158 2,594 553 374 2,771 3,151
Total assets........................................ 4,281 6,171 6,408 9,713 19,645 27,468
Long-term debt...................................... -- -- -- -- -- 10,000
Series A Redeemable Preferred Stock................. -- -- -- -- -- 15,000
Series B Redeemable Preferred Stock................. -- -- -- -- -- 10,340
Total shareholders' equity (deficit)................ 1,681 2,996 2,429 2,836 5,074 (28,751)
</TABLE>

19
<PAGE> 20

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

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 provide 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 entire enterprise.

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 $6.2 million in the six months ended June 30, 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 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.

20
<PAGE> 21

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>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------- --------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses......................................... 72.4% 66.4% 71.6% 68.3% 75.5%
Services......................................... 27.6 33.6 28.4 31.7 24.5
----- ----- ----- ----- -----
Total revenues........................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of revenues:
Licenses......................................... 7.4 7.1 9.9 10.7 5.0
Services......................................... 11.4 10.8 7.2 7.4 6.1
----- ----- ----- ----- -----
Total cost of revenues................... 18.8 17.9 17.1 18.2 11.1
----- ----- ----- ----- -----
Gross profit....................................... 81.2 82.1 82.9 81.8 88.9
Operating expenses:
Sales and marketing.............................. 33.6 31.9 34.0 31.1 43.0
Research and development......................... 23.3 23.5 23.1 25.9 21.4
General and administrative....................... 27.2 18.8 15.2 14.7 14.1
Compensation and other costs..................... -- -- -- -- 2.7
----- ----- ----- ----- -----
Total operating expenses................. 84.1 74.2 72.3 71.7 81.2
----- ----- ----- ----- -----
Income (loss) from operations...................... (2.9) 7.9 10.6 10.1 7.7
Other income (expense), net........................ 3.0 (0.7) 0.9 0.8 0.3
----- ----- ----- ----- -----
Income before income tax provision................. 0.1 7.2 11.5 10.9 8.0
Income tax provision............................... -- 5.6 4.8 4.5 3.4
----- ----- ----- ----- -----
Net income......................................... 0.1% 1.6% 6.7% 6.4% 4.6%
===== ===== ===== ===== =====
</TABLE>

SIX MONTHS ENDED JUNE 30, 1998 AND 1999

Revenues

Revenues are derived from the sale of software licenses and related
services. Total revenues were $14.0 million and $28.3 million for the six months
ended June 30, 1998 and 1999, respectively, representing an increase of $14.3
million, or 102.1%. International revenues accounted for 15.3% and 22.0% of
total revenues for the six months ended June 30, 1998 and 1999, respectively.

Licenses. Licenses were $9.6 million and $21.4 million for the six months
ended June 30, 1998 and 1999, respectively, representing an increase of $11.8
million, or 123.0%. This increase resulted from both an increase in the size of
both the domestic and international sales organizations of 129 people as well as
the availability of new products. Products available in the first six 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
68.3% and 75.5% of total revenues for the six months ended June 30, 1998 and
1999, respectively. International licenses represented 17.2% and 24.3% of total
licenses in the six months ended June 30, 1998 and 1999, respectively.

Services. Services were $4.5 million and $6.9 million for the six months
ended June 30, 1998 and 1999, respectively, representing an increase of $2.4
million, or 53.3%. Services consist primarily of annual maintenance fees for
technical support and product enhancements. Maintenance fees are generally

21
<PAGE> 22

renewable annually at the customer's option and are recognized over the term of
each agreement. The increase in services for the six months ended June 30, 1999
reflected increases in the installed base of customers that purchased
maintenance. Services represented 31.7% and 24.5% of total revenues for the six
months ended June 30, 1998 and 1999, respectively. International services
accounted for 11.1% and 15.0% of services for the six months ended June 30, 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
$1.5 million and $1.4 million for the six months ended June 30, 1998 and 1999,
respectively, representing a decrease of $100,000, or 6.7%. This decrease was
principally a result of a $144,000 decrease in royalties and a $143,000 decrease
in amortization of purchased technology and software licenses, offset in part by
an increase of $185,000 in product media, printing and duplication costs. Cost
of licenses represented 15.7% and 6.6% of license revenue for the six months
ended June 30, 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 $1.0 million and $1.7 million
for the six months ended June 30, 1998 and 1999, respectively, representing an
increase of $700,000, or 70.0%. This increase was primarily due to a 12 person
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 23.4% and 25.1% of service revenues for the six months ended
June 30, 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, commissions earned by sales personnel, recruiting costs, trade show,
travel and entertainment and other marketing communications costs such as
advertising and promotion. Sales and marketing expenses were $4.4 million and
$12.1 million for the six months ended June 30, 1998 and 1999, respectively,
representing an increase of $7.7 million, or 175%. This increase reflects a $3.2
million increase in salaries and related expenses due to the rapid expansion of
our sales and marketing organization which we commenced in early 1998. Sales
commissions also increased $2.1 million. Sales and marketing expenses
represented 31.1% and 43.0% of total revenues for the six months ended June 30,
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 $3.6 million and
$6.0 million for the six months ended June 30, 1998 and 1999, respectively,
representing an increase of $2.4 million, or 66.7%. This increase was primarily
related to an 83 person increase in the number of software developers, both in
our domestic and Australian development operations. Research and development
costs represented 25.9% and 21.4% of total revenues for the six months ended
June 30, 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.

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<PAGE> 23

General and administrative expenses were $2.1 million and $4.0 million for the
six months ended June 30, 1998 and 1999, respectively, representing an increase
of $1.9 million, or 90.5%. This increase was due to a number of factors
including a $495,000 increase in salaries and related expenses due to a ten
person increase in the number of general and administrative personnel necessary
to support our expanding operations and a $806,000 increase in professional fees
and depreciation in the aggregate. General and administrative costs represented
14.7% and 14.1% of total revenues for the six months ended June 30, 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.

Compensation and Other Costs. Compensation and other costs include $715,000
related to the severance package provided to Doran Machin, one of our founders
and a director, which will be paid out over a three year period, and $60,000 in
compensation costs related to the grant of stock options.

Other Income (Expense), net. Other income (expense), net is comprised of
interest income, interest expense and foreign currency transaction gains and
losses. Other income (expense), net was $119,000 and $82,000 for the six months
ended June 30, 1998 and 1999, respectively, representing a decrease of $37,000.

Provision for Income Taxes. Provision for income taxes was $637,000 and
$959,000 for the six months ended June 30, 1998 and 1999, respectively,
representing an increase of $322,000 due to higher income. Our effective income
tax rate was 41.5% and 42.2% for the six months ended June 30, 1998 and 1999,
respectively.

Net Income Applicable to Common Shareholders. Net income applicable to
common shareholders represents net income less $340,000 of cumulative dividends
payable on the Series B Redeemable Preferred Stock.

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 10.2%, 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%, 66.4% 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 of 67 people, a $3.6 million 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%, 33.6% 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 5.7%, 5.7% and 11.9% of total
services in 1996, 1997 and 1998, respectively.

23
<PAGE> 24

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 161.5%, from 1997 to
1998. Cost of licenses as a percentage of license revenue was 10.2%, 10.8% and
13.8% for 1996, 1997 and 1998, respectively. The increase in cost of licenses as
a percentage of license revenue from 1997 to 1998 was attributable primarily to
a $1.8 million increase in royalties and a $551,000 increase in amortization of
purchased technology and software licenses.

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 41.4%, 32.0% and 25.4%
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 $11.8 million in 1996, 1997 and 1998, respectively, representing
increases of $1.5 million, or 34.9%, from 1996 to 1997 and $6.0 million, or
103.4%, from 1997 to 1998. The increase from 1996 to 1997 was primarily due to
additional commissions. The increase from 1997 to 1998 reflects our increasing
investment in our sales and marketing organization, which included a $3.6
million increase in salaries and related expenses, a $1.1 million increase in
additional commissions and a $353,000 increase in marketing communications
expenses such as trade shows and advertising. Travel and entertainment expenses,
and related costs of hiring sales and marketing management also increased.

Research and Development. Research and development expenses were $3.0
million, $4.3 million and $8.0 million in 1996, 1997 and 1998, respectively,
representing increases of $1.3 million, or 43.3%, from 1996 to 1997 and $3.7
million, or 86.0%, from 1997 to 1998. The increases for these periods were
primarily related to a 63 person increase in the number of software developers
and quality assurance personnel and, to a lesser extent, an increase of $1.1
million in the cost of hiring outside contractors to support product development
activities.

General and Administrative. General and administrative expenses were $3.5
million, $3.5 million and $5.3 million in 1996, 1997 and 1998, respectively,
representing a decrease of $44,000, or 1.3%, from 1996 to 1997 and an increase
of $1.8 million, or 51.4%, from 1997 to 1998. The most significant expense
increases from 1997 to 1998 were for salaries and related expenses and rent.

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 5 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> 25

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth unaudited consolidated statement of
operations data for the ten quarters in the period ended June 30, 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,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:

Licenses................................ $2,505 $2,700 $3,066 $3,887 $4,840 $4,740 $6,190 $9,131
Services................................ 1,487 1,600 1,405 1,665 2,203 2,252 2,544 2,890
------ ------ ------ ------ ------ ------ ------ ------
Total revenues.................... 3,992 4,300 4,471 5,552 7,043 6,992 8,734 12,021
------ ------ ------ ------ ------ ------ ------ ------
Cost of revenues:
Licenses................................ 215 183 179 730 557 947 1,081 848
Services................................ 420 474 500 578 521 523 609 854
------ ------ ------ ------ ------ ------ ------ ------
Total cost of revenues............ 635 657 679 1,308 1,078 1,470 1,690 1,702
------ ------ ------ ------ ------ ------ ------ ------
Gross profit.............................. 3,357 3,643 3,792 4,244 5,965 5,522 7,044 10,319
Operating expenses:
Sales and marketing..................... 1,245 1,265 1,461 1,874 1,923 2,448 3,169 4,296
Research and development................ 856 1,230 1,087 1,120 1,766 1,863 1,928 2,490
General and administrative.............. 723 849 900 978 841 1,229 980 2,228
Compensation and other costs............ -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses.......... 2,824 3,344 3,448 3,972 4,530 5,540 6,077 9,014
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from operations............. 533 299 344 272 1,435 (18) 967 1,305
Other income (expense), net............... (84) (62) (9) 18 48 71 106 111
------ ------ ------ ------ ------ ------ ------ ------
Income before provision for income
taxes................................... 449 237 335 290 1,483 53 1,073 1,416
Provision for income taxes................ 350 183 262 227 615 22 446 596
------ ------ ------ ------ ------ ------ ------ ------
Net income................................ $ 99 $ 54 $ 73 $ 63 $ 868 $ 31 $ 627 $ 820
====== ====== ====== ====== ====== ====== ====== ======
AS A PERCENTAGE OF TOTAL REVENUES
Revenues:
Licenses................................ 62.8% 62.8% 68.6% 70.0% 68.7% 67.8% 70.9% 76.0%
Services................................ 37.2 37.2 31.4 30.0 31.3 32.2 29.1 24.0
------ ------ ------ ------ ------ ------ ------ ------
Total revenues.................... 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
Services................................ 10.5 11.0 11.2 10.4 7.4 7.5 7.0 7.1
------ ------ ------ ------ ------ ------ ------ ------
Total cost of revenues............ 15.9 15.3 15.2 23.6 15.3 21.0 19.3 14.2
------ ------ ------ ------ ------ ------ ------ ------
Gross profit.............................. 84.1 84.7 84.8 76.4 84.7 79.0 80.7 85.8
Operating expenses:
Sales and marketing..................... 31.2 29.4 32.7 33.8 27.3 35.0 36.3 35.7
Research and development................ 21.4 28.6 24.3 20.2 25.1 26.6 22.1 20.7
General and administrative.............. 18.1 19.8 20.1 17.5 11.9 17.6 11.2 18.5
Compensation and other costs............ -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses.......... 70.7 77.8 77.1 71.5 64.3 79.3 69.6 75.0
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from operations............. 13.4 6.9 7.7 4.9 20.4 (0.3) 11.1 10.8
Other income (expense), net............... (2.1) (1.4) (0.2) 0.3 0.6 1.0 1.2 0.9
------ ------ ------ ------ ------ ------ ------ ------
Income before provision for income
taxes................................... 11.3 5.5 7.5 5.2 21.0 0.7 12.3 11.7
Provision for income taxes................ 8.8 4.3 5.9 4.1 8.7 0.3 5.1 5.0
------ ------ ------ ------ ------ ------ ------ ------
Net income................................ 2.5% 1.2% 1.6% 1.1% 12.3% 0.4% 7.2% 6.7%
====== ====== ====== ====== ====== ====== ====== ======

<CAPTION>
THREE MONTHS ENDED
-------------------
MAR. 31, JUNE 30,
1999 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Licenses................................ $9,540 $11,825
Services................................ 3,299 3,625
------ -------
Total revenues.................... 12,839 15,450
------ -------
Cost of revenues:
Licenses................................ 684 720
Services................................ 904 834
------ -------
Total cost of revenues............ 1,588 1,554
------ -------
Gross profit.............................. 11,251 13,896
Operating expenses:
Sales and marketing..................... 5,036 7,122
Research and development................ 2,758 3,276
General and administrative.............. 1,938 2,051
Compensation and other costs............ -- 775
------ -------
Total operating expenses.......... 9,732 13,224
------ -------
Income (loss) from operations............. 1,519 672
Other income (expense), net............... 113 (31)
------ -------
Income before provision for income
taxes................................... 1,632 641
Provision for income taxes................ 689 270
------ -------
Net income................................ $ 943 $ 371
====== =======
AS A PERCENTAGE OF TOTAL REVENUES
Revenues:
Licenses................................ 74.3% 76.5%
Services................................ 25.7 23.5
------ -------
Total revenues.................... 100.0 100.0
------ -------
Cost of revenues:
Licenses................................ 5.3 4.7
Services................................ 7.0 5.4
------ -------
Total cost of revenues............ 12.3 10.1
------ -------
Gross profit.............................. 87.6 89.9
Operating expenses:
Sales and marketing..................... 39.2 46.1
Research and development................ 21.5 21.2
General and administrative.............. 15.1 13.3
Compensation and other costs............ -- 5.0
------ -------
Total operating expenses.......... 75.8 85.6
------ -------
Income (loss) from operations............. 11.8 4.3
Other income (expense), net............... 0.9 (0.2)
------ -------
Income before provision for income
taxes................................... 12.7 4.1
Provision for income taxes................ 5.4 1.2
------ -------
Net income................................ 7.3% 2.4%
====== =======
</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.

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<PAGE> 26

While we have not experienced a significant amount of seasonality in the
past, we expect that we will begin to experience seasonal customer buying
patterns in the foreseeable future. Specifically, we would expect to experience
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. 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.

LIQUIDITY AND CAPITAL RESOURCES

We have funded our business to date primarily from cash generated by our
operations. Our sources of liquidity as of June 30, 1999 consisted principally
of cash and cash equivalents of $11.8 million.

Net cash provided by operating activities was $16,000, $3.6 million and
$8.2 million in 1996, 1997 and 1998, respectively, and $4.3 million for the six
months ended June 30, 1999. The increases in 1997, 1998 and 1999 were primarily
due to increases in net income, depreciation and amortization, deferred revenue
resulting from additional service contracts and accrued expenses, offset by
increases in accounts receivable resulting from increased sales.

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 $1.5 million in the six months ended June 30, 1999. Purchases
of technology and software licenses were $769,000, $831,000 and $57,000 in 1996,
1997 and 1998, respectively, and $234,000 for the six months ended June 30,
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 $229,000 for the six months ended June 30,
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 6 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. 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 of our Operations. 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;

26
<PAGE> 27

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

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

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

We are currently in the process of assessing the potential overall impact
of the Year 2000 on our operations. The phases of our Year 2000 assessment 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 potentially
subject to the Year 2000 problem;

- communication as necessary with significant suppliers and service
providers to determine the readiness of their products and systems and
their ability to remediate their own Year 2000 issues;

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

- testing and remediation, including contacting and obtaining from vendors
of the material software systems used in our business Year 2000 compliant
versions of their products.

To date, we have identified the material systems used in our business that
may be affected by the Year 2000 and we expect to test them prior to the end of
September 1999. We have not to date identified any non-compliant systems used in
our operations. We have not used nor do we expect in the future to use any
independent third parties to validate our risk assessment and cost estimates of
our efforts related to Year 2000.

Readiness of Our Products. 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 when they were sold. However, we currently
make available versions of our non-discontinued software that is Year 2000
compliant for customers that have current maintenance contracts with us.

Risks. Although we have not been a party to any litigation or arbitration
proceeding to date involving our products or services related to Year 2000
compliance issues, we may 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, could have a material
adverse effect on our business, results of operations and financial condition.

Success of our Year 2000 compliance efforts may 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.

27
<PAGE> 28

Contingency Plan. To date, we have not encountered any material Year 2000
problems with the hardware and software systems we use in our operations.
However, 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. 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 continue
developing such a plan, to the extent possible, throughout 1999. 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."

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. Moreover, to date, other
projects, including our new product development efforts, have not been delayed
due to our Year 2000 efforts. We do not expect the total cost of Year 2000
problems to be material to our business, financial condition and operating
results.

Purchasing Patterns of our Customers. 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.

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.

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

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<PAGE> 29

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> 30

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 provide application and information availability software solutions that
enhance the performance and reliability of an organization's e-business,
enterprise and custom applications and enable the delivery of information across
the entire enterprise. Our application availability products are designed to
help ensure uninterrupted and high performance access to software systems by
utilizing a number of integrated products that enhance the performance of
applications and the underlying database which stores an enterprise's critical
information. Other primary components of our application availability solution
include our database products that maintain a real-time copy of a database for
offloading critical systems and assuring high availability, as well as our
products that manage the complex and error-prone process of development and
deployment of rapidly changing applications. 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 and 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 business 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 entire enterprise.

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<PAGE> 31

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 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, enterprise and
custom applications and enable the delivery of information across the entire
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 Internet-enabled applications; accurately
deploy database and application changes; provide replication solutions for
fail-over capability, data distribution and distributing load across multiple
systems; 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 enterprise 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
wide deployment of Internet browser technology.

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, enterprise and custom applications. We also
believe that we offer the leading Web-based information availability software
solutions in terms of functionality and innovation. We intend to advance this
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
enterprise resource planning (ERP) 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 existing enterprise applications by
extending them over the Internet. 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.

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

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<PAGE> 34

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 software solutions
that support e-business and enterprise 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 version
control, 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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<PAGE> 36

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 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 the
ability to quickly navigate 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.
Vista Plus 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 provide a wide range of services
that work together to maintain the high level of performance and continuous
access required by today's demanding e-business environment. 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 user response times 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 the ability to quickly
navigate 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

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<PAGE> 37

displays a comprehensive diagram of a database's internal workings and the flow
of information within the 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 Internet-enabled application development. SQL
Navigator and TOAD allow developers to rapidly and accurately develop and
enhance the performance of 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 six months of 1999, no customer accounted for more than 10%
of our total revenues.

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<PAGE> 38

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

The following case studies illustrate how a selected group of
representative customers are using a variety of Quest products to ensure high
application and information availability across their increasingly heterogeneous
and distributed networks. We compiled this information in consultation with the
companies listed below.

Applied Materials

Applied Materials is a leading semiconductor equipment manufacturer. To
improve efficiency in its global operations, Applied Materials needed a
Web-based enterprise-wide report management solution that could seamlessly
integrate with their existing applications, automate their processes and provide
instant access to corporate reports to thousands of employees worldwide. Such a
solution would eliminate the need to prepare, compile and distribute thousands
of corporate reports manually. Applied Materials selected and implemented Vista
Plus as an enterprise-wide report warehouse and distribution solution for
automated electronic delivery and archiving of application reports. We believe
that Applied Materials was able to realize cost savings and productivity
benefits immediately. Administrative overhead was reduced through lower paper
and printing costs and reduced human resource expenses. Moreover, Applied
Materials deployed Vista Plus without having to reconfigure its existing
applications. After experiencing the benefits of Vista Plus, Applied Materials
purchased I/Watch, for enterprise monitoring and SQLab Xpert for application
turning, to improve the availability and performance of their Oracle database
environment.

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<PAGE> 39

EarthLink

EarthLink is a leading Internet service provider, with a full range of
innovative access and hosting solutions used by approximately 1.15 million
individuals and businesses every day. Using Oracle databases, EarthLink needed a
better way to diagnose and address day-to-day application availability and
management issues. Due to the size and the dynamic nature of its business,
downtime would be catastrophic. EarthLink selected our products to satisfy its
requirements in this area. To manage its applications, EarthLink uses I/Watch
and Instance Monitor for database monitoring, diagnostics and resolution. Based
on our discussions with EarthLink, we believe that they particularly liked the
user interfaces and integration of the products they purchased. We also believe
that these products, along with SQLab Xpert, enable their database
administrators to perform "targeted tuning" with intelligent tuning
recommendations that improve the performance of the databases. Space Manager
provides EarthLink with a comprehensive solution for database reorganization and
capacity planning for application availability through preventive 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 ensure that all databases have the same
structure across the entire 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 database structural 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. As a result of implementing our products, we believe that NCR was
able to realize a reduction in processing time by improving code integrity and
reducing development time.

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
distributing load across multiple systems and scalability testing.

SALES, MARKETING AND DISTRIBUTION

We market and sell our products and services 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

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<PAGE> 40

involve technology presentations and pilot implementations, and many times
involve numerous decision makers. As a result, a key feature of our sales
efforts 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.

Our services contracts are generally of 12 months' duration and are
renewable at the customer's option. Service contracts are generally priced at
approximately 20% of the amount of licenses and the customer is invoiced
annually in advance.

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

40
<PAGE> 41

to understand complex output data streams, enabling search, transformation and
extraction from graphics-intensive output.

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:

- providers of enterprise report management products such as Actuate,
Computer Associates, Mobius, and IBM;

- providers of hardware and software replication tools such as EMC and
Veritas; and

- providers of database and database management products such as BMC,
Compuware, Oracle, and Computer Associates.

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

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<PAGE> 42

margins and loss of market share, any of which could materially affect our
business, operating results or financial condition.

PROPRIETARY RIGHTS

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
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. 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 we infringe 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.

We incorporate technology from third parties into our SQL Navigator, TOAD
and Vista Plus products. We currently have a material license agreement with
Inso for the use of file viewing technology which is incorporated into an add-on
module for our Vista Plus products. We currently pay Inso royalty fees based on
sales of our Vista Plus product. This license agreement terminates on February
10, 2002. In addition, we currently have a material license agreement with
Artifex for the use of technology which is incorporated into an add-on module
for our Vista Plus products. We currently pay Artifex royalty fees based on
sales of Vista Plus products incorporating the licensed software. The license
for the technology from Artifex remains in effect for so long as any proprietary
rights in the licensed technology are enforceable under the laws of any
jurisdiction, unless earlier terminated by us upon 30 days written notice or by
Artifex upon a material breach by us. As we continue to introduce new products,
we may be

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<PAGE> 43

required to license additional technology from others. There can be no assurance
that these third-party technology licenses will continue to be available to us
on commercially reasonable terms, if at all.

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 June 30, 1999, we employed 415 full-time employees, including 208 in
sales and marketing, 140 in research and development, 34 in customer service and
support and 33 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.

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. In October 1999 we intend to relocate our
headquarters in Newport Beach to a leased facility in nearby Irvine, California,
consisting of approximately 67,500 square feet of office space. The new facility
will be under a six-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
advertisements that Mobius alleges in its complaint are false and misleading are
two e-mails intended for internal use, a comparison chart believed to have been
prepared by a former Quest employee in 1997 for internal purposes, and a
statement made regarding our Vista Plus Java client which had been posted on the
Internet. 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. In response to Mobius' complaint, we
have filed a motion to dismiss which is set for hearing on September 13, 1999.
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> 44

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information regarding our executive
officers and directors as of August 9, 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
Kimberly A. Kinnison.......... 38 Vice President, Technical Support
Terence J. Mullin............. 44 Vice President, Output Management Business Unit
Charles C. Ramsey............. 45 Vice President, International Sales
Doran G. Machin(1)(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.

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<PAGE> 45

Mr. Aronoff received a B.A. degree in computer science and chemistry from
Bar-Ilan University Ramat-Gan, Israel.

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.

Kimberly A. Kinnison has been our Vice President of Technical Support since
January 1999. As such, Ms. Kinnison oversees our management information systems
department and our worldwide technical support staff. From January 1998 to
January 1999, Ms. Kinnison was our Director of Technical Support and from June
1995 to December 1997, she was our Support Manager. Ms. Kinnison joined Quest in
November 1991 as a technical support engineer. Prior to joining Quest, Ms.
Kinnison held positions as a systems programmer at Hughes Aircraft and
instructor/consultant at Hewlett Packard. Ms. Kinnison received her B.S. in
Computer Information Systems from California State Polytechnic University,
Pomona.

Terence J. Mullin has been our Vice President of the Output Management
Business Unit since April 1998. From November 1997 to April 1998, Mr. Mullin was
the Vice President of Marketing and Business Development of Clarion Corporation
of America's Advanced Technology Division. From April 1997 to November 1997, Mr.
Mullin was the Vice President of Marketing and Business Development for
NetSoft/NetManage. From April 1995 to April 1997, Mr. Mullin held the position
of Strategic Planner of Internet Strategy and Marketing at FileNet Corporation.
Mr. Mullin studied Computer Science at California State University, Fullerton
and completed the Advanced Management Development in Business Administration
program offered by the University of Southern California.

Charles C. Ramsey has been our Vice President of International Sales since
January 1999. In this position, Mr. Ramsey heads up the expansion of our
international direct-sales and support teams and will complete the development
of a worldwide channel organization. From April 1998 to January 1999, Mr. Ramsey
was a Regional Field Sales Manager. From May 1989 to April 1998, Mr. Ramsey was
employed with Ziff Davis Market Intelligence, where he was most recently the
Vice President of Sales. Prior to working at Ziff Davis, Mr. Ramsey worked for
IBM Corporation for five years. Mr. Ramsey received a B.S. in Communications
from University of California, San Diego and an M.I.M. from American Graduate
School of International Management.

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.

On August 5, 1999, Raymond J. Lane, a member of our board since June 1999
and the President and Chief Operating Officer of Oracle Corporation, resigned
from our board to avoid any possible conflicts of interest. Mr. Lane made the
decision to resign after further reviewing Oracle's internal policies on outside
directorships with companies in similar markets. Mr. Lane's decision to resign
was not precipitated by any disagreement with Quest or its management on any
matter related to our operations, policies or practices.

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<PAGE> 46

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. Murdock and
Machin.

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 October 1997, we sold to Mr. Smith, our Chief Executive Officer and
Chairman of the Board, 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%. The accrued interest on this note at 1998 fiscal year end was
$175,636. As of the date of this prospectus, the entire principal amount of this
note is outstanding. This note is also secured in part by the 3,900,000 shares
of common stock.

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> 47

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. Mr. Machin resigned from his position as
Secretary in April 1999. 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. The amount set forth in the "All Other
Compensation" column includes matching contributions under our 401(k) Plan and
expenses paid by us for Mr. Machin's car and the automobile insurance thereon.

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------- ------------------
SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION 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
Secretary
Eyal M. Aronoff........................ 195,445 -- 39,000 --
Vice President, Technology and
Engineering
Douglas F. Garn........................ 184,510 125,000 576,000 --
Vice President, Worldwide Sales
</TABLE>

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($)
OPTIONS EMPLOYEES IN PER-SHARE EXPIRATION -------------------------
NAME GRANTED(#) 1998(%) ($) 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 6/23/08 211,308 535,497
15,000 * 1.17 10/1/08 132,067 334,685
Douglas F. Garn...... 450,000 13.3 1.00 6/23/08 3,962,036 10,040,577
126,000 3.7 1.00 7/1/08 1,109,370 2,811,361
</TABLE>

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

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<PAGE> 48

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 for
300,000 of Mr. Garn's 450,000 options, the options shown in this table are all
nonqualified stock options. These options vest as follows:

- 20% upon the completion of one year of employment,

- 13% upon the completion of each of the next five six-month periods of
employment, and

- 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.

During 1998 we granted options to purchase up to an aggregate of 3,383,100
shares of common stock. 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.

The potential realizable value is calculated based on the ten year term of
the option at its time of grant. It is calculated based on the assumption that
the initial public offering price of $14.00 per share appreciates at the
indicated annual rate compounded annually for the entire term of the option and
that the option is exercised and sold on the last day of its term for the
appreciated stock price. 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.

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 VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
DECEMBER 31, 1998 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 -- $ 504,450
Douglas F. Garn............................ -- 576,000 -- 7,488,000
</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 $14.00 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 became effective
upon its adoption by the board. On the date of this offering, all outstanding
options under our predecessor plan will be incorporated into the 1999 Stock
Incentive Plan, and no further option grants will thereafter 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

48
<PAGE> 49

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. 7,493,400 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 determined by the plan administrator;

- 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 determined by the plan administrator 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

- 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.

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<PAGE> 50

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 1999 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.

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. A compensation expense
will be recorded for the amount of the salary reduction. As a result, the total
spread on the option shares at the time of grant 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
beginning with the 2001 annual shareholders meeting, each non-employee board
member who has served as a non-employee board member since the date of the last
annual shareholders meeting will automatically be granted an option to purchase
7,500 shares of common stock.

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

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<PAGE> 51

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
such 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 grant 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 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.

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 8, 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.

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<PAGE> 52

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;

- 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

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<PAGE> 53

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> 54

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. The proceeds from the
issuance of the Series A and Series B Preferred Stock was used to repurchase
shares of our common stock held by Mr. Machin, one of our co-founders and
directors. See "-- Repurchase of Shares from and Severance Arrangement with
Director."

Both the Series A Preferred Stock and the Series B Preferred Stock have
cumulative dividends, liquidation preferences, redemption rights and conversion
features. So long as the Series A shares have not been converted into Common
Stock, the Series B shares may be converted into Series A shares by Quest at any
time prior to April 21, 2000 and by the holders of the Series B shares at any
time after April 21, 2000. 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."

We intend to use approximately $10.6 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. The entities affiliated with InSight Capital
Partners consist of InSight Capital Partners II, L.P., InSight Capital Partners
(Cayman) II, L.P. and WI Software Investors LLC.

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

REPURCHASE OF SHARES FROM AND SEVERANCE ARRANGEMENT WITH 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. During late 1998, Mr.
Machin sought to sell his stock and liquidate his position in Quest. Mr. Machin
and the Company negotiated at arms-length to determine the pricing of the
repurchase and Mr. Machin ultimately agreed upon a price based on the fact that
he could obtain cash immediately. 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. There was no prior agreement that obligated us to
consummate the repurchase transaction with Mr. Machin. 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

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<PAGE> 55

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 under
the option for a per share purchase price of $.769 and a total purchase price of
$750,000, for which Mr. Aronoff executed a promissory note. 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. 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. The accrued interest on this note at 1998 fiscal year end was
$32,063. As of June 30, 1999, $573,008 of principal and interest on this note
was outstanding.

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. See
"Management -- Compensation Committee Interlocks and Insider Participation."

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 September 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 January
1999, 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.

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> 56

PRINCIPAL SHAREHOLDERS

The table below sets forth information regarding the beneficial ownership
of our common stock as of June 30, 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 30, 1999, as adjusted to
reflect

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

- the conversion of all outstanding shares of our Series A Preferred Stock
into 4,000,000 shares of common stock; and

- the redemption for cash of all outstanding shares of our Series B
Redeemable Preferred Stock.

In addition, information presented in the table below 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 33,724,600 shares of common stock outstanding as
of June 30, 1999 and 38,124,600 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 30, 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)........................................ 18,233,499 54.1% 47.8%
David M. Doyle............................................. 7,397,100 21.9% 19.4%
Eyal M. Aronoff(2)......................................... 2,932,920 8.7% 7.7%
Jerry Murdock(3)........................................... 2,785,201 8.3% 7.3%
c/o InSight Capital Partners
122 East 42nd Street
New York, NY 10168
InSight Capital Partners II, L.P.(4)....................... 2,520,001 7.5% 6.6%
InSight Capital Partners
122 East 42nd Street
New York, NY 10168
UBS Capital LLC(5)......................................... 1,466,667 4.3% 3.8%
299 Park Avenue
34th Floor
New York, NY 10171
Douglas F. Garn(6)......................................... 173,700 * *
Doran G. Machin............................................ -- -- --
All executive officers and directors as a group (11 82.3%
persons)(7).............................................. 31,614,670 93.0%
</TABLE>

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

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<PAGE> 57

(1) Includes 38,100 shares held in the name of McNair Smith and 38,100 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 30, 1999.

(3) Includes 265,200 shares of common stock owned directly by Mr. Murdock. Also
includes 792,000 shares of Series A Preferred Stock held by InSight Capital
Partners II, L.P., 88,001 shares of Series A Preferred Stock held by InSight
Capital Partners (Cayman) II, L.P., and 800,000 shares of Series A Preferred
Stock held by WI Software Investors LLC., which will be converted into an
aggregate of 2,520,001 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 88,001 shares of Series A Preferred Stock held by InSight Capital
Partners (Cayman) II, L.P., 792,000 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 2,520,001 shares of common stock immediately
prior to the closing of this offering. InSight Capital Partners II, L.P. is
a limited partnership controlled by its general partner, InSight Venture
Associates II, LLC, which has voting and dispositive powers over its shares
of Series A Preferred Stock. InSight Capital Partners (Cayman) II, L.P. is a
limited partnership controlled by its general partner, InSight Venture
Associates (Cayman) II, a Cayman Island company, which has voting and
dispositive powers over its shares of Series A Preferred Stock. The managing
members of InSight Venture Associates II, LLC and InSight Venture Associates
(Cayman) II are Jeff Horing, Jerry Murdock and Ramanan Raghavendran.

(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. UBS is a limited liability company controlled by a
board of managers who have voting and dispositive powers over UBS' shares of
Series A and Series B Preferred Stock. The board of managers consists of
Justin Maccarone, Michael Green and Marc Unger.

(6) Consists of 173,700 shares issuable upon the exercise of stock options that
are exercisable within 60 days of June 30, 1999.

(7) Includes 273,870 shares issuable upon the exercise of stock options that are
exercisable within 60 days of June 30, 1999. See Notes 2 and 6.

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<PAGE> 58

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 30, 1999, there were 33,724,600 shares of common stock
outstanding held of record by 24 shareholders, and options to purchase an
aggregate of 4,578,875 shares of common stock were also outstanding. There will
be 38,124,600 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 30, 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, 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

58
<PAGE> 59

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

Our common stock has been approved for quotation on the Nasdaq National
Market under the trading symbol "QSFT."

59
<PAGE> 60

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 38,124,600 shares of common
stock outstanding assuming the issuance of 4,400,000 shares of common stock
offered, no exercise of the underwriters' over-allotment option and no exercise
of outstanding stock options after June 30, 1999. Of the total outstanding
shares of common stock, the 4,400,000 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 33,724,600 shares of common stock are "restricted securities"
as that term is defined in Rule 144. All of these restricted securities will be
available for sale in the public market under Rule 144 following the expiration
of the 180 day lock-up agreement further described below. If the underwriter
elects to waive the lock-up period for any reason, these shares will be
available for sale under Rule 144 prior to that time.

Beginning on the effective date of this offering the holders of 4,000,000
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. 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

60
<PAGE> 61

to sell within any three-month period a number of shares of common stock that
does not exceed the greater of:

- one percent of the then-outstanding shares of common stock (approximately
381,246 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 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 will file, on or after the date of this prospectus, a 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
will become 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."

61
<PAGE> 62

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. ......................... 1,886,000
Donaldson, Lufkin & Jenrette Securities Corporation ........ 1,189,000
CIBC World Markets Corp. ................................... 758,500
First Albany Corporation.................................... 266,500
Moors & Cabot, Inc. ........................................ 100,000
Needham & Company, Inc. .................................... 100,000
SoundView Technology Group, Inc. ........................... 100,000
---------
Total............................................. 4,400,000
=========
</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 $0.59 per share, of which $0.10
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 660,000
additional shares of common stock at the same price per share as we will receive
for the 4,400,000 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 4,400,000 shares
offered hereby. If purchased, such additional shares will be sold by the
underwriters on the same terms as those on which the 4,400,000 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
$70,840,000, $4,958,800 and $64,931,200, 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.

62
<PAGE> 63

Lock-Up Agreements

Each of our executive officers, directors and shareholders and
substantially all of our 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.

Directed Shares

We have requested that the underwriters reserve up to 12% of the shares of
common stock for sale at the initial public offering price to individuals
designated by us.

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 has been determined through negotiations between us and the
representatives. Among the factors to be considered in such negotiations were
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.

63
<PAGE> 64

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 materially 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.

64
<PAGE> 65

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 June 30, 1999 (Unaudited)............................. F-3
Consolidated Statements of Operations for the Years ended
December 31, 1996, 1997 and 1998 and the Six Months ended
June 30, 1998 and 1999 (Unaudited)........................ F-4
Consolidated Statements of Shareholders' Equity for the
Years ended December 31, 1996, 1997 and 1998 and the Six
Months ended June 30, 1999 (Unaudited).................... F-5
Consolidated Statements of Cash Flows for the Years ended
December 31, 1996, 1997 and 1998 and the Six Months ended
June 30, 1998 and 1999 (Unaudited)........................ F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 66

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.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California
June 9, 1999

F-2
<PAGE> 67

QUEST SOFTWARE, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1997 1998 1999
------- ------- ------------
(UNAUDITED)

<S> <C> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents................................. $ 2,096 $ 8,981 $ 11,777
Accounts receivable, net of allowance for doubtful
accounts and sales returns of $783 (1997), $1,052 (1998)
and $1,182 (1999)....................................... 4,815 7,443 10,447
Income taxes receivable................................... 122 -- --
Prepaid expenses and other current assets................. 100 720 1,608
Deferred income taxes..................................... -- 198 198
------- ------- --------
Total current assets.................................. 7,133 17,342 24,030
Property and equipment:
Furniture and fixtures.................................... 397 596 825
Machinery and equipment................................... 140 270 410
Computer equipment........................................ 1,001 1,711 2,709
Computer software......................................... 186 315 426
Leasehold improvements.................................... 56 109 166
------- ------- --------
1,780 3,001 4,536
Less accumulated depreciation and amortization.............. (857) (1,613) (2,245)
------- ------- --------
Property and equipment, net................................. 923 1,388 2,291
Purchased technology and software licenses, net............. 1,531 527 376
Deferred income taxes....................................... -- 267 267
Other assets................................................ 126 121 504
------- ------- --------
$ 9,713 $19,645 $ 27,468
======= ======= ========
</TABLE>

<TABLE>
<CAPTION>
PRO FORMA
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 527 $ 1,468 $ 1,371
Accrued compensation...................................... 775 1,937 3,256
Other accrued expenses.................................... 1,170 2,243 3,706
Deferred support revenue.................................. 4,005 7,298 9,365
Deferred license revenue.................................. 282 1,625 3,181
------- ------- --------
Total current liabilities............................. 6,759 14,571 20,879
Deferred income taxes....................................... 118 -- --
Bank loan payable........................................... -- -- 10,000 10,000
Series A Redeemable Preferred Stock, no par value, 2,667
shares authorized, issued and outstanding at June 30,
1999...................................................... -- -- 15,000
Series B Redeemable Preferred Stock, no par value, 1,800
shares authorized, 1,778 issued and outstanding at June
30, 1999.................................................. -- -- 10,340 10,340
Commitments and contingencies (Note 6)
Shareholders' equity:
Preferred stock (pro forma) -- 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 29,725 shares issued and outstanding
at December 31, 1997 and 1998, and June 30, 1999,
respectively, 33,725 shares issued and outstanding, pro
forma................................................... 3,425 4,241 4,306 $ 19,306
Retained earnings........................................... 1,645 3,991 31 31
Notes receivable from sale of common stock.................. (2,234) (3,158) (3,024) (3,024)
Capital distribution in excess of basis in common stock..... -- -- (30,064) (30,064)
------- ------- -------- --------
Total shareholders' equity (deficit).................. 2,836 5,074 (28,751) $(13,751)
------- ------- -------- ========
$ 9,713 $19,645 $ 27,468
======= ======= ========
</TABLE>

See accompanying notes to consolidated financial statements.
F-3
<PAGE> 68

QUEST SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses............................... $ 9,316 $12,158 $24,901 $ 9,580 $21,365
Services............................... 3,546 6,157 9,889 4,455 6,924
------- ------- ------- ------- -------
Total revenues.................... 12,862 18,315 34,790 14,035 28,289
Cost of revenues:
Licenses............................... 950 1,307 3,433 1,504 1,404
Services............................... 1,467 1,972 2,507 1,044 1,738
------- ------- ------- ------- -------
Total cost of revenues............ 2,417 3,279 5,940 2,548 3,142
------- ------- ------- ------- -------
Gross profit............................. 10,445 15,036 28,850 11,487 25,147

Operating expenses:
Sales and marketing.................... 4,328 5,845 11,836 4,371 12,158
Research and development............... 2,995 4,293 8,047 3,629 6,034
General and administrative............. 3,494 3,450 5,278 2,070 3,989
Compensation and other costs........... -- -- -- -- 775
------- ------- ------- ------- -------
Total operating expenses.......... 10,817 13,588 25,161 10,070 22,956
------- ------- ------- ------- -------
Income (loss) from operations............ (372) 1,448 3,689 1,417 2,191
Other income (expense), net.............. 389 (137) 336 119 82
------- ------- ------- ------- -------
Income before income tax provision....... 17 1,311 4,025 1,536 2,273
Income tax provision..................... 1 1,022 1,679 637 959
------- ------- ------- ------- -------
Net income............................... $ 16 $ 289 $ 2,346 $ 899 1,314
======= ======= ======= =======
Preferred stock dividends................ 340
-------
Net income applicable to common
shareholders........................... $ 974
=======
Net income per share:
Basic.................................. $ -- $ 0.01 $ 0.05 $ 0.02 $ 0.03
Diluted................................ $ -- $ 0.01 $ 0.05 $ 0.02 $ 0.02
Weighted average shares:
Basic.................................. 38,350 40,373 44,261 43,990 38,809
Diluted................................ 38,350 40,617 44,459 43,990 43,580
Pro forma basic and diluted net income
per share.............................. $ 0.05 $ 0.02
Pro forma weighted average basic shares
outstanding............................ 48,261 42,809
Pro forma weighted average diluted shares
outstanding............................ 48,459 45,016
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 69

QUEST SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
CAPITAL
DISTRIBUTION
NOTES IN EXCESS OF TOTAL
COMMON STOCK RECEIVABLE BASIS IN SHAREHOLDERS'
----------------- RETAINED FROM COMMON EQUITY
SHARES AMOUNT EARNINGS SHAREHOLDERS STOCK (DEFICIT)
-------- ------ -------- ------------ ------------ -------------
<S> <C> <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.................. 7 7 -- -- -- 7
Payment on notes receivable from
shareholders for purchase of common
stock.................................... -- -- -- 230 -- 230
Accrued interest receivable from
shareholders............................. -- -- -- (96) -- (96)
Repurchase of common stock................. (14,820) (2) (4,934) -- (30,064) (35,000)
Compensation expense associated with stock
option grants............................ -- 60 -- -- -- 60
Dividends on Series B Redeemable Preferred
Stock.................................... -- -- (340) -- -- (340)
Net income................................. -- -- 1,314 -- -- 1,314
-------- ------ ------- ------- -------- --------
BALANCE, June 30, 1999..................... 29,725 $4,306 $ 31 $(3,024) $(30,064) $(28,751)
======== ====== ======= ======= ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 70

QUEST SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- ------ --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 16 $ 289 $ 2,346 $ 898 $ 1,314
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 743 964 1,893 776 1,002
Compensation expense associated with stock option
grants.......................................... -- -- -- -- 60
Loss from disposal of property and equipment....... 25 52 -- -- --
Accrued interest receivable from shareholders...... -- (34) (174) (75) (96)
Deferred income taxes.............................. -- 178 (643) (970) --
Changes in assets and liabilities, net of effects
of acquisitions:
Accounts receivable............................. (1,051) (683) (2,628) (212) (3,004)
Income taxes receivable......................... -- (122) 122 122 --
Prepaid expenses and other current assets....... (363) 282 (620) (651) (888)
Other assets.................................... (131) 38 5 12 (383)
Accounts payable................................ 263 113 941 (263) (97)
Bank overdraft.................................. 393 (393) -- -- --
Accrued compensation............................ (703) 108 1,162 868 1,319
Other accrued expenses.......................... 119 881 1,141 963 1,471
Deferred revenue................................ 705 1,960 4,636 572 3,623
------- ------- ------- ------ --------
Net cash provided by operating activities....... 16 3,633 8,181 2,040 4,321
Cash flows from investing activities:
Purchases of property and equipment.................... (589) (536) (1,231) (462) (1,520)
Purchases of software licenses......................... -- (831) (57) (31) (234)
Cash received (paid) for acquisitions.................. (769) 100 -- -- --
------- ------- ------- ------ --------
Net cash used in investing activities........... (1,358) (1,267) (1,288) (493) (1,754)
Cash flows from financing activities:
Distributions to shareholders.......................... (1,360) (261) -- -- --
Proceeds from note payable............................. -- -- -- -- 10,000
Proceeds from issuance of preferred stock.............. -- -- -- -- 25,000
Repurchase of common stock............................. -- -- -- -- (35,000)
Proceeds from the exercise of stock options............ -- -- -- -- 7
Repayment of note payable to related party............. (7) (9) (8) (4) (8)
Payment on notes receivable from shareholders for
purchase of common stock............................. -- -- -- -- 230
------- ------- ------- ------ --------
Net cash (provided by) used in financing
activities.................................... (1,367) (270) (8) (4) 229
------- ------- ------- ------ --------
Net increase (decrease) in cash and cash equivalents..... $(2,709) $ 2,096 $ 6,885 $1,543 $ 2,796
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 $3,639 $ 11,777
======= ======= ======= ====== ========
Supplemental disclosures of consolidated cash flow
information:
Cash paid during the year for:
Interest............................................. $ 2 $ 8 $ 5 $ 4 $ 69
======= ======= ======= ====== ========
Income taxes......................................... $ 28 $ 938 $ 2,054 $ 932 $ 1,787
======= ======= ======= ====== ========
Supplemental schedule of noncash investing and financing
activities:
Note receivable from shareholders for purchase of
common stock......................................... $ 2,200 $ 750 $ 750
======= ======= ======
Accrued interest receivable from shareholders.......... $ 34 $ 174 $ 75 $ 96
======= ======= ====== ========
Dividends payable on Series B Redeemable Preferred
Stock................................................ $ 340
========
</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> 71

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") provide 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 entire 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 June 30, 1999 and for the six months ended June 30,
1998 and June 30, 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. 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 six months ended June 30, 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 consolidated 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 June 30, 1999
was approximately $3,290 and $3,222, respectively.

Cash and Cash Equivalents -- Cash equivalents include short-term, highly
liquid investments with original maturities of three months or less. Interest
income, included in other income (expense) in the accompanying consolidated
statements of operations, was $17, $72, $372, $35 and $315 for the years ended
December 31, 1996, 1997 and 1998, and the six months ended June 30, 1998 and
1999, respectively.

F-7
<PAGE> 72
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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 June 30, 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
$1,638 at December 31, 1997 and 1998, and June 30, 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 $871 at December 31, 1997 and 1998,
and June 30, 1999, respectively. The net carrying amount of purchased technology
and software licenses was considered recoverable at December 31, 1998 and June
30, 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 $42 of the
settlement receivable is recorded in other current assets in the accompanying
consolidated financial statements at December 31, 1998 and June 30, 1999,
respectively.

Capital Distribution in Excess of Basis in Common Stock -- In connection
with the repurchase of common stock in April 1999 from a major stockholder (note
3) the excess of the repurchase price over the original cost of the shares has
been recorded as a capital distribution in excess of the basis of the common
stock in the accompanying consolidated financial statements.

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

F-8
<PAGE> 73
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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 June 30, 1999.

Advertising Expenses -- Advertising expenses were $636, $300, $594, $257
and $516 for the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1998 and 1999, respectively.

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
6). 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.

For the six months ended June 30, 1999, net income applicable to common
shareholders was $974 representing net income for the period of $1,314 less
Preferred Stock dividends of $340 associated with the Series B Redeemable
Preferred Stock.

F-9
<PAGE> 74
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below sets forth the reconciliation of the denominator of the
earnings per share calculation:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
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 43,990 38,809
Conversion of Series A Preferred Stock... -- -- -- -- 1,547
Conversion of Series B Redeemable
Preferred Stock........................ -- -- -- -- 1,017
Dilutive effect of stock options......... -- 244 198 -- 2,207
------- ------- ------- ------- -------
Shares used in computing diluted net
income per share....................... 38,350 40,617 44,459 43,990 43,580
======= ======= =======
Conversion of Series A Preferred Stock... 4,000 2,453
Redemption of Series B Redeemable
Preferred Stock........................ -- (1,017)
Shares used in computing proforma diluted
net income per share................... 48,459 45,016
======= =======
</TABLE>

The conversion of the Series A Preferred and Series B Redeemable Preferred
Stock into common stock reflects the weighted average of such shares per SFAS
No. 128. The pro forma adjustment for the conversion of the Series A Preferred
Stock represents the adjustment required to reflect the conversion of the Series
A Preferred Stock to common stock as if it occurred on January 1, 1999. The
adjustment to the pro forma basic and diluted net income per share reflects the
redemption of the Series B Redeemable Preferred Stock from the proceeds of the
Company's planned initial public offering.

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 6). The accompanying pro forma
information, which is unaudited, gives effect to the conversion of all
outstanding shares of Series A Preferred Stock into common stock immediately
prior to the closing of the offering.

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 six months ended June 30, 1998 and 1999.

F-10
<PAGE> 75
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 9 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 subsidiary, and in July 1997 commenced liquidation proceedings. At December
31, 1998 and June 30, 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 was included in other accrued expenses in
the accompanying consolidated financial statements representing the remaining
outstanding

F-11
<PAGE> 76
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

note payable balance at December 31, 1998. The remaining note payable balance
was repaid during the six months ended June 30, 1999.

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.

In 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. The Company recorded
approximately $715 of expense related to the agreement in April 1999, which is
included in compensation and other costs in the accompanying consolidated
financial statements.

F-12
<PAGE> 77
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

\ 4. TERM NOTE

In connection with the repurchase of common stock from a shareholder in
April 1999 (Note 3), 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 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. The Company
was in compliance with all covenants at June 30, 1999. Interest expense related
to the loan was $315 for the six months ended June 30, 1999.

5. 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>

F-13
<PAGE> 78
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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.

6. SHAREHOLDERS' EQUITY

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.

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

F-14
<PAGE> 79
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

on a when and as if declared basis at a rate of 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. For the six months ended June 30,
1999, $340 has been recorded as dividends payable.

7. 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.

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 on June 9, 1999. The 1999 Stock Incentive Plan became effective
upon its adoption by the board. On the date of the Company's initial public
offering all outstanding options under the 1998 plan will be incorporated into
the 1999 Stock Incentive Plan, and no further option grants will thereafter 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
F-15
<PAGE> 80
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. 7,493 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 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 determined by the plan administrator;

- the stock issuance program under which individuals may be issued shares
of common stock directly, through the purchase of such shares at a price
determined by the plan administrator 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:

- 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.

F-16
<PAGE> 81
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 1999 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.

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 nor more than $75.
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.
Compensation expense will be recorded for the amount of the salary reduction.
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 will be equal to the amount of
salary invested in that option. The option will vest and become exercisable in a
series of twelve 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.

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 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
beginning with the 2001 annual shareholders meeting, each non-employee board
member who has served as a non-employee board member since the date of the last
annual shareholders meeting will automatically be granted an option to purchase
8 shares of common stock.

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
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
F-17
<PAGE> 82
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

shares. The shares subject to each 25 share automatic option grant will vest
over a four year period in successive equal annual installments upon the
individual's completion of each year of board service over the four year period
measured from the option grant date. However, the shares subject to each such
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 8 share automatic option grant will be immediately exercisable and
fully vested on the option grant date.

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 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 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 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
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.

F-18
<PAGE> 83
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Eligible Employees. Individuals who are scheduled to work more than twenty
hours per week for more than five 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 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 .6 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 available to
common shareholders would have been decreased to the pro forma amounts indicated
below:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ---------
<S> <C> <C>
Net income available to common shareholders:
As reported............................................... $2,346 $ 974
====== ======
Pro forma................................................. $2,177 $ 598
====== ======
Basic net income per share:
As reported............................................... $ 0.05 $ 0.03
====== ======
Pro forma................................................. $ 0.05 $ 0.02
====== ======
Diluted net income per share:
As reported............................................... $ 0.05 $ 0.02
====== ======
Pro forma................................................. $ 0.05 $ 0.01
====== ======
</TABLE>

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 six months ended June 30, 1998 and 1999: expected
volatility of zero; risk-free interest rates of 6%; and expected lives of ten
years.

F-19
<PAGE> 84
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------------------------------------- -------------------------------------
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 1,198 $1.00 1,419 $3.56
Exercised................. -- $ -- -- $ -- -- $ -- -- $ -- (7) $1.00
Canceled.................. -- $ -- (556) $0.40 (991) $0.77 -- $ -- (200) $2.18
----- ----- ----- ----- -----
Balance, end of period.... 1,531 $0.64 975 $0.77 3,367 $1.19 2,173 $0.90 4,579 $1.88
Weighted average fair
value of options granted
during the year......... $0.00 -- $0.53 $0.24 $3.09
===== ===== ===== ===== =====
</TABLE>

The Company will record compensation expense of approximately $1,905
relating to options granted to purchase 387 shares of common stock in May and
June of 1999 equal to the difference between the fair market value of the
Company's common stock on the grant date and the exercise price of the stock
options. The expense will be recognized ratably over the four-year vesting
period of the stock options. The Company recorded $60 of expense associated with
such option grants during the six month period ended June 30, 1999 which is
included in compensation and other costs in the accompanying consolidated
financial statements.

The following tables summarize information about stock options outstanding
as of December 31, 1998 and June 30, 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>
JUNE 30, 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........................... 2,228 9.0 $1.00 246 $1.00
$1.16 -- 2.00........................... 667 9.3 $1.17 -- --
$2.00 -- 4.00........................... 1,512 9.6 $2.74 -- --
$4.00 -- 9.00........................... 172 10.0 $8.48 -- --
----- ---
4,579 246
===== ===
</TABLE>

F-20
<PAGE> 85
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Options to purchase 15 shares of common stock at $1.00 per share were
exercised in July 1999.

8. COMMITMENTS AND CONTINGENCIES

The Company leases its office facilities and certain equipment under
various operating leases. Total rent expense was $456, $732, $1,038, $484, and
$732, for the years ended December 31, 1997, 1998, and 1999, and the six months
ended June 30, 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>

Subsequent to December 31, 1998, the Company entered into a new office
facility lease which is scheduled to commence October 1, 1999. The minimum lease
commitment under the new lease is $1,944, $2,025, $2,106, $2,187, $2,268, and
$2,349 for the first, second, third, fourth, fifth, and sixth years following
the commencement date, respectively.

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, $196, and $733 to the amended plan for the years ended December 31, 1997
and 1998 and the six months ended June 30, 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
advertisements that Mobius allege in its complaint are false and misleading are
two e-mails intended for internal use, a comparison chart believed to have been
prepared by a former Company employee in 1997 for internal purposes, and a
statement made regarding the Company's Vista Plus Java client which had been
posted on the Internet. 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. In response to Mobius' complaint, the
Company has filed a motion to dismiss which is set for hearing on September 13,
1999. 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 the Company's business, results of operations or
financial condition; 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, that the ultimate disposition of these matters will not materially
affect the Company's results of operations or financial position.

F-21
<PAGE> 86
QUEST SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. 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.

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 as this information and the geographic information described below are
the only information provided to the chief operating decision maker.

Operating segment data for the three years in the period ended December 31,
1998 and the six months ended June 30, 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.................................................. $12,158 $6,157 $18,315
Cost of revenues.......................................... 1,307 1,972 3,279
------- ------ -------
Gross profit........................................... $10,851 $4,145 $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
======= ====== =======
Six months ended June 30, 1998:
Revenues.................................................. $ 9,580 $4,455 $14,035
Cost of revenues.......................................... 1,504 1,044 2,548
------- ------ -------
Gross profit........................................... $ 8,076 $3,411 $11,487
======= ====== =======

Six months ended June 30, 1999:
Revenues.................................................. $21,365 $6,924 $28,289
Cost of revenues.......................................... 1,404 1,738 3,142
------- ------ -------
Gross profit........................................... $19,961 $5,186 $25,147
======= ====== =======
</TABLE>

F-22
<PAGE> 87
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 long-lived assets concerning principal
geographic areas in which the Company operates are as follows:

<TABLE>
<CAPTION>
UNITED
STATES 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)
Long-lived assets............................ 1,662 68 -- 1,730

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
Long-lived assets............................ 2,336 118 -- 2,454

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
Long-lived assets............................ 1,600 315 -- 1,915

Six months ended June 30, 1998:
Revenues..................................... $13,017 $1,746 $ (728) $14,035
Gross profit................................. 10,624 1,591 (728) 11,487
Income (loss) from operations................ 1,291 203 (77) 1,417
Long-lived assets............................ 2,056 180 -- 2,236

Six months ended June 30, 1999:
Revenues..................................... $24,573 $4,799 $(1,083) $28,289
Gross profit................................. 21,662 4,574 (1,089) 25,147
Income from operations....................... 1,281 667 243 2,191
Long-lived assets............................ 2,142 525 -- 2,667
</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 six months ended June 30, 1998 and 1999, no single customer
accounted for 10% or more of total revenue. No single international location
accounted for more than 5% of total revenues for any of the periods indicated.

F-23
<PAGE> 88

Inside Back Cover

[QUEST SOFTWARE LOGO]

[Background consists of the names of certain Quest customers]

Quest Software products have been sold to thousands of corporations,
governmental agencies and other organizations worldwide. The companies listed
here are a representative sampling of customers who have purchased at least
$100,000 of software licenses since January 1996.
<PAGE> 89

[QUEST SOFTWARE LOGO]