QUARTERDECK CORP, PRE 14A, 1997-12-08

QUARTERDECK CORP
PRE 14A, 1997-12-08
PREPACKAGED SOFTWARE

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<PAGE> 1

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12

QUARTERDECK CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

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(2) Aggregate number of securities to which transaction applies:

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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):

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(4) Proposed maximum aggregate value of transaction:

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(5) Total fee paid:

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[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

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(2) Form, Schedule or Registration Statement No.:

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(3) Filing Party:

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(4) Date Filed:

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<PAGE> 2

PRELIMINARY COPIES

[QUARTERDECK LOGO]

QUARTERDECK CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD FEBRUARY 5, 1998

To Our Stockholders:

The Annual Meeting of Stockholders of Quarterdeck Corporation (the
"Company") will be held at the Marina del Rey Hotel, 13534 Bali Way, Marina del
Rey, California 90292, on February 5, 1998, at 10:00 a.m., local time (the
"Annual Meeting"), for the following purposes:

1. To elect two directors to serve three-year terms and until such
directors' successors are duly elected and qualified;

2. To approve the issuance of shares of Common Stock representing 20% or
more of the Common Stock outstanding, which are issuable upon conversion
of shares of the Company's Series C Convertible Preferred Stock issued
in a private placement;

3. To approve and authorize an amendment to the Company's Certificate of
Incorporation to increase the number of shares of Common Stock
authorized for issuance by the Company from 70,000,000 to 90,000,000;

4. To approve an amendment to the Company's Amended and Restated 1990 Stock
Plan to increase the number of shares of stock authorized for issuance
thereunder from 7,500,000 to 9,500,000;

5. To ratify the appointment of KPMG Peat Marwick LLP as independent
auditors of the Company for the fiscal year ending September 30, 1998;
and

6. To transact such other business as may properly come before the Annual
Meeting and any adjournments and postponements thereof.

The Board of Directors has fixed December 30, 1997 as the record date for
determination of stockholders entitled to notice of and to vote at the Annual
Meeting and any adjournment thereof.

YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL
MEETING, PLEASE DATE AND SIGN THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY
IN THE ENVELOPE ENCLOSED FOR THAT PURPOSE. THE GIVING OF A PROXY WILL NOT AFFECT
YOUR RIGHT TO REVOKE SUCH PROXY BY APPROPRIATE WRITTEN NOTICE OR BY VOTING IN
PERSON AT THE ANNUAL MEETING.

By Order of the Board of Directors

Ron Ben-Yehuda
Secretary

Los Angeles, California
January 5, 1998
<PAGE> 3

QUARTERDECK CORPORATION
13160 MINDANAO WAY
MARINA DEL REY, CALIFORNIA 90292
(310) 309-3700
------------------------

PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY 5, 1998
------------------------

GENERAL

The accompanying proxy is solicited by and on behalf of the Board of
Directors of Quarterdeck Corporation (the "Company") in connection with the
Annual Meeting of Stockholders of the Company (the "Annual Meeting") to be held
at 10:00 a.m., local time, on February 5, 1998 at the Marina del Rey Hotel,
13534 Bali Way, Marina del Rey, California 90292, and at any and all
postponements and adjournments thereof.

This Proxy Statement and accompanying proxy will first be mailed to
stockholders on or about January 5, 1998. The costs of solicitation of proxies
will be paid by the Company. In addition to soliciting proxies by mail, the
Company's officers, directors and other regular employees, without additional
compensation, may solicit proxies personally or by other appropriate means. In
addition, MacKenzie Partners, Inc. has been engaged to solicit proxies on behalf
of the Company for a fee of $3,000 plus reasonable out-of-pocket expenses. The
Company will reimburse brokers, banks, fiduciaries and other custodians and
nominees holding Common Stock in their names or in the names of their nominees
for their reasonable charges and expenses in forwarding proxies and proxy
materials to the beneficial owners of such Common Stock.

VOTING RIGHTS AND OUTSTANDING SHARES

Only stockholders of record of the Company's Common Stock as of December
30, 1997 will be entitled to vote at the meeting. On December 30, 1997, there
were outstanding shares of Common Stock, which constituted all of the
outstanding voting securities of the Company entitled to vote at the Annual
Meeting. Each share of Common Stock is entitled to one vote on all matters to
come before the Annual Meeting.

The presence, in person or by proxy, of the holders of at least a majority
of the total number of shares of Common Stock entitled to vote is necessary to
constitute a quorum at the Annual Meeting. Abstentions and broker non-votes
(i.e., shares held by brokers or nominees as to which instructions have not been
received from the beneficial owners or persons entitled to vote that the broker
or nominee does not have discretionary power to vote on a particular matter) are
counted for the purpose of determining the presence or absence of a quorum for
the transaction of business. In the event that there are not sufficient votes
for a quorum at the time of the Annual Meeting, the Annual Meeting may be
adjourned in order to permit the further solicitation of proxies.

A director will be elected by a plurality of the votes of the shares of
Common Stock present in person or represented by proxy. The affirmative vote of
a majority of the outstanding shares of Common Stock will be required to approve
and authorize the proposed amendment to the Company's Certificate of
Incorporation. The affirmative vote of a majority of the shares of Common Stock
present in person or represented by proxy will be required to approve the
issuance of Common Stock representing more than 20% of Common Stock outstanding,
to approve the amendment to the Company's 1990 Amended and Restated Stock Plan
and to ratify the appointment of KPMG Peat Marwick LLP as independent auditors
of the Company for the fiscal year ending September 30, 1998.

With regard to the election of directors, votes may be cast in favor of or
withheld; votes that are withheld will be excluded entirely from the vote and
will have no effect. Abstentions may be specified on proposals
<PAGE> 4

other than the election of directors and will be counted as present for purposes
of the item on which the abstention is voted. Therefore, such abstentions will
have the effect of a negative vote. Broker non-votes are not counted for
purposes of determining whether a proposal has been approved and, therefore,
have the effect of reducing the number of affirmative votes required to achieve
a majority of the votes cast for such proposal.

REVOCABILITY OF PROXIES

Proxies must be written, signed by the stockholder and returned to the
Secretary of the Company. Any stockholder who signs and returns a proxy may
revoke it at any time before it is voted by filing with the Secretary of the
Company a written revocation or a duly executed proxy bearing a date later than
the date of the proxy being revoked. Any stockholder attending the Annual
Meeting in person may withdraw such stockholder's proxy and vote such
stockholder's shares.

DIRECTORS

The Board of Directors is divided into three classes, with the term of each
class ending in successive years. Two directors are to be elected at the Annual
Meeting, to hold office for a term of three years and until the election of such
directors' successors. Certain information with respect to the nominees for
election as directors at the Annual Meeting and the other directors whose terms
of office will continue after the Annual Meeting is set forth below.

<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
- ---------------------- --- -------------------------------------------------------------
<S> <C> <C>
Nominees for Term of Office Expiring in Three Years

Dr. Howard L. Morgan 52 Dr. Morgan has been a Director of the Company since 1983. He
is currently President of The Arca Group, Inc., a consulting
and investment management firm specializing in the areas of
computer and communications technologies. He serves as a
director of Cylink Corporation, Franklin Electronic
Publishers, Inc., Infonautics Corporation, Kentek Information
Systems, HDS Network Systems, Inc., MetaCreations, Inc.,
Segue Software and Unitronix Corp.
Curtis A. Hessler 54 Mr. Hessler was appointed President and Chief Executive
Officer of the Company in February 1997 and currently serves
in such capacity. From 1995 until he joined Quarterdeck, Mr.
Hessler was Chairman of the Board of I-Net, Inc., a personal
computer network management services company. He served as
Executive Vice President of The Times Mirror Company during
199l through 1995, managing that publishing enterprise's
professional information, cable systems, magazine, and
digital media businesses. Earlier in his career, Mr. Hessler
served as Vice Chairman of Unisys Corporation, a large
computer and computer services firm and practiced corporate
law with firms in New York and Los Angeles. During the
administration of President Carter, he served as Assistant
Secretary of the Treasury Department. He serves as a director
of Legacy Software, Inc., a multimedia software development
company.

Directors Whose Terms of Office Expire in One Year

Frank W.T. LaHaye 68 Mr. LaHaye has been a Director of the Company since 1982 and
the Chairman of the Board since 1985. Mr. LaHaye has been a
general partner of the general partnerships of Peregrine
Ventures and Peregrine Ventures II, venture capital
investment partnerships, since their formation in 1981 and
1983, respectively. Mr. LaHaye serves as a director or
trustee of various funds affiliated with the
Franklin/Templeton Group of Funds and as a director of
Fischer Imaging Corporation and Digital Transmission Systems,
Inc.
</TABLE>

2
<PAGE> 5

<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
- ---------------------- --- -------------------------------------------------------------
<S> <C> <C>
William H. Lane III 59 Mr. Lane has been a director of the Company since September
1996. He retired from Intuit Inc., a tax preparation software
company, effective July 31, 1996, having served as its Vice
President and Chief Financial Officer from January 1994 until
April 1, 1996. From July 1991 to January 1994, Mr. Lane
served in a similar capacity at ChipSoft, Inc., a tax
preparation software company. Mr. Lane is also a director of
MetaCreations, Inc. and Expert Software, Inc.

Director Whose Term of Office Expires in Two Years

King R. Lee 57 Mr. Lee was appointed as a member of the Office of the
President of the Company on August 27, 1996 and served in
such capacity until February 1997. Mr. Lee also served as
Interim Chief Executive Officer of the Company from December
1994 until January 1995 and served as Interim Chief Operating
Officer of the Company between July and December 1994. He was
elected a Director of the Company in July 1994. Mr. Lee is
the Chief Executive Officer and Chairman of Wynd
Communications Corporation, a two-way wireless messaging
service provider, and is President of King R. Lee &
Associates, Inc., a management consulting firm, which has
provided consulting services to the Company. From 1987 to
1993, Mr. Lee was President and Chief Executive Officer of
Xtree Company, a developer of computer systems software. He
serves as a director of Nettech Systems, Inc., Outback
Resource Group, Inc., Boss Entertainment, Dover Pacific, Inc.
and Microframe Inc.
</TABLE>

COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS

The Company's Board of Directors has a standing Audit Committee and
Compensation Committee.

The Audit Committee, currently comprised of Messrs. Lane, LaHaye and
Morgan, advises and assists the Board of Directors in evaluating the performance
of the Company's auditors, including the scope and adequacy of the auditors'
examinations. In fiscal year 1997, the Audit Committee held four meetings.

The Compensation Committee, currently comprised of Messrs. LaHaye and Lane,
oversees the Company's overall executive compensation program, reviews the
Company's employee benefit plans and administers the Company's stock option
plans. The Compensation Committee met seven times during the last fiscal year.

The Company's Board of Directors selects nominees for election as
directors. The Company does not have a standing nominating committee. The
candidates for election at this Annual Meeting were nominated by the Board of
Directors. Stockholder nominations for election as directors may be voted on at
an annual meeting only if such nominations are made pursuant to written notice
timely given to the Secretary of the Company accompanied by certain information
specified in the Company's bylaws. To be timely, a stockholder's written notice
must be delivered to or mailed and received at the principal executive offices
of the Company not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that, in the event that less than 60 days' notice or prior
public disclosure of the date of the meeting is given or made to stockholders, a
stockholder's notice will be timely if received not later than the tenth day
following the day on which such notice of the date of the meeting is mailed or
such public disclosure is made. Such stockholder's notice must set forth with
respect to each director nominee all of the information relating to such person
that is required to be disclosed in solicitations for elections of directors
under the rules of the Securities and Exchange Commission and such stockholder's
name and address, as they appear on the Company's books, and the number of
shares of Common Stock owned by the stockholder giving the notice.

The Board of Directors held 13 meetings during the fiscal year ended
September 30, 1997. All directors attended at least 75% of the meetings of the
Board of Directors, and all members of the committees of the Board of Directors
attended at least 75% of the meetings of those committees, in each case, after
the election of such individuals to the Board of Directors or to such committee.

3
<PAGE> 6

DIRECTORS' COMPENSATION

Non-employee directors receive $6,000 ($12,000 in the case of the Chairman
of the Board) annually, payable quarterly, as compensation for serving on the
Board of Directors, plus $1,500 per meeting for Board or Committee meetings
attended. Non-employee directors are reimbursed for their reasonable expenses
incurred in attending meetings. Non-employee directors also participate in the
1990 Directors Stock Option Plan which provides for automatic grants of options
to non-employee directors. Under the 1990 Directors Stock Option Plan, each
non-employee director is granted an option to purchase 30,000 shares of the
Company's Common Stock three business days following his or her first election
as a director (the "initial grant"). Thereafter, each non-employee director who
has been re-elected or who is continuing as a member of the Board of Directors
is granted an option to purchase 7,500 shares of the Company's Common Stock on
the date of the Company's annual meeting of stockholders (an "annual grant").
Options are granted at 100% of the fair market value of the Company's Common
Stock on the grant date and have a term of five years. Initial grants vest
immediately as to one-third of the shares and vest an additional one-third on
the first and second anniversaries of the grant date. Annual grants vest in full
on the first anniversary of the grant date. The Board of Directors or the
Compensation Committee may also make discretionary option grants to non-employee
directors. During fiscal 1997, the Board of Directors made a discretionary grant
of 25,000 options to each non-employee director.

In July 1994, King R. Lee, a director of the Company, entered into a
consulting agreement (the "Consulting Agreement") with the Company. Under the
terms of the Consulting Agreement, as amended, King R. Lee & Associates, Inc.,
of which Mr. Lee is President and sole stockholder, was paid $1,500 per full day
plus expenses in exchange for Mr. Lee's consulting services to the Company,
generally for four full days a week. Mr. Lee provided consulting services to the
Company under the Consulting Agreement through January 1995 and King R. Lee &
Associates, Inc. was paid $181,000 in fiscal year 1995 pursuant to the terms of
the Consulting Agreement. In addition, the Company entered into a new consulting
agreement (the "New Consulting Agreement") with Mr. Lee on August 27, 1996 when
Mr. Lee assumed the duties as a member of the Office of the President. Pursuant
to the New Consulting Agreement, King R. Lee & Associates, Inc. was paid $1,500
per full day plus expenses in exchange for Mr. Lee's consulting service to the
Company. The Company paid to King R. Lee & Associates, Inc. an additional
$33,000 during fiscal year 1996 and a total of $76,500 during fiscal year 1997
pursuant to the New Consulting Agreement. Mr. Lee provided consulting services
to the Company under the New Consulting Agreement through February 1997.

4
<PAGE> 7

EXECUTIVE COMPENSATION

The following table sets forth information concerning the annual and
long-term compensation paid by the Company during the fiscal years ended
September 30, 1997, 1996 and 1995 to (i) the persons who served as Chief
Executive Officer or performed the functions thereof during fiscal year 1997,
(ii) the four most highly compensated executive officers as of the end of fiscal
year 1997, whose total annual salary and bonus exceeded $100,000 and (iii) one
additional individual who would have been included among the four most highly
compensated executive officers, but for the fact the individual was not serving
as an executive officer at the end of fiscal year 1997.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL ---------------------------
COMPENSATION SECURITIES
----------------- UNDERLYING ALL OTHER
SALARY BONUS OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($)
- --------------------------------------------- ---- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Curtis A. Hessler(1) 1997 297,692 0 1,350,000 0
President and Chief Executive Officer
King R. Lee(2) 1997 101,250 0 115,000 0
Former Office of the President 1996 58,500 0 100,000 0
1995 192,000 0 0 0
Anatoly Tikhman(3) 1997 182,922 57,375 275,000 0
Former Office of the President 1996 22,153 0 250,000 0
Frank R. Greico(4) 1997 187,589 61,250 106,250 0
Senior Vice President and Chief Financial 1996 129,230 25,000 75,000 0
Officer
Joseph Fusco(5) 1997 145,802 43,531 150,000 0
Senior Vice President -- Marketing and
Product Management
Ron Ben-Yehuda(6) 1997 136,667 61,083 72,500 0
Vice President, General Counsel and 1996 47,115 12,222 30,000 0
Secretary
John Strosahl(7) 1997 138,221 72,320 51,575 0
Vice President -- International 1996 60,000 30,000 0 0
Bradley D. Schwartz(8) 1997 110,000 128,000 125,000 165,000
Former Senior Vice President, General 1996 127,500 82,500 100,000 0
Counsel and Secretary
</TABLE>

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

(1) Mr. Hessler became President and Chief Executive Officer of the Company in
February 1997.

(2) From September of 1994 until January 1995, Mr. Lee acted in the capacity of
Chief Executive Officer and was formally appointed Interim Chief Executive
Officer in December 1994. In addition, Mr. Lee was Interim Chief Executive
Officer between July and December 1994. Mr. Lee was appointed as a member of
the Office of President in August 1996 and resigned from such position upon
the appointment of Mr. Hessler in February 1997. Mr. Lee is also a director
of the Company and received compensation as a non-employee director. Mr.
Lee's salary for fiscal 1995 includes $181,000 of consulting fees paid to
King R. Lee & Associates and $11,000 of non-employee fees, Mr. Lee's salary
for fiscal 1996 includes $33,000 of consulting fees paid to King R. Lee &
Associates and $25,000 of non-employee director fees and Mr. Lee's salary
for fiscal 1997 includes $76,500 of consulting fees paid to King R. Lee &
Associates and $24,750 of non-employee director fees. The options granted to
Mr. Lee during fiscal 1997 include 90,000 options granted to Mr. Lee in
connection with a like value exchange of options discussed below.

(3) Mr. Tikhman was appointed Senior Vice President in July 1996 and as a member
of the Office of President in August 1996. He resigned as a member of the
Office of President upon the appointment of Mr. Hessler in February 1997 and
as a Senior Vice President in October 3, 1997. The options granted to Mr.
Tikhman during fiscal 1997 include 225,000 options granted to Mr. Tikhman in
connection with a like value exchange of options discussed below.

5
<PAGE> 8

(4) Mr. Greico was appointed an executive officer in February 1996. The options
granted to Mr. Greico during fiscal 1997 include 56,250 options granted to
Mr. Greico in connection with a like value exchange of options discussed
below.

(5) Mr. Fusco was appointed as a Vice President in September 1996 and in April
28, 1997 he was appointed Senior Vice President -- Marketing and Product
Management. The options granted to Mr. Fusco during fiscal 1997 include
67,500 options granted to Mr. Fusco in connection with a like value exchange
of options discussed below.

(6) Mr. Ben-Yehuda was appointed an executive officer in May 1997 and joined the
Company in April 1996. The options granted to Mr. Ben-Yehuda during fiscal
1997 include 22,500 options granted to Mr. Ben-Yehuda in connection with a
like value exchange of options discussed below.

(7) Mr. Strosahl was appointed an executive officer in August 1997. The bonus
amount for Mr. Strosahl in fiscal 1997 includes reimbursement of relocation
and relocation related expenses that he received from the Company in the
amount of $38,722. The options granted to Mr. Strosahl during fiscal 1997
include 21,575 options granted to Mr. Strosahl in connection with a like
value exchange of options discussed below.

(8) Mr. Schwartz was appointed an executive officer in February 1997 and
resigned as such in April 1997. The amounts shown for Mr. Schwartz under
"All Other Compensation" consist of severance payments which Mr. Schwartz
became entitled to receive upon resignation in accordance with the terms of
his employment agreement. The options granted to Mr. Schwartz during fiscal
1997 include 75,000 options granted to Mr. Schwartz in connection with a
like value exchange of options discussed below.

The following two tables set forth information concerning stock options
granted to, exercised by and held by the named executive officers in fiscal year
1997. No SARs were granted by the Company or exercised by the named executive
officers in fiscal year 1997.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------- POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SECURITIES % OF TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS/SARS PRICE APPRECIATION FOR
OPTIONS/SARS GRANTED TO EXERCISE OR OPTION TERM
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ------------------------- ------------ ------------ ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Curtis A. Hessler 1,350,000 24.61 4.4375 1/3/2007 9,250,541 15,129,465
King R. Lee 90,000 1.64 4.6875 9/18/2006 660,706 1,034,679
25,000 .46 3.625 3/14/2007 145,412 233,307
Anatoly Tikhman 225,000 4.10 4.6875 7/24/2006 1,639,142 2,547,319
50,000 .91 3.00 7/24/2007 245,074 400,382
Frank R. Greico 56,250 1.03 4.6875 1/18/2006 399,422 605,029
50,000 .91 2.375 4/28/2007 191,719 309,504
Joseph Fusco 67,500 1.23 4.6875 9/30/2006 496,344 778,564
82,500 1.5 2.375 4/28/2007 316,336 510,682
Ron Ben-Yehuda 22,500 .41 4.6875 4/18/2006 161,751 248,052
50,000 .91 2.3438 5/21/2007 189,797 307,639
John Strosahl 18,000 .33 4.6875 6/25/2006 130,612 202,173
3,575 .06 4.6875 3/28/2006 25,627 39,187
30,000 .55 2.375 4/28/2007 115,031 185,702
Bradley D. Schwartz 75,000 1.37 4.6875 1/16/2006 532,417 806,264
40,200 .73 4.75 12/17/2006 302,760 480,008
</TABLE>

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

(1) Except as noted below, the options granted to the executive officers listed
above vest in the following manner: one fourth of the options vest on the
first anniversary of the date of grant and 1/48 of the total number of
options vest thereafter on a monthly basis. Mr. Tikhman's options listed
above vest in the

6
<PAGE> 9

following manner: one third of the options vest on the first anniversary of
the date of grant and the remaining two thirds of the options vest on the
day immediately preceding the second anniversary of the date of grant. Mr.
Lee's options for 25,000 shares was an annual director grant and vest
pursuant to the Directors Stock Option Plan. See "Directors -- Directors'
Compensation." Mr. Lee's options for 90,000 shares vest in the following
manner: one third of the options vest on the six month anniversary of Mr.
Lee's appointment to the Office of the President and 1/18 of the total
number of options vest thereafter on a monthly basis. The employment
agreements of certain individuals also provide for accelerated vesting under
certain circumstances generally related to achievement of certain targets or
certain changes-of-control. See "Executive Compensation -- Employment
Agreements." Options generally remain exercisable for ten years from the
date of grant. All options were granted at a price equal to the fair market
value on the date of grant.

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

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS/SARS AT MONEY OPTIONS/SARS AT
SHARES ACQUIRED VALUE REALIZED FISCAL YEAR-END (#) FISCAL YEAR-END ($)
NAME ON EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---------------------- --------------- -------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Curtis A. Hessler 0 0 0 1,350,000 0 0
King R. Lee 0 0 80,000 92,500 25,693 9,918
Anatoly Tikhman 0 0 75,000 187,145 0 1,550
Frank R. Greico 0 0 23,438 82,812 0 32,800
Joseph Fusco 0 0 16,876 133,124 0 54,120
Ron Ben-Yehuda 0 0 7,969 64,531 0 34,360
John Strosahl 0 0 6,966 44,609 0 19,680
Bradley D. Schwartz 0 0 90,200 0 0 0
</TABLE>

LIKE-VALUE EXCHANGE OF STOCK OPTIONS

In January 1997, the Company implemented a program allowing a "like-value
exchange" of certain options previously awarded to employees (including the
named executive officers, but excluding non-employee directors of the Company).
Optionees were given the opportunity to exchange options previously awarded (the
"Old Options") with an option price of more than $6.00 per share for a lesser
amount of new options (the "New Options") which had a value equal to the Old
Options, with an option price equal to the then current stock price $4.6875 per
share. The New Options had the same vesting schedule (and expiration date) as
the Old Options; provided, however, none of the New Options could be exercised
until six months after the date of grant.

The Company retained William M. Mercer Incorporated, a compensation and
benefits consulting firm, to assist it in calculating the relevant Black-Scholes
values for both the Old Options and the New Options and determined the
categories of exchange ratios for each of the option grants included in the
program. The Black-Scholes model has become generally accepted in the financial
community as an appropriate means of valuing a stock option. The exchange ratios
ranged from 50% to 90%. The Company should incur no significant new costs in
conjunction with the program, since the overall value of the grants remained the
same. The Board of Directors believed that the reduced exercise price would
create a more immediate positive incentive to the optionees who agreed to the
exchange. This was, and continues to be, especially important during a period of
transition during which the retention and commitment of key employees are
essential.

Board of Directors:

<TABLE>
<S> <C>
Frank W.T. LaHaye William H. Lane III
Curtis A. Hessler Howard Morgan
King R. Lee
</TABLE>

7
<PAGE> 10

The following table sets forth the details of all exchanges and repricings
of options held by any named executive officer during the last ten completed
fiscal years (which only includes those in connection with the 1997 like-value
exchange).

<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF SECURITIES ORIGINAL
UNDERLYING MARKET PRICE OF OPTION
OPTIONS/SARS STOCK AT TIME OF EXERCISE PRICE AT TERM REMAINING
REPRICED OR REPRICING OR TIME OF REPRICING NEW EXERCISE AT DATE OF
AMENDED AMENDMENT OR AMENDMENT PRICE REPRICING OR
NAME DATE (#) ($) ($) ($) AMENDMENT
- ------------------ -------- -------------------- ---------------- ----------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Curtis A. Hessler -- -- -- -- -- --
King R. Lee 1/8/1997 90,000 4.6875 7.875 4.6875 9/18/2006
Anatoly Tikhman 1/8/1997 225,000 4.6875 7.00 4.6875 7/24/2006
Frank R. Greico 1/8/1997 75,000 4.6875 15.813 4.6875 1/18/2006
Joseph Fusco 1/8/1997 75,000 4.6875 6.875 4.6875 9/30/2006
Ron Ben-Yehuda 1/8/1997 30,000 4.6875 13.625 4.6875 4/18/2006
John Strosahl 1/8/1997 20,000 4.6875 8.8125 4.6875 6/25/2006
1/8/1997 4,766 4.6875 13.625 4.6875 3/28/2006
Bradley D.
Schwartz 1/8/1997 100,000 4.6875 15.25 4.6875 1/16/2006
</TABLE>

EMPLOYMENT AGREEMENTS

The Company entered into a four-year employment agreement with Curtis A.
Hessler, dated as of January 13, 1997. Pursuant to that agreement, Mr. Hessler
is entitled to receive a base salary of $450,000 per year and an annual target
bonus of $250,000 based upon achievement of objectives established by the Board
of Directors or the Compensation Committee; provided, however, that during the
first four full fiscal quarters of employment, the minimum amount of bonus shall
be $125,000. In addition, Mr. Hessler was granted, pursuant to the terms of his
employment agreement, options to purchase 1,350,000 shares of Common Stock. The
employment agreement also provides for accelerated vesting of Mr. Hessler's
options upon the occurrence of certain "change in control" transactions or if
certain stock price levels are reached. Mr. Hessler is entitled to, among other
things, eighteen months annual base salary upon a termination of Mr. Hessler's
employment (other than for cause) prior to the expiration of the employment
agreement or if Mr. Hessler terminates his employment within one year of a
change in control if there is a material diminution of his duties and
responsibilities, a reduction in compensation or significant reduction in
benefits or a non-voluntary relocation from the Southern California area.

As described above, King R. Lee received compensation from the Company
pursuant to the terms of the Consulting Agreement.

The Company entered into a two-year employment agreement with Anatoly
Tikhman which expired as of July 24, 1997. The agreement provided for salary of
$180,000 per year and an annual bonus in an amount not to exceed $90,000
determined in accordance with the terms of a Management Performance Bonus Plan.

The Company entered into a two-year employment agreement with Joseph Fusco,
dated as of September 16, 1996. Pursuant to that agreement, Mr. Fusco is
entitled to receive a base salary of $135,000 per year and an annual target
bonus of $67,500 determined in accordance with the terms of a Management by
Objective Plan of the Company and contingent upon attainment of objectives
mutually agreed upon by Mr. Fusco and the Chief Executive Officer of the
Company. In addition, Mr. Fusco was granted options to purchase 75,000 shares of
Common Stock pursuant to the terms of the employment agreement.

The Company entered into an employment agreement with Ron Ben-Yehuda, dated
as of May 1, 1996, which was amended on June 6, 1997. The agreement may be
terminated by the Company or Mr. Ben-Yehuda at any time in accordance with the
terms of the agreement. Pursuant to that agreement, Mr. Ben-Yehuda is entitled
to receive a base salary of $155,000 per year and an annual target bonus of
$70,000 contingent upon corporate and personal performance. In addition, Mr.
Ben-Yehuda was granted options to purchase 50,000 shares of Common Stock
pursuant to the terms of the employment agreement.

8
<PAGE> 11

The Company entered into a four-year employment agreement with Bradley D.
Schwartz, dated as of January 16, 1996. Pursuant to that agreement, Mr. Schwartz
received a base salary of $170,000 per year and an annual bonus of $110,000
multiplied by a "Multiplier" based upon achievement of certain individual and
department goals, but to be no less than one. Mr. Schwartz resigned in April
1997 and pursuant to the terms of his employment agreement is entitled to
receive among other things, twelve months' salary plus an amount equal to the
maximum bonus he could have received for such 12-month period (payable in
bi-weekly installments) and accelerated vesting of 50% of his unvested options.

COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION

The Company's Compensation Committee oversees the Company's overall
executive compensation program in addition to reviewing and administering
programs available to employees of the Company.

COMPENSATION POLICIES

In recognition that the recruitment of personnel in the computer software
industry is highly competitive, the Company's compensation policies, both for
executive and non-executive employees, are structured to attract and retain
highly skilled technical, marketing and management personnel. To reward and
encourage performance that enhances both the short-term and long-term results of
the Company, the Company's compensation program is centered in three specific
areas: base salary, performance bonus and long-term incentive awards.

In applying these main components to executive compensation, the
Compensation Committee has determined to place a greater emphasis on merit and
risk-oriented compensation for the Company's executive officers. Consequently,
for executive officers, the Compensation Committee has preferred base salaries
for executive officers that fall within the moderate range of competitor
salaries and to establish bonus guidelines and long-term incentive programs
(particularly option grants) that are designed to inspire and reward
productivity.

BASE SALARY

In general, the Compensation Committee reviews salaries for the Chief
Executive Officer and executive officers on an annual basis, generally
coordinated with the Board's annual election of executive officers following the
Company's annual meeting. During fiscal year 1997, the base salary for each of
Messrs. Hessler, Fusco, Ben-Yehuda, Tikhman and Schwartz was paid pursuant to
the terms of their employment agreements. The Compensation Committee believes
that the terms of each employment agreement are consistent with the Committee's
philosophy of establishing base salaries within the moderate range and placing
greater emphasis on merit and risk-oriented compensation such as bonus payments
based on performance and stock options.

DISCRETIONARY BONUS PLAN

In fiscal 1997, the Company implemented a Discretionary Bonus Plan (the
"Bonus Plan") designed to further the long-term growth and profitability of the
Company by motivating participants to achieve predefined quarterly and annual
objectives. Employees of the Company in senior management positions were
eligible to receive benefits under the Bonus Plan with the exception of Curt
Hessler, who was not eligible to receive any benefits under the Bonus Plan.
Awards under the Bonus Plan were based on a combination of Company, departmental
and individual performance.

The Company performance objectives were established by the Board of
Directors in conjunction with the Chief Executive Officer. Quarterly and annual
personal and departmental performance objectives were generally established by
the Chief Executive Officer in conjunction with each eligible employee and
reviewed by the Compensation Committee. In general, payment of bonus amounts was
dependent on achievement of the objectives according to the following formula:
(i) 50% of the individual bonus award for each eligible employee was based upon
achievement of company-wide sales and profitability relative to the established

9
<PAGE> 12

performance objective and (ii) 50% of the individual bonus award for the
executive officer was based on an evaluation of the eligible employee's personal
performance against the targeted personal performance objectives and achievement
of department objectives.

Pursuant to his employment, Mr. Hessler is entitled to receive a base
salary of $450,000 per year and an annual target bonus of $250,000 based upon
achievement of objectives established by the Board of Directors or the
Compensation Committee; provided, however, that during the first four full
fiscal quarters of employment, the minimum amount of bonus shall be $125,000.
Mr. Hessler's bonus has not yet been determined for fiscal 1997, but is expected
to be based on his achieving or exceeding certain financial performance goals
for the Company and other factors.

LONG-TERM INCENTIVE AWARDS

The Company's Stock Plan permits the Compensation Committee to grant to
eligible employees stock options, stock appreciation rights and other stock
awards such as restricted stock and bonus stock. The Compensation Committee
believes that the option grants made to the executive officers of the Company
were a key factor in the Company's ability to hire such executives during fiscal
year 1997 and were consistent with the Committee's philosophy of placing
emphasis on risk-oriented compensation. The Compensation Committee has
determined that long-term incentives should be granted on a discretionary basis
based principally on the quality of individual performance and base salary
levels. The Compensation Committee takes into consideration the amount of
previous option grants held when granting additional options.

INTERNAL REVENUE CODE SECTION 162(m)

Section 162(m) of the Internal Revenue Code of 1986, as amended, places a
per-person limit of $1,000,000 on the amount of compensation that may be
deducted by the Company in any year with respect to certain of the Company's
most highly compensated officers. Section 162(m) does not, however, disallow a
deduction for qualified "performance-based compensation" the material terms of
which are disclosed to and approved by stockholders. In February 1995, the
stockholders approved amendments to and a restatement of the Company's 1990
Stock Plan with the result that compensation resulting from most awards granted
thereunder would be qualified "performance-based compensation" and would be
deductible. However, the Company may from time to time pay compensation to its
executive officers that may not be deductible. 750,000 of the options granted to
Mr. Hessler during fiscal year 1997 were granted outside of the Company's 1990
Stock Plan and will not qualify as performance based compensation.

Compensation Committee:

Frank W.T. LaHaye
William H. Lane III

10
<PAGE> 13

STOCK PERFORMANCE GRAPH

The graph below compares the cumulative total return on the Company's
Common Stock from September 30, 1992 to September 30, 1997, compared to the H&Q
Software Sector Index and the Nasdaq Stock Market (U.S. Companies) Index. The
graph assumes a $100 investment at the beginning of the period and the
reinvestment of all dividends.

1997 PROXY: STOCK PERFORMANCE

<TABLE>
<CAPTION>
MEASUREMENT PERIOD NASDAQ STOCK
(FISCAL YEAR COVERED) QUARTERDECK H&Q SOFTWARE MARKET-U.S.
<S> <C> <C> <C>
SEP-92 100 100 100
SEP-93 59 131 117
SEP-94 54 132 140
SEP-95 456 182 217
SEP-96 162 216 265
SEP-97 71 297 342
</TABLE>

This graph represents historical stock price performance and is not
necessarily indicative of any future stock price performance.

The foregoing report of the Compensation Committee and the Performance
Graph that appears immediately after such report shall not be deemed to be
soliciting material or to be filed with the Securities and Exchange Commission
under the Securities Act of 1933 or the Securities Exchange Act of 1934 or
incorporated by reference in any document so filed.

COMPANY PROPOSALS

The following proposals will be submitted for stockholder consideration and
voting at the Annual Meeting. Approval of Proposal 3 will require the
affirmative vote of a majority of the outstanding shares of Common Stock, and
approval of Proposals 2, 4 and 5 will require the affirmative vote of the
holders of a majority of the shares of Common Stock present in person or
represented by proxy. A director will be elected by a plurality of the votes of
the shares of Common Stock present in person or represented by proxy.

11
<PAGE> 14

PROPOSAL 1

ELECTION OF DIRECTORS

The following persons are nominated for election as directors, to hold
office for a term of three years and until the election of such directors'
successors:

DR. HOWARD L. MORGAN
CURTIS A. HESSLER

The nominees listed above are current members of the Board of Directors.
All proxies received by the Board of Directors will be voted for the nominees if
no direction to the contrary is given. In the event that the nominees are unable
to or decline to serve, an event that is not anticipated, the proxies will be
voted for the election of nominees designated by the Board of Directors or, if
none are so designated, will be voted according to the judgment of the person or
persons voting the proxy.

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
NOMINEES.

PROPOSAL 2

APPROVAL OF ISSUANCE OF
COMMON STOCK IN CONNECTION WITH PRIVATE PLACEMENT

GENERAL

In September through November 1997, the Company issued 29,000 shares of
Series C Convertible Preferred Stock (the "Series C Preferred Stock") at $1,000
per share and granted to the placement agent certain warrants to purchase an
additional 2,900 shares of Series C Preferred Stock (the "Series C Preferred
Stock Warrants"). All of the securities were sold in a private placement (the
"Private Placement") solely to accredited investors pursuant to an exemption
from the Securities Act of 1933.

NASDAQ LISTING OBLIGATION

The Common Stock is quoted on the Nasdaq National Market. Under the
applicable Nasdaq rules, a listed company is required to obtain stockholder
approval of the issuance of common stock equal to 20% or more of the number of
shares or voting power then issued and outstanding (the "Share Limit").
Stockholder approval is also required for transactions deemed to constitute a
"change in control." Although the Company does not believe that the issuances of
the securities in the Private Placement constitute a "change in control" under
the Nasdaq's rules, if the transactions were to be so construed, the approval
sought hereby would also be effective to satisfy the stockholder vote required
thereby. The Company's belief is based on, among other things, the fact that no
investor is entitled to convert any shares of Series C Preferred Stock into
Common Stock if following the conversion the investor and its affiliates would
be the beneficial owners of 10% or more of the Common Stock, that no voting
rights were granted to holders of the Series C Preferred Stock as such and that
if this proposal is approved such holders do not have any contractual right to
elect a director or otherwise influence management of the Company.

The exact number of shares of Common Stock issuable upon conversion of the
Series C Preferred Stock cannot currently be determined because it is dependent
on the future trading prices of the Common Stock and the conversion decisions
made by holders. Each share of Series C Preferred Stock is convertible into the
number of shares of Common Stock equal to the quotient of (i) $1000.00 divided
by (ii) the Conversion Price. Up until March 1, 1998, the Conversion Price will
be $5.00. Thereafter, subject to the maximum Conversion Price specified below,
the Conversion Price will be equal to 101% of the average of the three lowest
daily trading prices for the 22 consecutive trading days immediately preceding
the date of conversion (the "Conversion Date"). If the market price of the
Common Stock was $1.00, $2.00 or $3.00, the aggregate number of shares of Common
Stock issuable upon conversion of the Series C Preferred Stock would be
approximately 31.6 million, 15.8 million or 10.5 million shares of Common Stock,
respectively. The maximum

12
<PAGE> 15

Conversion Price is $5.125 until March 31, 1999, and thereafter will be the
lesser of (i) $5.125, (ii) 101% of the average daily low trade prices of the
Common Stock for all trading days in March 1999, (ii) 101% of the average daily
low trade prices of the Common Stock for all trading days in September 1999 and
(iii) 101% of the average daily low trade prices of the Common Stock for all
trading days in March 2000. The shares of Series C Preferred Stock will
automatically convert into Common Stock on September 30, 2002 to the extent any
shares of Series C Preferred Stock remain outstanding at that time.

In order to assure continued compliance with the applicable rules of the
Nasdaq National Market, the terms of the Series C Preferred Stock provide that
the Company will not be obligated to issue shares of Common Stock in excess of
the Share Limit unless and until the approval sought hereby is obtained. The
Company agreed to use its best efforts to obtain such approval. If the approval
sought hereby is not obtained, the Company will only be permitted to issue an
aggregate of approximately 8.6 million shares of Common Stock in connection with
the Private Placement, and any other obligations will have to be paid in cash as
described below.

CONSEQUENCES IF STOCKHOLDER APPROVAL NOT OBTAINED

If the stockholder approval sought hereby is not obtained, the Company will
be prohibited by Nasdaq rules from issuing 20% or more of its Common Stock in
connection with the Private Placement. If the approval sought hereby is not
granted by stockholders, the Company will be obligated to immediately redeem, at
the Special Redemption Price (as defined below), a sufficient number of shares
of Series C Preferred Stock which, in its reasonable judgment, will permit
conversion of the remaining shares of Series C Preferred Stock without violating
the Share Limit. The "Special Redemption Price" means a cash payment equal to
110% of the liquidation preference of $1000 (subject to adjustments under
certain circumstances). Any delay in payment will cause such redemption amount
to accrue interest at the rate of 0.1% per day until paid.

The amount of cash which the Company would be required to pay in the event
stockholder approval is not obtained will depend on the per share market price
of the Common Stock on the date such payment must be made. Assuming a market
price of $1.00, $2.00 or $3.00 per share, the Company would be required to pay
approximately $25.9 million, $16.6 million or $7.4 million. Since the number of
shares of Common Stock issuable upon conversion of the Series C Preferred Stock
will increase if the market price of the Common Stock decreases, the number of
shares of Series C Preferred Stock which could not be converted into Common
Stock would increase and the amount of cash that the Company would be required
to pay to holders of the Series C Preferred Stock would increase. THERE CAN BE
NO ASSURANCE THAT THE COMPANY WILL HAVE AVAILABLE THE CASH RESOURCES TO SATISFY
ITS REDEMPTION OBLIGATIONS. DEPENDING ON THE MARKET PRICE OF THE COMMON STOCK,
COMPLIANCE WITH THE REDEMPTION OBLIGATION WOULD HAVE A MATERIAL ADVERSE EFFECT
ON THE COMPANY'S FINANCIAL CONDITION AND ABILITY TO IMPLEMENT ITS BUSINESS
STRATEGY. If the Company fails or is unable to effect the redemption, then the
holders of the outstanding shares of Series C Preferred Stock shall have the
right to elect a majority of the directors of the Company unless and until such
redemption is effectuated.

In addition, in the event that stockholder approval is not obtained, any
shares of Series C Preferred Stock submitted for conversion over and above the
Share Limit shall entitle the holder thereof to receive, in lieu of shares of
Common Stock, cash in an amount equal to the proceeds that would otherwise have
been received by the holder of the converted shares if Common Stock had been
delivered upon such conversion and sold at the highest reported sale price of
the Common Stock on the date of conversion.

INTERESTS OF CERTAIN PERSONS

To the Company's knowledge, prior to the Private Placement none of the
investors therein was a director, executive officer or 5% stockholder of the
Company or an affiliate of any such person or entity.

CERTAIN VOTING UNDERTAKINGS

Each member of the Board of Directors and each executive officer of the
Company has agreed with the investors of the Series C Preferred Stock to vote
all shares of Common Stock over which he exercises voting

13
<PAGE> 16

authority in favor of this proposal. As of December 30, 1997, the Company has
been advised that such undertakings cover an aggregate of approximately
shares, representing approximately % of the shares outstanding on
the record date for the Meeting.

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" PROPOSAL 2.

PROPOSAL 3

APPROVAL AND AUTHORIZATION OF AN AMENDMENT
TO THE COMPANY'S CERTIFICATE OF INCORPORATION

The authorized capital stock of the Company consists of 2,000,000 shares of
Preferred Stock, $.001 par value, 29,000 of which are outstanding (and 2,900 of
which are reserved for issuance with respect to the Series C Preferred Stock
Warrants and 500,000 of which are reserved for issuance in connection with the
Company's Stockholder Rights Plan) and 70,000,000 shares of Common Stock, $.001
par value, shares of which were outstanding and shares of
which were held in treasury as of December 30, 1997. In addition, as of December
30, 1997, approximately (i) shares of Common Stock were reserved for
issuance upon the exercise of outstanding stock options, (ii) 1.2 million shares
of Common Stock were reserved for issuance with respect to the Company's
$25,000,000 convertible subordinated debentures, (iii) million shares
of Common Stock were reserved for issuance with respect to outstanding warrants,
and (iv) million shares of Common Stock were reserved for issuance
with respect to the outstanding shares of Series C Preferred Stock and Series C
Preferred Stock Warrants.

The Board of Directors considers the proposed increase in the number of
authorized shares of Common Stock necessary to give the Company the ability to
issue shares of Common Stock in connection with financing activities as well as
for other general corporate purposes, including employee stock options, without
the expense and delay incidental to obtaining stockholder approval of an
increase in the number of authorized shares at the time of such action (unless
such approval is otherwise then required for a particular issuance by applicable
law or by the rules of any stock exchange on which the Company's securities may
then be listed). In addition, the Board of Directors considers the proposed
increase in the number of authorized shares of Common Stock necessary to fulfill
its obligation noted above to reserve a sufficient number of shares of Common
Stock with respect to a conversion of the Series C Preferred Stock and Series C
Preferred Stock Warrants. In addition, pursuant to the terms of the Series C
Preferred Stock, without the consent of the holders of a majority of the Series
C Preferred Stock, the Company is prohibited from issuing any shares of Common
Stock (otherwise than pursuant to commitments existing at the time the Series C
Preferred Stock was issued) or any rights, options, convertible securities or
other contract obligations to issue Common Stock unless the number of shares of
authorized Common Stock which is thereafter reserved exclusively for issuance
upon conversion of the Series C Preferred Stock is not less than 150% of the
number of shares of Common Stock which would be issuable upon conversion of the
number of Series C Preferred shares then outstanding at the conversion price
then in effect.

Except as noted above, the Company does not currently have any agreements
with respect to the issuance of its common stock relating to either capital
raising or acquisitions; however, the Company may explore various financing
alternatives that may involve the issuance of Common Stock or securities
convertible into Common Stock. In addition, while the Company has no current
plans to make any acquisition, and its strategic plans include the integration
of prior acquisitions, it is possible that the Company will make additional
acquisitions in the future using shares of its Common Stock as consideration.
Any decision to issue additional shares of Common Stock will depend on various
factors, including the Company's capital needs and the price of its Common
Stock.

The Board of Directors has adopted a resolution approving amending the
Certificate of Incorporation to effect the aforementioned increase, subject to
stockholder approval. Upon stockholder approval, all 20,000,000 additional
authorized shares would be issuable in the discretion of the Board of Directors
without further stockholder action, unless such approval is required by
applicable law. If the proposed amendment is approved, the increase in the
number of authorized shares of Common Stock could enable the Board of

14
<PAGE> 17

Directors to render more difficult or discourage an attempt by another person or
entity to obtain control of the Company in the future. Such additional shares
could be issued by the Board of Directors in a public or private sale, merger or
similar transaction, increasing the number of outstanding shares and thereby
diluting the equity interest and voting power of a person or entity attempting
to obtain control of the Company. In addition, the issuance of shares otherwise
than on a pro rata basis to all current stockholders would reduce the current
stockholders' proportionate interests in the Company and could therefore be
dilutive to the financial and voting interests of current stockholders. However,
in any such event, stockholders wishing to maintain their interests may be able
to do so through normal market purchases.

The first paragraph of Article IV of the Company's Certificate of
Incorporation would be amended to read as follows:

"The total authorized number of shares of the Corporation shall be
92,000,000 shares, consisting of 90,000,000 shares designated as Common Stock,
$.001 par value, and 2,000,000 shares designated as Preferred Stock, $.001 par
value."

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" PROPOSAL 3.

PROPOSAL 4

APPROVAL OF AMENDMENT TO THE COMPANY'S
AMENDED AND RESTATED 1990 STOCK PLAN

In 1990, the Board of Directors of the Company approved and adopted the
Company's 1990 Stock Plan (as amended, the "1990 Plan"). The 1990 Plan currently
authorizes the issuance of up to 7,500,000 shares of the Common Stock, subject
to adjustment as provided in the 1990 Plan. The 1990 Plan provides for, among
other things, the grant of incentive options described in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") ("Incentive Options") and
"non-qualified options" ("Non-qualified Options"). As of December 30, 1997,
approximately options to purchase shares of Common Stock remain
available for awards under the 1990 Plan. On November 10, 1997, the Board of
Directors adopted and approved, subject to stockholder approval, amendments to
the 1990 Plan to increase the number of shares of Common Stock that may be the
subject of awards under the 1990 Plan from an aggregate of 7,500,000 shares to
an aggregate of 9,500,000 shares (the "Share Increase Amendment"), subject to
adjustments to prevent dilution as specified in Section 10 of the 1990 Plan. The
Board of Directors believes that stock options are necessary to enable the
Company to provide meaningful equity incentives to attract, motivate and retain
key personnel.

As of December 30, 1997, options to purchase shares of Common
Stock were outstanding under the 1990 Plan. All options granted to date under
the 1990 Plan have an exercise price which is 100% of the fair market value of
the Common Stock on the date of grant. Although permitted by the terms of the
1990 Plan, the Company has never granted stock appreciation rights ("SARs"),
restricted stock awards or stock bonuses under the 1990 Plan.

If the Share Increase Amendment is approved by the stockholders, the first
sentence of Section 5 of the 1990 Plan will be amended to read as follows:

"The total number of shares of stock subject to issuance under the Plan may
not exceed 9,500,000 subject to adjustments as provided in the Plan."

See "Description of the 1990 Stock Plan" below for a description of the
material features of the 1990 Plan.

The Board recommends that stockholders vote for the approval of the Share
Increase Amendment. The Board believes that the grant of options will be a key
factor in its ability to attract and retain key members of its management team.
Proxies solicited by the Board will be voted in favor of approval unless
stockholders specify otherwise in such proxies.

15
<PAGE> 18

DESCRIPTION OF THE 1990 STOCK PLAN

General. The Company's 1990 Stock Plan was adopted by the Board of
Directors on May 23, 1990 and ratified by the stockholders as of June 1, 1990.
In addition to prior amendments increasing the number of shares of Company stock
that may be acquired upon the exercise of options, the Board of Directors
amended the 1990 Plan, and the stockholders ratified such amendments in February
1995, to impose a limit on the number of shares with respect to which awards may
be made under the 1990 Plan to any one employee in a fiscal year of 600,000 for
new hires and 200,000 shares otherwise and to provide that stock options or SARs
granted at less than 100% of the fair market value of the Common Stock at the
time of grant, restricted stock awards, stock bonuses and other stock awards may
be awarded as performance-based compensation and to establish applicable
performance measures for such awards, including one or more of the following:
improvements in revenues, earnings per share, profit before taxes, net income or
operating income; return on shareholder equity; return on net assets; and stock
price performance. The purposes of the 1990 Plan are to encourage key personnel
of the Company to increase their interest in the Company's long-term success, to
enhance the profitability and value of the Company for the benefit of its
stockholders and to assist the Company in attracting, retaining and motivating
key personnel by giving suitable recognition for services that contribute
materially to the Company's success. Except as described below with respect to
Incentive Options and Non-qualified Options, the 1990 Plan does not specify a
minimum amount of consideration that a recipient of an award must pay to obtain
the benefit of the award, and therefore the maximum compensation payable under
the 1990 Plan, during the term of the 1990 Plan and all awards granted
thereunder, is equal to the number of shares of Common Stock with respect to
which awards may be issued thereunder multiplied by the value of such shares on
the date the compensation is measured.

Eligibility. The 1990 Plan provides for the grant of stock options for
Common Stock (including Incentive Options and Non-qualified Options), SARs and
other stock awards (including restricted stock awards and stock bonuses) to the
employees of the Company or its affiliates or any consultant or advisor engaged
by the Company who renders bona fide services to the Company or the Company's
affiliates in connection with its business, provided that such services are not
in connection with the offer or sale of securities in a capital raising
transaction, and provided further that only employees are eligible to receive
Incentive Options. As of September 30, 1997, the Company had approximately 486
employees, all of whom are eligible to receive grants under the 1990 Plan. If
Proposal 4 is adopted, the 1990 Plan, which currently covers up to 7,500,000
shares of Common Stock, will be amended to permit the issuance of up to
9,500,000 shares.

Administration. The 1990 Plan is administered by a committee of the Board
of Directors consisting of two or more persons. The committee has the power,
discretion and authority to interpret, construe and administer the 1990 Plan, to
prescribe, amend and rescind rules and regulations relating to the 1990 Plan, to
provide for conditions and assurances deemed necessary or advisable to protect
the interests of the Company and to make all other determinations necessary or
advisable for the administration of the 1990 Plan, to the extent not contrary to
the explicit provisions of the 1990 Plan. The committee may accelerate the
exercisability of options and SARs or remove restrictions on awards in the event
of a change of control of the Company. The committee has the authority with
respect to performance-based compensation awards to determine the performance
measures, the specific targets applicable to those measures and the performance
period for each such award.

Types of Awards Under the 1990 Plan

Stock Options. Stock options may be granted by the committee on such terms,
including vesting and payment forms, as it deems appropriate in its discretion,
provided that no option may be exercised later than ten years after its grant,
and the purchase price for Incentive Options and Non-qualified Options may not
be less than 100% and 85% of the fair market value of the Common Stock at the
time of grant, respectively. Incentive Options may be granted only to employees
but may not be granted to a participant who owns more than 10% of the total
combined voting power of the Company at the time of grant unless the exercise
price is 110% of fair market value and the option is not exercisable after five
years from the date of grant. The aggregate fair market value, determined at the
time of grant, of shares first exercisable under Incentive

16
<PAGE> 19

Options by an individual during a calendar year may not exceed $100,000. An
option may not be transferred other than by will or the laws of descent and
distribution and, during the lifetime of the optionee to whom granted, may be
exercised only by such optionee or, as to Non-qualified Options, by the
optionee's guardian or legal representative. Non-qualified Options granted at
less than 100% of the fair market value of the Common Stock at the time of grant
may be awarded as performance-based compensation subject to the performance
goals specified by the committee.

SARs. SARs may be granted by the committee on such terms, including payment
forms, as the committee deems appropriate, provided that a SAR granted in
connection with a stock option will become exercisable and lapse according to
the same vesting schedule and lapse rules established for the stock option
(which will not exceed ten years from the date of grant), a SAR will not be
exercisable during the first six months of its term and a SAR is exercisable
only when the fair market value of the underlying Common Stock exceeds the SAR's
exercise price, subject to any other conditions on exercise imposed by the
committee. SARs may not be transferred otherwise than by will or the laws of
descent and distribution and are exercisable during a recipient's lifetime only
by the recipient or, as to SARs granted in connection with a Non-qualified
Option, by the recipient's guardian or legal representative. SARs granted at
less than 100% of the fair market value of the Common Stock at the time of grant
may be awarded as performance-based compensation subject to the performance
goals specified by the committee.

Other Stock Awards. Other awards payable in Common Stock of the Company may
be granted by the committee, upon such terms and conditions as the committee may
determine, subject to the provisions of the 1990 Plan. Other stock awards may
include a grant of shares of Common Stock subject to restrictions, terms and
conditions ("Restricted Stock"). Certificates representing Restricted Stock are
to remain in the physical custody of the Company or an escrow holder or placed
in trust until the restrictions have lapsed and, until the lapse or release of
such restrictions, Restricted Stock is subject to forfeiture in accordance with
conditions imposed by the committee. A participant holding Restricted Stock
shall be entitled to the voting rights and dividends of such stock subject to
the provisions of the 1990 Plan. If Restricted Stock is granted which requires
the payment of an exercise price by a participant, such Restricted Stock award
must be accepted in a period of time after the date of grant, as specified by
the committee. The committee may also grant stock bonuses payable in such
amounts, at such times and subject to such conditions as the committee shall
determine. Restricted Stock, stock bonuses and other stock awards may be awarded
as performance-based compensation subject to the performance goals specified by
the committee.

Amendments. The Board of Directors may amend, suspend or terminate the 1990
Plan provided that any amendment, suspension or termination that would impair
the rights of a participant with an award under the 1990 Plan may not be made
without such participant's consent. Stockholder approval is required for any
amendments to the 1990 Plan that would materially increase the benefits accruing
to participants, materially increase the number of securities that may be issued
or materially modify requirements as to eligibility for participation if and to
the extent stockholder approval is necessary to allow the 1990 Plan to meet the
conditions of Rule 16b-3 of the Securities and Exchange Act of 1934. Unless
otherwise terminated, the 1990 Plan continues until May 23, 2000.

Tax Consequences

The following is a brief summary of the principal federal income tax
consequences of awards under the 1990 Plan based on laws in effect on the date
hereof. This summary is not intended to be exhaustive and does not describe
state, local or foreign tax laws. Because the following is only a brief summary
of the general federal income tax rules, recipients of awards should not rely
thereon for individual tax advice, as each taxpayer's situation and the
consequences of any particular transaction will vary depending upon the specific
facts and circumstances involved. Each taxpayer is advised to consult with his
or her own tax advisor for particular federal, as well as state and local,
income and any other tax advice.

Incentive Stock Options. The grant of an Incentive Option will not result
in any immediate tax consequence to the Company or to the participant. A
participant will not realize taxable income upon the exercise of an Incentive
Option, provided the participant was an employee of the Company or a subsidiary
at

17
<PAGE> 20

all times from the date the option was granted to the date three months (in the
case of a disabled employee, one year) before the date of exercise, and the
Company will not be entitled to any deduction. However, the excess, if any, of
the fair market value of the stock on the date of exercise over the option price
will be included in the participant's "alternative minimum taxable income"
("AMTI") for purposes of the "alternative minimum tax" in the year the Incentive
Option is exercised. (The "alternative minimum tax" imposed on individual
taxpayers is generally equal to the amount by which 28% (26% of AMTI below
certain amounts) of the individual's AMTI (reduced by certain exemption amounts)
exceeds his or her regular income tax liability for the year). If the
participant disposes of the acquired stock after the later of (i) one year after
the date the stock is received or (ii) two years after the date of the option
grant, the participant will recognize capital gain or loss equal to the
difference between the amount realized from such disposition over the option
price, and the Company will not be entitled to a deduction. If, instead, the
participant disposes of the acquired stock prior to the expiration of such
period, the participant will recognize ordinary income in an amount equal to the
lesser of (i) the excess of the fair market value of the stock on the date of
exercise over the option price or (ii) if the disposition is a taxable sale or
exchange, the excess of the amount realized on the sale or exchange over the
option price. Any gain recognized by the participant on the disposition in
excess of the amount taxable as ordinary income, or any loss recognized if the
shares are sold for less than the option price, will be treated as capital gain
or loss, long-term, mid-term or short term depending on the holding period of
the stock. Upon such a disposition, the Company will generally be entitled to a
deduction in the same amount and at the same time as the participant recognizes
such ordinary income.

Non-qualified Options. The grant of a Non-qualified Option will not result
in any immediate tax consequence to the Company or the participant. Upon
exercise of a Non-qualified Option, the participant will recognize ordinary
income in an amount equal to the fair market value of the stock at the time of
exercise over the option price, and the Company will generally be entitled to a
deduction in the same amount. See "Special Rules for Awards Granted to
Insiders," below.

SARs. The grant of a stock appreciation right will not result in any
immediate tax consequence to the Company or to the participant. Upon the
exercise of a stock appreciation right, any cash received and the fair market
value of any stock received will constitute ordinary income to the participant
in an amount equal to the cash or fair market value of the stock received,
determined at the time of exercise, over the exercise price. The Company will
generally be entitled to a deduction in the same amount and at the same time as
the participant recognizes such income.

Restricted Stock. A participant granted Restricted Stock will in most cases
recognize ordinary income at the time the restrictions lapse equal to the
excess, if any, of the fair market value of the Restricted Stock at that time
over the amount, if any, paid for the stock. However, a participant who makes an
election under Section 83(b) of the Internal Revenue Code (an "83(b) Election")
within 30 days of the date of grant will recognize ordinary income as of the
date of grant equal to the excess, if any, of the fair market value of the
shares of Restricted Stock on that date (determined without regard to the
restrictions) over the amount paid for the Restricted Stock. If the shares
subject to such election are forfeited, the participant will not be entitled to
a deduction, refund or loss for tax purposes as a result of recognizing income
upon making the 83(b) Election. In the case of shares sold or exchanged after
the expiration of the restriction period, the holding period to determine
whether the participant has long-term, mid-term or short-term capital gain or
loss begins upon such expiration and the tax basis for such shares will be equal
to the fair market value thereof on such expiration date. If the participant
makes the 83(b) Election with respect to the Restricted Stock, however, the
holding period commences just after the date the stock is granted and the tax
basis will be equal to the fair market value of the shares on the date of grant,
determined without regard to the restrictions. The Company will in most
instances be entitled to a deduction equal to the amount treated as ordinary
income recognized by the participant at the time the participant recognizes such
income.

Other Stock-Based Bonus Award. A participant receiving any other
stock-based bonus award will recognize income and the Company will generally be
allowed a deduction when the award is paid. The amount of cash and the fair
market value of the shares of the Common Stock received will be ordinary income
to the participant and the Company will generally be entitled to a tax deduction
therefor.

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<PAGE> 21

Special Rules for Awards Granted to Insiders. If a Participant is a
director, officer or shareholder subject to Section 16 of the Securities
Exchange Act of 1934 (an "Insider"), the determination of the amount and the
timing of income recognition in connection with the exercise of an option or the
receipt of other awards generally may be required to be deferred until the
expiration of any period during which the insider would be restricted from
disposing of any stock received. Insiders should consult their tax advisors to
determine the tax consequences to them of awards granted to them pursuant to the
1990 Plan.

Withholding for Taxes. The Company will generally be required to withhold
income taxes and employment taxes with respect to an employee-participant who is
an employee at the time the participant recognizes ordinary income with respect
to an award. The Company has the right to deduct these withholding obligations
from awards paid in cash, and, in the case of awards paid in stock, the person
receiving the stock may be required to pay the amount of the withholding
obligation to the Company prior to the delivery of the stock. At the discretion
of the committee administering the 1990 Plan, the Company may accept shares of
stock of equivalent fair market value in payment of the withholding tax
obligation or provide alternative methods of complying with the withholding
obligations. The payment of tax obligations in shares, or the surrender or
withholding of shares in order to satisfy a tax obligation, will in certain
circumstances result in the recognition of income with respect to such shares or
a carryover basis in the shares acquired.

Tax Considerations Relating to Change in Control. The terms of the
agreements pursuant to which specific awards are made to employees under the
1990 Plan may provide for accelerated vesting or payment of an award in
connection with a change in ownership or control of the Company. In that event
and depending upon the individual circumstances of the recipient, certain
amounts with respect to such awards may constitute "excess parachute payments"
under the "golden parachute" provisions of the Code. Pursuant to these
provisions, a recipient will be subject to a 20% excise tax on any "excess
parachute payments" and the Company will be denied any deduction with respect to
such payment. Recipients of awards should consult their tax advisors as to
whether accelerated vesting of an award in connection with a change of ownership
or control of the Company would give rise to an excess parachute payment.

Interest on Debt Used to Purchase Shares. With certain exceptions, an
individual may not deduct investment related interest to the extent such
interest exceeds the individual's net investment income for the year. Investment
interest generally includes interest paid on indebtedness incurred to purchase
shares of stock pursuant to the exercise of options or otherwise pursuant to the
1990 Plan. Interest disallowed under this rule may be carried forward to and
deducted in later years, subject to the same limitations.

Certain Limitations on Company Deductions. Section 162(m) of the Code
limits to $1,000,000 per person annually the amount that the Company may deduct
for compensation paid to certain of its most highly compensated officers,
including deductions arising from options, SARs and Restricted Stock. The
Company has attempted to structure its Non-qualified Options granted under the
1990 Plan at fair market value so that the deductions arising therefrom will not
be subject to this limitation, although there can be no assurances that all
compensation deductions arising from awards under the 1990 Plan will be allowed
for federal income tax purposes.

Plan Benefits

The committee has discretion to determine the number and amount of stock
awards to be granted to eligible employees under the 1990 Plan, subject to the
limitation described above on the total number of options that may be granted in
a fiscal year to any employee. Therefore, the benefits and amount that will be
received by each of the named executive officers, the executive officers as a
group and all other key employees under the 1990 Plan are not presently
determinable.

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" PROPOSAL 4.

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<PAGE> 22

PROPOSAL 5

RATIFICATION OF THE SELECTION OF INDEPENDENT AUDITORS

The Company's Board of Directors has selected KPMG Peat Marwick LLP as the
Company's independent auditors for the fiscal year ending September 30, 1997.
Although the appointment of KPMG Peat Marwick LLP is not required to be
submitted to a vote of the stockholders, the Board of Directors believes it
appropriate as a matter of policy to request that the stockholders ratify the
appointment for the current fiscal year. In the event a majority of the votes
cast at the meeting are not voted in favor of the appointment, the Board of
Directors will reconsider its selection. Proxies solicited by the Board will be
voted in favor of the appointment unless stockholders specify otherwise in such
proxies.

A representative of KPMG Peat Marwick LLP is expected to be present at the
Annual Meeting with the opportunity to make a statement if he or she so desires
and to respond to appropriate questions.

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" PROPOSAL 5.

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<PAGE> 23

SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information as of November 19, 1997, with
respect to Common Stock of the Company owned by (i) each person known by the
Company to be the beneficial owner of more than 5% of the outstanding Common
Stock, (ii) each director and director nominee of the Company, (iii) each
executive officer named in the Summary Compensation Table, and (iv) all
directors and executive officers of the Company, determined as of the end of
fiscal year 1997, as a group. Except as noted below, each stockholder has sole
voting and investment power with respect to the shares shown. Amounts shown
include shares subject to outstanding options that are exercisable within 60
days of November 19, 1997. The address of each such person is that of the
Company, 13160 Mindanao Way, Marina del Rey, California 90292.

<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENT OF SHARES OF
NAME COMMON STOCK COMMON STOCK
- ------------------------------------------------------- ------------------- --------------------
<S> <C> <C>
Frank W.T. LaHaye(1)................................... 174,221 *
William H. Lane III(2)................................. 15,000 *
King R. Lee(3)......................................... 90,000 *
Howard Morgan(4)....................................... 22,500 *
Curtis A. Hessler(5)................................... 337,500 *
Anatoly Tikhman(6)..................................... 1,317,214 3.04%
Frank R. Greico(7)..................................... 29,126 *
Joseph Fusco(8)........................................ 21,095 *
Ron Ben-Yehuda(9)...................................... 9,843 *
John Strosahl(10)...................................... 8,314 *
Bradley D. Schwartz(11)................................ 90,200 *
All directors and executive officers as a group(10
persons)(12)......................................... 2,114,013 4.87%
</TABLE>

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

* Less than one percent

(1) Includes 22,500 shares which may be purchased pursuant to options granted
to Mr. LaHaye, exercisable within 60 days of November 19, 1997, and also
includes 151,721 shares of Common Stock held by the Frank LaHaye Family
Trust, of which Mr. LaHaye is Trustee.

(2) Includes 10,000 shares which may be purchased pursuant to options granted
to Mr. Lane, exercisable within 60 days of November 19, 1997.

(3) Includes 80,000 shares which may be purchased pursuant to options granted
to Mr. Lee, exercisable within 60 days of November 19, 1997, and also
includes 10,000 shares of Common Stock held by The Lee Living Trust, of
which Mr. Lee and his spouse are the Trustees.

(4) Includes 22,500 shares which may be purchased pursuant to options granted
to Mr. Morgan, exercisable within 60 days of November 19, 1997, and also
includes 24,000 shares of Common Stock held in trust for Dr. Morgan's
children with respect to which Dr. Morgan disclaims beneficial ownership.

(5) Includes 337,500 shares which may be purchased pursuant to options granted
to Mr. Hessler, exercisable within 60 days of November 19, 1997.

(6) Includes 75,000 shares which may be purchased pursuant to options granted
to Mr. Tikhman, exercisable within 60 days of November 19, 1997.

(7) Includes 28,126 shares which may be purchased pursuant to options granted
to Mr. Greico, exercisable within 60 days of November 19, 1997.

(8) Includes 21,095 shares which may be purchased pursuant to options granted
to Mr. Fusco, exercisable within 60 days of November 19, 1997.

(9) Includes 9,843 shares which may be purchased pursuant to options granted to
Mr. Ben-Yehuda, exercisable within 60 days of November 19, 1997.

(10) Includes 8,314 shares which may be purchased pursuant to options granted to
Mr. Strosahl, exercisable within 60 days of November 19, 1997.

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<PAGE> 24

(11) Includes 90,200 shares which may be purchased pursuant to options granted
to Mr. Schwartz, exercisable within 60 days of November 19, 1997.

(12) Includes 705,078 shares which may be purchased pursuant to options grated
to the directors and executive officers as a group, exercisable within 60
days of November 19, 1997.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In November 1996, Frank Greico, Senior Vice President and Chief Financial
Officer of the Company, received an advance on his salary of approximately
$74,000 pursuant to his employment offer letter. As of November 19, 1997,
approximately $40,000 remained outstanding on the advance.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than ten percent
of a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
To the Company's knowledge, based solely on its review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, the Company believes that all of its officers and
directors and greater than ten percent beneficial owners complied with all
Section 16(a) filing requirements applicable to them with respect to those
transactions during the fiscal year ended September 30, 1997, except as follows:
Mr. Lane, a director, filed a late Form 4 with respect to an open-market
purchase.

STOCKHOLDER PROPOSALS AND NOMINATIONS

Any stockholder intending to submit to the Company a proposal for inclusion
in the Company's Proxy Statement and proxy relating to the fiscal year ending
September 30, 1998 must submit such proposal so that it is received by the
Company no later than September 7, 1998. Stockholder proposals should be
submitted to the Secretary of the Company.

Pursuant to the Company's Bylaws, no business proposal will be considered
properly brought before the next annual meeting by a stockholder, and no
nomination for the election of directors will be considered properly made at the
next annual meeting by a stockholder, unless notice thereof, which contains
certain information required by the Bylaws, is provided to the Company not less
than 60 days nor more than 90 days prior to the meeting, provided, however,
that, in the event that less than 60 days' notice or prior public disclosure of
the date of the meeting is given or made to stockholders, a stockholder's notice
will be timely if received not later than the tenth day following the day on
which such notice of the date of the meeting is mailed or such public disclosure
is made.

OTHER MATTERS

While the Notice of Annual Meeting of Stockholders calls for the
transaction of such other business as may properly come before the meeting, the
Board of Directors has no knowledge of any matters to be presented for action by
the stockholders other than as set forth above. The enclosed proxy gives
discretionary authority to the proxies, however, to consider and vote upon any
additional matters that may be presented.

ANNUAL REPORT TO STOCKHOLDERS

The Company's Annual Report on Form 10-K for the year ended September 30,
1997, as filed with the Securities and Exchange Commission, including audited
financial statements, is being mailed to stockholders together with this Proxy
Statement. Exhibits to the Annual Report on Form 10-K may be obtained from the
Company upon payment of the Company's reasonable expenses to furnish such
exhibits. To obtain any such

22
<PAGE> 25

exhibits, contact the Corporate Secretary, Quarterdeck Corporation, 13160
Mindanao Way, Marina del Rey, California 90292.

STOCKHOLDERS ARE URGED TO IMMEDIATELY MARK, DATE, SIGN AND RETURN THE
ENCLOSED PROXY IN THE ENVELOPE PROVIDED, TO WHICH NO POSTAGE NEED BE AFFIXED IF
MAILED IN THE UNITED STATES.

By Order of the Board of Directors,

Ron Ben-Yehuda
Secretary

Los Angeles, California
January 5, 1998

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<PAGE> 26
PRELIMINARY COPIES

PROXY
QUARTERDECK CORPORATION

13160 MINDANAO WAY, MARINA DEL REY, CALIFORNIA 90292

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby appoints Frank Greico or Ron Ben-Yehuda or either of
them, with unlimited power of substitution, as Proxies, to represent the
undersigned at the Annual Meeting of Stockholders of QUARTERDECK CORPORATION, to
be held on Wednesday, February 5, 1998, at the Marina del Rey Hotel, 13534 Bali
Way, Marina del Rey, California 90292, at 10:00 a.m. or any postponements or
adjournments thereof, and to vote, as directed herein, all shares of Common
Stock, which the undersigned would be entitled to vote if then personally
present. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR THE NOMINEE DIRECTOR LISTED, FOR PROPOSALS 2, 3, 4 AND 5 AND AS
SAID PROXIES DEEM ADVISABLE ON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE
THE MEETING.

[X] Please mark your votes as in this example

ITEM 1 -- ELECTION OF DIRECTOR -- Nominees: Howard Morgan, Curtis A. Hessler

FOR WITHOLD FOR ALL EXCEPT
[ ] [ ] [ ]

Nominee Exception _______________

ITEM 2 -- To approve for issuance shares of Common Stock representing 20% or
more of the Common Stock outstanding, which are issuable upon conversion of
shares of the Company's Series C Convertible Preferred Stock issued in a private
placement.