INFERENCE CORP /CA/, 10-K, 1997-04-28

INFERENCE CORP /CA/
10-K, 1997-04-28
PREPACKAGED SOFTWARE

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
for the fiscal year ended January 31, 1997, or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .

Commission File Number: 0-26334

INFERENCE CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 95-3436352
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification Number)

100 Rowland Way, Novato California 94945
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (415) 893-7200

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

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, no par value per share
(Title of Class)

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
at least the past 90 days. Yes x No
----- -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $33,073,000 as of April 21, 1997, based upon the
closing sale price on the NASDAQ National Market reported for such date. Shares
of Common Stock held by each officer and director and by each person who, in the
Company's judgment, may be deemed to be an affiliate have been excluded. The
determination of affiliate status is not necessarily a conclusive determination
for other purposes.

As of April 21, 1997, there were 6,849,013 shares of the Registrant's Class A
Common Stock, no par value per share, and 1,190,332 shares of the Registrant's
Class B Common Stock, no par value per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Report on Form 10-K incorporates information by reference from
the Registrant's definitive Proxy Statement to be used in conjunction with its
fiscal 1997 Annual Meeting of Shareholders.
<PAGE>

INFERENCE CORPORATION

1997 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS
<TABLE>
<CAPTION>

PART I
------
<S> <C> <C>
Item 1. Business............................................................ 3

Item 2. Properties.......................................................... 11

Item 3. Legal Proceedings................................................... 11

Item 4. Submission of Matters to a Vote of Security
Holders............................................................. 11

PART II
-------
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................. 11

Item 6. Selected Financial Data............................................. 12

Item 7. Management's Discussion and Analysis of Financial
Condition and Results............................................... 13

Item 8. Financial Statements and Supplementary Data......................... 20

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................ 20

PART III
--------
Item 10. Directors and Executive Officers of the Registrant.................. 21

Item 11. Executive Compensation.............................................. 21

Item 12. Security Ownership of Certain Beneficial Owners and Management...... 21

Item 13. Certain Relationships and Related Transactions...................... 21

PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.... 22

SIGNATURES.............................................................................. 39
</TABLE>
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Certain statements contained hereunder regarding matters that are not
historical facts are forward-looking statements (as such term is defined in the
rules promulgated pursuant to the Securities Act of 1933, as amended (the
"Securities Act")). Such forward-looking statements are subject to certain
risks, trends and uncertainties; thus, actual results may differ materially from
those expressed in or implied by such forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
fluctuations in quarterly operating results, the size and timing of customer
orders, rapid technological change and product transitions, and competitive
actions in the marketplace. These business factors and others are discussed
further in the section of this Annual Report entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The Company
undertakes no obligation to release publicly the result of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Readers should also carefully review the business and risk
factors described in the documents the Company files from time to time with the
Securities and Exchange Commission, specifically the Quarterly Reports on Form
10-Q and any Current Reports on Form 8-K filed by the Company.

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PART I

ITEM 1. BUSINESS

GENERAL

Inference Corporation ("the Company") develops, markets and supports
client/server and Internet software for knowledge publishing, knowledge
distribution, and content management for the front office, where organizations
interact with their external and internal customers, prospects and vendors.
Inference's CBR Express family of products ("CBR Products") facilitates
successful dialogue with the customer to quickly identify and resolve problems
in external and internal customer support and service, sales automation and
telemarketing operations.

The Company's primary focus to date has been on the customer support market,
which includes external customer support and internal help desks. The customer
support market is divided into two segments: problem management, where customer
calls and information are tracked; and problem identification and resolution,
where information is obtained from the customer and used to define the problem
and provide a solution. The Company believes its strengths are in content
management and retrieval for problem identification and resolution, which
enables organizations to diagnose and solve customer problems. These
organizations are also extending the use of the Company's CBR Products in self-
service technical support applications, where knowledge is accessed directly by
customers and employees to help them resolve problems independently. For
example, the Company's product for the World Wide Web, CasePoint WebServer, is
designed to provide this self-service technical support over the Internet
allowing an increased level of customer service.

The Company recently released CBR Content Navigator ("CBR CN"), the next
generation of CBR Products, which includes new features designed to reduce the
cost of knowledge acquisition and maintenance. CBR CN is a comprehensive content
management and retrieval system that is designed to provide a common index and
retrieval method for the wide variety of unstructured information in help desk,
customer service, human resource, and telesales and telemarketing organizations.
The Company began shipment of certain modules of the CBR CN product line in
February 1997.

The Company's CBR Products are scaleable and available on popular computing
platforms, including Microsoft Windows, Windows 95, Windows NT, IBM OS/2 and
AIX, HP-UX and Sun Solaris. The CBR Products support many database management
systems, including Oracle, Informix, Sybase, Microsoft's SQL Server and IBM's
DB2. The Company's CBR Products support stand alone, client/server, Internet and
intranet environments, providing companies with many options to deploy
knowledge. The Company also provides consulting services, technical support and
training for its CBR Products.

INDUSTRY BACKGROUND

Customer support has become a major focus area for companies seeking to
differentiate themselves by offering superior customer service. Customers today
have greater expectations from interactions with suppliers. In addition,
sophisticated products are increasingly being sold to broader markets of first-
time buyers. At the same time, suppliers are dealing with significant rates of
employee turnover in customer service and support operations. Organizations that
recognize the lifetime value of a customer are investing to support external
customers to improve repeat sales potential.

In addition to the challenges of serving external customers, companies are
facing increasing demands to support internal "customers." Throughout
companies, the transition to group-oriented network computing (client/server)
and the use of hardware and software from multiple vendors greatly increase the
complexity of systems management and support. Such complexity often outpaces
employees' abilities to use and/or manage the system, thereby creating a new
class of internal customers who require support. As a result, organizations
train or hire internal support talent to protect and leverage their investment
in these distributed, client/server systems. This additional investment usually
takes the form of an internal help desk that gives employees the same type of
support that hardware and software vendors provide to their external customers.

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Companies have attempted to improve responsiveness to both external and
internal customers by adding personnel. In many cases, such personnel increases
have resulted in increased costs with limited improvements in customer
satisfaction. In addition, experienced personnel with the technical knowledge
required for external customer support and internal help desk positions are in
short supply.

In recent years, companies have turned to software automation to assist the
customer support staff in contact with external and internal customers in order
to improve and leverage those valuable interactions. Specifically, organizations
are turning to software programs to help them track the customer and identify
and resolve problems, including efficient implementation of the appropriate
solution. Companies have begun to deploy call avoidance programs that make
problem identification and resolution technology directly available to the user
through the Internet on the World Wide Web or by embedding problem resolution
tools or technologies into their products. Initial client/server applications
available to automate the customer support and internal help desk functions
focused primarily on maintaining user-specific records and tracking reported
problems. These systems, which have improved customer support and internal help
desk operations, address primarily the problem management segment of this
market. Automation of problem management itself, however, does not reduce the
required individual attention necessary to identify and resolve problems
presented to customer support personnel.

Because the identification and resolution of problems presented to support
personnel remains a time consuming and expensive process, companies are seeking
to automate the identification and resolution of support problems. This
capability, however, is not generally available in many problem management
software applications offered today. While problem identification and resolution
applications are available, the Company believes that many of these applications
are limited to customer support and do not fully address the complexity,
scaleability, ease of implementation and use requirements of most customer
service and support operations.

THE INFERENCE SOLUTION

The Company believes that its proprietary implementation of case-based
reasoning ("CBR") technology is the core technology that differentiates the
Company in the marketplace. The Company's CBR Products incorporate this
adaptable and scaleable technology that is designed to support front office
operations and ultimately make problem identification and resolution technology
directly available to the user. CBR Products enable customer support and
internal help desk personnel to effectively manage customer interactions,
identify customer problems and quickly provide resolutions. Key elements of CBR
Products include an intuitive user interface, a query refinement capability, an
easy-to-use authoring environment, support for case base objects that reference
multiple information formats (such as documents, databases and multimedia
content), search matching algorithms and a fully interactive and dynamic
information maintenance capability. CBR Products, also utilize an easy-to-use,
intuitive question-and-answer technique to efficiently match inquiries with
available data. This question-and-answer approach allows support personnel with
a wide range of experience, from novice to expert, to establish a successful
dialogue with customers and to quickly identify and resolve their problems. CBR
Products provide a uniform graphical point-and-click interface to case bases
referencing structured information in computer databases and unstructured
information such as policy manuals, free text, publications, multimedia content
and business know-how. The Company believes its basic technology has practical
applicability for a wide range of business processes, including sales
automation, telemarketing, product configuration and selection, document
management and navigation, personnel evaluation, and intelligent order entry.
The Company believes that this uniform access to case bases that reference
structured and unstructured information combined with a flexible, responsive and
easy-to-use delivery system offers a competitive advantage in the front office.

STRATEGY

The Company's mission is to be the leading provider of knowledge management
tools and content that help people in business solve problems for other people.
The following are the key elements of the Company's strategy:

Focus on Problem Identification and Resolution. The Company's primary
objective is to establish its CBR Products as the industry standard problem
identification and resolution products for internal and external customer
support. The Company believes that it can establish this position due to the key
attributes of the CBR Products. The Company intends to continue its focus on
problem identification and resolution and to leverage existing products by
adding features and functionality to extend the Company's CBR product line
beyond customer support, sales automation and telemarketing operations.

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Provide Multiple Platform Support. CBR Products are available on several
computing platforms, including Microsoft Windows 3.x, Windows 95, Windows NT,
IBM OS/2 and AIX, HP-UX and Sun Solaris for SPARC, and support many database
management systems, including Oracle, Informix, Sybase, Microsoft's SQL Server
and IBM's DB2. Additionally, certain of the Company's products are available in
up to 15 languages.

Third-Party Integration. The open architecture of CBR Products makes it
possible to integrate it with a broad range of related technologies and products
in the computing and telephony areas. Components of the CBR Products can be
embedded in legacy applications as either call-in or call-out functions, and
they can be integrated with many popular applications, such as electronic mail,
document or media browsers, spreadsheets and document editors. The Company's
software also provides an interface to a number of third-party call tracking and
help desk automation systems.

Broaden Indirect Channels of Distribution. To date, the majority of the
Company's revenues have been generated through its direct sales force and to a
lesser extent, through indirect sales channels, including VARs, systems
integrators and OEMs. The Company recently established its Channel sales
organization, which will focus on the Company's VAR and OEM partners. The
Company believes that the VAR and OEM Partners will provide more opportunities
for the sale of Inference's CBR Products.

Build On Established International Presence. The Company currently derives a
significant portion of its revenues from its international operations and
believes that it enjoys a leading market position in the United Kingdom and
Germany. The Company recently established operations in France and Holland and
is expanding its international distribution base in order to expand its
penetration of global markets.

Leverage Product Sales by Providing Professional Consulting Services. To
address the growing demand for custom applications, the Company employs a staff
of professional consultants who are experienced in the design and implementation
of problem identification and resolution applications. These individuals are
also skilled at managing the development and deployment of custom solutions
using either customer or third-party programmers. The Company intends to offer
these consulting services as a secondary yet effective and differentiating
component of its sales strategy. These services are offered at rates that the
Company believes are competitive with, but generally not lower than, other
professional consulting firms.

PRODUCTS AND SERVICES

Current Products

CBR Content Navigator, the Company's principal product, is a suite of
client/server and Internet applications that are designed to provide access to
case bases that reference structured and unstructured information for use in the
front office. To date, CBR CN's primary use has been in external customer
support and call centers and internal help desk operations.

CBR CN includes new features including those designed to reduce the cost of
case base creation and maintenance and increase the value of summarized
documents. CBR CN is intended to broaden the scope of easily accessible
knowledge with two key additions: integration with the Topic full-text search
engine from Verity, Inc., and a new intelligent Internet meta-search and
clustering tool. In addition, CBR CN is designed to provide a set of development
kits based on a fully documented open architecture, enabling its tools to be
customized and embedded within third party customer interaction applications and
other systems.

CBR CN supports Microsoft Windows 95 and Windows NT, and other operating
systems and is designed to support various database management systems,
including Oracle, Informix, Sybase, Microsoft SQL Server and IBM DB2. CBR CN is
planned to be available in several languages.

The CBR Content Navigator products consist of the following unbundled
components described below:

CBR Express. CBR Express is a client/server application that provides a series
of templates for "authoring" (developing) case histories, business policies
and information stored in documents into a format readable by the CasePoint
viewer of CBR CN.

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. CBR Express Professional Author - The primary knowledge creation and
maintenance application designed to capture and update cases quickly. It
offers a fully object-oriented authoring environment with visual content
management techniques.

. CBR Express Generator - A stand-alone application which allows users to
automatically create a case base representation that summarizes a set of
documents, allowing easy access to information in Microsoft Word, tech notes,
Lotus Notes, or HTML pages among other formats.

. CBR Express Reports - An integrated set of tools used to manage, test and
report on the consistency and validity of the content in a case base.

CasePoint. The CasePoint viewer is the primary end user search interface for
CBR information bases. It runs as a client under Microsoft Windows 95 and
Windows NT, IBM OS/2, HP-UX and Sun Solaris for SPARC and offers a GUI for
submitting queries and searching information bases. CasePoint is offered in the
following versions:

. CasePoint Standard - A powerful, easy-to-use search and retrieval
application, available as a 16- and 32-bit product, which is ideal for
OEM/embedded and knowledge distribution applications. It can be deployed in a
stand-alone, file-server or client/server environment. CasePoint Standard
provides an intuitive dialogue-based interface that requests further input
until the solution is located.

. CasePoint Professional - A more robust, fully object-oriented 32-bit search
and retrieval application for corporate knowledge. It offers both the
intuitive dialogue-based interface of CasePoint Standard and a new visual
folder-based view of content for experienced users.

. CasePoint Verity Search - An option to CasePoint Professional that
integrates and provides access to documents using Verity TOPIC.

CasePoint WebServer. CasePoint WebServer has added the World Wide Web as a
vehicle for delivering knowledge in front office applications, using Inference's
CBR technology. CasePoint WebServer is an interactive World Wide Web application
that enables organizations to increase their level of customer service by
allowing customers to directly access troubleshooting information and product
information--without having to wait to contact a service agent. CasePoint
WebServer uses standard RPC facilities and is written to the Common Gateway
Interface ("CGI") specification and can be accessed using any World Wide Web
browser.

Pre-Packaged Knowledge Bases. Unlike external customer support operations,
internal help desks often find themselves dealing with a number of common
"domains" of problem areas relating to support of client/server systems. In
addressing the growing need for higher quality, cost-effective service and
support, the Company formed its Knowledge Publishing Division ("KPD") to provide
off-the-shelf content to users and help desks. KPD's products include a set of
CBR-optimized pre-packaged knowledge based on content developed by third-party
sources. KPD will also look to other sources such as software manufacturers,
help desk and customer support outsourcers, and Inference customers for
publishable knowledge.

Future Products

Future releases of the CBR Content Navigator product family will include
development kits for embedding and customizing CBR Content Navigator's search,
acquisition and management technologies as well as upgrades to CasePoint
WebServer.

Services

The Company has a worldwide customer services organization that provides
quality technical support and education services designed to ensure customer
success and build customer loyalty. The Company also has a worldwide consulting
services organization that assists in the design and deployment of customer
solutions. As of January 31, 1997, the Company's worldwide customer services
organization consisted of 42 employees in North America and 36 employees
internationally.

Consulting Services. Consultants assist customers with case base design,
review and audit and also provide technology transfer by working with a
customer's in-house staff to establish procedures for developing case bases from
existing problem identification and resolution information. Most consulting
engagements are designed to allow the customer's staff to carry out much of the
work involved in analyzing existing customer support and internal help desk
activities and designing the case base. Consulting services are typically priced
on an hourly basis.

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Technical Support Options. Customers can access the Company's support centers
by telephone, fax, electronic mail, an electronic bulletin board system and the
Internet's World Wide Web. The Company typically provides second line support
for customers of its VARs, systems integrators and OEMs. New customers receive
an initial 30-day period of complimentary support after which, for an annual
fee, customers receive new software releases, upgrades, maintenance releases and
support. Depending on the chosen support plan, the fee generally ranges from 10%
to 30% of the current list price of the licensed products. The Company offers
three levels of support, Basic, Gold and Platinum, each tailored to the
customers' specific requirements.

Training and Education. Customers can choose from a wide variety of basic and
customized education and training programs, which are charged separately from
the Company's software products and are offered through the Company's in-house
classroom facilities in Novato, California. The Company also conducts classes at
the customer's place of business.

Pricing

The CBR CN products are offered either on a per CPU, per concurrent user or
per server license basis. The current U.S. list price for an entry-level ten-
user client/server system is in the $20,000 to $40,000 range and varies
depending on the number of modules purchased. Discounts from the Company's list
prices may be made available for volume purchasers, or for competitive or
strategic reasons.

The Company believes that its products and services are currently priced
competitively, yet the market for products of the type developed by the Company
is highly competitive. As a result, the Company anticipates increasing pricing
pressure from current and future competitors. Any substantial downward
adjustment in the price of the Company's products or services without a
corresponding increase in unit sales would adversely affect the Company's gross
margins and could have a negative impact on the Company's business, operating
results and financial condition.

CUSTOMERS

The Company estimates that it has granted licenses for its products to over
500 customers for use by more than 500,000 end users. In fiscal 1996, AT&T Corp.
accounted for 11% of total revenues. In fiscal 1997 and 1995, no customer
accounted for more than 10% of the Company's total revenues.

MARKETING AND SALES

The Company markets and sells its software and services in North America
through its direct sales organization, VARs, systems integrators and OEMs. The
domestic sales staff is based at the Company's corporate headquarters in Novato,
California, and in the Company's field sales offices in Atlanta, Chicago,
Dallas, Houston, McLean (Virginia), Seattle, Toronto (Canada), and New Jersey.
As of January 31, 1997, the Americas sales and marketing staff consisted of 34
employees.

The Company maintains subsidiaries in England, Germany, France, and the
Netherlands which are responsible for the Company's activities throughout
Europe, Asia, Africa and the Middle East. As of January 31, 1997, the
international sales and marketing staff consisted of 42 employees.

The Company and its indirect channel partners typically sell CBR Products and
related services through a sales representative who is assisted on an as-needed
basis by a systems engineer. To assist the sales force, the Company utilizes a
multi-tiered marketing program comprising periodic customer communications, user
conferences, advertising, public relations activities, seminars and trade show
participation.

VARs, distributors, systems integrators and OEMs complement the Company's
marketing and sales organization. These entities license certain CBR Products at
a re-licensing discount and may provide end users with a range of services
including training and customer service/support. There can be no assurance that
the Company can establish and maintain relationships with indirect channel
partners with the capabilities necessary to market CBR Products effectively.

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PRODUCT DEVELOPMENT

The Company believes that strong development capabilities are essential to its
future performance and the maintenance of its competitive position. Since its
formation, the Company has primarily developed its technology and products
internally. The Company intends to extend its CBR product line to support
additional hardware platforms and operating systems and to develop new
facilities for authors and end users of those products. This development is
expected to include the creation of third-party applications and database
interfaces to facilitate the integration of CBR technology into customers'
environments.

Although the Company has a number of ongoing development projects, its primary
product development effort is focused on enhancing the CBR CN product line,
which began initial shipment of certain modules in February 1997. The CBR CN
enhancements will continue to add functionality to the Company's current product
line. However, there can be no assurance that the development of these
enhancements will be completed successfully or on a timely basis or that the
product will include the features required to achieve market acceptance. The
Company's future operations will be substantially dependent on the CBR Content
Navigator product line, and failure to achieve market acceptance of this family
of products would have a material adverse effect on the Company's business,
operating results and financial condition.

The Company has in the past experienced delays in software development, and
there can be no assurance that the Company will not experience further delays in
connection with its current product development or future development
activities. Software products as complex as those offered by the Company may
contain undetected errors when first introduced or as new versions are released.
There can be no assurance that errors will not be found in the Company's new or
enhanced products after commencement of commercial shipments or that
modifications to such products will not be required to satisfy customer
requirements, resulting in loss of or delay in market acceptance. Delays or
difficulties associated with new product introductions or product enhancements
could have a material adverse effect on the Company's business, operating
results and financial condition.

The Company began commercially shipping its CasePoint WebServer product in
March 1996, which provides an Internet compatible, World Wide Web ("WWW")
server with a Mosaic-compatible browser, intuitive CasePoint interface. A
prototype of the CasePoint WebServer product has been available on the WWW since
December 1994. CasePoint WebServer is designed to allow the users of the WWW to
be clients of any CBR-compatible case base or document base. By providing the
WWW access to CBR knowledge bases, companies could implement call avoidance
strategies, allowing their customers, prospects and vendors to directly submit
problems, questions and requests; receive appropriate responses; or, if
appropriate, download entire case bases to a local computer.

The Company's development organization is arranged in three groups: the
Research Group, which designs and develops technology; the Engineering Group,
which specifies, produces and maintains product releases; the Knowledge
Publishing Division development group, which designs and builds the Knowledge
Publishing products; and the Quality Assurance Group, which verifies that
products meet their specifications and the Company's quality standard. These
groups are designed to ensure that there is an efficient separation between
technology development and the time-sensitive demands of product delivery.

The market for the Company's products is characterized by rapid technological
developments, evolving industry standards, swift changes in customer
requirements and frequent new product introductions and enhancements. As a
result, the Company's success depends upon its ability to continue to enhance
its existing products, develop and introduce in a timely manner new products
incorporating technological advances and respond to customer requirements. To
the extent one or more of the Company's competitors introduce products that more
fully address customer requirements, the Company's business could be adversely
affected. There can be no assurance that the Company will be successful in
developing and marketing new products or enhancements to its existing products
on a timely basis or that any new or enhanced products will adequately address
the changing needs of the marketplace. If the Company is unable to develop and
introduce new products or enhancements to existing products in a timely manner
in response to changing market conditions or customer requirements, the
Company's business, operating results and financial condition will be materially
and adversely affected. From time to time, the Company or its competitors may
announce new products, capabilities or technologies that have the potential to
replace or shorten the life cycles of the Company's existing products. There can
be no assurance that announcements of currently planned or other new products
will not cause customers to delay their purchasing decisions in anticipation of
such products, which could have a material adverse effect on the Company's
business, operating results and financial condition.

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As of January 31, 1997, there were 38 employees on the Company's product
development staff. The total product development expenditures for the Company's
products for fiscal 1997 were $3.5 million. Product development expense during
fiscal 1996 and 1995 was $2.0 million and $2.8 million, respectively. The
Company expects to continue to allocate significant resources to future research
and development. At present, there have been minimal capitalized software
development costs resulting from the Company's development efforts.

COMPETITION

The market for customer support software is highly competitive, and there are
certain competitors with substantially greater sales, marketing, development and
financial resources than the Company. Among the Company's major competitors in
the problem identification and resolution segment of the market are Answer
Systems, Inc., Astea International Inc., Clarify, Inc. and Software Artistry,
Inc. Furthermore, many potential customers develop internal solutions by
creating business applications that eliminate the need to acquire software and
services from third-party vendors such as the Company.

The Company believes that the competitive factors affecting the market for the
Company's products and services include vendor and product reputation; product
quality, performance and price; product functionality and features; product
scaleability; product integration with other enterprise applications; the
availability of products on multiple platforms; product ease-of-use; and the
quality of customer support services, documentation and training. The relative
importance of each of these factors depends upon the specific customer involved.
There can be no assurance that the Company will be able to compete effectively
with respect to any of these factors.

The Company's present or future competitors may be able to develop products
comparable or superior to those offered by the Company or adapt more quickly
than the Company to new technologies or evolving customer requirements. In order
to be successful in the future, the Company must respond to technological
change, customer requirements and competitors' current products and innovations.
In particular, while the Company is currently developing additional product
enhancements that the Company believes address customer requirements, there can
be no assurance that the Company will successfully complete the development or
introduction of these additional product enhancements on a timely basis or that
these product enhancements will achieve market acceptance. Accordingly, there
can be no assurance that the Company will be able to continue to compete
effectively in its market, that competition will not intensify or that future
competition will not have a material adverse effect on the Company's business,
operating results or financial condition.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

The Company's success depends in part upon its proprietary technology.
Although case-based reasoning technology is available in the public domain, the
Company believes its implementation of the CBR technology is proprietary. The
Company relies on a combination of copyright, trademark and trade secret laws,
confidentiality procedures and licensing arrangements to establish and protect
its proprietary rights. In December 1996, the Company was awarded two patents
for its Case-Based Reasoning technology. The Company's CBR technology is
embedded in its CBR family of products. Despite the precautions the Company has
taken, it may be possible for an unauthorized third party to copy or otherwise
obtain and use the Company's products, technology or other information that the
Company regards as proprietary or to develop similar products or technology
independently. In addition, effective trademark, copyright and trade secret
protection may be unavailable or limited in certain foreign countries where the
Company operates.

The Company generally provides its products to end users under signed license
agreements. These agreements are negotiated with and signed by the licensee. The
Company occasionally publishes articles regarding its technical developments in
industry publications that may prevent the Company from obtaining patent
protection for ideas contained in such publications, thus increasing the
availability to third parties of fundamental aspects of the Company's
technology.

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The Company is not aware that any of its products infringe upon the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim such infringement by the Company with respect to
current or future products. The Company expects that it will increasingly be
subject to such claims as the number of products and competitors in the customer
support software market grows and the functionality of such products overlaps
with other industry segments. Any such claims, whether or not they are
meritorious, could result in costly litigation or require the Company to enter
into royalty or licensing agreements. Such royalty or license agreements, if
required, may not be available on terms acceptable to the Company or at all. If
the Company were found to have infringed upon the proprietary rights of third
parties, it could be required to pay damages, cease sales of the infringing
products and redesign or discontinue such products, any of which could have a
material adverse effect on the Company's business, operating results and
financial condition.

EMPLOYEES

As of January 31, 1997, the Company had a total of 223 employees, of which 115
were based in the United States, 87 in the United Kingdom, 14 in Germany, 5 in
France, and 2 in the Netherlands. Of the total, 76 were engaged in sales and
marketing, 15 were in customer support, 63 were in consulting services, 38 were
in product development, and 31 were in administration and finance. The Company's
employees are not represented by any labor unions. The Company considers its
relations with its employees to be good, and there has never been an
interruption in business activities due to labor unrest. However, the Company's
future performance is contingent upon the uninterrupted service of key
technological and executive management staff and upon the maintenance of
conditions that can help attract and retain capable technicians and managers.
There is significant competition for talented and qualified employees, and there
can be no assurance that the Company will be able to retain its most strategic
employees or that it can attract and retain comparably qualified personnel in
the future.

10
<PAGE>

ITEM 2. PROPERTIES

The Company's headquarters in Novato, California house product development,
sales, technical support and administrative operations in approximately 37,000
square feet of space. The facility is under lease through February 2005. The
Company also leases space in its various sales offices throughout North America
and in Europe.

The Company's European headquarters in Slough, England house product
development, sales, marketing, technical support and administrative operations
in approximately 14,500 square feet. This facility is under sublease through
August 2002.

ITEM 3. LEGAL PROCEEDINGS

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's Class A Common Stock is traded on the NASDAQ National Market
under the symbol of "INFR". The following table sets forth for the quarterly
period indicated the range of high and low closing sales prices for the
Company's Class A Common Stock since its initial public offering effective as of
June 29, 1995.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Fiscal 1997 High Low
- ---------------------------------------------------------------
<S> <C> <C>
First Quarter $19.75 $16.75
Second Quarter 25.25 16.25
Third Quarter 20.50 12.25
Fourth Quarter 8.25 5.88
- ---------------------------------------------------------------
- ---------------------------------------------------------------
Fiscal 1996 High Low
- ---------------------------------------------------------------
Second Quarter $15.88 $13.50
Third Quarter 18.75 12.13
Fourth Quarter 19.75 13.50
- ---------------------------------------------------------------
</TABLE>

The Company paid cash dividends amounting to $114,000 to holders of Class H
Preferred Stock on May 15, 1995. The Company's obligation to pay cash dividends
to the holders of Class H Preferred Stock was relieved upon completion of the
initial public offering and related conversion of all preferred stock to common
stock. The Company currently does not anticipate paying any cash dividends in
the foreseeable future.

As of January 31, 1997, there were approximately 146 stockholders of record of
the Company's Class A and 1 stockholder of Class B Common Stock.

11
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA:

CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- -------- --------- -------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Products--CBR.......................... $20,402 $16,479 $ 9,790 $ 6,662 $ 4,515
Products--Tools........................ -- 399 2,230 3,581 5,394
Services............................... 15,588 12,517 16,479 17,084 11,735
------- ------- ------- ------- -------
Total................................. 35,990 29,395 28,499 27,327 21,644
Operating costs and expenses:
Cost of product revenues............... 1,248 1,710 1,611 1,575 873
Cost of service revenues............... 9,237 7,667 12,292 13,111 8,746
Product development.................... 3,492 1,959 2,753 3,731 2,531
Selling and marketing.................. 16,909 12,758 9,414 8,554 6,457
General and administrative............. 3,492 1,845 1,420 1,587 1,343
Non-recurring.......................... -- -- 774 -- --
------- ------- ------- ------- -------
Total................................. 34,378 25,939 28,264 28,558 19,950
------- ------- ------- ------- -------
Income (loss) from operations........... 1,612 3,456 235 (1,231) 1,694
Costs of attempted secondary offering... 241 -- -- -- --
Non-employee option expenses............ 215 -- -- -- --
Loss from divested Tools Business....... -- 210 -- -- --
Interest income......................... (1,327) (803) (109) -- --
Interest expense and other, net......... 141 81 25 58 187
Provision (benefit) for income taxes.... (90) 195 110 -- 145
------- ------- ------- ------- -------
Net income (loss)....................... $ 2,432 $ 3,773 $ 209 $(1,289) $ 1,362
======= ======= ======= ======= =======
Net income (loss) per share (1)......... $0.28 $0.51 $0.04 $(0.26) $0.32
======= ======= ======= ======= =======
Shares used in computing net
income (loss) per share (2)............ 8,702 7,393 5,228 4,898 4,268

CONSOLIDATED BALANCE SHEET DATA:
JANUARY 31,
------------------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------- -------
(IN THOUSANDS)
Cash and cash equivalents............... $28,620 $18,619 $ 3,023 $ 2,642 $ 2,953
Short-term investments.................. 987 7,314 -- 1,097 --
Working capital......................... 29,963 26,222 4,683 4,774 4,220
Total assets............................ 42,241 36,895 12,940 11,870 11,108
Total long-term debt.................... -- -- -- -- 1,964
Total shareholders' equity.............. 32,111 27,963 7,042 6,823 4,483
</TABLE>
- ------------------
(1) Fully diluted net income per share for the fiscal year ended January 31,
1996 was $0.49.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing net income (loss) per
share.

12
<PAGE>

ITEM 7.

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

Certain statements contained hereunder regarding matters that are not
historical facts are forward-looking statements (as such term is defined in the
rules promulgated pursuant to the Securities Act of 1933, as amended (the
"Securities Act")). Such forward-looking statements are subject to certain
risks, trends and uncertainties; thus, actual results may differ materially from
those expressed in or implied by such forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
fluctuations in quarterly operating results, the size and timing of customer
orders, rapid technological change and product transitions, and competitive
actions in the marketplace. The Company undertakes no obligation to release
publicly the result of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events. Readers should also carefully
review the business and risk factors described in the documents the Company
files from time to time with the Securities and Exchange Commission,
specifically the Quarterly Reports on Form 10-Q and any Current Reports on Form
8-K filed by the Company.

The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto. All information is based on the
Company's fiscal year end, January 31.

BACKGROUND

The Company was founded in 1979 to provide consulting services. In 1985, the
Company made its first commercial shipment of a software application development
tool ("ART"). From 1985 until May 1991, revenues of the Company were primarily
derived from the sale of ART products and related consulting services. In May
1991, the Company commercially shipped its first CBR Product.

From May 1991 through April 30, 1995, the Company's revenues were derived from
two separate product lines: (i) the customer support product line, consisting of
CBR Products and associated services (the "CBR Business"); and (ii) the
application development and solutions product line, which included the Company's
products: ART, ART-IM and ART*Enterprise ("Tools") and associated services
(the "Tools Business"). In the fourth quarter of fiscal 1995, the Company made
a strategic decision to focus on the CBR Business and to divest the Tools
Business. Effective May 1, 1995, the Company transferred certain assets and
liabilities of the Tools Business to a wholly-owned subsidiary ("Brightware")
of the Company and distributed all of the shares of such subsidiary to the
Company's stockholders (the "Spin-Off"). As part of the Spin-Off, the Company
entered into an agreement with Brightware to provide certain services to the new
entity including operational and systems support, facilities and administrative
support and certain technical and customer support ("Administrative Agreement").
This agreement expired on January 31, 1996. The amount received for these
services was $760,000.

FISCAL 1997 OVERVIEW

For the year ended January 31, 1997, the Company did not meet its planned
operating results, and had a reduced growth rate in product revenues, both in
North America and internationally. The Company attributes this decrease in
growth in product revenues to several factors, including: a) channel conflicts
in the Company's sales distribution - attempting to implement a partnering and
reseller strategy within a direct territorial sales model; b) lower productivity
by the sales organization in most geographic areas; c) impact on the sales
organizations from the resignations of the Company's Senior Vice Presidents of
North American Operations and International Operations in the second quarter;
and d) the increased competitive environment in which the Company operates. The
Company has attempted to respond to these issues with certain marketing
initiatives and adjustments to the product distribution model. Effective
February 1, 1997, the Company transitioned its Americas sales organization from
territorial sales to a direct sales organization segmented along vertical
industry lines and a channels sales group dedicated to the OEM and VAR partners.

13
<PAGE>

YEARS ENDED JANUARY 31, 1997, JANUARY 31, 1996 AND JANUARY 31, 1995

Revenues

The Company's revenues are derived principally from two sources: (i) fees for
licenses of the Company's software products and technology and (ii) fees for
consulting services, maintenance (technical support and upgrades of software
products) and training. Product revenues result principally from non-cancelable
license agreements that provide customers the non-exclusive right to use the
products for a fixed term or on a perpetual basis. Such revenues are recognized
upon: (i) execution of a binding agreement; (ii) shipment of the product to the
customer; (iii) when the license fee is fixed or determinable; and (iv) when
collectability is reasonably assured. Revenues from consulting and training are
recognized as the related services are performed, and maintenance revenues are
deferred and recognized over the term of the Company's maintenance contracts,
typically one year.

Total revenues increased 22% to $35,990,000 in fiscal 1997 from $29,395,000 in
fiscal 1996, and 3% in fiscal 1996 from $28,499,000 in fiscal 1995.

North American revenues amounted to $21,408,000, $15,845,000, and $19,128,000
for fiscal 1997, 1996, and 1995, respectively. The decrease in fiscal 1996 from
fiscal 1995 was the result of the spin-off of the Tools Business.

International revenues amounted to $14,582,000, $13,550,000, and $9,371,000
for fiscal 1997, 1996, and 1995, respectively, representing 41%, 46%, and 33% of
total revenues for such periods, respectively. The percentage increase in fiscal
1996 from fiscal 1995 was the result of the spin-off of the Tools Business. The
Company currently has subsidiaries in the United Kingdom, Germany, France and
the Netherlands, offering licenses and consulting services, and has
relationships with over 15 distributors worldwide, serving Europe, the Middle
East and Africa, and Asia and the Pacific Rim. International revenues, however,
are subject to various risks, including unexpected changes in regulatory
requirements, tariffs and other trade barriers; costs and risks of localizing
products for foreign countries; longer accounts receivable payment cycles;
potentially adverse tax consequences; repatriation of earnings; exchange rate
fluctuations; and the burdens of complying with a wide variety of foreign laws.
There can be no assurance that such factors will not have an adverse effect on
the revenues from the Company's future international sales and, consequently,
the Company's results of operations.

Product Revenues

Product revenues increased 21% to $20,402,000 in fiscal 1997 from $16,878,000
in fiscal 1996, and 40% in fiscal 1996 from $12,020,000 in fiscal 1995. Product
revenues represented 57%, 57%, and 42% of total revenues for fiscal years 1997,
1996, and 1995, respectively. Product revenues have principally been derived
from direct licenses of the Company's software products to end users. Although
the Company believes that such direct licenses will continue to account for a
major portion of product revenues, the Company expects that licenses of software
through original equipment manufacturers (OEMs), value added resellers (VARs)
and other indirect channels will increase as a percentage of product revenues.
Substantially all of the growth in product revenues was due to higher unit sales
volumes; the prices of the Company's products have remained relatively constant.

North American product revenues increased 19% to $12,070,000 in fiscal 1997
from $10,119,000 in fiscal 1996, and increased 25% in fiscal 1996 from
$8,063,000 in fiscal 1995.

International product revenues increased 23% to $8,332,000 in fiscal 1997 from
$6,759,000 in fiscal 1996, and increased 71% in fiscal 1996 from $3,957,000 in
fiscal 1995. International product revenues represented 41%, 40%, and 33% of
total product revenues for fiscal 1997, 1996 and 1995, respectively.

CBR product revenues increased 24% to $20,402,000 in fiscal 1997 from
$16,479,000 in fiscal 1996, and 68% in fiscal 1996 from $9,790,000 in fiscal
1995. The Company believes that these increases are the result of the growing
market acceptance of the CBR Products. However, in the second-half of fiscal
1997, the Company experienced a sharp decline in the growth rate of CBR product
sales. The Company attributed this decline to several factors, including: a)
channel conflicts in the Company's sales distribution - attempting to implement
a partnering and reseller strategy within a direct territorial sales model; b)
lower productivity by the sales organization in most geographic areas; c) impact
on the sales organizations from the resignations of the Company's Senior Vice
Presidents of North American Operations and International Operations in the
second quarter; and d) the increased competitive environment in which the
Company operates.

14
<PAGE>

Tools product revenues, which consist of the Company's application development
tools: ART, ART-IM and ART*Enterprise, decreased 82% to $399,000 in fiscal 1996,
from $2,230,000 in fiscal 1995, and were zero in Fiscal 1997.

Service Revenues

Service revenues increased 25% to $15,588,000 in fiscal 1997 from $12,517,000
in fiscal 1996, and decreased 24% in fiscal 1996 from $16,479,000 in fiscal
1995. Service revenues represented 43%, 43%, and 58% of total revenues for
fiscal 1997, 1996, and 1995, respectively.

North American service revenues increased 63% to $9,338,000 in fiscal 1997
from $5,726,000 in fiscal 1996, and decreased 43% in fiscal 1996 from
$10,017,000 in fiscal 1995. The decrease in service revenues between fiscal 1996
and fiscal 1995 was the result of the spin-off of the Tools Business, which was
a more consulting oriented business.

International service revenues decreased 8% to $6,250,000 in fiscal 1997 from
$6,791,000 in fiscal 1996, and increased 5% in fiscal 1996 from $6,462,000 in
fiscal 1995. International service revenues represented 40%, 54%, and 39% of
total service revenues for fiscal 1997, 1996 and 1995, respectively. During
fiscal 1997, 1996, and 1995, one customer accounted for 7%, 23%, and 28% of
international service revenues, respectively. This customer terminated its
contract with the Company in mid-fiscal 1997. In addition to the termination of
this major customer's contract, the decrease in fiscal 1997 revenues was also
the result of a transition in the international consulting business, away from
the Tools Business (which was spun-off in May 1995) to a consulting business
based on the Company's CBR product line.

Cost of Product Revenues

Cost of product revenues, consisting primarily of the costs of product media
and duplication, manuals, packaging materials, personnel-related costs, shipping
expenses and royalties paid to third-party vendors, decreased 27% to $1,248,000
in fiscal 1997 from $1,710,000 in fiscal 1996, and increased 6% in fiscal 1996
from $1,611,000 in fiscal 1995. The gross margin on product revenues was 94%,
90%, and 84% in fiscal 1997, 1996, and 1995, respectively. The improved product
gross margins in fiscal 1997 and 1996, was the result of increased product
revenues, thereby increasing the gross margin, and from a significant decrease
in royalties paid to third-parties. The decreased royalties principally resulted
from the lack of Tools product sales in fiscal 1997.

Cost of Service Revenues

Cost of service revenues, consisting principally of personnel-related costs
for consulting, training and technical support, increased 20% to $9,237,000 in
fiscal 1997 from $7,667,000 in fiscal 1996, and decreased 38% in fiscal 1996
from $12,292,000 in fiscal 1995. The gross margin on service revenues was 41%,
39%, and 25% in fiscal 1997, 1996, and 1995, respectively. The improved gross
margins in fiscal 1997 and 1996 was primarily the result of the increased
utilization of consultants and the increased renewal rate of maintenance on CBR
Products.

Product Development

Product development expense consists primarily of employee-related costs,
including salaries, benefits, equipment and facility costs, incurred in the
research, design, development and enhancement of the Company's products. Product
development expenditures, including capitalized software costs, increased 78% to
$3,492,000 in fiscal 1997 from $2,009,000 in fiscal 1996, and decreased 42% in
fiscal 1996 from $3,473,000 in fiscal 1995. Capitalized software development
costs amounted to $0, $50,000, and $720,000 in fiscal 1997, 1996, and 1995,
respectively. Product development expense as a percentage of total revenues was
10%, 6%, and 10% for fiscal 1997, 1996, and 1995, respectively. The significant
increase in fiscal 1997 was the result of the investment in the CBR Content
Navigator product release and the establishment of the KPD development group.
The percentage and dollar amount decrease in product development expense in
fiscal 1996 was the result of the spin-off of the Tools Business in May 1995.

The Company believes that continued commitment to product development will be
required for the Company's CBR Products to obtain a competitive advantage.
Accordingly, the Company intends to allocate increasing resources to product
research and development, but such expenses may continue to vary as a percentage
of total revenues.

15
<PAGE>

Selling and Marketing

Selling and marketing expense consists primarily of salaries, benefits and
commissions of sales and marketing personnel, trade shows and promotional
expenses, and non-chargeable customer field service and sales support. Selling
and marketing expense increased 33% to $16,909,000 in fiscal 1997 from
$12,758,000 in fiscal 1996, and 36% in fiscal 1996 from $9,414,000 in fiscal
1995. This increase was the result of the expansion of the Company's direct
sales force and related marketing efforts, both in North America and
internationally. Selling and marketing expense as a percentage of total revenues
was 47%, 43%, and 33% in fiscal 1997, 1996, and 1995, respectively.

General and Administrative

General and administrative expense consists of the personnel costs for finance
and accounting, human resources, information systems and general management of
the Company. General and administrative expense increased 89% to $3,492,000 in
fiscal 1997 from $1,845,000 in fiscal 1996, and 30% in fiscal 1996 from
$1,420,000 in fiscal 1995. This increase is primarily attributable to increased
staffing and associated expenses necessary to manage and support the Company's
planned growth, both domestically and internationally; additionally, the Company
received funds (which were accounted for as an offset to general and
administrative expenses) during fiscal 1996 from the Administrative Agreement
with the Tools Business, as previously discussed. Even with the benefit of the
Administrative Agreement, general and administrative expenses increased in
fiscal 1996. This increase was attributable to the relocation of the Company's
corporate headquarters to Northern California, as well as increased headcount
due to the Company's increased infrastructure requirements. General and
administrative expense as a percentage of total revenues was 10%, 6%, and 5% in
fiscal 1997, 1996, and 1995, respectively.

Non-Recurring

During fiscal 1995, the Company invested in the development of a new business
concept unrelated to its current businesses or product groups, managed by the
Company's then Chairman of the Board of Directors. In November 1994, the Company
made a strategic decision to discontinue its efforts in this area. In connection
with this decision, the Company entered into a severance agreement with the
former Chairman of the Board of Directors effective February 28, 1995, which
provided for the continuation of his monthly salary through April 30, 1995.
Costs associated with the severance agreement, as well as other costs incurred
related to this discontinued business venture were recorded in fiscal 1995 as a
non-recurring expense. In addition, non-recurring expense included approximately
$200,000 accrued in the fourth quarter of fiscal 1995 for lease payments
associated with the early termination of the Company's European headquarters
facility lease, in order to relocate to a larger facility.

Interest Income

Interest income increased 65% to $1,327,000 in fiscal 1997 from $803,000 in
fiscal 1996, and 637% in fiscal 1996 from $109,000 in fiscal 1995. These
increases were attributable to the interest earned on the proceeds of the
Company's initial public offering.

Income Taxes

The benefit for income taxes in fiscal 1997 was the result of refunds of
foreign taxes, offset by certain state taxes. The Company's provision for
income taxes in fiscal 1996 represented the accrual of foreign taxes, federal
alternative minimum taxes and certain state taxes; the resulting effective tax
rate was approximately 5%. The Company's effective tax rate of 34% in fiscal
1995 represented the accrual of foreign taxes. Federal taxes for fiscal 1997 and
1995 were not provided as a result of the utilization of net operating loss
carryforwards and other tax credits.

The Company's net operating loss carryforwards of $21,700,000 for federal
purposes, $7,500,000 for state purposes and certain general business credits of
$1,100,000, expire in various years through 2010. Based on the Internal Revenue
Code, the future use of these carryforwards would be subject to an annual
limitation should a 50% change in ownership of the Company's stock occur within
any three-year period.

16
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents and short-term investments at January 31, 1997 were
$29,607,000, an increase of $3,674,000 since January 31, 1996. Working capital
at January 31, 1997 was $29,963,000.

Net cash provided by operating activities amounted to $3,169,000 during the
year ended January 31, 1997. Net cash provided by operating activities amounted
to $5,762,000 in fiscal 1996 and $473,000 in fiscal 1995.

Investing activities for the year ended January 31, 1997 included $1,211,000
for purchases of property and equipment. The Company currently has no
significant capital commitments for fiscal 1997.

Cash provided by financing activities in the year ended January 31, 1997
included $2,104,000 from the exercise of options and warrants to purchase common
stock, as well as shares issued in connection with the Employee Stock Purchase
Plan. Cash used in financing activities during fiscal 1997 amounted to $388,000
for repurchase of the Company's common stock.

The Company's international operations are principally transacted in British
pounds and German marks. Translation into the Company's reporting currency, the
U.S. dollar, has not historically had a material impact on the Company's
financial position. Additionally, the Company's net assets denominated in
currencies other than the functional currency has not exposed the Company to
material risk associated with fluctuations in currency rates. Given this and the
relatively stable nature of the exchange rates, historically, between the
British pound and the German mark, and the U.S. dollar, the Company has not
considered it necessary to use foreign currency contracts or other derivative
instruments to manage changes in currency rates. However, future changes in the
exchange rates between the foreign currencies and the U.S. dollar could have an
adverse effect on the Company's financial position.

The Company believes that existing cash balances, together with anticipated
cash flow from operations, will be sufficient to meet its working capital and
capital expenditure requirements for at least the next twelve months.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

Fluctuations in Quarterly Operating Results. The Company has experienced
significant quarterly fluctuations in operating results and anticipates such
fluctuations in the future. Typically, revenues, operating income and net income
for the Company's fourth quarter are higher than those for the first quarter of
the following year. In addition, the Company has historically recognized a
substantial portion of its license revenues in the last month of the quarter,
typically in the last week. The Company generally ships orders as they are
received and as a result has little or no backlog. Quarterly revenues and
operating results therefore depend on the volume and timing of orders received
during the quarter, which are difficult to forecast. In addition, consulting
service revenues tend to fluctuate as projects, which may continue over several
quarters, are undertaken or completed. Operating results may also fluctuate due
to factors such as the demand for the Company's products; the size and timing of
customer orders; the introduction of new products and product enhancements by
the Company or its competitors; the budgeting cycles of customers; changes in
the proportion of revenues attributable to licenses and service fees; changes in
the level of operating expenses; and competitive conditions in the industry. The
value of individual licenses as a percentage of quarterly revenues can be
substantial, and particular licenses may generate a substantial portion of the
operating profits for the quarter in which they are signed. The sales cycle
typically ranges from three to nine months, and license signing may be delayed
for a number of reasons outside of the control of the Company. Because the
Company's staffing and other operating expenses are based on anticipated
revenues, a substantial portion of which is not typically generated until the
end of each quarter, delays in the receipt of orders can cause significant
variations in operating results from quarter to quarter. The Company also may
choose to reduce prices or to increase spending in response to competition or to
pursue new market opportunities, which may adversely affect the Company's
operating results. Accordingly, the Company believes that period-to-period
comparisons of its results of operations may not be meaningful and should not be
relied upon as an indication of future performance. Furthermore, there can be no
assurance that the Company will remain profitable.

Due to all of the foregoing factors, it is likely that in some future quarters
the Company's operating results will be below the expectations of public market
analysts and investors. Regardless of the general outlook for the Company's
business, the announcement of quarterly operating results below analyst and
investor expectations is likely to result in a decline in the trading price of
the Company's Class A Common Stock.

17
<PAGE>

Rapid Technological Change; Product Transitions. The market for the Company's
products is characterized by rapid technological developments, evolving industry
standards, swift changes in customer requirements and frequent new product
introductions and enhancements. As a result, the Company's success depends upon
its ability to continue to enhance its existing products, develop and introduce
in a timely manner new products incorporating technological advances and respond
to customer requirements. To the extent one or more of the Company's competitors
introduce products that more fully address customer requirements, the Company's
business could be adversely affected. There can be no assurance that the Company
will be successful in developing and marketing new products or enhancements to
its existing products on a timely basis or that any new or enhanced products
will adequately address the changing needs of the marketplace. If the Company is
unable to develop and introduce new products or enhancements to existing
products in a timely manner in response to changing market conditions or
customer requirements, the Company's business, operating results and financial
condition will be materially and adversely affected.

Competition. The market for customer support software is highly competitive,
and there are certain competitors with substantially greater sales, marketing,
development and financial resources than the Company. Among the Company's major
competitors are Answer Systems, Inc., Astea International Inc., Clarify, Inc.
and Software Artistry, Inc. Furthermore, many potential customers develop
internal solutions by creating business applications that eliminate the need to
acquire software and services from third-party vendors such as the Company.

Pricing. The Company believes that its products are competitively priced with
other products in the customer support market. However, the market for the
Company's products is highly competitive, and the Company expects that it will
face increasing pricing pressures from its current competitors and new market
entrants. Any material reduction in the price of the Company's products would
negatively affect gross margins and could materially adversely affect the
Company's business, operating results and financial condition if the Company
were unable to increase unit sales. In addition, the Company expects increased
competition and intends to invest significantly in its business. As a result,
there can be no assurance that the Company will remain profitable on a quarterly
or annual basis.

Management of Growth; Dependence Upon Key Personnel. In recent years, the
Company has experienced changes in its operations which have placed significant
demands on the Company's administrative, operational and financial resources.
The Company's future performance depends in significant part upon the continued
service of its key technical, sales and senior management personnel. The loss of
the services of one or more of these key employees could have a material adverse
effect on the Company's business, operating results and financial condition. The
Company's future success also depends on its ability to attract and retain
highly qualified technical, sales and managerial personnel. Competition for such
personnel is intense, and there can be no assurance that the Company can retain
its key employees or that it can attract, assimilate or retain other highly
qualified personnel in the future.

18
<PAGE>

Product Concentration. The Company currently derives substantially all of its
revenues from licenses of CBR products and associated services. Broad market
acceptance of CBR products is critical to the Company's future success. As a
result, a decline in demand for or failure to achieve broad market acceptance of
CBR products as a result of competition, technological change or otherwise would
have a material adverse effect on the business, operating results and financial
condition of the Company.

Possible Volatility of Stock Price. The trading price of the Company's Class A
Common Stock has been and is subject to wide fluctuations in response to
quarterly variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, changes in
financial estimates or recommendations by securities analysts and other events
or factors. In addition, the stock market has experienced volatility that has
particularly affected the market prices of equity securities of many technology
companies and that often has been unrelated to the operating performance of such
companies. These broad market fluctuations may adversely affect the trading
price of the Company's Class A Common Stock.

Uncertainty of Proprietary Rights. The Company's success depends in part upon
its proprietary technology. Although case-based reasoning technology is
available in the public domain, the Company believes its implementation of the
CBR technology is proprietary. The Company relies on a combination of copyright,
trademark and trade secret laws, confidentiality procedures and licensing
arrangements to establish and protect its proprietary rights. In December 1996,
the Company was awarded two patents for its Case-Based Reasoning technology. The
Company's CBR technology is embedded in its CBR family of products. Despite the
precautions the Company has taken, it may be possible for an unauthorized third
party to copy or otherwise obtain and use the Company's products, technology or
other information that the Company regards as proprietary or to develop similar
products or technology independently. In addition, effective trademark,
copyright and trade secret protection may be unavailable or limited in certain
foreign countries where the Company operates.

19
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See "Index to Consolidated Financial Statements" for a listing of the
consolidated financial statements filed with this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

20
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item will be included in the Company's Proxy
Statement with respect to its 1997 Annual Meeting of Shareholders to be filed
with the Commission within 120 days of January 31, 1997 under the captions
"Election of Directors" and "Executive Officers," and is incorporated herein by
this reference as if set forth in full herein.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item will be included in the Company's Proxy
Statement with respect to its 1997 Annual Meeting of Shareholders to be filed
with the Commission within 120 days of January 31, 1997 under the captions
"Executive Compensation and Other Information," "Election of Directors,"
"Compensation Report," and "Company Stock Price Performance," and is
incorporated herein by this reference as if set forth in full herein.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item will be included in the Company's Proxy
Statement with respect to its 1997 Annual Meeting of Shareholders to be filed
with the Commission within 120 days of January 31, 1997 under the caption
"Common Stock Ownership of Certain Beneficial Owners and Management," and is
incorporated herein by this reference as if set forth in full herein.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item will be included in the Company's Proxy
Statement with respect to its 1997 Annual Meeting of Shareholders to be filed
with the Commission within 120 days of January 31, 1997 under the caption
"Certain Transactions," and is incorporated herein by this reference as if set
forth in full herein.

21
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

(1) Consolidated Financial Statements See "Index to Consolidated Financial
Statements"

(2) Consolidated Financial Statement Schedules:

All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.

(3) Exhibits See "Exhibit Index"

(b) Reports on Form 8-K:

No reports on Form 8-K were filed during the last quarter of the fiscal
year ended January 31, 1997.

22
<PAGE>

INFERENCE CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

PAGE
----
<S> <C>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS.................................. F-2

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets at January 31, 1997 and 1996........................ F-3

Consolidated Statements of Income for the years ended January 31, 1997,
1996 and 1995............................................................... F-4

Consolidated Statements of Cash Flows for the years ended January 31,1997,
1996 and 1995............................................................... F-5

Consolidated Statements of Shareholders' Equity for the years ended
January 31, 1997, January 31, 1996 and January 31, 1995..................... F-6

Notes to Consolidated Financial Statements...................................... F-7
</TABLE>

F-1
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Inference Corporation

We have audited the accompanying consolidated balance sheets of Inference
Corporation as of January 31, 1997 and 1996, and the related consolidated
statements of income, cash flows and shareholders' equity for each of the three
years in the period ended January 31, 1997. 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Inference
Corporation at January 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 31, 1997, in conformity with generally accepted accounting principles.

Ernst & Young LLP

Sacramento, California
February 17, 1997

F-2
<PAGE>

INFERENCE CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands)
<TABLE>
<CAPTION>

January 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents................................................. $ 28,620 $ 18,619
Short-term investments.................................................... 987 7,314
Accounts receivable, less allowance for doubtful
accounts of $165 ( $90 in 1996).......................................... 9,794 8,502
Other current assets...................................................... 692 719
-------- --------
Total current assets.................................................. 40,093 35,154
Property and equipment, net................................................ 2,055 1,415
Other assets............................................................... 93 326
-------- --------
$ 42,241 $ 36,895
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable.......................................................... $ 1,113 $ 1,508
Accrued salaries and related items........................................ 1,539 1,588
Other accrued liabilities................................................. 2,082 2,292
Deferred revenue.......................................................... 5,396 3,544
-------- --------
Total current liabilities............................................. 10,130 8,932

Commitments

Shareholders' equity:
Preferred stock, $0.01 par value;
Authorized shares--2,000 and 10,000 at
January 31, 1997 and 1996, respectively;
Issued and outstanding shares--none...................................... -- --
Common stock, $0.01 par value (no par value in 1996);
Authorized shares--17,000 and 25,000 at
January 31, 1997 and 1996, respectively; Issued
shares--8,259 and 7,480 at January 31, 1997 and
1996 respectively; Outstanding shares--8,205 and
7,480 at January 31, 1997 and 1996, respectively......................... 82 50,414
Additional paid-in capital................................................ 52,048 --
Accumulated deficit....................................................... (20,019) (22,451)
-------- --------
Total shareholders' equity............................................ 32,111 27,963
-------- --------
$ 42,241 $ 36,895
======== ========
</TABLE>

See accompanying notes.

F-3
<PAGE>

INFERENCE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except net income per share)
<TABLE>
<CAPTION>

YEAR ENDED JANUARY 31,
-------------------------------------
1997 1996 1995
--------- ----------- ----------
<S> <C> <C> <C>
Revenues (1):
Products--CBR................................................ $20,402 $16,479 $ 9,790
Products--Tools.............................................. -- 399 2,230
------- ------- -------
Total product revenues.................................... 20,402 16,878 12,020
Services..................................................... 15,588 12,517 16,479
------- ------- -------
Total revenues............................................ 35,990 29,395 28,499
Operating costs and expenses:
Products..................................................... 1,248 1,710 1,611
Services..................................................... 9,237 7,667 12,292
Product development.......................................... 3,492 1,959 2,753
Selling and marketing........................................ 16,909 12,758 9,414
General and administrative................................... 3,492 1,845 1,420
Non-recurring................................................ -- -- 774
------- ------- -------
Total operating costs and expenses........................ 34,378 25,939 28,264
------- ------- -------
Income from operations........................................... 1,612 3,456 235
Costs of attempted secondary offering............................ 241 -- --
Non-employee option expenses..................................... 215 -- --
Loss from divested Tools Business................................ -- 210 --
Interest income.................................................. (1,327) (803) (109)
Interest expense and other, net.................................. 141 81 25
------- ------- -------
Income before income taxes....................................... 2,342 3,968 319
Benefit (provision) for income taxes............................. 90 (195) (110)
------- ------- -------
Net income....................................................... $ 2,432 $ 3,773 $ 209
======= ======= =======

PER SHARE INFORMATION:
Net income per share, primary.................................. $ 0.28 $0.51 $0.04
======= ======= =======
Shares used in computing net
income per share, primary.................................... 8,702 7,393 5,228

Net income per share, fully diluted............................ $ 0.28 $0.49 $0.04
======= ======= =======
Shares used in computing net income
per share, fully diluted..................................... 8,704 7,694 5,228

- -------------------------------------
(1) Related party transactions included in Revenues............. $ 1,011 $ 1,722 $ 2,028
======= ======= =======

</TABLE>

See accompanying notes.

F-4
<PAGE>

INFERENCE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)
<TABLE>
<CAPTION>

YEAR ENDED JANUARY 31,
------------------------------------
1997 1996 1995
--------- ----------- ----------

<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 2,432 $ 3,773 $ 209
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization................................... 771 1,091 883
Changes in operating assets and liabilities:
Accounts receivable............................................ (1,292) (2,386) (1,394)
Other current assets........................................... 27 (559) (82)
Other assets................................................... 33 (14) 6
Accounts payable............................................... (395) 587 336
Accrued salaries and related................................... (49) 482 (33)
Other accrued liabilities...................................... (210) 894 31
Deferred revenue............................................... 1,852 1,894 517
------- -------- -------
Net cash provided by operating activities........................... 3,169 5,762 473

CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity of short-term investments................................. 7,314 -- 1,097
Purchases of short-term investments................................ (987) (7,314) --
Cash contributed to divested Tools Business........................ -- (1,684) --
Purchases of property and equipment................................ (1,211) (1,417) (479)
Software development costs capitalized............................. -- (50) (720)
------- -------- -------
Net cash provided (used) by investing activities.................... 5,116 (10,465) (102)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends on convertible preferred stock................ -- (114) --
Net proceeds from issuance of common stock......................... 2,104 20,413 10
Repurchase of common stock......................................... (388) -- --
------- -------- -------
Net cash provided by financing activities........................... 1,716 20,299 10
------- -------- -------
Net increase in cash and cash equivalents........................... 10,001 15,596 381
Cash and cash equivalents at beginning of year...................... 18,619 3,023 2,642
------- -------- -------
Cash and cash equivalents at end of year............................ $28,620 $ 18,619 $ 3,023
======= ======== =======

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

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period.................................... $ 26 $ 45 $ 42
Income taxes paid during the period................................ 165 181 --
Conversion of convertible preferred stock into common stock........ -- 28,816 --
</TABLE>

See accompanying notes.

F-5
<PAGE>

INFERENCE CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(in thousands)
<TABLE>
<CAPTION>

COMMON STOCK
CONVERTIBLE --------------------------- ADDITIONAL TOTAL
PREFERRED SHARES PAID- IN ACCUMULATED SHAREHOLDERS'
STOCK OUTSTANDING AMOUNT CAPITAL DEFICIT EQUITY
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 31, 1994........... $ 28,816 753 $ 1,175 $ -- $(23,168) $ 6,823
Issuance of common stock............. -- 4 10 -- -- 10
Net income........................... -- -- -- -- 209 209
----------- ----- -------- -------- -------- -------
Balances at January 31, 1995........... 28,816 757 1,185 -- (22,959) 7,042
Divestiture of tools business........ -- -- -- -- (3,151) (3,151)
Conversion of preferred stock
into common stock.................. (28,816) 4,286 28,816 -- -- --
Issuance of common stock............. -- 2,437 20,413 -- -- 20,413
Dividend on Class H preferred
stock.............................. -- -- -- -- (114) (114)
Net income........................... -- -- -- -- 3,773 3,773
----------- ----- -------- -------- -------- -------
Balances at January 31, 1996........... -- 7,480 50,414 -- (22,451) 27,963
Reincorporation in the state of
Delaware........................... -- -- (50,338) 50,338 -- --
Issuance of common stock............. -- 779 7 2,097 -- 2,104
Repurchase of common stock........... -- (54) (1) (387) -- (388)
Net income........................... -- -- -- -- 2,432 2,432
----------- ----- -------- -------- -------- -------
Balances at January 31, 1997........... $ -- 8,205 $ 82 $52,048 $(20,019) $32,111
=========== ===== ======== ======== ======== =======
</TABLE>

See accompanying notes.

F-6
<PAGE>

INFERENCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 31, 1997

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization

Inference Corporation (the "Company") is engaged in the design, development
and marketing of software products for the customer support and service market.
The Company offers maintenance, training and consulting services in support of
its software.

Consolidation

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

Foreign Currency Translation

Assets and liabilities of the Company's wholly-owned foreign subsidiaries are
translated at period-end exchange rates, and revenues and expenses are
translated at the weighted average monthly exchange rates. Foreign exchange
transaction gains and losses and translation adjustments are not material in the
periods presented.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Cash equivalents and short-term investments

The Company considers investments that are highly liquid, readily convertible
to cash and that mature within three months from the date of purchase as cash
equivalents. Short-term investments generally mature between three months and
one year from the purchase date. All cash and short-term investments are
classified as held-to-maturity as the Company intends and has the ability to
hold the securities to maturity. Held-to-maturity securities are stated at
amortized cost, adjusted for amortization of premiums and accretion of discounts
to maturity. Such amortization is included in interest income. The carrying
values for cash and short-term investments approximate their respective fair
values at January 31, 1997 and 1996.

Property and Equipment

Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from one to five years, except for leasehold improvements which are
amortized over the remaining lease term, if lesser.

Property and equipment at January 31, 1997 and 1996 is as follows (in
thousands):
<TABLE>
<CAPTION>

1997 1996
-------- --------

<S> <C> <C>
Computer equipment............................ $ 2,130 $1,159
Furniture & leasehold improvements............ 1,612 1,064
Vehicles...................................... 64 131
------- ------
Total...................................... 3,806 2,354
Accumulated depreciation...................... (1,751) (939)
------- ------
Property and equipment, net................ $ 2,055 $1,415
======= ======
</TABLE>

F-7
<PAGE>

INFERENCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

JANUARY 31, 1997

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenue Recognition

Product revenues result principally from non-cancelable license agreements
that provide customers the non-exclusive right to use the products for a fixed
term or on a perpetual basis. Such revenues are recognized upon: (i) execution
of a binding agreement; (ii) shipment of the product to the customer; (iii) when
the license fee is fixed or determinable; and (iv) when collectability is
reasonably assured. If the Company has significant future obligations to the
customer, revenues are recognized when such obligations are satisfied.

The Company enters into maintenance and support agreements with customers that
call for the Company to provide technical support and certain product updates.
Maintenance revenues received are deferred and recognized on a straight-line
basis over the maintenance support period, generally one year. Maintenance and
support revenues are included in service revenues in the accompanying
Consolidated Statements of Income.

Service revenues result from contracts with customers for the development and
support of system applications. Service revenues are generally recognized as the
services are performed. Fixed-price service contracts are recognized on a
percentage of completion based on level of effort performed.

Software Development Costs

Software development costs incurred subsequent to the determination of the
software product's technological feasibility and prior to the product's general
release to customers are not material to the Company's financial position or
results of operations for fiscal 1997 and 1996, and have been charged to
research and development expense in the accompanying statements of income.

Concentrations of Credit Risk

Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents, short-term
investments and accounts receivable. The Company places its cash, cash
equivalents, and short term investments with high credit quality financial
institutions. At times, such investments may be in excess of the FDIC
insurance limit. Concentrations of credit risk with respect to accounts
receivable are limited due to the large number of customers comprising the
Company's customer base, and their dispersion across many different industries
and geographic regions. Generally, the Company does not require collateral or
other security to support customer receivables. The Company routinely assesses
the financial strength of its customers and, as a consequence, believes that its
accounts receivable credit risk exposure is limited.

Income Taxes

Income taxes are accounted for using the liability method in accordance with
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes" (Note 4). Under this method, deferred tax liabilities and assets are
recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities.

The Company has not provided U.S. income taxes on the undistributed income of
its foreign subsidiaries. The cumulative amount of such income was immaterial as
of January 31, 1997.

F-8
<PAGE>

INFERENCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

JANUARY 31, 1997

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Net Income Per Share

Net income per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares from convertible preferred
stock (using the if-converted method) and stock options and warrants (using the
treasury stock method) have been included in the computation when dilutive.
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletins,
all common and common equivalent shares issued by the Company at an exercise
price below the initial public offering price during the twelve-month period
prior to the offering have been included in the calculation as if they were
outstanding for all periods presented prior to the initial public offering.

Accounting for Stock-Based Compensation

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), was issued and is effective for the Company's
1997 fiscal year. As permitted under SFAS 123, the Company has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations ("APB 25"), in accounting for stock-
based awards to employees. Under APB 25, the Company has generally recognized
no compensation expense with respect to such awards, while disclosures required
by FAS 123 are included in Note 6 to the financial statements.

Non-Employee Stock Option Related Expenses

During fiscal 1997, the Company incurred payroll-related taxes of $215,000 as
a result of the exercise of non-qualified stock options held by former Inference
employees. In connection with these option exercises, the Company will be able
to take a tax deduction, if and when adequate taxable income is earned, for the
related compensation expense. However, the tax benefit will be accounted for
when utilized as an adjustment to shareholders' equity.

Non-Recurring Expense

During fiscal 1995, the Company invested in the development of a new business
concept unrelated to its current businesses or product groups, managed by the
Company's former Chairman of the Board of Directors. In November 1994, the
Company made a strategic decision to discontinue its efforts in this area and in
May 1995 licensed this technology to a newly formed company in which the Company
was issued an equity interest. The Company has recorded no value related to this
equity interest. In connection with the strategic decision, the Company entered
into a severance agreement with the Chairman of the Board of Directors effective
February 28, 1995, which provided for the continuation of his monthly salary
through April 30, 1995. Costs associated with the severance agreement, as well
as other costs (principally salaries and related expenses) incurred related to
this discontinued business venture have been recorded in fiscal 1995 as a non-
recurring expense in the accompanying Consolidated Statements of Operations. In
addition, non-recurring expense also includes approximately $200,000 accrued in
the fourth quarter of fiscal 1995 for lease payments associated with the early
termination of the Company's European headquarters facility lease.

Reclassifications

Certain prior year amounts have been reclassified to conform with the current
year presentation.

F-9
<PAGE>

INFERENCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

JANUARY 31, 1997

2. FINANCIAL INSTRUMENTS

The following table summarizes the Company's financial instruments as
of January 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Cash and equivalents:
Cash............................................................. $ 5,818 $ 3,853
Commercial paper................................................. 14,523 --
Money market funds............................................... 8,279 3,802
U.S. Treasury securities and obligations
of U.S. government agencies................................. -- 10,964
------- -------
Total cash and equivalents.......................................... $28,620 $18,619
======= =======

Short-term investments:
U.S. Treasury securities and obligations
of U.S. government agencies................................. -- $ 7,314
Commercial paper................................................. 987 --
------- -------
Total short-term investments........................................ $ 987 $ 7,314
======= =======

Total cash and cash equivalents and short-term investments.......... $29,607 $25,933
======= =======
</TABLE>

3. COMMITMENTS

The Company leases its facilities and certain computer equipment under various
operating leases. Total rental expense under operating leases was approximately
$1,448,000, $1,436,000 and $1,770,000 during fiscal 1997, 1996 and 1995,
respectively. Future minimum obligations as of January 31, 1997 are as follows
(in thousands):

<TABLE>

<S> <C>
1998.................................. $ 1,784
1999.................................. 1,562
2000.................................. 1,407
2001.................................. 1,291
2002.................................. 1,294
Thereafter............................ 3,023
-------
Total.............. $10,361
=======
</TABLE>

4. INCOME TAXES

The components of the benefit (provision) for income taxes consists of the
following (in thousands):

<TABLE>
<CAPTION>
1997 1996 1995
------ ------- -----
<S> <C> <C> <C>
Current:
Federal....................... $ -- $ (70) $ --
State......................... (38) (35) --
Foreign....................... 128 (90) (110)
------ ------- -----
Total.................... $ 90 $ (195) $(110)
====== ======= =====
</TABLE>

The Company's effective tax rate differed from the statutory federal income
tax rate as follows:

<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -----
<S> <C> <C> <C>
Statutory federal income tax (benefit) rate.... 34.0% 34.0% 34.0%
State taxes, net of federal benefit............ 1.0 0.7 --
Tax benefit from utilization of net operating
loss carryforward.......................... (48.0) (28.0) (4.8)
Effect of foreign operations................... 8.0 (4.2) (7.4)
Other.......................................... 1.0 2.5 12.6
------ ------- -----
Effective tax rate............................. (4.0)% 5.0% 34.4%
====== ======= =====
</TABLE>

F-10
<PAGE>

INFERENCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

JANUARY 31, 1997

4. INCOME TAXES (CONTINUED)

Significant components of deferred tax assets (liabilities) and related
valuation allowance at January 31, 1997 and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>

1997 1996
--------- --------
<S> <C> <C>
Deferred tax liabilities:
Capitalized software................................ $ -- $ (85)
-------- -------
Total deferred tax liabilities...................... -- (85)

Deferred tax assets:
Net operating loss carryforwards.................... 7,678 5,462
General business and foreign tax credits............ 1,109 1,109
Other............................................... 1,712 1,261
-------- -------
Total deferred tax assets........................... 10,499 7,832
Valuation allowance.................................... (10,499) (7,747)
-------- -------
Net deferred tax assets................................ -- 85
-------- -------

Net deferred taxes..................................... $ -- $ --
======== =======
</TABLE>

Due to the uncertainties surrounding the timing of realizing the benefits of
its favorable tax attributes in future tax returns, the Company has placed a
valuation allowance against its otherwise recognizable deferred tax assets. The
valuation allowance decreased by approximately $1,242,000 during the year ended
January 31, 1996, and increased by approximately $2,752,000 during fiscal 1997.
The increase in the valuation allowance is due to the increase in the net
operating loss resulting from tax benefits associated with stock option activity
during fiscal 1997. Deferred tax assets relating to net operating loss
carryforwards as of January 31, 1997 include approximately $4,000,000 associated
with stock option activity for which any subsequent recognized tax benefits will
be credited directly to shareholders' equity.

At January 31, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $21,700,000 which expire in various
years through 2010 and net operating loss carryforwards for state income tax
purposes of approximately $7,500,000 which expire in various years through 2010.
The Company also has general business and foreign tax credits of approximately
$1,100,000 which expire in various years through 2009.

Due to the "change in ownership" provisions of the Tax Reform Act of 1986,
utilization of the Company's net operating loss carryforwards and research and
development credit carryforwards may be subject to a substantial limitation if a
greater than 50% ownership change were to occur in the future.

5. CAPITAL STRUCTURE

Initial Public Offering

In July 1995, the Company completed an initial public offering of 2,130,000
shares of Class A Common Stock and 400,000 shares of outstanding common stock
that were offered by certain selling shareholders. The Company received
approximately $20 million after deducting expenses and underwriting discounts
and commissions.

Effective with the closing of the initial public offering, the Company's
Board of Directors also approved a one-for-five reverse stock split of the
Company's common stock and convertible preferred stock. All references in the
accompanying consolidated financial statements to the number of shares of common
stock, preferred stock and per common share amounts have been adjusted to
reflect the reverse stock split.

F-11
<PAGE>

INFERENCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

JANUARY 31, 1997

5. CAPITAL STRUCTURE (CONTINUED)

Reincorporation

In July 1996, the Company was reincorporated in the state of Delaware. As
part of this reincorporation, each outstanding share of the California
corporation, no par value, common stock was converted into one share of the
Delaware corporation, $0.01 par value, common stock. The Company is authorized
to issue up to 15,000,000 shares of Class A Common Stock, par value $0.01 per
share, 2,000,000 shares of Class B Common Stock, par value $0.01 per share, and
2,000,000 shares of Preferred Stock, par value $0.01 per share.

Common Stock

The Common Stock consists of two classes, Class A Common Stock and Class B
Common Stock. At January 31, 1997 there were 7,015,000 shares of Class A Common
Stock and 1,190,000 shares of Class B Common Stock outstanding.

Class A Common Stock. The holders of the Class A Common Stock are entitled
--------------------
to one vote per share on all matters submitted to a vote of the shareholders.
The holders of shares of Class A Common Stock do not have any preemptive rights
or rights to subscribe for additional securities of the Company. Dividends are
payable on the Class A Common Stock, when, as and if declared by the Board of
Directors out of funds legally available therefor. Each share of Common Stock,
irrespective of class, will be treated equally in respect of rights upon
liquidation of the Company and rights to dividends, except that, in the case of
dividends in the form of Common Stock, shares of any class of Common Stock will
be payable only to the holders of that class. Upon liquidation or dissolution of
the Company, the holders of the Class A Common Stock and Class B Common Stock
are entitled to share ratably in all assets available for distribution to
shareholders after payment of all prior claims.

Class B Common Stock. The rights of the holders of the Class B Common Stock
--------------------
are identical to those of the Class A Common Stock except with respect to voting
and conversion rights. The holders of Class B Common Stock have no right to vote
on matters submitted to a vote of shareholders, except (i) as to an amendment of
a provision of the Restated Articles of Incorporation that adversely affects the
powers, preferences or special rights of the holders of the Class B Common Stock
and (ii) as otherwise required by law. Holders may convert shares of Class B
Common Stock into Class A Common Stock, except that no holder of shares of Class
B Common Stock may convert any such shares to the extent that, as a result, the
holder and its affiliates, directly or indirectly, would own, control or have
the power to vote more than 5% of the outstanding shares of the Class A Common
Stock. A holder of Class A Common Stock also may convert its Class A Common
Stock into Class B Common Stock, subject to certain limitations. As currently
provided, each conversion will be on a one-for-one basis.

Preferred Stock

The Board of Directors has the authority to issue the Preferred Stock in one
or more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or the designation of such series,
without further vote or action by the shareholders.

Common Stock Warrants

At January 31, 1997, there were warrants to purchase 168,000 shares of the
Company's common stock outstanding and exercisable with an average exercise
price of approximately $5.00 per share. Warrants to purchase approximately
146,000 shares of common stock expire in December 1997; the remaining warrants
expire in April 1999.

F-12
<PAGE>

INFERENCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

JANUARY 31, 1997

5. CAPITAL STRUCTURE (CONTINUED)

Common Stock Repurchase Program

In December 1996, the Company's Board of Directors approved a program to
repurchase up to 500,000 shares of the Company's Class A Common Stock. The
purpose of this program is to reduce the dilutive effect of common stock to be
issued under the Company's employee stock plans. In fiscal 1997, the Company
repurchased 54,000 shares of its common stock at an average repurchase price of
$7.19 per share.

Shareholder Rights Plan

In November 1996, the Board of Directors adopted a Shareholder Rights Plan
(the "Rights Plan"), which authorized the distribution of one right to purchase
one one-hundredth share of Junior Participating Preferred Stock at the rate of
one Right for each share of the Company's Common Stock held by shareholders of
record as of December 10, 1996. The Rights Plan was adopted to provide
protection to shareholders in the event of an unsolicited attempt to acquire the
Company.

Rights are not exercisable until the earlier of (i) ten business days
following a public announcement that a person or group has acquired beneficial
ownership of 20% or more of the Company's general voting power or (ii) ten
business days (or such later date as may be determined by action of the Board of
Directors) following the commencement of, or announcement of an intention to
make, a tender offer which would result in a person or group obtaining
beneficial ownership of 20% or more of the Company's general voting power,
subject to certain exceptions (the earlier of such dates being called the
"Distribution Date"). The Rights are initially exercisable for one one-
hundredth of a share of the Company's Junior Participating Preferred Stock at a
price of $40.00, subject to adjustment. However, if (i) after the Distribution
Date the Company is acquired in certain types of transactions, or (ii) any
person or group (with certain exceptions) acquires beneficial ownership of 20%
of the Company's Common Stock, then holders of Rights (other than the 20%
holder) will be entitled to receive, upon exercise of the Right, Common Stock
(or common stock equivalents) of the Company (or in the case of acquisition of
the Company, Common Stock of the acquirer) having a market value of two times
the exercise price of the Right.

The Company is entitled to redeem the Rights, for $0.001 per Right, at the
discretion of the Board of Directors. The Rights expire in November 2006.

6. STOCK BASED BENEFIT PLANS

Stock Option Plans

The Company has authorized stock option plans that cover the issuance of
incentive stock options and non-statutory stock options. The plans provide for
the granting of options for the purchase of up to 2,100,000 authorized shares of
the Company's common stock. There were 437,000 shares available for future
option grants under the plans as of January 31, 1997. Under the terms of the
plans, options, which expire ten years from date of grant, may be granted to
employees, non-employee directors or consultants at prices not less than the
fair value at the date of grant. Options principally vest over periods up to
four years from the date of grant.

On November 25, 1996, the Board of Directors approved a stock option
repricing program pursuant to which employees of the Company could elect to
cancel certain unexercised stock options in exchange for new stock options with
an exercise price of $6.13, equal to the closing price of the Company's common
stock on November 25, 1996. Approximately 666,000 options were repriced. The
vesting schedules and expiration dates of repriced stock options were extended
by two years.

F-13
<PAGE>

INFERENCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

JANUARY 31, 1997

6. STOCK BASED BENEFIT PLANS (CONTINUED)

Information relating to the outstanding stock options is as follows:
<TABLE>
<CAPTION>

SHARES PRICE
---------- -------------
<S> <C> <C>
Outstanding at January 31, 1994... 1,067,000 $ 2.50--$6.75
Options granted................. 338,000 $ 2.50--$3.75
Options exercised............... (4,000) $ 2.50
Options canceled................ (114,000) $ 2.50--$6.75
---------
Outstanding at January 31, 1995... 1,287,000 $ 2.50--$6.75
Options granted................. 565,000 $7.00--$16.75
Options exercised............... (67,000) $ 2.50--$6.75
Options canceled................ (81,000) $2.50--$14.75
---------
Outstanding at January 31, 1996... 1,704,000 $2.50--$16.25
Options granted................. 1,197,000 $6.13--$23.50
Options exercised............... (753,000) $2.50--$16.25
Options canceled................ (860,000) $2.50--$23.50
---------
Outstanding at January 31, 1997... 1,288,000 $2.50--$16.25
=========
</TABLE>

Included in the above table as of January 31, 1997 are 374,000 stock options
issued and outstanding outside the stock option plan. The options expire at
various dates from 1997 to 2005. At January 31, 1997 and 1996, options for
344,000 and 953,000 shares, respectively, were exercisable at $2.50 to $16.25
per share.

The following table summarizes information concerning options outstanding
and exercisable as of January 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ------------------------------
WEIGHTED AVERAGE WEIGHTED
RANGE OF REMAINING AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
- ------------------ --------- ---------------- --------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$2.50--$5.00 384,000 6.14 $ 2.50 315,000 $ 2.51
$5.00--$7.50 886,000 9.71 $ 6.39 24,000 $ 7.00
$7.50--$14.75 12,000 8.16 $11.55 3,000 $11.65
$14.75--$16.25 6,000 8.30 $17.37 2,000 $16.25
- ------------------ --------- ---- ------ ------- ------
$2.50--$16.25 1,288,000 8.62 $ 5.33 344,000 $ 2.98
</TABLE>

Stock-Based Compensation

As permitted under SFAS 123, the Company has elected to follow APB 25, and
related Interpretations, in accounting for stock-based awards to employees.
Under APB 25, the Company has generally recognized no compensation expense with
respect to such awards.

Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS 123 for awards granted after January 31, 1995 as if
the Company had accounted for its stock-based awards to employees under the fair
value method of SFAS 123. The fair value of the Company's stock-based awards to
employees was estimated using the Black-Scholes multiple option pricing model.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, the Black-Scholes model requires the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock-based awards to employees have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock based awards to employees.

F-14
<PAGE>

INFERENCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

JANUARY 31, 1997

6. STOCK BASED BENEFIT PLANS (CONTINUED)

The fair value of the Company's stock-based awards to employees was
estimated assuming no expected dividends and the following weighted-average
assumptions:

OPTIONS ESPP
---------------- --------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Expected life (years)............. 2.04 1.85 0.50 --
Expected stock price volatility... 0.85 0.96 0.85 --
Risk-free interest rate........... 6.18% 5.98% 5.26% --
</TABLE>

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information, which includes the stock option plans and the Employee
Stock Purchase Plan, for the years ended January 31, 1997 and 1996 follows (in
thousands except for net income (loss) per share information):

1997 1996
-------- -------
<S> <C> <C>
Net income - actual..................... $2,432 $3,773
Net income (loss) - pro forma........... (189) 2,498

Net income per share - actual........... $ 0.28 $ 0.51
Net income (loss) per share - pro forma. (0.02) 0.34
</TABLE>

Because SFAS 123 is applicable only to options granted subsequent to January
31, 1995, its pro forma effect will not be fully reflected until fiscal 2000.
The weighted average fair value of options granted during fiscal 1997 and 1996,
was $10.28 and $13.04, respectively.

7. EMPLOYEE BENEFIT PLANS

Employee Savings and Retirement Plans

The Company sponsors an employee savings and retirement plan (the "401(k)
Plan") as allowed under Section 401(k) of the Internal Revenue Code. The 401(k)
Plan is available to all domestic employees who meet minimum age and service
requirements, and provides employees with tax deferred salary deductions and
alternative investment options. Employees may contribute up to 20% of their
salary, subject to certain limitations. The Company, at the discretion of the
Company's Board of Directors, may make contributions to the 401(K) Plan.. The
Company has not contributed to the 401(k) Plan since its inception.

The Company also sponsors a voluntary defined contribution retirement plan
(the "UK Plan") for employees in the United Kingdom. Employees may elect to
contribute a percentage of their annual gross compensation to the UK Plan.
Employer contributions to the UK Plan range between 5% to 12% of participating
employees' base salary, depending on the years of experience with the Company.
Contributions to the plan were $333,000, $272,000, and $207,000 for the fiscal
years 1997, 1996, and 1995, respectively.

Employee Stock Purchase Plan

In February 1996, the Company adopted an Employee Stock Purchase Plan ("the
ESPP") and reserved 500,000 shares of Class A Common Stock for issuance
thereunder. Pursuant to the ESPP, employees meeting certain eligibility
criteria may purchase shares of the Company's Class A Common Stock, subject to
certain limitations, at not less than 85 percent of fair market value as defined
in the plan. During fiscal 1997, a total of 12,000 shares were issued under the
ESPP at $5.21 per share. At January 31, 1997, a total of 488,000 shares remained
available for future issuance under the ESPP.

F-15
<PAGE>

INFERENCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

JANUARY 31, 1997

8. REORGANIZATION AND DIVESTITURE OF BUSINESS UNIT

Effective May 1, 1995, the Company transferred certain assets and
liabilities of the application development and solutions product line to a
wholly-owned subsidiary of the Company and distributed all of the shares of such
subsidiary to the Company's shareholders (the "Spin-Off"). As part of the
Spin-Off, the Company entered into an agreement (the "Administrative Services
Agreement") with the Tools Business to provide certain services to the new
entity including operational and systems support, facilities and administrative
support and certain technical and customer support. The term of this agreement
extended through January 31, 1996. The amount received for these services was
approximately $760,000 and was accounted for as an offset against expenses.
Revenues for the Tools Business was $1,928,000 for the quarter ended April 30,
1995.

9. RELATED PARTY TRANSACTIONS

The Company earned revenues on product sales and services from two
shareholders in the amounts of $1,722,000 and $2,028,000, during fiscal 1996 and
1995, respectively. No revenue was earned from either of these shareholders
during fiscal 1997. At January 31, 1996 the related accounts receivable balance
from these shareholders was $241,000.

In July 1996, the Company agreed to sell its minority investment in Limbex
Corporation ("Limbex") to Quarterdeck Corporation ("Quarterdeck") for
approximately $3,400,000 ("Investment Amount"), pursuant to Quarterdeck's
acquisition of the outstanding shares of Limbex. The Company's gain on this
transaction will be recorded if and when the Company receives the Investment
Amount, expected by the Company to be on or about July 31, 1997, in common stock
of Quarterdeck or cash, at the option of Quarterdeck. Total revenues earned on
one-time product sales to Limbex were $1,011,000 in fiscal 1997.

10. SIGNIFICANT CUSTOMER AND GEOGRAPHIC DATA

Information relating to the Company's geographic areas is as follows (in
thousands):
<TABLE>
<CAPTION>

TOTAL OPERATING IDENTIFIABLE
REVENUES INCOME (LOSS) ASSETS
-------- ------------- ------------
<S> <C> <C> <C>
Year ended January 31, 1997:
North America............. $21,408 $1,974 $34,172
International............. 14,582 (362) 8,069
------- ------ -------
Total.................... $35,990 $1,612 $42,241
======= ====== =======
Year ended January 31, 1996:
North America............. $15,845 $1,826 $30,381
International............. 13,550 1,630 6,514
------- ------ -------
Total.................... $29,395 $3,456 $36,895
======= ====== =======
Year ended January 31, 1995:
North America............. $19,128 $ (109) $ 8,763
International............. 9,371 344 4,177
------- ------ -------
Total.................... $28,499 $ 235 $12,940
======= ====== =======
</TABLE>

In fiscal 1996, the Company earned revenue from one customer in the amount
of $3,217,000, which represented 11% of total revenues. No customer accounted
for more than 10% of revenues in fiscal 1997 or fiscal 1995.

F-16
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) if the Securities
Exchange Act of 1934, the Registrant had duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.

INFERENCE CORPORATION

Date: April 24, 1997 By: /s/ William D. Griffin
----------------------
William D. Griffin
Chief Financial Officer
and Senior Vice President

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Peter R. Tierney and William D. Griffin, and
each of them, his attorneys-in fact and agents, each with the power of
substitution, for him in any and all capacities, to sign any and all amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchanges
Commission, hereby ratifying and confirming all that each of said attorneys-in
fact, or substitutes may do or cause to be done by virtue hereof.

Pursuant to requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons in the capacities and on the
dates indicated.
<TABLE>

<S> <C> <C>
/s/ Peter R. Tierney Chairman of the Board, President April 24, 1997
- -------------------- Chief Executive Officer (Principal
(Peter R. Tierney) Executive Officer) and Director

/s/ William D. Griffin Chief Financial Officer (Principal April 24, 1997
- ---------------------- Financial and Accounting Officer)
(William D. Griffin) and Senior Vice President

/s/ Dean O. Allen Director April 24, 1997
- -----------------
(Dean O. Allen)

/s/ Thomas Davenport Director April 24, 1997
- --------------------
(Thomas Davenport)

/s/ C. Scott Gibson Director April 24, 1997
- -------------------
(C. Scott Gibson)

/s/ Anthony Sun Director April 24, 1997
- ---------------
(Anthony Sun)
</TABLE>

39
<PAGE>

EXHIBIT INDEX
<TABLE>
<CAPTION>

SEQUENTIAL
PAGE
EXHIBIT NO. DESCRIPTION NUMBER
- ----------- ----------- ------
<C> <S> <C>
2.1 Agreement of Merger dated as of July 5, 1996 by and between the Registrant and its predecessor
(merger agreement effectuating the reincorporation of the Registrant into Delaware). (3)

3.1 Certificate of Incorporation of the Registrant. (3)
3.2 Bylaws of the Registrant. (3)

4.1 Reference is made to Exhibits 3.1. and 3.2.
4.2 Master Registration Rights Agreement, dated as of December 5, 1984, by and among the
Registrant and the investors named therein, as amended and supplemented. (1)
4.3 Second Amended and Restated Demand Registration Rights Agreement, dated as of April 19,
1993, by and among the Registrant and the investors named therein. (1)
4.4 Rights Agreement, dated as of November 25, 1996, between Registrant and Harris Trust Company
of California (incorporated by reference to Exhibit 2 to Registrant's Registration Statement
on Form 8-A dated November 27, 1996 on file with the Securities and Exchange Commission
("Form 8-A")).
4.5 Form of Certificate of Designations of Junior Participating Preferred Stock (incorporated by
reference to Exhibit 4 to the Form 8-A).

10.1* The Amended and Restated Inference Corporation 1993 Stock Option Plan and forms of
agreement thereunder. (1)
10.2* The Registrant's Fourth Amended and Restated Incentive Stock Option Plan and Nonqualified
Stock Option Plan and forms of agreements thereunder. (1)
10.3* The Registrant's Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to
Registrant's Current Report on Form 8-K dated July 8, 1996 on file with the Securities and
Exchange Commission ("July Form 8-K")).
10.4 Master Contribution and Spin-Off Agreement dated as of May 1, 1995 between the Registrant
and Brightware. (1)
10.5 Assumption Agreement executed by Brightware dated as of May 1, 1995. (1)
10.6 Distributorship and Licensing Agreement dated as of May 1, 1995 between Brightware as Owner
and the Registrant as Distributor. (1)
10.7 Distributorship and Licensing Agreement dated as of May 1, 1995 between Brightware as Owner
and Inference Ltd. as Distributor. (1)
10.8 Distributorship and Licensing Agreement dated as of May 1, 1995 between the Registrant as
Owner and Brightware as Distributor. (1)
10.9 Administration and General Service Agreement dated as of May 1, 1995 between the Registrant
and Brightware. (1)
10.10 Technology Transfer and License Agreement dated as of May 1, 1995 between the Registrant
and Brightware. (1)
10.11* Executive Employment Agreement effective as of February 1, 1997 between the Registrant
and William D. Griffin. (4)
10.12* Executive Employment Agreement effective as of February 1, 1997 between the Registrant
and Peter R. Tierney. (4)
10.13* Amendment No. 1 to Registrant's Amended and Restated 1993 Stock Option Plan dated
February 14, 1996 (incorporated by reference to Exhibit 10.2 to the July Form 8-K).
10.14* Amendment No. 2 to Registrant's Amended and Restated 1993 Stock Option Plan dated
March 28, 1996 (incorporated by reference to Exhibit 10.3 to the July Form 8-K).
10.15-10.16 Not used
10.17 Knowledge-Pak Reseller License Agreement dated May 1, 1994 between the Registrant and
ServiceWare, Inc. (1)
10.18-10.20 Not used
10.21 Distributorship and Licensing Agreement dated June 20, 1988 between the Registrant and
Nichimen Corporation, and Adenda thereto. (1)
10.22 Not used
10.23 Golden Gate Plaza Full Service Lease dated October 14, 1994 between Novato Gateway
Associates and the Registrant. (1)
10.24-10.25 Not used
10.26 License Agreement for Distribution of Third Party Components with Microsoft Products dated
April 30, 1993 between the Registrant and Microsoft Corporation. (1)
10.27 Agreement and Plan of Reorganization dated August 13, 1996 among Quarterdeck Corporation,
Limbex Corporation, the Registrant and the other shareholders of Limbex Corporation named
therein. (4)
</TABLE>

40
<PAGE>

SEQUENTIAL
PAGE
EXHIBIT NO. DESCRIPTION NUMBER
- ---------- ----------- ------
<C> <S> <C>
10.28 License Agreement dated January 31, 1994 between the Registrant and International Business
Machines Corporation, together with amendments thereto. (1)
10.29 Software License, Customization and Maintenance Agreement dated April 28, 1995 between the
Registrant and Bank of America National Trust and Savings Association. (1)
10.30 Not used
10.31 Agreement G 16187 D for the Procurement of License and Maintenance of Software and
Software Development dated February 1, 1991 between the Registrant and American Telephone
and Telegraph Company, together with amendments and related order agreements thereto. (2)
10.32 Agreement for Underleases dated March 1, 1995 between the Registrant and Digital Equipment
Co. Limited (lease for the facility in the United Kingdom). (1)
10.33 Technology License Agreement dated May 9, 1995 between the Registrant and Limbex
Corporation. (1)
10.34 Software License and Maintenance Agreement dated September 22,1995 between the
Registrant and ICL Sorbus UK Limited. (2)
10.35 License and Consulting Agreements dated March 30, 1995 between the Registrant
and Gateway 2000. (2)
10.36-10.39 Not used
10.40* Indemnification Agreement dated August 21, 1995 between the Registrant and William D.
Griffin. (2)
10.41* Indemnification Agreement dated August 21, 1995 between the Registrant and Peter R.
Tierney. (2)
10.42* Indemnification Agreement dated August 21, 1995 between the Registrant and John Binns. (2)
10.43* Indemnification Agreement dated May 30, 1996 between the Registrant and Christopher
McKee. (4)
10.44* Indemnification Agreement dated February 7, 1997 between the Registrant and Glen D.
Vondrick. (4)
10.45* Indemnification Agreement dated August 21, 1995 between the Registrant and Dean O. Allen. (2)
10.46* Indemnification Agreement dated February 7, 1997 between the Registrant and Thomas
Davenport. (4)
10.47* Indemnification Agreement dated August 21, 1995 between the Registrant and Scott Gibson. (2)
10.48* Indemnification Agreement dated August 21, 1995 between the Registrant and Anthony Sun. (2)

11.1 Computation of Earnings Per Share. (4)

21.1 Subsidiaries of the Registrant. (4)

23.1 Consent of Independent Auditors. (4)
</TABLE>
__________________________
* Denotes a compensation plan or other agreement under which directors
or executive officers may participate.

(1) Incorporated by reference to Exhibit of same number to the
Registrant's Registration Statement on Form S-1, as amended (file no.
33-92386) on file with the Securities and Exchange Commission .

(2) Incorporated by reference to Exhibit of same number to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 31, 1996.

(3) Incorporated by reference to Exhibit of same number to the
Registrant's Current Report on Form 8-K dated November 25, 1996.

(4) Filed herewith.

41
<PAGE>

(THIS PAGE INTENTIONALLY LEFT BLANK)

42
<PAGE>

(THIS PAGE INTENTIONALLY LEFT BLANK)

<PAGE>

EXHIBIT 10.11

EXECUTIVE EMPLOYMENT AGREEMENT

This Executive Employment Agreement ("Agreement") is dated as of February
1, 1997, between Inference Corporation, a Delaware corporation (the "Company"),
and William D. Griffin (the "Executive").

WITNESSETH:

WHEREAS, the Company believes that the Executive is a valued employee of
the Company and wishes to ensure his continued employment with the Company and
document the terms of the Executive's employment by the Company.

WHEREAS, the Company also has determined that it is in the best interests
of the Company and its stockholders to reinforce and encourage the continued
attention and dedication of certain key members of the Company's management,
including the Executive, to their assigned duties without distraction in
uncertain circumstances arising from the possibility of a change in control of
the Company.

WHEREAS, the Company also has determined that it is in the best interests
of the Company and its stockholders to minimize the personal considerations of
certain key members of management in their evaluation of any offers for a change
in control of the Company.

WHEREAS, the Company has determined that the loss of the Executive's
services would have a detrimental effect on an effort to effect a change in
control of the Company (in the event the Company determines to effect such a
change in control of the Company).

NOW, THEREFORE, in consideration of the foregoing and the mutual promises
and conditions contained herein, the parties hereto agree as follows:

ARTICLE I
EMPLOYMENT

I.1 Employment. The Company employs the Executive and the Executive
----------
hereby accepts employment as Senior Vice President, Chief Financial Officer and
Secretary of the Company upon the terms and conditions hereinafter set forth.

I.2 Term. The employment of the Executive by the Company under the
----
terms and conditions of this Agreement will commence on the date hereof and
continue for a period of two (2) years ("Employment Term").

I.3 Executive Duties. As the Company's Senior Vice President, Chief
----------------
Financial Officer and Secretary, the Executive shall perform such duties as are
requested by and shall report to the Company's Chief Executive Officer and the
Board of Directors. The Executive agrees to devote his full business time (with
allowances for vacations and sick leave) and attention and best efforts to the
affairs of the Company and its subsidiaries and affiliates during the term of
employment.

I.4 Termination of Prior Employment Arrangement. Immediately upon the
-------------------------------------------
commencement of Executive's employment pursuant to the terms of this Agreement,
that certain letter agreement dated March 23, 1990 by and between Executive and
the Company, as amended heretofore, shall terminate and shall be of no further
force or effect.

-1-
<PAGE>

ARTICLE II
COMPENSATION AND BENEFITS

II.1 Annual Salary. During the Employment Term, the Company shall pay
-------------
to the Executive a base salary as provided in Exhibit A, payable in
substantially equal semimonthly installments. The Company will review annually
and may, in the discretion of the Board of Directors, increase such base salary
in light of the Executive's performance, inflation, in cost of living or other
factors. The Company also shall pay to the Executive an annual incentive
compensation bonus to be calculated and paid as set forth on Exhibit A. For
purposes of this Agreement, the Executive's annual base salary and annual
incentive compensation bonus collectively shall be referred to herein as his
"Annual Salary."

II.2 Benefits. During the Employment Term, the Executive shall be
--------
eligible for participation in and covered by any and all such performance,
bonus, profit sharing, incentive, stock option, and other compensation plans and
such medical, dental, disability, life, and other insurance plans and such other
benefits generally available to other employees of the Company in similar
employment positions, on the same terms as such employees, subject to meeting
applicable eligibility requirements (collectively referred to herein as the
"Company Benefit Plans"), including but not limited to, the Amended and Restated
Inference Corporation 1993 Stock Option Plan.

II.3 Reimbursement of Expenses. The Executive shall be entitled to
-------------------------
receive prompt reimbursement of all reasonable expenses incurred by the
Executive in performing services hereunder, including all expenses of travel,
entertainment and living expenses while away from home on business at the
request of, or in the service of, the Company, provided that such expenses are
incurred and accounted for in accordance with the policies and procedures
established by the Company.

II.4 Automobile Allowance. The Company shall provide the Executive with
--------------------
an automobile allowance in the amount of Six Hundred Dollars ($600) per month as
reimbursement to the Executive of costs and expenses incurred by the Executive
for the purchase or lease and maintenance and operation of an automobile for use
by the Executive in the performance of the Executive's duties hereunder. Such
automobile allowance shall be paid in substantially equal semi-monthly
installments.

II.5 Vacation and Holidays. The Executive shall be entitled to an annual
---------------------
vacation leave of four (4) weeks at full pay or such greater vacation benefits
as may be provided for by the Company's vacation policies applicable to senior
executives of the Company. Any unused vacation time may be accumulated and
carried over from one year to the next; provided, however only eight weeks of
vacation may be accumulated at any time; or provided, however, if any vacation
time would otherwise be carried over for a second year, the Executive may, at
his option, elect not to have such vacation time carried over but may instead
request the Company to compensate the Executive for such vacation time by paying
the Executive for such time at the Executive's then current base salary rate.
Except to the extent that accumulated vacation time is paid off by the Company
as described above, none of the accumulated vacation time will be lost for any
reason. Executive shall be entitled to such holidays as are established by the
Company for all employees.

II.6 Life Insurance. In addition to the life insurance provided to all
--------------
employees of the Company (see Section 2.2 above), the Company shall provide
Executive life insurance in the amount of $1,000,000 payable to the
beneficiaries designated by the Executive.

II.7 Annual Physical. The Company shall reimburse the Executive for all
---------------
costs and expenses incurred by the Executive in connection with a complete
annual physical.

ARTICLE III
CONFIDENTIALITY AND NONDISCLOSURE

III.1 Confidentiality. Executive will not during Executive's employment
---------------
by the Company or thereafter at any time disclose, directly or indirectly, to
any person or entity or use for Executive's own benefit any trade secrets or
confidential information relating to the Company's business, operations,
marketing data, business plans, strategies, employees, negotiations and
contracts with other companies, or any other subject matter pertaining to the
business of the Company or any of its clients, customers, consultants, or
licensees, known, learned, or acquired by Executive during the period of
Executive's employment by the Company (collectively "Confidential Information"),
except as may be necessary in the ordinary course of performing Executive's
particular duties as an employee of the Company.

-2-
<PAGE>

III.2 Return of Confidential Material. Executive shall promptly deliver
-------------------------------
to the Company on termination of Executive's employment with the Company,
whether or not for Cause and whatever the reason, or at any time the Company may
so request, all memoranda, notes, records, reports, manuals, drawings,
blueprints, Confidential Information and any other documents of a confidential
nature belonging to the Company, including all copies of such materials which
Executive may then possess or have under Executive's control. Upon termination
of Executive's employment by the Company, Executive shall not take any document,
data, or other material of any nature containing or pertaining to the
proprietary information of the Company.

III.3 Prohibition on Solicitation of Customers. During the term of
----------------------------------------
Executive's employment with the Company and for a period of one (1) year
thereafter Executive shall not, directly or indirectly, either for Executive or
for any other person or entity, solicit any person or entity to terminate such
person's or entity's contractual and/or business relationship with the Company,
nor shall Executive interfere with or disrupt or attempt to interfere with or
disrupt any such relationship. None of the foregoing shall be deemed a waiver
of any and all rights and remedies the Company may have under applicable law.

III.4 Prohibition on Solicitation of Employees, Agents or Independent
---------------------------------------------------------------
Contractors After Termination. During the term of Executive's employment with
- -----------------------------
the Company and for a period of one (1) year following the termination of
Executive's employment with the Company, Executive will not solicit any of the
employees, agents, or independent contractors of the Company to leave the employ
of the Company for a competitive company or business. However, Executive may
solicit any employee, agent or independent contractor who voluntarily terminates
his or her employment with the Company after a period of 120 days have elapsed
since the termination date of such employee, agent or independent contractor.
None of the foregoing shall be deemed a waiver of any and all rights and
remedies the Company may have under applicable law.

III.5 Right to Injunctive and Equitable Relief. Executive's obligations
----------------------------------------
not to disclose or use Confidential Information and to refrain from the
solicitations described in this Article III are of a special and unique
character which gives them a peculiar value. The Company cannot be reasonably or
adequately compensated for damages in an action at law in the event Executive
breaches such obligations. Therefore, Executive expressly agrees that the
Company shall be entitled to injunctive and other equitable relief without bond
or other security in the event of such breach in addition to any other rights or
remedies which the Company may possess or be entitled to pursue. Furthermore,
the obligations of Executive and the rights and remedies of the Company under
this Article III are cumulative and in addition to, and not in lieu of, any
obligations, rights, or remedies created by applicable law relating to
misappropriation or theft of trade secrets or Confidential Information.

III.6 Survival of Obligations. Executive agrees that the terms of this
-----------------------
Article III shall survive the term of this Agreement and the termination of
Executive's employment by the Company.

ARTICLE IV
TERMINATION

IV.1 Definitions. For purposes of this Article IV, the following
-----------
definitions shall be applicable to the terms set forth below:

(a) Cause. "Cause" shall mean only the following: (i) the
-----
Executive's death or Disability; (ii) the willful and continued failure by the
Executive to substantially perform his duties hereunder (other than such failure
resulting from the Executive's incapacity due to physical or mental illness)
after demand for substantial performance is delivered by the Company that
specifically identifies the manner in which the Company believes the Executive
has not substantially performed his duties; (iii) willful misconduct by the
Executive which is materially injurious to the Company; (iv) conviction of a
felony under the laws of the State of California; (v) habitual drunkenness by
the Executive; or (vi) a willful, material breach of this Agreement by the
Executive. For purposes of this Agreement, no act, or failure to act, on the
Executive's part shall be considered "willful" unless done, or omitted to be
done, by the Executive in bad faith and without a reasonable belief that such
action or omission by the Executive was in the best interests of the Company.
Notwithstanding anything to the contrary in the foregoing, no termination or
other action shall be considered to be for Cause under this Agreement unless (x)
the Executive first shall have received at least 5 days written notice setting
forth the reasons for the Company's intention to terminate or take other action
and shall have been provided an opportunity to appear, accompanied by counsel,
and be heard before the Board of Directors; (y) after such appearance before the
Board, the Board of Directors shall have duly adopted by a majority of the
Directors of the Company then in office, and shall have provided to the
Executive a certified resolution finding that in the good faith opinion of such
Directors the Executive was guilty of conduct constituting Cause, as set forth
above, and specifying the particulars thereof in detail; and (z) the Executive
shall have failed to cure or remedy the event constituting Cause within 15 days
after the Executive's receipt of such certified resolution from the Board of
Directors.

-3-
<PAGE>

(b) Disability. "Disability" shall mean a physical or mental
----------
incapacity as a result of which the Executive becomes unable to continue the
proper performance of his duties hereunder (reasonable absences because of
sickness for up to three (3) consecutive months excepted). A determination of
Disability shall be subject to the certification of a qualified medical doctor
agreed to by the Company and the Executive or, in the event of the Executive's
incapacity to designate a doctor, the Executive's legal representative. In the
absence of agreement between the Company and the Executive, each party shall
nominate a qualified medical doctor and the two doctors so nominated shall
select a third doctor, who shall make the determination as to Disability.

(c) Good Reason. "Good Reason" shall mean each of the following:
-----------
(i) the failure of the Company to vest the Executive, without the Executive's
consent, with the powers and authority of the Executive's office or position of
employment as contemplated herein, or any removal of the Executive from or
failure to re-elect the Executive, without the Executive's consent, to a
position of employment consistent with the position and status of Executive as
set forth herein; (ii) a reduction by the Company, without the Executive's
consent, in the Executive's annual base salary as it may exist from time to
time; (iii) a failure by the Company, without the Executive's consent, to
continue any Company Benefit Plans in which the Executive presently is entitled
to participate, as the same may be modified from time to time; (iv) a failure,
without the Executive's consent, by the Company to continue the Executive as a
participant in any Company Benefit Plans on at least the same basis as he
presently participates in such plans; (v) the requirement by the Company,
without Executive's consent, that the Executive be based anywhere other than
within 50 miles of the Executive's present office location, except for required
travel on the Company's business to an extent substantially consistent with the
Executive's present business travel obligations; (vi) a failure by the Company
to comply with any material provisions of this Agreement which has not been
cured within thirty (30) days after notice of such noncompliance has been given
by the Executive to the Company, or if such failure is not capable of being
cured in such time, a cure shall not have been diligently initiated by the
Company within such thirty-day period; or (vii) a failure by the Company to
obtain from any successor, before the succession takes place, an agreement to
assume and perform this Agreement; provided, however, that any of the foregoing
actions shall not be considered to be Good Reason if such action is undertaken
by the Company for Cause.

IV.2 Termination by Company. The Executive's employment hereunder may be
----------------------
terminated by the Company immediately for Cause. Subject to the other
provisions contained in this Agreement, the Company may terminate this Agreement
for any reason other than Cause upon thirty (30) days' written notice to
Executive. The effective date of termination ("Effective Date") shall be
considered to be thirty (30) days subsequent to written notice of termination;
however, the Company may elect to have Executive leave the Company immediately.

IV.3 Severance Benefits Received Upon Termination.
---------------------------------------------

(a) If (i) at any time the Executive's employment is terminated by
the Company for Cause, or (ii) at any time the Executive's employment is
terminated by the Executive without Good Reason, the Company shall pay the
Executive his base salary through the end of the month during which such
termination occurs (or at the Executive's election, the rate in effect on the
first day of the month preceding the month in which the date of termination
occurs) plus credit for any accrued vacation and the Company shall thereafter
have no further obligations under this Agreement to the Executive or his
dependents, beneficiaries or estate; provided, however, that the Company will
continue to honor any obligations that may have been accrued under then existing
Company Benefit Plans or any other agreements or arrangements applicable to the
Executive.

(b) If (i) at any time the Executive's employment is terminated by
the Company without Cause or (ii) at any time the Executive's employment is
terminated by the Executive for Good Reason, then the Company shall:

(1) pay to the Executive within four business days following
the date of termination his base salary through the end of the month during
which such termination occurs (or at the Executive's election, the rate in
effect on the first day of the month preceding the month in which the date of
termination occurs) plus credit for any vacation earned but not taken; and

(2) pay to the Executive as severance pay in a lump sum, in
cash, within seven business days following the date of termination, an amount
equal to the Executive's annual base salary in effect as of the date of
termination (or at the Executive's election, 12 times the Executive's monthly
base salary in effect on the first day of the month preceding the month in which
the termination occurs); provided, however, that if the lump sum severance
payment under this Section 4.3(b)(2), either alone or together with other
payments which the Executive has the right to receive from the Company, would
constitute a "excess parachute payment" (as defined in Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code")), such lump sum severance
payment shall be reduced to the largest amount as will result in no portion of
the lump sum severance payment under this Article III being subject to the
excise tax imposed by Section 4999 of the Code; and

-4-
<PAGE>

(3) maintain, at the Company's expense, in full force and
effect, for the Executive's continued benefit until the earlier of (i) one year
after the date of termination or (ii) the Executive's commencement of full time
employment with a new employer, all life insurance, medical, health and
accident, and disability plans, programs or arrangements in which the Executive
was entitled to participate immediately prior to the date of termination,
provided that the Executive's continued participation is possible under the
general terms and provisions of such plans and programs. In the event that the
Executive's participation in any such plan or program is barred, the Company
shall arrange to provide the Executive with benefits substantially similar to
those which the Executive was entitled to receive under such plans or programs.
Subsequent health insurance benefits will be in accordance with COBRA.

IV.4 No Obligation to Mitigate Damages; No Effect on Other Contractual
-----------------------------------------------------------------
Rights.
------

(a) The Executive shall not be required to mitigate damages or the a
mount of any payment provided for under this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided for under
this Agreement be reduced by any compensation earned by the Executive as the
result of employment by another employer after the date of termination, or
otherwise (except as provided in Section 4.3(b)(3)).

(b) The provisions of this Agreement, and any payment or benefit
provided for hereunder, shall not reduce any amounts otherwise payable, or in
any way diminish the Executive's existing rights, or rights which would accrue
solely as a result of the passage of time, under any Company Benefit Plan,
employment agreement or other contract, plan or arrangement.

ARTICLE V
ASSUMPTION OF OBLIGATIONS BY SUCCESSOR TO COMPANY

V.1 Assumption of Obligations. The Company will require any successor or
-------------------------
assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, by agreement in form and substance satisfactory to the Executive,
expressly, absolutely and unconditionally to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession or assignment had taken place. Any
failure of the Company to obtain such agreement prior to the effectiveness of
any such succession or assignment shall be a material breach of this Agreement.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor or assign to its business and/or assets as aforesaid
which executes and delivers the agreement provided for in this Article V or
which otherwise becomes bound by all the terms and provisions of this Agreement
by operation of law. If at any time during the term of this Agreement the
Executive is employed by any corporation a majority of the voting securities of
which is then owned by the Company, "Company" as used in this Agreement shall in
addition include such employer. In such event, the Company agrees that it shall
pay or shall cause such employer to pay any amounts owed to the Executive
pursuant to this Agreement.

V.2 Beneficial Interests. This Agreement shall inure to the benefit of
--------------------
and be enforceable by the Executive's personal and legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If the Executive should die while any amounts are still payable to him
hereunder, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the Executive's devisee, legatee,
or other designee or, if there be no such designee, to the Executive's estate.

ARTICLE VI
GENERAL PROVISIONS

VI.1 Notice. For purposes of this Agreement, notices and all other
------
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:

-5-
<PAGE>

If to the Company: Inference Corporation
100 Rowland Way
Novato, California 94945
Attn: Corporate Secretary

If to the Executive: William D. Griffin
207 Photinia Place
Petaluma, California 94952

or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.

VI.2 No Waivers. No provision of this Agreement may be modified, waived
----------
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time.

VI.3 Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of California.

VI.4 Severability or Partial Invalidity. The invalidity or
----------------------------------
unenforceability of any provisions of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement, which shall
remain in full force and effect.

VI.5 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.

VI.6 Legal Fees and Expenses. Should any party institute any action or
-----------------------
proceeding to enforce this Agreement or any provision hereof, or for damages by
reason of any alleged breach of this Agreement or of any provision hereof, or
for a declaration of rights hereunder, the prevailing party in any such action
or proceeding shall be entitled to receive from the other party all costs and
expenses, including reasonable attorneys' fees, incurred by the prevailing party
in connection with such action or proceeding.

VI.7 Entire Agreement. This Agreement constitutes the entire agreement of
----------------
the parties and supersedes all prior written or oral and all contemporaneous
oral agreements, understandings, and negotiations between the parties with
respect to the subject matter hereof. This Agreement is intended by the parties
as the final expression of their agreement with respect to such terms as are
included in this Agreement and may not be contradicted by evidence of any prior
or contemporaneous agreement. The parties further intend that this Agreement
constitutes the complete and exclusive statement of its terms and that no
extrinsic evidence may be introduced in any judicial proceeding involving this
Agreement.

VI.8 Assignment. Subject to the provisions of Article V hereof, this
----------
Agreement and the rights, duties, and obligations hereunder may not assigned or
delegated by any party without the prior written consent of the other party
shall be void and be of no effect. Notwithstanding the foregoing provisions of
this Section 6.8, the Company may assign or delegate its rights, duties, and
obligations hereunder to any person or entity which succeeds to all or
substantially all of the business of the Company through merger, consolidation,
reorganization, or other business combination or by acquisition of all or
substantially all of the assets of the Company; provided that such person
assumes the Company's obligations under this Agreement in accordance with
Section 5.1.

VI.9 Arbitration. Any controversy, dispute, claim or other matter in
-----------
question arising out of or relating to this Agreement shall be settled, at the
request of either party, by binding arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association ("AAA"),
and judgement upon the award rendered by the arbitrators may be entered in any
court having jurisdiction thereof, subject to the following terms, conditions
and exceptions:

-6-
<PAGE>

(a) Notice of the demand for arbitration shall be filed in writing
with the other party and with the AAA. There shall be a panel of three (3)
arbitrators whose selection shall be made in accordance with the procedures then
existing for the selection of such arbitrators by the AAA.

(b) Reasonable discovery shall be allowed in arbitration.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.

INFERENCE CORPORATION, a Delaware corporation

By: _____________________________________
Peter R. Tierney, President and
Chief Executive Officer

EXECUTIVE

__________________________________________
William D. Griffin

-7-
<PAGE>

EXHIBIT A

EXECUTIVE EMPLOYMENT AGREEMENT

A. Base Salary
-----------

Annual base salary as of February 1, 1997: $175,000

B. Incentive Compensation Bonus
----------------------------

As set forth in Section 2.1 of the Agreement, the Executive shall receive
from the Company an incentive compensation bonus which shall be part of the
Executive's Annual Salary. The amount of the incentive compensation bonus will
be determined by the Board of Directors.

The amount of the Executive's incentive bonus shall be based upon the
Company attaining mutually agreed upon financial objectives. Accordingly, if all
of the mutually agreed-upon financial objectives are attained, Executive will
receive an annual and/or quarterly incentive compensation bonus as determined by
the Board of Directors for the applicable fiscal year or quarterly period, as
the case may be. Should the Company not attain all of the relevant financial
objectives, the Board of Directors shall use its discretion in determining the
amount of the Executive's incentive compensation bonus. The annual incentive
compensation bonus calculation shall be made promptly after the Company's
audited financial statements are completed following each of the Company's
fiscal years. The Company agrees to use its best efforts to complete the audit
of its financial statements so as to permit payment of this annual incentive
compensation bonus within ninety (90) days of the Company's fiscal year end. Any
quarterly incentive compensation bonus calculation shall be made promptly after
the Company's financial statements for the applicable quarter have been
completed.

-8-

<PAGE>
EXHIBIT 10.12

EXECUTIVE EMPLOYMENT AGREEMENT

This Executive Employment Agreement ("Agreement") is dated as of
February 1, 1997, between Inference Corporation, a Delaware corporation (the
"Company"), and Peter R. Tierney (the "Executive").

WITNESSETH:

WHEREAS, the Company believes that the Executive is a valued employee
of the Company and wishes to ensure his continued employment with the Company
and document the terms of the Executive's employment by the Company.

WHEREAS, the Company also has determined that it is in the best
interests of the Company and its stockholders to reinforce and encourage the
continued attention and dedication of certain key members of the Company's
management, including the Executive, to their assigned duties without
distraction in uncertain circumstances arising from the possibility of a change
in control of the Company.

WHEREAS, the Company also has determined that it is in the best
interests of the Company and its stockholders to minimize the personal
considerations of certain key members of management in their evaluation of any
offers for a change in control of the Company.

NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and conditions contained herein, the parties hereto agree as follows:

ARTICLE I

EMPLOYMENT

I.1 Employment. The Company employs the Executive and the Executive
----------
hereby accepts employment as the President and Chief Executive Officer of the
Company upon the terms and conditions hereinafter set forth.

I.3 Executive Duties. As the Company's President and Chief Executive
----------------
Officer, the Executive shall perform such duties as are requested by and shall
report directly to the Company's Board of Directors. The Executive agrees to
devote his full business time (with allowances for vacations and sick leave) and
attention and best efforts to the affairs of the Company and its subsidiaries
and affiliates during the term of employment.

I.4 Termination of Prior Employment Arrangement. Immediately upon
-------------------------------------------
the commencement of Executive's employment pursuant to the terms of this
Agreement, that certain letter agreement dated December 4, 1990 by and between
Executive and the Company, as amended heretofore, shall terminate and shall be
of no further force or effect.

-1-
<PAGE>

ARTICLE II
COMPENSATION AND BENEFITS

II.1 Annual Salary. During the Employment Term, the Company shall
-------------
pay to the Executive a base salary as provided in Exhibit A, payable in
substantially equal semimonthly installments. The Company will review annually
and may, in the discretion of the Board of Directors, increase such base salary
in light of the Executive's performance, inflation, in cost of living or other
factors. The Company also shall pay to the Executive an annual incentive
compensation bonus to be calculated and paid as set forth on Exhibit A. For
purposes of this Agreement, the Executive's annual base salary and annual
incentive compensation bonus collectively shall be referred to herein as his
"Annual Salary."

II.4 Automobile Allowance. The Company shall provide the Executive
--------------------
with an automobile allowance in the amount of Six Hundred Dollars ($600) per
month as reimbursement to the Executive of costs and expenses incurred by the
Executive for the purchase or lease and maintenance and operation of an
automobile for use by the Executive in the performance of the Executive's duties
hereunder. Such automobile allowance shall be paid in substantially equal semi-
monthly installments.

II.5 Vacation and Holidays. The Executive shall be entitled to an
---------------------
annual vacation leave of four (4) weeks at full pay or such greater vacation
benefits as may be provided for by the Company's vacation policies applicable to
senior executives of the Company. Any unused vacation time may be accumulated
and carried over from one year to the next; provided, however only eight weeks
of vacation may be accumulated at any time; or provided, however, if any
vacation time would otherwise be carried over for a second year, the Executive
may, at his option, elect not to have such vacation time carried over but may
instead request the Company to compensate the Executive for such vacation time
by paying the Executive for such time at the Executive's then current base
salary rate. Except to the extent that accumulated vacation time is paid off by
the Company as described above, none of the accumulated vacation time will be
lost for any reason. Executive shall be entitled to such holidays as are
established by the Company for all employees.

II.6 Life Insurance. In addition to the life insurance provided to
--------------
all employees of the Company (see Section 2.2 above), the Company shall provide
Executive life insurance in the amount of $1,000,000 payable to the
beneficiaries designated by the Executive.

II.7 Annual Physical. The Company shall reimburse the Executive for
---------------
all costs and expenses incurred by the Executive in connection with a complete
annual physical.

ARTICLE III
CONFIDENTIALITY AND NONDISCLOSURE

III.1 Confidentiality. Executive will not during Executive's
---------------
employment by the Company or thereafter at any time disclose, directly or
indirectly, to any person or entity or use for Executive's own benefit any trade
secrets or confidential information relating to the Company's business,
operations, marketing data, business plans, strategies, employees, negotiations
and contracts with other companies, or any other subject matter pertaining to
the business of the Company or any of its clients, customers, consultants, or
licensees, known, learned, or acquired by Executive during the period of
Executive's employment by the Company (collectively "Confidential Information"),
except as may be necessary in the ordinary course of performing Executive's
particular duties as an employee of the Company.

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<PAGE>

III.2 Return of Confidential Material. Executive shall promptly
-------------------------------
deliver to the Company on termination of Executive's employment with the
Company, whether or not for Cause and whatever the reason, or at any time the
Company may so request, all memoranda, notes, records, reports, manuals,
drawings, blueprints, Confidential Information and any other documents of a
confidential nature belonging to the Company, including all copies of such
materials which Executive may then possess or have under Executive's control.
Upon termination of Executive's employment by the Company, Executive shall not
take any document, data, or other material of any nature containing or
pertaining to the proprietary information of the Company.

III.3 Prohibition on Solicitation of Customers. During the term of
----------------------------------------
Executive's employment with the Company and for a period of two (2) years
thereafter Executive shall not, directly or indirectly, either for Executive or
for any other person or entity, solicit any person or entity to terminate such
person's or entity's contractual and/or business relationship with the Company,
nor shall Executive interfere with or disrupt or attempt to interfere with or
disrupt any such relationship. None of the foregoing shall be deemed a waiver of
any and all rights and remedies the Company may have under applicable law.

III.4 Prohibition on Solicitation of Employees, Agents or Independent
---------------------------------------------------------------
Contractors After Termination. During the term of Executive's employment with
- -----------------------------
the Company and for a period of two (2) years following the termination of
Executive's employment with the Company, Executive will not solicit any of the
employees, agents, or independent contractors of the Company to leave the employ
of the Company for a competitive company or business. However, Executive may
solicit any employee, agent or independent contractor who voluntarily terminates
his or her employment with the Company after a period of 120 days have elapsed
since the termination date of such employee, agent or independent contractor.
None of the foregoing shall be deemed a waiver of any and all rights and
remedies the Company may have under applicable law.

III.5 Right to Injunctive and Equitable Relief. Executive's
----------------------------------------
obligations not to disclose or use Confidential Information and to refrain from
the solicitations described in this Article III are of a special and unique
character which gives them a peculiar value. The Company cannot be reasonably or
adequately compensated for damages in an action at law in the event Executive
breaches such obligations. Therefore, Executive expressly agrees that the
Company shall be entitled to injunctive and other equitable relief without bond
or other security in the event of such breach in addition to any other rights or
remedies which the Company may possess or be entitled to pursue. Furthermore,
the obligations of Executive and the rights and remedies of the Company under
this Article III are cumulative and in addition to, and not in lieu of, any
obligations, rights, or remedies created by applicable law relating to
misappropriation or theft of trade secrets or Confidential Information.

III.6 Survival of Obligations. Executive agrees that the terms of
-----------------------
this Article III shall survive the term of this Agreement and the termination of
Executive's employment by the Company.

ARTICLE IV

TERMINATION

IV.1 Definitions. For purposes of this Article IV, the following
-----------
definitions shall be applicable to the terms set forth below:

(a) Cause. "Cause" shall mean only the following: (i) the
-----
Executive's death or Disability; (ii) the willful and continued failure by the
Executive to substantially perform his duties hereunder (other than such failure
resulting from the Executive's incapacity due to physical or mental illness)
after demand for substantial performance is delivered by the Company that
specifically identifies the manner in which the Company believes the Executive
has not substantially performed his duties; (iii) willful misconduct by the
Executive which is materially injurious to the Company; (iv) conviction of a
felony under the laws of the State of California; (v) habitual drunkenness by
the Executive; or (vi) a willful, material breach of this Agreement by the
Executive. For purposes of this Agreement, no act, or failure to act, on the
Executive's part shall be considered "willful" unless done, or omitted to be
done, by the Executive in bad faith and without a reasonable belief that such
action or omission by the Executive was in the best interests of the Company.
Notwithstanding anything to the contrary in the foregoing, no termination or
other action shall be considered to be for Cause under this Agreement unless (x)
the Executive first shall have received at least 5 days written notice setting
forth the reasons for the Company's intention to terminate or take other action
and shall have been provided an opportunity to appear, accompanied by counsel,
and be heard before the Board of Directors; (y) after such appearance before the
Board, the Board of Directors shall have duly adopted have provided to the
Executive a certified resolution finding that in the good faith opinion of such
Directors the

-3-
<PAGE>

Executive was guilty of conduct constituting Cause, as set forth above, and
specifying the particulars thereof in detail; and (z) the Executive shall have
failed to cure or remedy the event constituting Cause within 15 days after the
Executive's receipt of such certified resolution from the Board of Directors.

(c) Good Reason. "Good Reason" shall mean each of the following: (i)
-----------
the failure of the Company to vest the Executive, without the Executive's
consent, with the powers and authority of the Executive's office or position of
employment as contemplated herein, or any removal of the Executive from or
failure to re-elect the Executive, without the Executive's consent, to a
position of employment consistent with the position and status of Executive as
set forth herein; (ii) a reduction by the Company, without the Executive's
consent, in the Executive's annual base salary as it may exist from time to
time; (iii) a failure by the Company, without the Executive's consent, to
continue any Company Benefit Plans in which the Executive presently is entitled
to participate, as the same may be modified from time to time; (iv) a failure,
without the Executive's consent, by the Company to continue the Executive as a
participant in any Company Benefit Plans on at least the same basis as he
presently participates in such plans; (v) the requirement by the Company,
without Executive's consent, that the Executive be based anywhere other than
within 50 miles of the Executive's present office location, except for required
travel on the Company's business to an extent substantially consistent with the
Executive's present business travel obligations; (vi) a failure by the Company
to comply with any material provisions of this Agreement which has not been
cured within thirty (30) days after notice of such noncompliance has been given
by the Executive to the Company, or if such failure is not capable of being
cured in such time, a cure shall not have been diligently initiated by the
Company within such thirty-day period; or (vii) a failure by the Company to
obtain from any successor, before the succession takes place, an agreement to
assume and perform this Agreement; provided, however, that any of the foregoing
actions shall not be considered to be Good Reason if such action is undertaken
by the Company for Cause.

IV.2 Termination by Company. The Executive's employment hereunder
----------------------
may be terminated by the Company immediately for Cause. Subject to the other
provisions contained in this Agreement, the Company may terminate this Agreement
for any reason other than Cause upon thirty (30) days' written notice to
Executive. The effective date of termination ("Effective Date") shall be
considered to be thirty (30) days subsequent to written notice of termination;
however, the Company may elect to have Executive leave the Company immediately.

IV.3 Severance Benefits Received Upon Termination.
---------------------------------------------

(a) If (i) at any time the Executive's employment is terminated
by the Company for Cause, or (ii) at any time the Executive's employment is
terminated by the Executive without Good Reason, the Company shall pay the
Executive his base salary through the end of the month during which such
termination occurs (or at the Executive's election, the rate in effect on the
first day of the month preceding the month in which the date of termination
occurs) plus credit for any accrued vacation and the Company shall thereafter
have no further obligations under this Agreement to the Executive or his
dependents, beneficiaries or estate; provided, however, that the Company will
continue to honor any obligations that may have been accrued under then existing
Company Benefit Plans or any other agreements or arrangements applicable to the
Executive.

(b) If (i) at any time the Executive's employment is terminated
by the Company without Cause or (ii) at any time the Executive's employment is
terminated by the Executive for Good Reason, then the Company shall:

(1) pay to the Executive within four business days
following the date of termination his base salary through the end of the month
during which such termination occurs (or at the Executive's election, the rate
in effect on the first day of the month preceding the month in which the date of
termination occurs) plus credit for any vacation earned but not taken; and

(2) pay to the Executive as severance pay in a lump sum,
in cash, within seven business days following the date of termination, an amount
equal to twice the Executive's annual base salary in effect as of the date of
termination (or at the Executive's election, 24 times the Executive's monthly
base salary in effect on the first day of the month preceding the month in which
the termination occurs); provided, however, that if the lump sum severance
payment under this Section 4.3(b)(2), either alone or together with other
payments which

-4-
<PAGE>

the Executive has the right to receive from the Company, would constitute a
"excess parachute payment" (as defined in Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code")), such lump sum severance payment shall be
reduced to the largest amount as will result in no portion of the lump sum
severance payment under this Article III being subject to the excise tax imposed
by Section 4999 of the Code; and

(3) maintain, at the Company's expense, in full force and
effect, for the Executive's continued benefit until the earlier of (i) two years
after the date of termination or (ii) the Executive's commencement of full time
employment with a new employer, all life insurance, medical, health and
accident, and disability plans, programs or arrangements in which the Executive
was entitled to participate immediately prior to the date of termination,
provided that the Executive's continued participation is possible under the
general terms and provisions of such plans and programs. In the event that the
Executive's participation in any such plan or program is barred, the Company
shall arrange to provide the Executive with benefits substantially similar to
those which the Executive was entitled to receive under such plans or programs.
Subsequent health insurance benefits will be in accordance with COBRA.

IV.4 No Obligation to Mitigate Damages; No Effect on Other
-----------------------------------------------------
Contractual Rights.
- ------------------

(a) The Executive shall not be required to mitigate damages or
the amount of any payment provided for under this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided for under
this Agreement be reduced by any compensation earned by the Executive as the
result of employment by another employer after the date of termination, or
otherwise (except as provided in Section 4.3(b)(3)).

(b) The provisions of this Agreement, and any payment or
benefit provided for hereunder, shall not reduce any amounts otherwise payable,
or in any way diminish the Executive's existing rights, or rights which would
accrue solely as a result of the passage of time, under any Company Benefit
Plan, employment agreement or other contract, plan or arrangement.

ARTICLE V

ASSUMPTION OF OBLIGATIONS BY SUCCESSOR TO COMPANY

V.1 Assumption of Obligations. The Company will require any
-------------------------
successor or assign (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company, by agreement in form and substance satisfactory to the
Executive, expressly, absolutely and unconditionally to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession or assignment had
taken place. Any failure of the Company to obtain such agreement prior to the
effectiveness of any such succession or assignment shall be a material breach of
this Agreement. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor or assign to its business and/or assets
as aforesaid which executes and delivers the agreement provided for in this
Article V or which otherwise becomes bound by all the terms and provisions of
this Agreement by operation of law. If at any time during the term of this
Agreement the Executive is employed by any corporation a majority of the voting
securities of which is then owned by the Company, "Company" as used in this
Agreement shall in addition include such employer. In such event, the Company
agrees that it shall pay or shall cause such employer to pay any amounts owed to
the Executive pursuant to this Agreement.

V.2 Beneficial Interests. This Agreement shall inure to the benefit
--------------------
of and be enforceable by the Executive's personal and legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If the Executive should die while any amounts are still payable to him
hereunder, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the Executive's devisee, legatee,
or other designee or, if there be no such designee, to the Executive's estate.

ARTICLE VI
GENERAL PROVISIONS

-5-
<PAGE>

If to the Company: Inference Corporation
100 Rowland Way
Novato, California 94945
Attn: Corporate Secretary

If to the Executive: Peter R. Tierney
4 Parkside Way
Greenbrae, California 94904

or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.

VI.2 No Waivers. No provision of this Agreement may be modified,
----------
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time.

VI.3 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of California.

VI.6 Legal Fees and Expenses. Should any party institute any action
-----------------------
or proceeding to enforce this Agreement or any provision hereof, or for damages
by reason of any alleged breach of this Agreement or of any provision hereof, or
for a declaration of rights hereunder, the prevailing party in any such action
or proceeding shall be entitled to receive from the other party all costs and
expenses, including reasonable attorneys' fees, incurred by the prevailing party
in connection with such action or proceeding.

VI.7 Entire Agreement. This Agreement constitutes the entire
----------------
agreement of the parties and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings, and negotiations between the
parties with respect to the subject matter hereof. This Agreement is intended by
the parties as the final expression of their agreement with respect to such
terms as are included in this Agreement and may not be contradicted by evidence
of any prior or contemporaneous agreement. The parties further intend that this
Agreement constitutes the complete and exclusive statement of its terms and that
no extrinsic evidence may be introduced in any judicial proceeding involving
this Agreement.

-6-
<PAGE>

(b) Reasonable discovery shall be allowed in arbitration.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.

INFERENCE CORPORATION, a Delaware corporation

By:
-------------------------------------------
William D. Griffin, Senior Vice President,
Chief Financial Officer and Secretary

EXECUTIVE

-----------------------------------------------
Peter R. Tierney

-7-
<PAGE>

EXHIBIT A

EXECUTIVE EMPLOYMENT AGREEMENT

A. Base Salary
-----------

Annual base salary as of February 1, 1997: $265,000

B. Incentive Compensation Bonus
----------------------------

-8-

<PAGE>

EXHIBIT 10.27

AGREEMENT AND PLAN OF REORGANIZATION

AMONG

QUARTERDECK CORPORATION,
LIMBEX CORPORATION

AND

THE SHAREHOLDERS LISTED ON THE
EXECUTION PAGES HERETO

August 13, 1996

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

ARTICLE 1 PLAN OF REORGANIZATION . . . . . . . . . . . . . . . . . . 1

1.1 Board of Directors' and Shareholders' Approval . . . . . . 1
1.2 The Merger . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 The Closing . . . . . . . . . . . . . . . . . . . . . . . 3
1.4 Effective Time . . . . . . . . . . . . . . . . . . . . . . 3
1.5 Exemption from Registration . . . . . . . . . . . . . . . 4
1.6 Surrender and Exchange of Outstanding Certificates;
Status of Outstanding Certificates;
Fractional Shares . . . . . . . . . . . . . . . . . . . . 4
1.7 Dissenters' Rights . . . . . . . . . . . . . . . . . . . . 4
1.8 Articles of Incorporation; Bylaws; Directors and
Officers of the Surviving Corporation . . . . . . . . . . 4
1.9 Escrow . . . . . . . . . . . . . . . . . . . . . . . . . . 4

ARTICLE 2 REPRESENTATIONS AND WARRANTIES
REGARDING LIMBEX . . . . . . . . . . . . . . . . . . . . . 5

2.1 Organization and Standing . . . . . . . . . . . . . . . . 5
2.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . 6
2.3 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . 6
2.4 Authority, Approval and Enforceability . . . . . . . . . . 6
2.5 Financial Statements and Other Financial
Information . . . . . . . . . . . . . . . . . . . . . . . 7
2.6 Material Adverse Change . . . . . . . . . . . . . . . . . 7
2.7 Properties . . . . . . . . . . . . . . . . . . . . . . . . 7
2.8 Insurance . . . . . . . . . . . . . . . . . . . . . . . . 8
2.9 Material Agreements . . . . . . . . . . . . . . . . . . . 8
2.10 Intellectual Property Rights . . . . . . . . . . . . . . . 8
2.11 Employees and Employee Benefit Plans . . . . . . . . . . 10
2.12 Environmental and Safety Laws . . . . . . . . . . . . . 10
2.13 Compliance with Laws . . . . . . . . . . . . . . . . . . 11
2.14 Absence of Litigation . . . . . . . . . . . . . . . . . 11
2.15 No Brokers . . . . . . . . . . . . . . . . . . . . . . . 11
2.16 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.17 Compliance with Instruments . . . . . . . . . . . . . . 13
2.18 Related Party Transactions . . . . . . . . . . . . . . . 13
2.19 Disclosure; Accuracy of Documents and Information . . . 14
</TABLE>

i
<PAGE>

<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 2A REPRESENTATIONS AND WARRANTIES REGARDING THE
SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . 14

2A.1 Authority, Approval and Enforceability. . . . . . . . . 14

ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF QUARTERDECK . . . . . 15

3.1 Organization and Standing . . . . . . . . . . . . . . . 15
3.2 Authority, Approval and Enforceability . . . . . . . . . 15
3.3 Financial Statements and Reports . . . . . . . . . . . . 16
3.4 Quarterdeck Common Stock . . . . . . . . . . . . . . . . 17
3.5 No Brokers . . . . . . . . . . . . . . . . . . . . . . . 17

ARTICLE 4 COVENANTS . . . . . . . . . . . . . . . . . . . . . . . 17

4.1 Maintenance of Business . . . . . . . . . . . . . . . . 17
4.2 Tax Treatment . . . . . . . . . . . . . . . . . . . . . 17
4.3 Other Discussions . . . . . . . . . . . . . . . . . . . 17
4.4 Best Efforts . . . . . . . . . . . . . . . . . . . . . . 17
4.5 Shareholder Vote; Investment Representation
Certificate . . . . . . . . . . . . . . . . . . . . . . 18
4.6 Registration Rights; NASDAQ Listing . . . . . . . . . . 18
4.7 Access to Information . . . . . . . . . . . . . . . . . 18
4.8 Business Plan . . . . . . . . . . . . . . . . . . . . . 18
4.9 Employment Agreements . . . . . . . . . . . . . . . . . 18
4.10 Existing Agreement . . . . . . . . . . . . . . . . . . . 20
4.11 Supplements to Schedules . . . . . . . . . . . . . . . . 20
4.12 Limbex Stock Options . . . . . . . . . . . . . . . . . . 21

ARTICLE 5 CONDITIONS TO MERGER . . . . . . . . . . . . . . . . . . 21

5.1 Conditions to Obligations of Quarterdeck, the
Shareholders and Limbex . . . . . . . . . . . . . . . . 21
5.2 Conditions to Obligations of Quarterdeck . . . . . . . . 21
5.3 Conditions to Obligations of Limbex and the
Shareholders . . . . . . . . . . . . . . . . . . . . . . 22

ARTICLE 6 INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . 22

6.1 Survival of Representations, Warranties,
Covenants and Agreements . . . . . . . . . . . . . . . . 22
6.2 Indemnification of Quarterdeck . . . . . . . . . . . . . 23
6.3 Indemnification of the Shareholders . . . . . . . . . . 25
6.4 Procedure for Indemnification of Quarterdeck and
the Surviving Corporation with Respect
to Non-Third Party Claims . . . . . . . . . . . . . . . 25
</TABLE>

ii
<PAGE>

<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
6.5 Procedure for Indemnification of the Shareholders
with Respect to Non-Third Party Claims . . . . . . . . . 27
6.6 Procedure for Indemnification with Respect to
Third-Party Claims . . . . . . . . . . . . . . . . . . . 27
6.7 Procedure for Indemnification with Respect to
Certain Claims . . . . . . . . . . . . . . . . . . . . . 29

ARTICLE 7 TERMINATION . . . . . . . . . . . . . . . . . . . . . . 29

7.1 Termination by Mutual Consent . . . . . . . . . . . . . 29
7.2 Effect of Termination . . . . . . . . . . . . . . . . . 29

ARTICLE 8 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . 30

8.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . 30
8.2 Entire Agreement; Modifications; Waiver . . . . . . . . 30
8.3 Counterparts . . . . . . . . . . . . . . . . . . . . . . 31
8.4 Publicity . . . . . . . . . . . . . . . . . . . . . . . 31
8.5 Successors and Assigns . . . . . . . . . . . . . . . . . 31
8.6 Governing Law . . . . . . . . . . . . . . . . . . . . . 31
8.7 Further Assurances . . . . . . . . . . . . . . . . . . . 32
8.8 Expenses . . . . . . . . . . . . . . . . . . . . . . . . 32
8.9 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . 32
8.10 Appointment of Escrow Committee . . . . . . . . . . . . 32
8.11 Covenant Not To Compete . . . . . . . . . . . . . . . . 32
</TABLE>

iii
<PAGE>

<TABLE>
<CAPTION>
EXHIBITS
--------
<S> <C>
Exhibit A Merger Consideration
Exhibit B Escrow Agreement
Exhibit C Registration Rights Agreement
Exhibit D Investment Representation Certificate
Exhibit E Limbex Stock Options
</TABLE>

iv
<PAGE>

AGREEMENT AND PLAN OF REORGANIZATION

This Agreement and Plan of Reorganization (the "Agreement") is
entered into as of August 13, 1996, by and among Quarterdeck Corporation, a
Delaware corporation ("Quarterdeck"), Limbex Corporation, a California
corporation ("Limbex"), and the shareholders of Limbex set forth on the
signature page hereto (the "Shareholders").

RECITALS

The parties hereto intend that, subject to the terms and
conditions hereinafter set forth, Quarterdeck will acquire Limbex in accordance
with the terms of this Agreement by way of a merger (the "Merger") of a
subsidiary of Quarterdeck incorporated in California ("Merger Sub") with and
into Limbex, as a result of which (i) all outstanding shares of capital stock
of Merger Sub will automatically be converted into the same number of shares of
Common Stock of Limbex, (ii) all of the outstanding shares of Convertible
Preferred Stock - Series B, $.00001 par value per share, of Limbex ("Series B
Preferred"), and common stock, $.00001 par value per share, of Limbex ("Limbex
Common Stock," and collectively with the Series B Preferred, "Limbex Stock"),
except for shares of Limbex Stock owned by Quarterdeck, will automatically be
converted into the right to receive shares of common stock of Quarterdeck
("Quarterdeck Common Stock") or, under certain circumstances, cash, (iii) all
of the outstanding shares of Limbex Stock owned by Quarterdeck and all of the
outstanding shares of Limbex's Convertible Preferred - Series A, par value
$.00001 per share ("Series A Preferred") owned by Quarterdeck will be canceled,
and no payment shall be made nor other consideration paid with respect thereto,
and (iv) all outstanding options to acquire Limbex Common Stock will be assumed
by Quarterdeck and become options to acquire Quarterdeck Common Stock, each on
the terms and conditions set forth herein. As used in this Agreement, the term
"Limbex Stock" does not include the Series A Preferred.

NOW, THEREFORE, in consideration of the premises and the
mutual agreements contained herein, the parties hereto, intending to be legally
bound, do hereby agree as follows:

ARTICLE 1

PLAN OF REORGANIZATION

1.1 BOARD OF DIRECTORS' AND SHAREHOLDERS' APPROVAL. The
respective boards of directors of Quarterdeck and Limbex have duly adopted and
approved this Agreement, and this Agreement shall be submitted to the
shareholders of Limbex for approval in accordance with the applicable
provisions of the California Corporations Code (the "California Law").

1.2 THE MERGER. Subject to the terms and conditions of
this Agreement Merger Sub shall be merged with and into Limbex (the "Merger")
pursuant to California Law, with Limbex as the surviving corporation. At the
Effective Time (as hereinafter defined), the
<PAGE>

separate existence of Merger Sub shall cease and Limbex, as the surviving
corporation in the Merger, shall continue its corporate existence under
California Law. As a result of the Merger, at the Effective Time, (i) all of
the issued and outstanding shares of Merger Sub will automatically be converted
into the same number of shares of common stock of Limbex, (ii) all of the
issued and outstanding shares of Limbex Stock (other than (a) shares as to
which dissenters' rights are perfected under Chapter 13 of the California Law,
(b) any shares of Limbex Stock owned by Limbex or any direct or indirect
wholly-owned subsidiary of Limbex (such shares described in this clause (b) are
referred to herein as the "Non-Participating Shares"), (c) any shares of Limbex
Stock owned by Quarterdeck and any shares of Series A Preferred, (d) any shares
of Limbex Stock owned by Morgan, which are addressed in Section 1.2(c) below,
and (e) any shares of Limbex Stock owned by Inference, which are addressed in
Section 1.2(d) below) shall automatically be converted into the right to
receive in the aggregate 1,197,009 shares of Quarterdeck Common Stock on the
SEC Effective Date (as defined below).

(a) On the date on which the Securities and
Exchange Commission (the "SEC") declares effective the registration statement
on Form S-3 of Quarterdeck to be filed with the SEC pursuant to Section 2(a)(i)
of the Registration Rights Agreement to be entered into among Quarterdeck and
the Shareholders substantially in the form of Exhibit C hereto (the "SEC
Effective Date"), Quarterdeck shall issue to each Shareholder (other than
Morgan, Inference, Quarterdeck, Limbex or any wholly-owned subsidiary of
Limbex) the number of shares of Quarterdeck Common Stock set forth opposite
such Shareholder's name on Exhibit A hereto.

(b) Any shares of Limbex Common Stock owned by
Quarterdeck and all shares of Series A Preferred shall be canceled in the
Merger, and no payment shall be made nor other consideration paid with respect
thereto. Any Non-Participating Shares shall be canceled in the Merger, and no
securities of Quarterdeck or other consideration shall be delivered in exchange
therefor.

(c) As a result of the Merger, at the Effective
Time, all of the issued and outstanding shares of Limbex Stock owned by Howard
Morgan shall automatically be converted into the right to receive (i) 34,984
shares of Quarterdeck Common Stock on the Closing Date and (ii) cash in an
amount equal to the fair market value of 18,838 shares of Quarterdeck Common
Stock, based upon the average closing sales price of Quarterdeck Common Stock
for a period of five trading days ending on the trading day two trading days
prior to the Closing Date, payable at the time that Howard Morgan is required
by federal tax laws to pay income taxes with respect to the shares of
Quarterdeck Common Stock received in the Merger; provided, however, that in no
event shall Quarterdeck pay such amount later than January 31, 1997, and offset
by any and all amounts that Mr. Morgan owes at such time to Quarterdeck.

(d) As a result of the Merger, at the Effective
Time, (i) all of the issued and outstanding shares of Limbex Common Stock owned
by Inference shall automatically be converted into the right to receive on the
Closing Date a number of shares of

2
<PAGE>

Quarterdeck Common Stock equal to $610,526 divided by the average closing sales
price of Quarterdeck Common Stock for the period of five trading days ending on
the trading day two trading days prior to the Closing Date, and (ii) all of the
issued and outstanding shares of Series B Preferred shall automatically be
converted into the right to receive $3,599,753 from Quarterdeck on the first
anniversary of the Closing Date (the "Inference Preferred Consideration Date"),
which may be paid, at Quarterdeck's option, in cash, a number of shares of
Quarterdeck Common Stock equal to $3,599,753 divided by the average closing
sales price of Quarterdeck Common Stock for the period of five trading days
ending on the trading day two trading days prior to the Inference Preferred
Consideration Date, or a combination of cash and shares of Quarterdeck Common
Stock.

(e) Prior to the Distribution Date (as defined in
the Rights Agreement), all references in this Agreement to the Quarterdeck
Common Stock to be received pursuant to the Merger shall be deemed to include
the corresponding percentage of a right (the "Right") to purchase shares of
Series A Junior Participating Preferred Stock of Quarterdeck pursuant to the
Rights Agreement dated as of August 11, 1992, between Quarterdeck and Bank of
America NT&SA, as Rights Agent (the "Rights Agreement").

(f) If, between the date of this Agreement and
the various dates at which shares of Quarterdeck Common Stock may be issued
pursuant to the Merger, the outstanding shares of Quarterdeck Common Stock
shall have been changed into a different number of shares or a different class
by reason of any reclassification, recapitalization, split, reverse split,
stock dividend or combination, the consideration to be issued to the holders of
Limbex Stock pursuant to the Merger shall be correspondingly adjusted.

(g) In the event that Quarterdeck enters into an
agreement with any corporation, partnership, person or other entity or group
(other than any affiliate or associate of Quarterdeck) (a "Third Party")
pursuant to which such Third Party agrees to acquire (the "Acquisition") all of
the then outstanding capital stock of Quarterdeck or substantially all of the
assets of Quarterdeck and the Acquisition is consummated prior to the Inference
Preferred Consideration Date, then the issuance of any shares of Quarterdeck
Common Stock to Inference with respect to the Series B Preferred Stock shall
occur immediately prior to the consummation of the Acquisition (the
"Acquisition Issuance Date") and all references to the Inference Preferred
Consideration Date in this Article 1 shall instead mean the Acquisition
Issuance Date.

1.3 THE CLOSING. The closing (the "Closing") of the
Merger shall take place at the principal executive offices of Quarterdeck
Corporation, (assuming the satisfaction or satisfactory waiver of all
conditions set forth in Article 5 of this Agreement) simultaneously with the
Effective Time. The date on which the Closing occurs is referred to herein as
the "Closing Date."

1.4 EFFECTIVE TIME. The Merger shall become effective
immediately upon the filing of the appropriate certificate of merger and
related instruments with the office of the Secretary of State for the State of
California (the "Effective Time").

3
<PAGE>

1.5 EXEMPTION FROM REGISTRATION. The Quarterdeck Common
Stock to be issued in connection with the Merger will be issued in a
transaction exempt from registration under the Securities Act of 1933, as
amended, and exempt from registration or qualification under the California
Corporate Securities Law (the "California Securities Act").

1.6 SURRENDER AND EXCHANGE OF OUTSTANDING CERTIFICATES;
STATUS OF OUTSTANDING CERTIFICATES; FRACTIONAL SHARES. The conversion of
shares of Limbex Stock into the right to receive shares of Quarterdeck Common
Stock or cash as provided for by this Agreement shall occur automatically at
the Effective Time without further action by the holders thereof. Until
surrendered, each certificate that prior to the Effective Time represented
shares of Limbex Stock will be deemed to evidence the right to receive that
number of shares of Quarterdeck Common Stock and/or the amount of cash into
which such Limbex Stock has been converted. Stock certificates for fractions
of Quarterdeck Common Stock shall not be issued in the Merger and such
fractional interests shall not entitle the owners thereof to vote, to receive
dividends or to exercise any other right of a stockholder with respect to such
fractional interest. In lieu of any such fractional interests, each holder of
Limbex Stock who would otherwise have been entitled to a fraction of a share of
Quarterdeck Common Stock upon surrender of stock certificates will be paid cash
(rounded to the nearest cent, 0.5 cents to be rounded to 1 cent) upon such
surrender in an amount equal to such fraction times the closing sale price of a
share of Quarterdeck Common Stock on the Nasdaq National Market on the Closing
Date.

1.7 DISSENTERS' RIGHTS. Holders of Limbex Stock who have
complied with all requirements for perfecting the dissenters' rights as set
forth in Chapter 13 of the California Law shall be entitled to their rights
under such laws. Limbex shall give Quarterdeck prompt written notice of any
assertions of dissenters' rights or withdrawals of assertions of dissenters'
rights, and any other instrument in respect thereof received by Limbex and the
opportunity to participate in all negotiations and proceedings with respect to
demands for appraisal.

1.8 ARTICLES OF INCORPORATION; BYLAWS; DIRECTORS AND
OFFICERS OF THE SURVIVING CORPORATION.

(a) The articles of incorporation and bylaws of
Merger Sub, as in effect on the Effective Date, shall be (until amended or
repealed as provided by law) the articles of incorporation and bylaws of the
surviving corporation, respectively, except that such articles of incorporation
shall be amended to provide that the name of the surviving corporation shall be
Limbex Corporation.

(b) The directors and officers of Merger Sub
immediately prior to the Effective Time shall be the directors and officers of
the surviving corporation until their successors are elected or appointed and
qualified.

1.9 ESCROW. A portion of the shares of Quarterdeck
Common Stock to be issued and cash to be paid in the Merger to the Shareholders
other than Inference (the "Escrow Consideration") shall be delivered by
Quarterdeck on behalf of such Shareholders into escrow and shall be held in
escrow as collateral for the indemnification obligations of the Shareholders

4
<PAGE>

pursuant to Article 6 of this Agreement and disbursed pursuant to the terms of
an escrow agreement ("Escrow Agreement") substantially in the form attached
hereto as Exhibit B. Quarterdeck shall, upon issuance of consideration in the
Merger from time to time, deliver into escrow on behalf of the Shareholders
(other than Inference) the number of shares of Quarterdeck Common Stock or the
amount of cash set forth opposite such Shareholder's name on Exhibit A hereto.

ARTICLE 2

REPRESENTATIONS AND WARRANTIES REGARDING LIMBEX

Alex Jacobson ("Jacobson") and Brad Allen ("Allen") represent
and warrant to Quarterdeck as follows:

2.1 ORGANIZATION AND STANDING.

(a) Limbex is a corporation duly organized,
validly existing and in good standing under the laws of the State of
California, has all requisite corporate power and authority to own, operate and
lease its properties and carry on its business as now conducted, and is duly
qualified to do business and is in good standing as a foreign corporation in
each jurisdiction in which the failure to so qualify would have a Material
Adverse Effect. Whenever used in this Article 2, "Material Adverse Effect"
shall mean any fact, event or condition, or the absence of any fact, event or
condition, as the context requires, which, individually or in the aggregate,
would have a material adverse effect on the business, properties, condition
(financial or otherwise) or results of operations of Limbex.

(b) Limbex has delivered to Quarterdeck complete
and accurate copies of its Articles of Incorporation and Bylaws and minutes of
all of its directors' and shareholders' meetings. Limbex stock books provided
to Quarterdeck are complete and accurate as of the date hereof.

2.2 CAPITALIZATION.

(a) The authorized capital stock of Limbex
consists of (i) 10,000,000 shares of Limbex Common Stock and (ii) 1,684,422
shares of preferred stock, par value $.00001 per share. Schedule 2.2
accurately sets forth the outstanding shares of capital stock of Limbex
(including any rights, options or warrants to purchase shares of capital stock
of Limbex) as well as the ownership thereof. Except as set forth on Schedule
2.2, there are no outstanding shares of capital stock of Limbex and there are
no options, warrants or other securities convertible into shares of capital
stock of Limbex nor any other rights, agreements or arrangements with respect
to the issuance of capital stock of Limbex or securities convertible into or
exchangeable for capital stock of Limbex.

(b) (i) all of the issued and outstanding shares
of Limbex Stock and the Series A Preferred have been duly authorized and
validly issued, are fully paid and non assessable, and were issued in full
compliance with all applicable federal and state securities

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<PAGE>

laws and were not issued in violation of any preemptive rights; (ii) none of
the issued and outstanding shares of Limbex Stock is subject to repurchase and
(iii) all outstanding options to purchase capital stock of Limbex have been
granted in accordance with Limbex's stock option plans (true and correct copies
of which have been delivered to Quarterdeck) and all applicable securities
laws.

(c) Except for any restrictions imposed by
applicable state and federal securities laws, there is no right of first
refusal, co-sale right, right of participation, right of first offer, option or
other restriction on transfer applicable to any shares of Limbex Stock. Limbex
is not a party or subject to any agreement, and there is no agreement between
or among any Shareholders that affects or relates to the voting or giving of
written consent with respect to any shares of Limbex Stock other than (i) the
Voting Trust and Transfer Restriction Agreement, dated as of May 9, 1995,
between Jacobson and Allen, (ii) the Shareholder Voting Agreement, dated as of
May 9, 1995, among Quarterdeck, Inference, Jacobson, Allen and Morgan and (iii)
the Buy-Sell Agreement, dated as of May 9, 1995, among Quarterdeck, Inference,
Jacobson, Allen and Morgan, all of which will terminate at or prior to the
Effective Time.

2.3 SUBSIDIARIES. Limbex does not own, directly or
indirectly, an interest in any corporation, partnership, business, trust or
other entity.

2.4 AUTHORITY, APPROVAL AND ENFORCEABILITY.

(a) Subject to obtaining any required approvals
of the holders of Limbex Stock and the Series A Preferred, Limbex has all
requisite corporate power and authority to execute, deliver and perform its
obligations under this Agreement and all corporate action on its part necessary
for such execution, delivery and performance has been duly taken.

(b) The execution and delivery by Limbex of this
Agreement does not, and the performance and consummation of the transactions
contemplated by this Agreement will not, result in any conflict with, breach or
violation of or default, termination or forfeiture under (or upon the failure
to give notice or the lapse of time, or both, result in any conflict with,
breach or violation of or default, termination or forfeiture under) any terms
or provisions of (i) its Articles of Incorporation or Bylaws, (ii) any statute,
rule, regulation, or any judicial, governmental, regulatory or administrative
decree, order or judgment applicable to Limbex, or (iii) any material
agreement, lease or other instrument to which it is a party or by which it or
any of its assets may be bound.

(c) No consent, approval, authorization, order,
registration, qualification or filing of or with any court or any regulatory
authority or any other governmental or administrative body is required on the
part of Limbex for the consummation by it of the transactions contemplated by
this Agreement, except the filing of the certificate of merger and related
instruments with the Secretary of State of the State of California.
<PAGE>

(d) Upon due execution and delivery by Limbex,
this Agreement will be its legal, valid and binding obligation, enforceable
against it in accordance with the terms hereof, except as such enforcement may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally and subject to the
availability of equitable remedies.

2.5 FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION.

(a) Limbex has delivered to Quarterdeck complete
copies of its unaudited balance sheet as of June 30, 1996 and the related
unaudited statements of income (loss) and retained earnings (deficit) for the
periods then ended (collectively, the "Limbex Financials"). The Limbex
Financials present fairly (but not in accordance with GAAP) its financial
position as of such date and the results of its operations and cash flows for
the period then ended. Certain financial transactions and liabilities
reflected in the Limbex Financials, including royalty advances paid to
Quarterdeck by Limbex and payments from Limbex to Inference, although fairly
presented, may not be presented in accordance with GAAP.

(b) There is no outstanding claim, liability or
obligation of any nature, whether absolute, accrued, contingent or otherwise,
known to Limbex, Jacobson or Allen, other than the liabilities and obligations
reflected on the Limbex Financials, except for (i) liabilities and obligations
incurred in the ordinary course of business since the date of the Limbex
Financials and (ii) obligations under contracts and commitments incurred in the
ordinary course of business and not required to be reflected in the Limbex
Financials in order fairly to present its financial position.

(c) All of the accounts receivable reflected on
the Limbex Financials (other than accounts receivable from Quarterdeck) and all
accounts receivable incurred since that date are or have been fully collectible
in the normal course of business and there are no known or asserted claims or
other rights of set-off against any thereof, except to the extent of any
reserves set forth therefore on the Limbex Financials.

(d) All of the accounts payable reflected on the
Limbex Financials and all accounts payable incurred since that date arose in
the ordinary course of business, and there is no such account payable
delinquent in its payment.

2.6 MATERIAL ADVERSE CHANGE. Since June 30, 1996, to the
best knowledge of Jacobson and Allen, there has not been any material adverse
change in the assets, liabilities, financial condition, or operating results of
Limbex from that reflected in the Limbex Financials.

2.7 PROPERTIES.

Except for the Intellectual Property of Limbex, which
is defined in and covered by Section 2.10, Limbex has good title to, valid
leasehold interests in, or other right to use all of the assets used in its
operations, free and clear of any mortgages, pledges, security interests,
encumbrances, material restrictions or adverse claims. All of such assets are
in good

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<PAGE>

operating condition, normal wear and tear excepted, and are adequate and
suitable for the purposes for which they are presently being used.

2.8 INSURANCE. Schedule 2.8 sets forth a list of the
insurance policies held by Limbex. Limbex is in compliance with each of such
policies such that none of the coverage provided under such policies has been
invalidated.

2.9 MATERIAL AGREEMENTS.

(a) Schedule 2.9 sets forth a list of the oral
and written agreements to which Limbex is a party or to which it is subject
presently in effect involving aggregate annual payments in excess of $10,000.

(b) To the best knowledge of Jacobson and Allen,
no party to any such contract, agreement or arrangement intends to cancel,
withdraw, modify or amend such agreement or arrangement except as expressly
provided in this Agreement.

(c) Limbex has performed all material obligations
required to be performed by it on or prior to the date hereof under each
contract, obligation, commitment, agreement, undertaking, arrangement or lease
referred to in this Section 2.9, except for such failures to perform, defaults,
breaches, or violations under such instruments or obligations that would not
have a Material Adverse Effect.

2.10 INTELLECTUAL PROPERTY RIGHTS.

(a) (i) Limbex has full title and ownership of or
rights to utilize all license rights, copyrights, trade secrets, information,
proprietary rights and processes necessary for or used in its business as now
conducted (collectively, "Intellectual Property") without any infringement of
the copyrights and trade secret rights of others; (ii) all Intellectual
Property is valid, subsisting, unexpired, enforceable and has not been
abandoned; (iii) no holding, decision or judgment has been rendered by any
governmental authority which would limit, cancel or question the validity of
any Intellectual Property; (iv) except for (A) the Technology License Agreement
dated May 5, 1995 between Limbex and Inference and the Software Publishing
Agreement dated May 5, 1995, as amended, between Limbex and Quarterdeck and (B)
agreements and licenses entered into in the ordinary course of business, there
are no outstanding options, licenses, liens, encumbrances or agreements of any
kind relating to the foregoing nor is Limbex bound by or a party to any
options, licenses, liens, encumbrances or agreements of any kind with respect
to the Intellectual Property of any other person or entity; (v) Limbex has not
received any communications nor is it or Jacobson or Allen aware of any entity
alleging that Limbex has infringed or, by conducting its business as currently
conducted, would infringe any intellectual property right of any other person
or entity; (vi) Limbex, Jacobson and Allen are not aware of any infringement of
the Intellectual Property by third parties; (vii) Limbex has not received any
communication from any governmental agency stating that Limbex is not entitled
to register, or receive patents for, any of its Intellectual Property; (viii)
Limbex, Jacobson and Allen are not aware that any of Limbex's employees or
consultants is obligated under any contract (including licenses,
<PAGE>

covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with the use of his or her best efforts to promote and secure the
Intellectual Property of Limbex or that would conflict with its business as
conducted; provided, however, that this representation shall not be violated by
any agreement by any Limbex employee to refrain from disclosing or using the
confidential information of any former employer or other third party or
otherwise with respect to any trade secrets or other intellectual property
rights of any former employer or third party; (ix) to the best knowledge of
Limbex, Jacobson and Allen, neither the execution nor delivery of this
Agreement, nor the carrying on of Limbex's business by Limbex's employees or
consultants, nor the conduct of Limbex's business as currently conducted, will
conflict with or result in a breach of the terms, conditions or provisions of,
or constitute a default under, any contract, covenant or instrument under which
any of such employees or consultants of Limbex is now obligated; (x) each of
Limbex's employees and consultants who participate in the creation of
Intellectual Property, past and present, have executed agreements with Limbex
assigning or licensing his or her rights in any Intellectual Property to
Limbex; and (xi) Limbex, Jacobson and Allen do not believe it is or will be
necessary to utilize any inventions of any of its employees or consultants (or
persons it currently intends to hire as service providers) made prior to their
employment by it. Schedule 2.10 also sets forth all material patents, patent
applications, trademarks (registered or unregistered) copyrights, processes,
and license agreements owned or licensed by Limbex that are necessary for or
used in its business as now conducted. All of Limbex's license agreements or
assignments with respect to its Intellectual Property are in writing and
evidence legitimate ownership or licensing of such rights in Limbex. All
royalty obligations of Limbex are listed on Schedule 2.10. No unlicensed
invention that is shown as being owned by any employee or consultant of Limbex
is necessary for the conduct of Limbex business as presently conducted.

(b) To the best knowledge of Limbex, Jacobson and
Allen, Limbex is not making unauthorized use of any confidential information of
third parties nor any confidential information in which any of its present or
past employees or other service providers, has claimed a proprietary interest;
and Limbex, Jacobson and Allen are not aware of any facts that would give rise
to such a claim.

(i) Limbex is not a party to any
existing or unexpired consulting agreements pursuant to which Limbex provides
consulting services to others;

(ii) Limbex, Jacobson and Allen are not
aware of any event that has occurred which would give rise to any present or
future liability under any agreement to provide indemnification for
infringement of any third party rights or otherwise; and

(iii) Limbex is not in arrears in the
payment of any royalty obligations pursuant to any license agreements with
third parties concerning the Intellectual Property.

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<PAGE>

2.11 EMPLOYEES AND EMPLOYEE BENEFIT PLANS. Except as set
forth on Schedule 2.11, Limbex does not maintain and is not a party to any
compensation or employee benefit plans, programs or contracts within the
meaning of Section 3(3) of ERISA (the "Compensation and Benefit Programs") for
employees or former employees or their dependents.

Limbex has provided Quarterdeck with all documents and
government filings relating to the Compensation and Benefit Programs.

The Compensation and Benefit Programs have been maintained in
all material respects, in compliance with all applicable laws, and there are no
material liabilities associated with the Compensation and Benefit Programs
(statutory, contractual or otherwise) which have not been fully funded by
Limbex.

Neither Limbex nor any ERISA Affiliate has sponsored,
maintained or contributed to, or has had any obligation to constitute, any
pension plan regulated under Title IV of ERISA within the last six years.

No Compensation or Benefit Program provides benefits described
in Section 3(1) of ERISA to any former employees or retirees of Limbex or any
ERISA Affiliate except as required under Part 6 Title I of ERISA.

"ERISA" means the Employee Retirement Income
Security Act of 1974, as amended.

"ERISA Affiliate" of Limbex means any other
person (other than Quarterdeck and Inference) that, together
with Limbex as of the relevant measuring date under ERISA, was
or is required to be treated as a single employer under
Section 414 of the Code.

2.12 ENVIRONMENTAL AND SAFETY LAWS. Limbex has, in all
material respects, complied and is in compliance with all applicable local,
state and federal environmental laws, regulations, ordinances and
administrative and judicial orders relating to the generation, recycling, use,
sale, storage, handling, transfer and disposal of any Hazardous Substances, and
Limbex has not been alleged to be in violation of, or been subject to any
administrative, judicial or regulatory proceeding pursuant to, such laws or
regulations. As used herein, "Hazardous Substances" shall mean any asbestos,
petroleum or any substance or material defined or designated as hazardous or
toxic waste, hazardous or toxic material, hazardous or toxic substance, or
other similar term, by any federal, state or local environmental statute,
regulation or ordinance presently in effect, including, without limitation, any
material or substance which is designated or defined as a "hazardous
substance," "hazardous waste" or "toxic substance" in (i) the Federal Water
Pollution Control Act, 33 U.S.C. Section 1251 et seq., and any amendments
thereto, (ii) the Federal Resource Conservation and Recovery Act 42 U.S.C.
Section Section 6901 et seq., and any amendments thereto, (iii) the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
Section 9601 et seq., and any amendments

10
<PAGE>

thereto, or (iv) the Hazardous Material Transportation Act, 49 U.S.C. Section
1801 et seq., and any amendments thereto.

2.13 COMPLIANCE WITH LAWS. Limbex has complied in all
material respects with all foreign, federal, state, local and county laws,
ordinances, regulations, judgments, orders, decrees or rules of any court,
arbitrator or governmental, regulatory or administrative agency or entity
applicable to its business. Limbex has all valid and current permits,
licenses, orders, authorizations, registrations, approvals and other analogous
instruments (and each is in full force and effect) and Limbex has made all
filings and registrations and the like necessary or required by law to conduct
its business, except where the failure to maintain such permits and other
instruments or to make such filings and registrations would not have a Material
Adverse Effect. Limbex has not received any governmental notice of any
violation by Limbex of any such laws, rules, regulation or orders. Limbex is
not in default or material noncompliance under any such permits, consents, or
similar instruments.

2.14 ABSENCE OF LITIGATION. Limbex is not a party to any
litigation, claim, arbitration, investigation or other proceeding, nor is there
any such litigation, claim, arbitration, investigation or other proceeding
threatened against Limbex. Neither Limbex nor any of its officers or directors
is bound by any judgment, decree, injunction, ruling or order of any court,
governmental, regulatory or administrative department, commission, agency or
instrumentality, arbitrator or any other person that relates to Limbex or its
business.

2.15 NO BROKERS. Limbex is not obligated for the payment
of fees or expenses of any broker or finder in connection with the origin,
negotiation or execution of this Agreement or in connection with any
transaction contemplated hereby or thereby.

2.16 TAXES.

(a) Definitions. For purposes of this Agreement:

(i) the term "Taxes" means (A) all
federal, state, local, foreign and other net income, gross income, gross
receipts, sales, use, franchise, withholding, payroll, employment, excise,
property or other taxes of any kind whatsoever, together with any interest and
any penalties, additions to tax or additional amounts with respect thereto, (B)
any liability for payment of amounts described in clause (A) whether as a
result of transferee liability, of being a member of an affiliated,
consolidated, combined or unitary group for any period, or otherwise through
operation of law and (C) any liability for the payment of amounts described in
clauses (A) or (B) as a result of any tax sharing, tax indemnity or tax
allocation agreement or any other express or implied agreement to indemnify any
other person; and the term "Tax" means any one of the foregoing Taxes; and

(ii) the term "Returns" means all
returns, statements and other documents required to be filed in respect of
Taxes, and the term "Return" means any one of the foregoing Returns.

11
<PAGE>

(b) Limbex has completed and filed on a timely
basis (giving effect to valid extensions of time for filing) and in materially
correct form all Returns required to be filed. As of the time of filing, the
filed Returns did not materially misstate the income, assets, operations,
activities, status or other matters of Limbex or any other information required
to be shown thereon, to the extent the same are relevant for Tax purposes and
none of such Returns contains a disclosure statement under Section 6662 of the
Code (or any predecessor provision or comparable provision of state, local or
foreign law). Limbex will complete and file on a timely basis (giving effect
to valid extensions of time for filing) and in a materially correct manner all
Returns required to be filed after the date of this Agreement and on or prior
to the Closing.

(c) With respect to all amounts in respect of
Taxes attributable to all taxable periods or portions of periods ending on or
before the date of Closing, all applicable Tax laws and agreements have been
complied with in all material respects, and all such amounts required to be
paid by Limbex to taxing authorities or others have been paid or, if due but
remain payable without penalty or interest, have been adequately reserved for.
Limbex does not owe any Taxes on compensation paid to any of its employees,
other than Taxes that are not yet due and payable.

(d) (i) none of the Limbex Returns have been
audited or are under audit by any tax authority, and Limbex has not received
notice of a forthcoming audit of its Returns; (ii) no claim has been made by a
Tax authority in a jurisdiction where Limbex does not file Returns that it is
or may be subject to Tax by that jurisdiction; (iii) no extensions or waivers
of statutes of limitations with respect to the Returns have been given by or
requested from Limbex; and (iv) no power of attorney granted by Limbex with
respect to Taxes is in force.

(e) There are no liens for Taxes (other than for
current Taxes not yet due and payable) upon the assets of Limbex.

(f) Limbex is not a party to or bound by any tax
indemnity, tax sharing or tax allocation agreement.

(g) Limbex has never been a member of an
affiliated group of corporations, within the meaning of Section 1504 of the
Code, or a member of combined, consolidated or unitary group for state, local
or foreign Tax purposes. Limbex has not filed a consent pursuant to the
collapsible corporation provisions of Section 341(f) of the Code (or any
corresponding provision of state, local or foreign income Tax law) or agreed to
have Section 341(f)(2) of the Code (or any corresponding provision of state,
local or foreign income Tax law) apply to any disposition of any asset owned by
it.

(h) Limbex has not agreed to make, nor is it
required to make, any adjustment under Sections 481(a) or 263A of the Code or
any comparable provision of state or foreign tax laws by reason of a change in
accounting method or otherwise. Limbex has taken no action that is not in
accordance with past practice that could defer a liability for Taxes of

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<PAGE>

Limbex or the Shareholders from any taxable period ending on or before the
Closing Date to any taxable period ending after such date.

(i) Limbex is not a party to any agreement,
contract, arrangement or plan that has resulted or would result, separately or
in the aggregate, in connection with the Merger, any change of control of
Limbex or any other transaction contemplated by this Agreement, in the payment
of any "excess parachute payments" within the meaning of Section 280G of the
Code.

(j) Limbex is not, and has not been, a United
States real property holding corporation (as defined in Section 897(c)(2) of
the Code) during the applicable period specified in Section 897(c)(1)(A)(ii) of
the Code.

(k) As of the date hereof, no shareholder of
Limbex is other than a United States person within the meaning of the Code.

(l) Limbex does not have and has not had a
permanent establishment in any foreign country, as defined in any applicable
Tax treaty or convention between the United States and such foreign country,
and Limbex has not engaged in a trade or business within any foreign country.

(m) The unpaid Taxes of Limbex as of the date
hereof are not materially in excess of the unpaid liability for Taxes reflected
on the most recent accounting books of Limbex heretofore provided to
Quarterdeck. No material Tax liability of Limbex has been incurred since
January 1, 1996, other than in the ordinary course of business.

(n) Except for those options issued to Howard
Morgan and Peter Tierney, all outstanding options to acquire equity of the
Limbex that purport to be or were otherwise intended (when issued) to be
treated as "incentive stock options" ("ISOs") within the meaning of Section 422
of the Code (and any predecessor provision and any similar provision applicable
state, local or other Tax law) were issued in compliance with such section.
Other than those options issued to Howard Morgan and Peter Tierney, all such
outstanding options currently qualify for treatment as ISOs, and are held by
persons who are employees of Limbex. The representations and warranties
contained in this Section 2.16(n) are not intended to expand in any way the
rights of the option holders of Limbex or expand any representations or
warranties made to them by Limbex or create any representations or warranties
to them by Limbex.

2.17 COMPLIANCE WITH INSTRUMENTS. Limbex is not in
violation of or conflict with, breach of or in default under (either with the
giving of notice or the passage of time or both) any term or provision of its
Articles of Incorporation or Bylaws, or any agreement, arrangement, contract,
lease or other instrument to which it or its properties is subject except where
such would not have a Material Adverse Effect.

2.18 RELATED PARTY TRANSACTIONS. Except as set forth on
Schedule 2.18, no employee, officer or director of Limbex or member of his or
her immediate family is indebted

13
<PAGE>

to Limbex, nor is Limbex indebted (or committed to make loans or extend or
guarantee credit) to any of them. None of such persons has any direct or
indirect ownership interest in any firm or corporation with which Limbex is
affiliated or with which Limbex has a business relationship, or any firm or
corporation that competes with Limbex, except that the employees, officers or
directors of Limbex and members of their immediate families may own stock in
publicly traded companies that may compete with Limbex. No member of the
immediate family of any officer or director of Limbex is directly interested in
any material contract with Limbex.

2.19 DISCLOSURE; ACCURACY OF DOCUMENTS AND INFORMATION.
No representation or warranty made by Limbex, Jacobson or Allen in this
Agreement, when taken together, contains any untrue statement of a material
fact or omits to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The copies of all instruments, agreements, other documents
delivered by Limbex to Quarterdeck or their counsel pursuant to this Agreement
shall be complete and correct in all material respects as of the date of
delivery thereof.

ARTICLE 2A

REPRESENTATIONS AND WARRANTIES REGARDING THE SHAREHOLDERS

Each of the Shareholders severally and not jointly represent
and warrant to Quarterdeck as follows:

2A.1 AUTHORITY, APPROVAL AND ENFORCEABILITY.

(a) Such Shareholder (other than Inference) has
the full power and authority to execute, deliver and perform its obligations
under this Agreement and the Escrow Agreement, and all action on its part
necessary for such execution, delivery and performance has been duly taken.
Inference has the full corporate power and corporate authority to execute,
deliver and perform its obligations under this Agreement, and all action on its
part necessary for such execution, delivery and performance has been duly
taken.

(b) The execution and delivery by such
Shareholder of this Agreement does not, and the performance and consummation of
the transactions contemplated by this Agreement and the Escrow Agreement will
not, result in any conflict with, breach or violation of or default,
termination or forfeiture under (or upon the failure to give notice or the
lapse of time, or both, result in any conflict with, material breach or
violation of or default, termination or forfeiture under) any statute, rule,
regulation, judicial, governmental, regulatory or administrative decree, order
or judgment applicable to such Shareholder, or any material agreement or other
instrument to which it is a party or to which it or any of its assets is
subject.

(c) Upon due execution and delivery by such
Shareholder, this Agreement and the Escrow Agreement (except with respect to
Inference) will be his, her or its

14
<PAGE>

legal, valid and binding obligation, enforceable against him, her or it in
accordance with the respective terms hereof and thereof, except as such
enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally and subject to the availability of equitable remedies.

(d) Such Shareholder is the record and beneficial
owner of the shares of Limbex Stock reflected as owned by him, her or it on
Schedule 2.2, free and clear of any and all liens, security interests,
encumbrances or claims.

ARTICLE 3

REPRESENTATIONS AND WARRANTIES OF

QUARTERDECK

Quarterdeck represents and warrants to Limbex and the
Shareholders as follows:

3.1 ORGANIZATION AND STANDING.

Quarterdeck is a corporation duly organized, validly existing
and in good standing under the laws of the state of Delaware, has all requisite
corporate power and authority to own, operate and lease its properties and
carry on its business as now conducted, and is duly qualified to do business
and is in good standing as a foreign corporation in each jurisdiction in which
the failure to so qualify would have a Material Adverse Effect. Whenever used
in this Article 3, "Material Adverse Effect" shall mean and be defined as any
fact, event or condition, or the absence of any fact, event or condition, as
the context requires, which, individually or in the aggregate, would have a
material adverse effect on the business, properties, condition (financial or
otherwise) or results of operations of Quarterdeck and its subsidiaries (on a
consolidated basis).

3.2 AUTHORITY, APPROVAL AND ENFORCEABILITY.

(a) Each of Quarterdeck and Merger Sub has all
requisite corporate power and authority to execute, deliver and perform its
obligations under this Agreement, the Escrow Agreement, and the Registration
Rights Agreement, and all corporate action on its part necessary for such
execution, delivery and performance has been duly taken. No vote or consent of
the stockholders of Quarterdeck is required in connection with the transactions
contemplated by this Agreement including the Merger.

(b) The execution and delivery by Quarterdeck and
Merger Sub of this Agreement and the Escrow Agreement and the execution and
delivery by Quarterdeck of the Registration Rights Agreement do not, and the
performance and consummation of the transactions contemplated by this
Agreement, the Escrow Agreement and the Registration Rights Agreement will not,
result in any conflict with, breach or violation of or default, termination or
forfeiture under (or upon the failure to give notice or the lapse of time, or
both, result in any conflict with, breach or violation of or default,
termination or forfeiture under) any terms or provisions of (i) their
respective Certificate or Articles of Incorporation, as the

15
<PAGE>

case may be, or Bylaws, (ii) any statute, rule, regulation or any judicial,
governmental, regulatory or administrative decree, order or judgment, or (iii)
any material agreement, lease or other instrument to which it is a party or to
which it or any of its assets may be bound.

(c) No consent, approval, authorization, order,
registration, qualification or filing of or with any court or any regulatory
authority or any other governmental or administrative body is required on the
part of Quarterdeck or Merger Sub for the consummation by Quarterdeck and
Merger Sub of the transactions contemplated by this Agreement, except any
approvals or filings required under state "blue sky" laws (which will be
obtained or made in accordance with such laws by Quarterdeck on a timely basis)
and the filing of the certificate of merger and related instruments with the
Secretary of State of the State of California.

(d) Upon due execution and delivery by the
parties hereto and thereto, this Agreement, the Escrow Agreement and the
Registration Rights Agreement will be the legal, valid and binding obligation
of Quarterdeck, and this Agreement and the Escrow Agreement will be the legal,
valid and binding obligation of Merger Sub enforceable against Quarterdeck or
Merger Sub, as the case may be, in accordance with the respective terms hereof
and thereof, except as such enforcement may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally.

3.3 FINANCIAL STATEMENTS AND REPORTS. Quarterdeck has
timely filed all required forms, reports, statements and documents with the
Securities and Exchange Commission (the "Commission") all of which have
complied in all material respects with all applicable requirements of the
Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Quarterdeck has delivered or made available to Limbex and the
Shareholders true and complete copies of (i) Quarterdeck's Annual Report on
Form 10-K for the fiscal year ended September 30, 1995, (ii) its proxy
statement relating to Quarterdeck's annual stockholders meeting held February
2, 1996, and (iii) all other forms, reports, statements and documents filed by
Quarterdeck with the Commission since September 30, 1995 (collectively, the
"Quarterdeck Reports"). As of their respective dates, the Quarterdeck Reports
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The consolidated financial statements of Quarterdeck included or
incorporated by reference in the Quarterdeck Reports were prepared in
accordance with GAAP applied on a consistent basis (except as otherwise stated
in such financial statements or, in the case of audited statements, the related
report thereon of independent certified public accounts), and present fairly
the financial position and results of operations, cash flows and of changes in
stockholders' equity of Quarterdeck and its consolidated subsidiaries as of the
dates and for the periods indicated, subject, in the case of unaudited interim
financial statements, to normal year-end audit adjustments, none of which
either singly or in the aggregate are or will be material, and except that the
unaudited interim financial statements do not contain all of the disclosures
required by GAAP.

16
<PAGE>

3.4 QUARTERDECK COMMON STOCK. The shares of Quarterdeck
Common Stock to be issued to the holders of Limbex Stock as contemplated
hereunder are duly authorized, and when issued pursuant to the terms of this
Agreement, will be validly issued, fully paid, non- assessable and not subject
to any preemptive rights.

3.5 NO BROKERS. Quarterdeck is not obligated for the
payment of fees or expenses of any broker or finder in connection with the
origin, negotiation or execution of this Agreement or in connection with any
transaction contemplated hereby or thereby.

ARTICLE 4

COVENANTS

4.1 MAINTENANCE OF BUSINESS. Except as otherwise
contemplated by this Agreement, during the period from the date hereof to the
Effective Time, Limbex agrees to carry on its business in the ordinary course
and in substantially in the same manner as it has prior to the date of this
Agreement and agrees not to enter into any material agreements or take any
other significant actions outside the ordinary course of business without the
prior written consent of Quarterdeck, which consent shall not be unreasonably
withheld.

4.2 TAX TREATMENT. Quarterdeck, Limbex and the
Shareholders understand and agree that the Merger will be treated for federal
income tax purposes as a taxable sale by the Shareholders of the Limbex Stock
and not as a "reorganization" within the meaning of Section 368(a) of the Code,
and agree to treat the Merger as such on their income tax returns reflecting
the Merger. Quarterdeck, Limbex and the Shareholders agree that no party to
this Agreement is (i) making any representation or warranty as to the tax
consequences of the Merger or (ii) indemnifying any party to this Agreement for
any tax consequences of the Merger.

4.3 OTHER DISCUSSIONS. From and after the date of this
Agreement until the Closing or this Agreement is terminated in accordance with
its terms, neither Limbex nor any of its officers, directors, agents or
representatives (including the Shareholders) will initiate discussions, solicit
or negotiate (including providing any non-public information concerning its
business), or authorize any person or entity to discuss, solicit or negotiate
on its or their behalf, with any other party concerning the possible sale or
disposition of all or any material portion of Limbex's business, assets or
capital stock. Limbex will immediately notify Quarterdeck, however, if any
offer is received from a potential purchaser or of any discussions with a
potential purchaser.

4.4 BEST EFFORTS. Each party will use its best efforts
to cause all conditions to the Closing to be satisfied as soon as practicable.
Without limiting any party's rights or remedies for any breach of any
representations or warranty made hereunder, each party shall use its best
efforts to obtain any consents necessary or desirable in connection with the
consummation of the transactions contemplated by this Agreement.

17
<PAGE>

4.5 SHAREHOLDER VOTE; INVESTMENT REPRESENTATION
CERTIFICATE. Until this Agreement has been terminated in accordance with its
terms, the Shareholders agree to vote all shares of Limbex Stock held by them
in favor of the Merger. Each of the Shareholders shall execute an Investment
Representation Certificate in the form attached hereto as Exhibit B (the
"Investment Representation Certificate").

4.6 REGISTRATION RIGHTS; NASDAQ LISTING. Quarterdeck
shall provide to the Shareholders of Limbex registration rights pursuant to the
terms of a registration rights agreement (the "Registration Rights Agreement")
substantially in the form of Exhibit C attached hereto. Quarterdeck shall
cause the shares of Quarterdeck Common Stock to be issued pursuant to this
Agreement to be listed as of the date such shares are issued on the Nasdaq
National Market.

4.7 ACCESS TO INFORMATION. Quarterdeck shall continue to
have access to the facilities, employees, and records of Limbex; provided,
however, all confidential information obtained by Quarterdeck will be kept
confidential in accordance with the terms of the Confidentiality Agreement
previously entered into between Quarterdeck and Limbex (the "Confidentiality
Agreement").

4.8 BUSINESS PLAN. The parties have agreed upon a
business plan (the "Business Plan") for the business of Limbex (the "Limbex
Business"), which includes a product development plan. The Business Plan may
not be materially modified without the consent of Jacobson and Allen so long as
they remain employees of Quarterdeck. Quarterdeck will contribute to the
Limbex Business the amounts by which the amounts required to carry out the
Business Plan exceed the cash generated by the Limbex Business on an on-going
basis, provided that Quarterdeck shall not be obligated to contribute more than
the amount to be specified in a budget to be incorporated into the Business
Plan. The day to day operations of the Limbex Business will be conducted by
Jacobson or Allen, so long as they are employees of Quarterdeck, subject to
senior management and the Board of Directors of Quarterdeck having the
authority to manage the Limbex Business.

4.9 EMPLOYMENT AGREEMENTS.

(a) As a condition to the closing of the Merger,
each of Jacobson and Allen will enter into an employment agreement with
Quarterdeck. The vesting period for options granted to Jacobson and Allen and
the acceleration of such vesting shall be as set forth in subparagraph (b)
below, provided that (i) in the event Quarterdeck terminates Jacobson or Allen
without Cause (as defined in their Employment Agreements) or Jacobson or Allen
leave with Good Reason (as defined below), fifty percent (50%) of any options
not yet vested in the terminated individual shall automatically and immediately
vest, (ii) for a period of one (1) year following any such termination without
Cause or following any such departure for Good Reason, the terminated
individual shall be retained by Quarterdeck to perform ongoing services as an
independent contractor consultant on terms to be mutually agreed upon, and
during such one (1) year period such individual will achieve vested rights in
the same number of shares that would have vested had such individual continued
to be employed by Quarterdeck

18
<PAGE>

during such one (1) year period (i.e., one quarter of the total options granted
shall be subject to vesting during such period) with such vested shares to be
in addition to all previously vested shares, including without limitation
shares previously vested pursuant to clause (i) of this Subsection 4.9(a).
"Good Reason" shall mean (x) Quarterdeck's material violation of its
obligations under the Employment Agreement of Jacobson or Allen, as the case
may be, provided that such violation shall not be deemed Good Reason if
Quarterdeck cures such violation within thirty (30) days after notice thereof
or (ii) the substantial diminution of Jacobson's or Allen's, as the case may
be, duties and responsibilities.

(b) Quarterdeck shall initially grant as of the
Closing Date a total of 300,000 non-qualified options to acquire shares of
Quarterdeck Common Stock to employees of the Limbex Business (including
Jacobson and Allen), with the allocation of such options to individual
employees to be determined by Jacobson and Allen as part of the management of
the Limbex Business, subject to approval by the Quarterdeck compensation
committee. Quarterdeck senior management will recommend approval by the
Quarterdeck compensation committee of the allocation of options determined by
Jacobson and Allen and endeavor to obtain such approval. Such options shall
vest over a period of four (4) years, provided that if Quarterdeck Common Stock
achieves the values set forth below at any time during the option period,
outstanding unvested options shall vest immediately on the date of achievement
of the acceleration trigger, with the options so vested to be applied pro rata
among the holders of outstanding unvested options, such that the aggregate
number of vested options (including options vested immediately prior to the
achievement of the applicable acceleration trigger) shall equal the number set
forth opposite each such acceleration trigger:

<TABLE>
<CAPTION>
Acceleration Trigger Number of Vested Options
-------------------- ------------------------
<S> <C>
$17 100,000

$22 200,000

$32 300,000
</TABLE>

(c) Provided that Jacobson or Allen (or both
Jacobson and Allen) remains in the employ of Quarterdeck, Quarterdeck shall
grant as of the first, second, and third anniversaries of the Closing Date an
additional 100,000 options to acquire shares of Quarterdeck Common Stock on
each such anniversary (i.e., a total of 300,000 additional options), which
options shall be allocated to employees of the Limbex Business (including
Jacobson and Allen) as determined by Jacobson and Allen, if both remain
employed by Quarterdeck, or by Jacobson or Allen, if only one remains employed
by Quarterdeck, subject to approval by the Quarterdeck compensation committee.
Quarterdeck senior management will recommend approval by the Quarterdeck
compensation committee of the allocation of options determined by Jacobson
and/or Allen and endeavor to obtain such approval. Such options shall also
vest over a period of four (4) years, provided that if Quarterdeck Common Stock
achieves the values set forth below at any time during the option period,
outstanding unvested options shall vest immediately (to the extent of
outstanding options) on the date of achievement of the acceleration trigger,
with options so vested to be applied pro rata among the holders of

19
<PAGE>

outstanding unvested options, such that the aggregate number of vested options
(including options vested immediately prior to the achievement of the
applicable acceleration trigger) shall equal the number set forth opposite each
such acceleration trigger:

<TABLE>
<CAPTION>
Acceleration Trigger Number of Options
-------------------- -----------------
<S> <C>
$47 100,000

$57 200,000

$67 300,000
</TABLE>

(d) Quarterdeck Common Stock shall be deemed to
have achieved the values set forth in subparagraphs (b) and (c) above if (i)
the closing sale price of Quarterdeck Common Stock as of the close of each
trading day during a period of forty-five (45) consecutive days equals or
exceeds the specified value, or (ii) the average closing sale price of
Quarterdeck Common Stock for the trading days during a period of forty-five
(45) consecutive days equals or exceeds the specified value, and the closing
sale price of Quarterdeck Common Stock is equal to or greater than the
specified value on at least thirty (30) of such forty-five (45) consecutive
days. In the event that Quarterdeck Common Stock achieves the applicable
acceleration trigger value prior to the date of grant of the applicable option,
such option shall be fully vested as of the date of grant provided that the
closing sale price of the Quarterdeck Common Stock as of the date of grant of
the option is equal to or higher than the applicable acceleration trigger
value. To the extent that the vesting of options is accelerated pursuant to
subparagraphs (b) or (c), the remaining options not so accelerated shall vest
pro rata over the remainder of the four year vesting period.

(e) The exercise price for the options pursuant
to this Section 4.9 shall be the fair market value of the Quarterdeck Common
Stock as of the date of grant of the applicable option. All shares of
Quarterdeck Common Stock issued upon exercise of options granted pursuant to
this Section 4.9 shall be registered on or before the date of issuance on Form
S-8.

4.10 EXISTING AGREEMENTS. All existing agreements between
Limbex and any party(ies) hereto will, upon the closing, terminate and be of no
further force and effect, other than (i) the Technology License Agreement,
dated May 9, 1995, between Inference and Limbex, as amended by Amendment No. 1
and Amendment No. 2 thereto (the "License Agreement"), and (ii) Stock Purchase
Agreement, dated July 31, 1996, among Limbex, Inference, Jacobson and Allen.

4.11 SUPPLEMENTS TO SCHEDULES. From time to time prior to
the Closing Date, Allen and Jacobson will promptly inform Quarterdeck and
Quarterdeck will promptly inform Allen and Jacobson in writing of any matter
known to any of them hereafter arising (as distinguished from matters that
existed prior to the date hereof) that, if existing or occurring on or prior to
the date hereof, would have been required to be set forth or described in the
Schedules hereto or as an exception to the representations and warranties
herein. No action or

20
<PAGE>

inaction by Allen, Jacobson, Limbex or Quarterdeck following receipt of any
such information shall constitute a waiver of any of its rights hereunder.

4.12 LIMBEX STOCK OPTIONS. Each option to acquire shares
of Limbex Common Stock outstanding at the Closing (the "Limbex Stock Options")
shall be assumed by Quarterdeck at the Closing (subject to execution by each
holder of (i) an option agreement with Quarterdeck and (ii) a release and
termination agreement with Limbex terminating such holder's Limbex Stock Option
and releasing Limbex from any obligations thereunder), and shall become options
to acquire 0.53553237 of a share of Quarterdeck Common Stock for each share of
Limbex Common Stock previously subject to the Option at an exercise price per
share equal to the exercise price per share of Limbex Common Stock divided by
0.53553237. The options to acquire shares of Quarterdeck Common Stock shall be
(x)(A) in the case of Limbex Stock Options that are ISOs, ISOs of Quarterdeck,
and (B) in the case of Limbex Stock Options that are non-qualified options,
non-qualified stock options of Quarterdeck, (y) fully vested at the assumption
and (z) issued under Quarterdeck's Amended and Restated 1990 Stock Incentive
Plan (relating to securities that have been registered on Registration
Statements on Form S-8). The assumed options shall be evidenced by the
standard forms of option agreement used in connection with such plans. Exhibit
E hereto sets forth the outstanding Limbex Stock Options as of the date hereof.

ARTICLE 5

CONDITIONS TO MERGER

5.1 CONDITIONS TO OBLIGATIONS OF QUARTERDECK, THE
SHAREHOLDERS AND LIMBEX. The respective obligations of Quarterdeck, the
Shareholders and Limbex to consummate the transactions contemplated hereby are
subject to satisfaction (or waiver) of the following conditions:

(a) The parties hereto shall have obtained all
consents and approvals of shareholders and third parties (including
governmental authorities) required to consummate the transactions contemplated
by this Agreement.

(b) Consummation of the transactions contemplated
by this Agreement shall not violate any order, decree or judgment of any court,
and if any order, decree or judgment of any court would be so violated, the
parties shall use their reasonable efforts to seek the modification,
rescission, withdrawal or elimination of such order, decree or judgment as soon
as practicable in order to permit the Closing to occur.

(c) The Escrow Agreement, the Registration Rights
Agreement and the Employment Agreements shall be executed and delivered by the
parties thereto.

5.2 CONDITIONS TO OBLIGATIONS OF QUARTERDECK. The
obligations of Quarterdeck to consummate the transactions contemplated hereby
are subject to satisfaction (or waiver) of the following conditions:

21
<PAGE>

(a) The representations and warranties of Limbex
and the Shareholders made herein shall be true and correct in all material
respects as of the Closing Date. (To the extent Allen, Jacobson or Limbex
hereafter provides supplements to the Schedules hereto as provided in Section
4.11 hereof, such supplements shall not be deemed a breach of the
representations and warranties of Limbex and the Shareholders hereunder, but to
the extent that any such supplement or supplements constitute a material
adverse change to the representations and warranties contained herein, such
supplement or supplements may constitute a basis for the failure of a condition
in the preceding sentence; the provisions of this sentence shall not apply to
the correction of any representation or warranty that was untrue as of the date
hereof.) Limbex and the Shareholders shall have performed in all material
respects all obligations and agreements undertaken to be performed by them at
or prior to the Closing.

(b) Quarterdeck shall have received the
Investment Representation Certificate executed by each of the Shareholders.

(c) Quarterdeck shall be satisfied that no
holders of Limbex Stock shall exercise dissenters' rights in connection with
the Merger.

5.3 CONDITIONS TO OBLIGATIONS OF LIMBEX AND THE
SHAREHOLDERS. The obligations of Limbex and the Shareholders to consummate the
transactions contemplated hereby are subject to satisfaction (or waiver) of the
following conditions:

(a) The representations and warranties of
Quarterdeck made herein shall be true and correct in all material respects as
of the Closing Date. Quarterdeck shall have performed in all material respects
all obligations and agreements undertaken to be performed by it at or prior to
the Closing.

(b) The shares of Quarterdeck Common Stock to be
issued in the Merger shall be approved for listing on the Nasdaq National
Market.

ARTICLE 6

INDEMNITY

6.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS
AND AGREEMENTS.

All representations, warranties, covenants and agreements of
Quarterdeck, Limbex and the Shareholders in this Agreement shall survive the
execution, delivery, and performance of this Agreement in accordance with this
paragraph. All representations and warranties of each party set forth in this
Agreement shall be deemed to have been made again by such party at and as of
the Closing Date. Quarterdeck shall, on behalf of the Shareholders (other than
Inference), deliver the Escrow Consideration into escrow as provided in the
Escrow Agreement. The Escrow Consideration shall be released from escrow one
year from the Closing Date (except to the extent that claims have been
submitted or notice of a claim has been provided during such one year period)
in accordance with the terms of the Escrow Agreement. The representations and
warranties of Quarterdeck and the Shareholders set forth

22
<PAGE>

in this Agreement shall terminate (absent fraud or willful misrepresentation)
on the date two years from the Closing Date (except to the extent that claims
have been submitted or notice of the claim has been provided during such two
year period), except for Sections 2.2(a) and 2A.1(d), which shall not
terminate, and Section 2.16, which shall terminate upon the expiration of the
statutes of limitations applicable to the matters covered thereby.

6.2 INDEMNIFICATION OF QUARTERDECK.

(a) Each of the Shareholders other than Inference
(the "Indemnifying Shareholders"), jointly and severally, agree to indemnify,
defend and hold harmless Quarterdeck and its affiliates, successors, assigns,
agents and representatives (collectively, the "Affiliated Parties") from and
against any and all claims, demands, losses, costs, expenses, obligations,
liabilities, damages, remedies and penalties, including interest, penalties and
reasonable attorneys' fees and expenses (collectively, "Losses") that any of
them shall incur or suffer to the extent they arise from or are attributable to
by reason of or in connection with any breach or inaccuracy of the
representations and warranties contained in Article 2 of this Agreement.

(i) No claim, demand, suit or cause of
action shall be brought under this Section 6.2(a) unless and until the
aggregate amount of claims under this Section 6.2(a) exceeds $50,000, in which
event Quarterdeck and the Affiliated Parties shall be entitled to
indemnification for all claims under this Section 6.2(a) in excess of such
$50,000.

(ii) The liability of the Shareholders
other than Inference, Jacobson and Allen under this Section 6.2(a) shall be
limited to the return to Quarterdeck of Escrow Consideration, whether or not
such Escrow Consideration has been issued or paid and delivered into, or
released from, escrow.

(iii) The liability of Jacobson and Allen
under this Section 6.2(a) shall be full recourse and shall not be limited to
the return of Escrow Consideration, subject to Section 6.2(e); provided,
however, that the liability of Jacobson and Allen shall not be full recourse
(and shall instead be limited to the Escrow Consideration, whether or not such
Escrow Consideration has been issued and delivered into or released from
escrow) with respect to a breach of the representations and warranties
contained in Section 2.10 hereof that are qualified to the knowledge, awareness
or belief of Limbex, Jacobson or Allen unless Jacobson or Allen had knowledge,
awareness or belief of the facts or circumstances causing the breach of such
representations or warranties.

(b) Each of the Shareholders, severally and not
jointly, agrees to indemnify, defend and hold harmless Quarterdeck and the
Affiliated Parties against and in respect of any Losses that any of them shall
incur or suffer to the extent they arise from or are attributable to by reason
of or in connection with any breach or inaccuracy of such Shareholder's
representations or warranties contained in Article 2A of this Agreement.

(i) Quarterdeck's and the Affiliated
Parties' recourse against the Escrow Consideration in respect of a claim
against any Shareholder under this

23
<PAGE>

Section 6.2(b) shall be limited to the return to Quarterdeck of Escrow
Consideration allocable to such Shareholder determined pursuant to the Escrow
Agreement, whether or not such Escrow Consideration has been issued or paid and
delivered into, or released from, escrow.

(ii) The liability of the Shareholders
under Section 6.2(b) shall be full recourse and shall not be limited to the
return of Escrow Consideration, subject to Section 6.2(e).

(c) For purposes of the indemnification set forth
in this Article 6, the fair market value of one share of Quarterdeck Common
Stock shall be equal to the average closing sales price of Quarterdeck Common
Stock on the Nasdaq National Market on each trading day during a period of five
trading days ending on the trading day two trading days prior to the date on
which a claim is paid under this Article 6.

(d) No disclosure by Limbex or the Shareholders
other than as set forth in this Agreement or the schedules hereto nor any
investigation made by or on behalf of Quarterdeck with respect to Limbex or the
Shareholders shall be deemed to affect Quarterdeck's reliance on the
representations and warranties made by Limbex or the Shareholders contained in
this Agreement and shall not constitute a waiver of Quarterdeck's rights to
indemnity as herein provided for the breach or inaccuracy of any of Limbex's or
the Shareholders' representations or warranties under this Agreement.

(e) Notwithstanding anything else in this Section
6.2 to the contrary, the aggregate liability of each Shareholder (other than
Inference) under Sections 6.2(a), 6.2(b) and 6.2(f) shall not exceed the amount
received or to be received by such Shareholder in connection with the Merger,
with the fair market value of one share of Quarterdeck Common Stock equal to
the average closing sales price of Quarterdeck Common Stock on the Nasdaq
National Market on each trading day during a period of five trading days ending
on the trading day two trading days prior to the SEC Effective Date and the
aggregate liability of Inference under Section 6.2(b) shall not exceed
$4,210,279; provided, however, that nothing in this Section 6.2(e) shall limit
Quarterdeck's right to full recourse against all of the Escrow Consideration
attributable to such Shareholder or Shareholders regardless of the value of
such Escrow Consideration and whether or not such Escrow Consideration has been
released from escrow. The indemnity obligations set forth in this Section 6.2
shall be the exclusive remedy of Quarterdeck with respect to a breach or
inaccuracy of the representations and warranties of the Shareholders, other
than with respect to liability arising out of, involving or relating to
intentional fraud or willful misrepresentation or a breach of Section 8.11.

(f) Allen and Jacobson agree to indemnify and
hold harmless Quarterdeck, and any current or future employee or director of
Quarterdeck, from and against any and all costs, expenses, liabilities and
damages (including but not limited to attorneys fees, taxes, interest and
penalties) resulting from a determination by a taxing authority that (i) the
Limbex options that purport to be ISOs were not ISOs immediately prior to the
time they were assumed by Quarterdeck in connection with the Merger, or (ii)
the acceleration of the vesting

24
<PAGE>

schedule set forth in such Limbex options resulted in such options being
treated other than as ISOs.

6.3 INDEMNIFICATION OF THE SHAREHOLDERS.

(a) Quarterdeck agrees to indemnify, defend and
hold harmless the Shareholders (and their respective successors and assigns)
from and against and in respect of, any and all claims, demands, losses, costs,
expenses, obligations, liabilities, damages, remedies and penalties, including
interest, penalties and reasonable attorneys' fees and expenses (collectively,
"Shareholder Losses") that any of the Shareholders shall incur or suffer and
which arise from or are attributable to by reason of or in connection with any
breach or inaccuracy of Quarterdeck's representations or warranties contained
in this Agreement.

(b) No claims, demand, suit or cause of action
shall be brought against the Shareholders under this Section 6.3 unless and
until the aggregate amount of claims under this Section 6.3 exceeds $50,000, in
which event the Shareholders shall be entitled to indemnification from
Quarterdeck for all claims under this Section 6.3 in excess of such $50,000.
Quarterdeck shall have no obligations under this Section 6.3 for an amount in
excess of the fair market value of Quarterdeck Common Stock received or to be
received by Jacobson and Allen in connection with the Merger and the fair
market value of Limbex Escrow Shares (as defined in the Escrow Agreement) and
Escrow Cash received or to be received by Howard Morgan, Thelma Birks, Michelle
Kraus and Clay Chisum, with the fair market value of one share of Quarterdeck
Common Stock equal to the average closing sales price of Quarterdeck Common
Stock on the Nasdaq National Market on each trading day during a period of five
trading days ending on the trading day two trading days prior to the SEC
Effective Date. The indemnity obligations set forth in this Section 6.3 shall
be the exclusive remedy of the Shareholders with respect to a breach or
inaccuracy of the representations and warranties of Quarterdeck, other than
with respect to liability arising out of, involving or relating to intentional
fraud or willful misrepresentation.

(c) No disclosure by Quarterdeck other than as
set forth in this Agreement or the schedules hereto nor any investigation made
by or on behalf of the Shareholders with respect to Quarterdeck shall be deemed
to affect the Shareholders' reliance on the representations and warranties made
by Quarterdeck contained in this Agreement and shall not constitute a waiver of
the Shareholders' rights to indemnity as herein provided for the breach or
inaccuracy of any of Quarterdeck's representations or warranties under this
Agreement.

6.4 PROCEDURE FOR INDEMNIFICATION OF QUARTERDECK AND THE
SURVIVING CORPORATION WITH RESPECT TO NON-THIRD PARTY CLAIMS. Prior to
termination of the escrow for the Escrow Consideration, Quarterdeck and the
Affiliated Parties shall not be entitled to seek recourse against a Shareholder
in satisfaction of a claim under Section 6.2 without first seeking recourse
against the Escrow Consideration allocable to such Shareholder in the escrow,
unless (i) the amount of such claim against such Shareholder, when taken
together with all other claims against such Shareholder by all of the
indemnified parties, exceeds the aggregate

25
<PAGE>

fair market value of the Escrow Consideration (with the fair market value of
Escrow Shares being determined pursuant to Section 6.2(c)) allocable to such
Shareholder in escrow at the time such claim is initiated and (ii) such
Shareholder's liability hereunder in respect of such claim is not limited to
the Escrow Consideration, in which event the indemnified party may seek direct
recourse against such Shareholder in respect of such claim. If Quarterdeck
shall have any claim against the Shareholders pursuant to this Article 6 for
which it seeks recourse against the Escrow Consideration (but excluding claims
resulting from the assertion of liability by third parties), Quarterdeck shall
promptly give written notice thereof to the Escrow Agent (as defined in the
Escrow Agreement) and the escrow committee established pursuant to the terms of
the Escrow Agreement (the "Committee"), including in such notice a brief
description of the facts upon which such claim is based and the amount thereof.
If the Committee objects to the allowance of any such claims, it shall give
written notice to Quarterdeck and the Escrow Agent within forty-five (45) days
following receipt of Quarterdeck's notice of claim, advising Quarterdeck and
the Escrow Agent that it does not consent to the delivery of any or some of the
Escrow Consideration out of escrow for application to such claims. If no such
written notice is timely provided by the Committee to Quarterdeck and the
Escrow Agent and received by the Escrow Agent within forty-five (45) days
following the Committee's receipt of Quarterdeck's notice of claim, the Escrow
Agent shall, within five business days after the expiration of the prior notice
period, deliver out of escrow the lesser of: (a) the portion of the Escrow
Consideration most nearly equal in value to the amount of the claim or claims
thus to be satisfied, or (b) all of the Escrow Consideration. If the Committee
notifies Quarterdeck and the Escrow Agent receives written notice within the
foregoing forty-five (45) day period that the Committee objects to such
application of the Escrow Consideration after a claim has been made, the Escrow
Agent shall hold the Escrow Consideration in an amount most nearly equal in
value to the amount of the claim or claims then made in escrow until the rights
of the Shareholders and Quarterdeck with respect thereto have been agreed upon
between the Committee and Quarterdeck in accordance with the Escrow Agreement
and the Escrow Agent receives written notice accordingly or the Escrow Agent is
directed by a court or arbitration panel. If any distribution referred to in
this Section 6.4 involves less than all of the Escrow Consideration, it shall
be allocated pro rata against the Escrow Consideration therein based on the
Escrow Consideration beneficially owned by each Shareholder (unless the claim
made is based on an inaccuracy or breach of a representation or warranty
contained in Article 2A of this Agreement, in which case the allocation of the
distribution of the Escrow Consideration shall be determined in accordance with
Section 6.2(b)). If Quarterdeck has any claim against any Shareholder or
Shareholders pursuant to this Article 6 (but excluding claims resulting from
the assertion of liability by third parties) outside of the Escrow or over and
above the amount of the Escrow Consideration, Quarterdeck shall promptly give
written notice thereof to such Shareholder or Shareholders, including in such
notice a brief description of the facts upon which such claim is based and the
amount thereof. If such Shareholder or Shareholders, within forty-five (45)
days after receipt of Quarterdeck's notice of claim, do not give written notice
to Quarterdeck announcing their intent to contest such assertion of Quarterdeck
such assertion shall be deemed accepted and the amount of claim shall be deemed
a valid claim and such Shareholder or Shareholders shall, within fifteen (15)
days after expiration of the prior notice period deliver to Quarterdeck the
amount of the claim. In the event, however, that such Shareholder or
Shareholders contest the assertion of a claim by giving such written notice to

26
<PAGE>

Quarterdeck within said period, then the parties shall act in good faith to
reach agreement regarding such claim. In the event the parties (other than
Inference) are unable to reach an agreement regarding such claim, such claim
shall be settled in accordance with Section 2.5 of the Escrow Agreement.

6.5 PROCEDURE FOR INDEMNIFICATION OF THE SHAREHOLDERS
WITH RESPECT TO NON-THIRD PARTY CLAIMS. If any Shareholder has any claim
against Quarterdeck pursuant to this Article 6 (but excluding claims resulting
from the assertion of liability by third parties), the Shareholder shall
promptly give written notice thereof to Quarterdeck, including in such notice a
brief description of the facts upon which such claim is based and the amount
thereof. If Quarterdeck, within forty five (45) days after receipt of the
Shareholders' notice of claim, does not give written notice to the Shareholders
announcing its intent to contest such assertion of the Shareholder such
assertion shall be deemed accepted and the amount of claim shall be deemed a
valid claim and Quarterdeck shall, within fifteen (15) days after expiration of
the prior notice period, deliver to the Shareholders the amount of the claim,
which, if such claim is brought on behalf of all Shareholders, shall be
allocated on a pro rata basis based on the number of shares of Limbex Stock
beneficially owned by each Shareholder as set forth in Schedule 2.2. In the
event, however, that Quarterdeck contests the assertion of a claim by giving
such written notice to the Shareholders within said period, then the parties
shall act in good faith to reach agreement regarding such claim. In the event
the parties are unable to reach an agreement regarding such claim, such claim
shall be settled in accordance with Section 2.5 of the Escrow Agreement.

6.6 PROCEDURE FOR INDEMNIFICATION WITH RESPECT TO
THIRD-PARTY CLAIMS.

(a) If an indemnified party determines to seek
indemnification under this Article 6 with respect to a claim resulting from the
assertion of liability by third parties, such indemnified party shall promptly
give notice to the indemnifying parties of facts upon which any such claim is
based; the notice shall set forth such material information with respect
thereto as is then reasonably available to such indemnified party. In case any
such liability is asserted against the indemnified party, and the indemnified
party notifies the indemnifying parties thereof, the indemnifying parties will
be entitled, if such indemnifying parties so elect by written notice delivered
to the indemnified party within fifteen (15) business days after receiving the
indemnified party's notice, to assume the defense thereof with counsel
reasonably satisfactory to the indemnified party. Notwithstanding the
foregoing, (i) the indemnified party shall also have the right to employ its
own counsel in any such case, but the fees and expenses of such counsel shall
be at the expense of the indemnified party unless the indemnified party shall
reasonably determine that there is a conflict of interest between or among the
indemnified party and any indemnifying party with respect to such claim, in
which case the fees and expenses of such counsel will be borne by such
indemnifying parties and (ii) the rights of an indemnified party to be
indemnified hereunder in respect of claims resulting from the assertion of
liability by third parties shall not be adversely affected by its failure to
give notice pursuant to the foregoing unless, and, if so, only to the extent
that, such indemnifying parties are materially prejudiced thereby. With
respect to any assertion of liability by a third party that

27
<PAGE>

results in an indemnifiable claim, the parties hereto shall make available to
each other all relevant information in their possession material to any such
assertion.

(b) In the event that such indemnifying parties,
within fifteen (15) business days after receipt of the aforesaid notice of a
claim, fail to assume the defense of an indemnified party against such claim,
the indemnified party shall have the right to undertake the defense,
compromise, or settlement of such action on behalf of and for the account,
expense, and risk of such indemnifying parties.

(c) Notwithstanding anything in this Article 6 to
the contrary, if there is a reasonable probability that a claim may materially
adversely affect an indemnified party, the indemnified party shall have the
right to participate (at the indemnified party's expense) in such defense,
compromise, or settlement and such indemnifying parties shall not, without the
indemnified party's written consent (which consent shall not be unreasonably
withheld), settle or compromise any such claim or consent to entry of any
judgment in respect thereof unless such settlement, compromise, or consent
includes as an unconditional term thereof the giving by the claimant or the
plaintiff to the indemnified party a release from all liability in form and
substance satisfactory to such indemnified party in respect of such claim. If
the indemnifying parties notify the indemnified party that they wish to accept
a bona fide written offer to settle or compromise from any such claimant or
plaintiff (which offer includes a release of the indemnified party from all
liability in respect of such claim), and the indemnified party does not consent
to such settlement or compromise, the indemnifying parties shall not be liable
under this Section 6.6 for the amount by which any Losses from any subsequent
settlement, compromise or judgment with respect to such claim exceeds such bona
fide written offer; provided, however, that, if one or more of the Shareholders
is the indemnifying party and Quarterdeck or any of the Affiliated Parties is
the indemnified party, the provisions of this sentence shall not apply unless,
at the time the indemnifying parties give notice of their desire to accept a
bona fide written offer, all such indemnifying parties (i) acknowledge in
writing to Quarterdeck that Quarterdeck and the Affiliated Parties are entitled
unconditionally to indemnification under this Agreement by the Shareholders for
such settlement or compromise and (ii) provide to Quarterdeck evidence
reasonably satisfactory to Quarterdeck that such parties have the financial
ability to satisfy any liability resulting from such settlement or compromise.

(d) In the event Quarterdeck is an "indemnified
party" with respect to a third party claim for which it seeks recourse against
the Escrow Consideration and a settlement or judgment is reached with respect
to such claim, such indemnified party shall promptly give written notice
thereof to the Committee and the Escrow Agent, including in such notice a brief
description of the settlement or judgment and the amount thereof. If the
Committee objects to the allowance of any such claims, it shall give written
notice to such indemnified party and the Escrow Agent within thirty

28
<PAGE>

(30) days following receipt of such notice of claim, advising such indemnified
party and the Escrow Agent that it does not consent to the delivery of any or a
portion of the Escrow Consideration out of escrow to such indemnified party for
application to such claims. If no such written notice is timely provided by
the Committee to such indemnified party and received by the Escrow Agent within
thirty (30) days following the Committee's receipt of Quarterdeck's notice of
claim, the Escrow Agent shall, within five (5) business days after the
expiration of the prior thirty (30) day notice period, deliver out of escrow
the lesser of: (a) that portion of the Escrow Consideration most nearly equal
in value to the amount of the claim or claims thus to be satisfied, or (b) all
of the Escrow Consideration. If the Committee notifies such indemnified party
and the Escrow Agent receives such written notice within the foregoing thirty
(30) day period that the Committee objects to such application of the Escrow
Consideration, the Escrow Agent shall hold the Escrow Consideration in escrow
until the rights of the Shareholders and such indemnified party with respect
thereto have been agreed upon between the Committee and such indemnified party
or until such rights are finally determined in accordance with the Escrow
Agreement and the Escrow Agent receives written notice accordingly. If any
distribution referred to in this Section 6.6 involves less than all of the
Escrow Consideration, it shall be allocated pro rata against the Escrow
Consideration therein based on the Escrow Consideration beneficially owned by
each Shareholder (unless the claim made is based on an inaccuracy or breach of
a representation or warranty contained in Article 2A of this Agreement, in
which case the allocation distribution of the Escrow Shares shall be determined
in accordance with Section 6.2(b)).

6.7 PROCEDURE FOR INDEMNIFICATION WITH RESPECT TO CERTAIN
CLAIMS. Notwithstanding the provisions of this Section 6, Quarterdeck shall
not be entitled to seek recourse against any Shareholder or against the Escrow
Consideration allocable to any Shareholder in satisfaction of a claim for which
Inference has enforceable indemnification obligations to Limbex pursuant to the
License Agreement without first seeking recourse against Inference.

ARTICLE 7

TERMINATION

7.1 TERMINATION BY MUTUAL CONSENT. At any time prior to
the Closing, this Agreement may be terminated by written consent of Quarterdeck
and Limbex, notwithstanding approval of the Merger by the shareholders of
Limbex. In addition, this Agreement shall automatically terminate if the
Closing does not occur on or before one month from the date hereof.

7.2 EFFECT OF TERMINATION. In the event of termination
as provided above, the obligations of the parties hereunder shall terminate;
provided, that (a) Sections 2.15, 3.5, 4.11, 8.1, 8.3, 8.4, 8.6, 8.8 and 8.9 of
this Agreement and the Confidentiality Agreement shall survive such termination
and continue in full force and effect and (b) nothing herein will relieve any
party from liability for any breach of this Agreement prior to such
termination.

29
<PAGE>

ARTICLE 8

MISCELLANEOUS

8.1 NOTICES. Any notice given hereunder shall be in
writing and shall be deemed effective upon the earlier of personal delivery
(including personal delivery by facsimile) or the third day after mailing by
certified or registered mail, postage prepaid, as follows:

(a) If to Quarterdeck:

Quarterdeck Corporation
13160 Mindanao Way, 3rd Floor
Marina del Rey, CA 90292
Attention: Law Department
Facsimile: (310) 309-4217

(b) If to Limbex:

Limbex Corporation
13160 Mindanao Way, 2nd Floor
Marina del Rey, CA 90292
Attention: Alex Jacobson and Brad Allen
Facsimile: (310) 309-4282

(d) If to Inference:

Inference Corporation
100 Rowland Way
Novato, California 94945
Attention: William D. Griffin
Facsimile: (415) 899-9080

or to such other address as any party may have furnished in writing to the
other parties in the manner provided above.

8.2 ENTIRE AGREEMENT; MODIFICATIONS; WAIVER. This
Agreement and the exhibits and schedules hereto and the documents referred to
herein and the Confidentiality

30
<PAGE>

Agreement between the parties hereto constitute the final, exclusive and
complete understanding of the parties with respect to the subject matter hereof
and supersede any and all prior agreements, understandings and discussions with
respect thereto, including, without limitation, (i) the Amended and Restated
Memorandum of Intent, dated January 30, 1996, (ii) the Amended and Restated
Memorandum of Intent, dated June 12, 1996, by and among Quarterdeck, Limbex and
the Shareholders, (iii) that certain Letter Agreement, dated July 31, 1996, by
and among Quarterdeck, Limbex and certain of the shareholders of Limbex and
(iv) that certain side Agreement, dated July 31, 1996, by and among
Quarterdeck, Limbex and Inference. No variation or modification of this
Agreement and no waiver of any provision or condition hereof, or granting of
any consent contemplated hereby, shall be valid unless in writing and signed by
the party against whom enforcement of any such variation, modification, waiver
or consent is sought. The rights and remedies available to Quarterdeck and
Limbex and the Shareholders pursuant to this Agreement and all exhibits
hereunder shall be cumulative.

8.3 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which when so executed shall constitute an
original copy hereof, but all of which together shall constitute one agreement.

8.4 PUBLICITY. Neither Limbex nor its officers or
directors, nor the Shareholders, shall, unless required by law, issue any
statement or communication to the general public or the press regarding the
transactions contemplated hereby without the prior written consent of
Quarterdeck. Neither Quarterdeck nor its officers or directors shall, unless
required by law, issue any statement or communication to the general public or
the press regarding the proposed transaction which mentions Inference unless
Quarterdeck first provides written notice of such statement or communication to
Inference. Quarterdeck may then issue such statement or communication if
Inference does not object in writing thereto within 48 hours (or within such
other time period as is reasonably practicable and specified in such notice to
Inference). If Inference does object within such period, Quarterdeck and
Inference shall in good faith attempt promptly to resolve their differences
regarding such statement or communication before it is issued.

8.5 SUCCESSORS AND ASSIGNS. No party may, without the
prior express written consent of each other party, assign this Agreement in
whole or in part. This Agreement shall be binding upon and inure solely to the
benefit of each party hereto and its successors and permitted assigns and
nothing in this Agreement, express or implied, is intended to or shall confer
upon any other person, including, without limitation, any option holder of
Limbex, any rights, benefits or remedies of any nature whatsoever under or by
reason of this Agreement.

8.6 GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of California as applied
to contracts between California residents made and to be performed entirely
within the State of California.

31
<PAGE>

8.7 FURTHER ASSURANCES. At the request of any of the
parties hereto, and without further consideration, the other parties agree to
execute such documents and instruments and to do such further acts as may be
necessary or desirable to effectuate the Merger.

8.8 EXPENSES. Provided that the Merger is consummated,
Quarterdeck shall pay any legal fees incurred by Limbex (but not any
shareholder thereof) in connection with the Merger up to the amount of $100,000
("Reimbursable Counsel Fees"). Neither Quarterdeck nor Limbex shall be liable
for or shall pay any Merger-related legal fees and expenses in excess of the
Reimbursable Counsel Fees incurred prior to the consummation of the Merger.

8.9 ATTORNEYS' FEES. In the event of any suit or other
proceeding to construe or enforce any provision of this Agreement or any other
agreement to be entered into pursuant hereto, or otherwise in connection with
this Agreement, the prevailing party's or parties' reasonable attorneys' fees
and costs (in addition to all other amounts and relief to which such party or
parties may be entitled) shall be paid by the other party or parties.

8.10 APPOINTMENT OF ESCROW COMMITTEE. By approval of this
Agreement (by written consent or at a duly authorized shareholders' meeting)
the shareholders shall appoint Allen and Jacobson as committee members pursuant
to the Escrow Agreement. Such committee members shall have all of the
authority granted pursuant to the Escrow Agreement.

8.11 COVENANT NOT TO COMPETE. Each of Allen and Jacobson,
severally and not jointly, agree that for a period of three years from the
Closing Date (the "Non-Compete Period"), he shall not, directly or indirectly,
as principal, agent, employee, employer, consultant, stockholder, partner or in
any other individual or representative capacity, engage in any business
directly competitive with the business currently conducted by Limbex in any
county or metropolitan area in which Limbex currently conducts business (the
"Competitive Business"); provided, further, that if the employment of Allen or
Jacobson is terminated by Quarterdeck without Cause or Jacobson or Allen
terminate their employment with Quarterdeck with Good Reason (as defined in
Section 4.9 of this Agreement) during the Non-Compete Period, Allen or
Jacobson, as the case may be, shall not be obligated to refrain from engaging
in the Competitive Business for more than one year from the date of such
termination. Notwithstanding anything to the contrary contained herein, Allen
and Jacobson may, without violating the provisions of this Section 8.11,
purchase and hold up to 5% of any entity whose shares are publicly traded on
NASDAQ or any U.S. stock exchange, whether or not such entity is engaged in a
Competitive Business. Any provision of this Section 8.11 which is deemed
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction and
subject to this paragraph be ineffective to the extent of such invalidity or
unenforceability, without affecting in any way the remaining provisions of this
paragraph in such jurisdiction or rendering that or any other provisions of
this Agreement invalid or unenforceable in any other jurisdiction. If any
covenant should be deemed invalid or unenforceable because of its scope,
geographical area or duration, or any combination thereof, such covenant shall
be modified and reformed so that the scope, geographic area and duration of the
covenant is reduced only to the minimum extent necessary to render the modified
covenant valid and enforceable. For

32
<PAGE>

purposes of this Section 8.11 only, each of the Allen and Jacobson agrees that
the counties and metropolitan areas in which Limbex currently conducts business
are those areas in which any product of Limbex may be purchased or is
accessible through electronic or other means.

33
<PAGE>

IN WITNESS WHEREOF, each of the parties has executed this
Agreement as of the date first above written.

QUARTERDECK CORPORATION

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

LIMBEX CORPORATION

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

THE SHAREHOLDERS:

-------------------------------------------
Bradley Allen

-------------------------------------------
Alexander Jacobson

-------------------------------------------
Howard Morgan

-------------------------------------------
Thelma Birks

-------------------------------------------
Michelle Kraus

-------------------------------------------
Clay Chisum

INFERENCE CORPORATION

By:
--------------------------------------

34
<PAGE>

EXHIBIT A

MERGER CONSIDERATION TO BE RECEIVED AT CLOSING

<TABLE>
<CAPTION>
SHARES TO BE RECEIVED
NAME IN MERGER
---- ---------
ESCROW NON-ESCROW TOTAL
------ ---------- -----
<S> <C> <C> <C>

Inference -- 77,897(1) 77,897(1)
Corporation

Howard Morgan 3,498(2) 31,486(2) 34,984(2)
</TABLE>

1 The shares of Limbex Common Stock owned by Inference shall
automatically be converted into the right to receive on the Closing
Date a number of shares of Quarterdeck Common Stock equal to $610,526
divided by the average closing sales price of Quarterdeck Common Stock
for the period of five business days ending on the business day two
business days prior to the Closing Date.

2 The shares of Limbex Common Stock owned by Howard Morgan shall
automatically be converted into the right to receive (i) 34,984 shares
of Quarterdeck Common Stock on the Closing Date and (ii) cash in an
amount equal to the fair market value of 18,838 shares of Quarterdeck
Common Stock, based upon the average closing sales price of
Quarterdeck Common Stock for a period of five business days ending on
the business day two business days prior to the Closing Date, payable
at the time that Howard Morgan is required by federal tax laws to pay
income taxes with respect to the shares of Quarterdeck Common Stock
received in the Merger; provided, however, that in no event shall
Quarterdeck pay such amount later than January 31, 1997, and offset by
any and all amounts that Mr. Morgan owes at such time to Quarterdeck.
<PAGE>

MERGER CONSIDERATION TO BE RECEIVED AFTER CLOSING

<TABLE>
<CAPTION>
DATE TO BE SHARES TO BE RECEIVED CASH CONSIDERATION TO BE RECEIVED IN TOTAL
NAME RECEIVED IN MERGER MERGER CONSIDERATION
---- --------- --------- ------ -------------
NON- NON-
ESCROW ESCROW TOTAL ESCROW ESCROW TOTAL
------ ------ ----- ------ ------- -----

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inference First -- (1) (1) -- -- -- (1)
Corporation Anniversary

Howard Tax Payment -- -- -- $14,765(2) $132,880(2) $147,645(2) (2)
Morgan Date

Brad Allen SEC 60,296 542,668 602,964 -- -- -- 602,964 shares
Effective
Date

Alex SEC 57,664 518,976 576,640 -- -- -- 576,640 shares
Jacobson Effective
Date

Thelma SEC 1,338 12,050 13,388 -- -- -- 13,388 shares
Birks Effective
Date

Clay SEC 268 2,410 2,678 -- -- -- 2,678 shares
Chisum Effective
Date

Michelle SEC 134 1,205 1,339 -- -- -- 1,339 shares
Kraus Effective
Date
</TABLE>

1 The shares of Limbex Series B Preferred owned by Inference shall
automatically be converted into the right to receive on the Inference
Preferred Consideration Date a number of shares of Quarterdeck Common
Stock equal to $3,599,753 divided by the average closing sales price
of Quarterdeck Common Stock for the period of five business days
ending on the business day two business days prior to the Inference
Preferred Consideration Date.

2
<PAGE>

EXHIBIT B

LIMBEX ESCROW AGREEMENT

This Agreement is made and entered into as of this 13th day of
August, 1996, by and among American Stock Transfer and Trust Company (the
"Escrow Agent"), Quarterdeck Corporation, a Delaware corporation
("Quarterdeck"), the shareholders of Limbex Corporation ("Limbex") listed on the
execution pages hereto (individually, a "Limbex Shareholder" and, collectively,
the "Limbex Shareholders"), and Bradley Allen and Alexander Jacobson (the
"Committee").

W I T N E S S E T H:

WHEREAS, Quarterdeck, Limbex and the Limbex Shareholders have
entered into an Agreement and Plan of Reorganization, dated as of August 13,
1996 (collectively, with all amendments, schedules, exhibits and certificates
referred to therein, the "Reorganization Agreement"), which provides for the
acquisition of Limbex by Quarterdeck by way of a merger of a subsidiary of
Quarterdeck with and into Limbex (the "Limbex Merger") in connection with which,
among other things, the issued and outstanding shares of common stock, $.00001
par value per share, of Limbex will be converted into the right to receive (i)
shares of common stock, $.001 par value per share, of Quarterdeck ("Quarterdeck
Common Stock") and/or (ii) cash, on the Closing Date, the SEC Effective Date (as
each such term is defined in the Reorganization Agreement) and December 31, 1996
(the "Issuance Dates") as specified in the Reorganization Agreement
(collectively, the "Merger Consideration"); and

WHEREAS, the Reorganization Agreement provides that the number
of shares of Quarterdeck Common Stock and the amount of cash set forth on
Exhibit A hereto to be issued or paid in the Limbex Merger and otherwise
distributable to the shareholders of Limbex pursuant thereto will be deposited
in escrow with the Escrow Agent pursuant to this Agreement.

NOW, THEREFORE, in consideration of the mutual premises and
covenants contained in the Reorganization Agreement and herein, the parties
agree as follows:

ARTICLE I

ESCROW

1.1 ESCROW.

(a) Subject to Sections 2.1 and 2.2 of this
Agreement, on each of the Issuance Dates, Quarterdeck shall, on behalf of each
of the Limbex Shareholders, deliver to the Escrow Agent, to the extent that each
such Limbex Shareholder receives Merger Consideration, and the Escrow Agent
shall hold in escrow, Quarterdeck Common Stock certificates in the names of each
such Limbex Shareholder representing the number of shares, if any, of
Quarterdeck Common Stock issued to such Limbex Shareholder on such date set
forth on Exhibit A hereto and the cash consideration, if any, paid to such
Limbex Shareholder on such date. The shares of Quarterdeck Common Stock
delivered into escrow are referred to as the "Limbex Escrow Shares;" the cash
consideration delivered into the Cash Escrow Account (as defined below) is
referred to as the "Escrow Cash;" and the Limbex Escrow Shares and the Escrow
Cash are collectively referred to as the "Escrow Consideration."

(b) Concurrently with the delivery of any Limbex
Escrow Shares to the Escrow Agent pursuant hereto, each Limbex Shareholder shall
execute a stock power with respect to such Limbex Shareholder's certificates
evidencing such shares, which stock power shall

42
<PAGE>

be delivered to the Escrow Agent and attached to the certificates evidencing
such shares. All Escrow Cash delivered by Limbex Shareholders to the Escrow
Agent pursuant hereto shall be held in a single separate account (the "Cash
Escrow Account") and shall be invested in accordance with written instructions
from the Committee to the Escrow Agent. The Limbex Escrow Shares and the Escrow
Cash shall be held and distributed by the Escrow Agent in accordance with the
terms and conditions of this Agreement.

(c) Promptly following the issuance thereof,
Quarterdeck shall provide a written notice to the Escrow Agent (with a copy to
the Committee) of the total number of shares of Quarterdeck Common Stock issued
to each Limbex Shareholder, the amount of cash consideration paid to each Limbex
Shareholder and the number of shares of Quarterdeck Common Stock and the amount
of cash consideration to be deposited into escrow by each Limbex Shareholder.

ARTICLE II

APPLICATION OF ESCROW CONSIDERATION

2.1 DISTRIBUTION OF ESCROW CONSIDERATION.

(a) Within five (5) business days after the date
one year from the Closing of the Limbex Merger, the Escrow Agent shall
distribute to the Limbex Shareholders all of the Escrow Consideration then held
in the escrow pursuant to Article I hereof, less Escrow Consideration having an
aggregate value most nearly equal to the amount of any pending claims asserted
by Quarterdeck under the Reorganization Agreement as is set forth in a written
notice from Quarterdeck to the Escrow Agent prior thereto. The value of such
pending claims shall be determined in good faith by the Board of Directors of
Quarterdeck, after taking into account such factors as the Board of Directors
shall deem appropriate, provided that if the Committee by prompt written notice
to the Escrow Agent does not agree with the Board of Directors' determination of
the amount of any such pending claims, the amount of any such pending claim
shall be finally determined in accordance with Section 2.5 of this Agreement.
The Escrow Consideration shall be distributed to the Limbex Shareholders on a
pro rata basis, based on each Limbex Shareholder's equity interest in Limbex
immediately prior to the Closing of the Limbex Merger, with each Limbex
Shareholder being entitled to receive such Limbex Shareholder's proportionate
share of Escrow Cash and/or Limbex Escrow Shares deposited by such Limbex
Shareholder in escrow.

(b) The Escrow Consideration not so distributed
pursuant to Section 2.1(a) shall be retained in escrow by the Escrow Agent until
all such pending claims are resolved and the Escrow Agent receives written
instructions from Quarterdeck and the Committee to distribute such Escrow
Consideration or the Escrow Agent receives written instructions from an
arbitrator or court to distribute such Escrow Consideration; provided, that upon
the disposition of any such claims prior to the disposition of all such claims,
the Escrow Agent shall, upon receipt of written instructions from Quarterdeck
and the Committee or an arbitrator or court, deliver to the Limbex Shareholders
Escrow Consideration in the amount indicated in such written notice and which,
in the aggregate, is most nearly equal to the excess of the value of the
remaining Escrow Consideration over the amount of the remaining unresolved and
pending aggregate claims as determined above.

43
<PAGE>

2.2. PROCEDURE FOR INDEMNIFICATION OF QUARTERDECK AND THE
SURVIVING CORPORATION.

(a) If Quarterdeck shall have any claim against
the Limbex Shareholders pursuant to Article 6 of the Reorganization Agreement
(but excluding claims resulting from the assertion of liability by third
parties) for which it seeks recourse against the Escrow Consideration, it shall
promptly give written notice thereof to the Escrow Agent and the Committee,
including in such notice a brief description of the facts upon which such claim
is based and the amount thereof. If the Committee objects to the allowance of
any such claims, it shall give written notice to Quarterdeck and the Escrow
Agent within forty-five (45) days following receipt of Quarterdeck's notice of
claim, advising it and the Escrow Agent that it does not consent to the delivery
of any or some of the Escrow Consideration out of escrow for application to such
claims. If no such written notice is timely provided by the Committee to
Quarterdeck and the Escrow Agent and received by the Escrow Agent within
forty-five (45) days following the Committee's receipt of Quarterdeck's notice
of claim, the Escrow Agent shall, within five (5) business days after the
expiration of the prior notice period, deliver out of escrow the lesser of: (a)
that portion of the Escrow Consideration most nearly equal in value to the
amount of the claim or claims thus to be satisfied, or (b) all of the Escrow
Consideration. If the Committee notifies Quarterdeck and the Escrow Agent; and
the Escrow Agent receives written notice within the foregoing forty-five (45)
day period that the Committee objects to such application of the Escrow
Consideration after a claim has been made, the Escrow Agent shall hold the
Escrow Consideration most nearly equal to the amount of the claim or claims then
made in escrow until the rights of the Limbex Shareholders and Quarterdeck with
respect thereto have been agreed upon between the Committee and Quarterdeck in
accordance with this Agreement and the Escrow Agent receives written notice from
Quarterdeck and the Committee accordingly. If any distribution referred to in
this Section 2.2(a) involves less than all of the Escrow Consideration, it shall
be allocated pro rata against the Escrow Consideration therein based on the
Escrow Consideration beneficially owned by each Limbex Shareholder (unless the
claim made is based on an inaccuracy or breach of a representation or warranty
contained in Article 2A of the Reorganization Agreement, in which case the
allocation of the distribution of the Escrow Consideration shall be determined
in accordance with Section 6.2(b) of the Reorganization Agreement).

(b) In the event Quarterdeck is an "indemnified
party" with respect to a third party claim for which it seeks recourse to the
Escrow Consideration and a settlement or judgment is reached with respect to
such claim, Quarterdeck shall promptly give written notice thereof to the
Committee and the Escrow Agent, including in such notice a brief description of
the settlement or judgment and the amount thereof. If the Committee objects to
the allowance of any such claims, it shall give written notice to such
indemnified party and the Escrow Agent within thirty (30) days following receipt
of such notice of claim, advising Quarterdeck and the Escrow Agent that it does
not consent to the delivery of any or some of the Escrow Consideration out of
escrow to Quarterdeck for application to such claims. If no such written notice
is timely provided by the Committee to Quarterdeck and the Escrow Agent and
received by the Escrow Agent within thirty (30) days following the Committee's
receipt of Quarterdeck's notice of claim, the Escrow Agent shall, within five
(5) business days after the expiration of the prior thirty (30) day notice
period, deliver out of escrow the lesser of: (a) that portion of the Escrow
Consideration most nearly equal in value to the amount of the claim or claims
thus to be satisfied, or (b) all of the Escrow Consideration. If the Committee
objects to such application of the Escrow Consideration by notifying Quarterdeck
and the Escrow Agent, and the Escrow Agent receives such written notice within
the foregoing thirty (30) day period, the Escrow Agent shall hold the Escrow
Consideration in escrow until the rights of the Limbex Shareholders and
Quarterdeck with respect thereto have been agreed upon between the Committee and
Quarterdeck or until

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<PAGE>

such rights are finally determined in accordance with this Escrow Agreement and
the Escrow Agent receives written notice from Quarterdeck and the Committee
accordingly. If any distribution referred to in this Section 2.2(b) involves
less than all of the Escrow Consideration, it shall be allocated pro rata
against the Escrow Consideration therein based on the Escrow Consideration
beneficially owned by each Limbex Shareholder (unless the claim made is based on
an inaccuracy or breach of a representation or warranty contained in Article 2A
of the Reorganization Agreement, in which case the allocation distribution of
the Escrow Consideration shall be determined in accordance with Section 6.2(b)
of the Reorganization Agreement).

2.3 OWNERSHIP OF LIMBEX ESCROW SHARES; VOTING RIGHTS. The
Limbex Shareholders shall have all indicia of ownership of the Limbex Escrow
Shares and shall remain the registered owners of such shares while they are held
in escrow, including, without limitation, the right to vote the Limbex Escrow
Shares and receive distributions thereon and the obligations to pay all taxes,
assessments, and charges with respect thereto, but excluding the right to sell,
transfer, pledge, hypothecate or otherwise dispose of any Limbex Escrow Shares;
provided, that any distribution of stock of Quarterdeck on or with respect to
the Limbex Escrow Shares and any other shares or securities into which such
Limbex Escrow Shares may be changed or for which they may be exchanged pursuant
to corporate action of Quarterdeck affecting holders of Quarterdeck Common Stock
generally shall be delivered to the Escrow Agent and upon such delivery and
receipt, held in escrow and shall be subject to the indemnity and escrow
provisions of Article 6 of the Reorganization Agreement. All amounts earned and
received into escrow on the Limbex Escrow Shares (dividends or other
distributions) shall be distributed pro rata to the Limbex Shareholders based
upon their beneficial ownership of Limbex Escrow Shares from time to time upon
the written request of the Committee, and the Escrow Agent shall be reimbursed
by Quarterdeck for the reasonable cost of such distribution. The Escrow Agent
shall have no responsibility or liability for shares or property not delivered
and received by it.

2.4 RIGHTS TO AMOUNTS EARNED ON ESCROW CASH. All amounts earned
and received into escrow with respect to the Escrow Cash shall be distributed
pro rata to the Limbex Shareholders based upon their beneficial ownership of the
Escrow Cash within five (5) business days after the date one year from the
Closing of the Limbex Merger, and the Escrow Agent shall be reimbursed by
Quarterdeck for the reasonable cost of such distribution.

2.5 ARBITRATION. Any controversy involving a claim by
Quarterdeck pursuant to Article 6 of the Reorganization Agreement or this
Agreement or a claim by any Limbex Shareholder pursuant to Article 6 of the
Reorganization Agreement or this Agreement shall be finally settled by
arbitration in Los Angeles, California, in accordance with the then-current
Commercial Arbitration Rules of the American Arbitration Association, and
judgment upon the award rendered by the arbitrators may be entered in any court
having jurisdiction thereof. Such arbitration shall be conducted by three
arbitrators chosen by mutual agreement of the Committee and Quarterdeck. Failing
such agreement, the arbitration shall be conducted in accordance with the
foregoing rules. Discovery, including without limitation the production of
books, records, documents and other evidence, and the taking of depositions,
shall be freely granted at the request of either party, subject to the
discretion and control of the arbitrators. At the conclusion of any arbitration,
the arbitrators will issue a written opinion of findings of fact and conclusions
of law. Upon receipt of such opinion, either party may file within ten (10) days
thereafter a motion to reconsider, and the arbitrators thereupon will reconsider
the issues raised by such motion and either confirm or change the decision,
which will then be final and conclusive. Depositions shall be conducted in
accordance with the California Code of Civil Procedure. The cost and expenses
(including counsel fees) of any such arbitration shall be borne by the Limbex
Shareholders and Quarterdeck in such proportions as shall be determined by the
arbitrators, or if there is no such

45
<PAGE>

determination, each party shall pay its own costs and expenses (including
counsel fees) of any such arbitration.

2.6 MARKET VALUE OF LIMBEX ESCROW SHARES. For purposes
of this Article II, the market value of Limbex Escrow Shares shall be
determined as provided in Article 6 of the Reorganization Agreement.

ARTICLE III

AUTHORITY AND INDEMNIFICATION

3.1 AUTHORITY. Upon consummation of the Limbex Merger and in
consideration of the Merger Consideration, each Limbex Shareholder shall be
deemed to have irrevocably appointed the Committee as their attorneys in fact to
contest, settle, compromise or otherwise dispose of any claim made by
Quarterdeck in accordance with this Agreement. No further documentation shall be
required to evidence such appointment, and such power of attorney shall be
coupled with an interest, thereby confirming such appointment as irrevocable.
The Committee shall be empowered to act by unanimous vote with respect to all
matters arising under this Agreement.

3.2 INDEMNITY. No Committee member shall be liable to anyone
whatsoever by reason of any error of judgment or for any act done or step taken
or omitted by them in good faith or for any mistake of fact or law for anything
which he or she may do or refrain from doing in connection herewith unless
caused by or arising out of his or her own gross negligence or willful
misconduct. Each Limbex Shareholder shall, jointly and severally, indemnify and
hold the Committee, and each of them, harmless from any and all liability and
expense (including, without limitation, counsel fees) which may arise out of any
action taken or omitted by them as a Committee member in accordance with this
Agreement, as the same may be amended, modified or supplemented, except such
liability and expense as may result from the gross negligence or willful
misconduct of a Committee member.

3.3 RELIANCE. The Committee shall be entitled to treat as
genuine any letter, paper, facsimile, telex, or other document furnished or
caused to be furnished to it by any party to this Agreement and believed by it
to be genuine and to have been telexed, telegraphed, faxed, or cabled or signed
and presented by any party to this Agreement.

ARTICLE IV

ESCROW AGENT

4.1 DUTIES AND OBLIGATIONS. The duties and obligations of the
Escrow Agent are exclusively set forth in this Agreement, as each may from time
to time be amended. The Escrow Agent may request, rely and shall be protected in
acting or refraining from acting upon any written notice, request, waiver,
consent, receipt or other paper or document from Quarterdeck, Limbex or any
Committee member, not only as to its due execution and the validity and
effectiveness of its provisions, but also as to the truth of any information
therein contained, that the Escrow Agent in good faith believes to be genuine
and as to which the Escrow Agent shall have no actual notice of invalidity, lack
of authority or other deficiency.

The Escrow Agent shall not be liable for any error of judgment,
or for any act done or step taken or omitted by it in good faith, or for any
mistake of fact or law, for anything which it may do or refrain from doing in
connection therewith, except for any liability arising from its own gross
negligence or willful misconduct.

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<PAGE>

The Escrow Agent shall be entitled to consult with competent
and responsible counsel of its choice with respect to the interpretation of the
provisions hereof, and any other legal matters relating hereto, and shall be
fully protected in taking any action or omitting to take any action in good
faith in accordance with the advice of such counsel. The Escrow Agent shall be
entitled to request written instructions from Quarterdeck or the Committee as
the case may be, and shall have the right to refrain from acting until it has
received such written instructions.

No provision in this Agreement or in the Reorganization
Agreement shall require the Escrow Agent to risk or expend its own funds or
otherwise incur any financial liability in the performance of any of its duties
hereunder; provided that the Escrow Agent will be promptly paid or reimbursed
upon request for any and all expenses, fees, costs, disbursements and/or
advances which may be incurred or made by it in accordance with the provisions
hereof (including reasonable compensation, and any expenses and disbursements of
Escrow Agent's counsel, and all agents not regularly in Escrow Agent's employ).

4.2 RISK OF LOSS. The Escrow Agent acknowledges and
agrees that the Escrow Agent bears the exclusive risk of loss, theft or damage
with respect to the Limbex Escrow Shares in its possession.

4.3 ESCROW AGENT'S COMPENSATION. Quarterdeck shall pay to the
Escrow Agent compensation in respect of the Escrow Agent's duties and
obligations under this Agreement. Upon the execution of this Agreement and the
delivery of the Limbex Escrow Shares to the Escrow Agent, the Escrow Agent shall
be entitled to a one-time escrow fee of $1,000; provided that in the event that
the escrow contemplated by this Agreement remains in effect after the one (1)
year anniversary of the Closing of the Limbex Merger, then the Escrow Agent
shall be entitled to received from Quarterdeck such additional escrow fees as
the parties may agree.

4.4 RESIGNATION. The Escrow Agent may resign at any time by
giving not less than sixty (60) days written notice thereof to each of
Quarterdeck and the Committee.

4.5 SUCCESSOR ESCROW AGENT. Upon receipt of the Escrow Agent's
notice of resignation, Quarterdeck and the Committee may appoint a successor
escrow agent. Upon the acceptance of the appointment as escrow agent hereunder
by a successor escrow agent and the transfer to such successor escrow agent of
the Limbex Escrow Shares, the resignation of the Escrow Agent shall become
effective and the Escrow Agent shall be discharged from any future duties and
obligations under this Agreement.

4.6 CONFLICTING DEMANDS. If on or before the close of escrow
the Escrow Agent receives or becomes aware of any conflicting demands or claims
with respect to the Escrow Consideration or the rights of any of the parties
hereto to such Escrow Consideration, the Escrow Agent shall have the right to
discontinue any or all further acts on the Escrow Agent's part until such
conflict is resolved to the Escrow Agent's satisfaction, and the Escrow Agent
shall have the right to commence or defend any action or proceedings for the
determination of such conflict. In the event any of the above-described events
occur, each of Quarterdeck, on the one hand, and the Limbex Shareholders (pro
rata based on the Merger Consideration received by the Limbex Shareholders in
connection with the Limbex Merger), on the other hand, agree to pay one half of
all costs, damages, judgments and expenses, including reasonable attorneys fees,
suffered or incurred by the Escrow Agent in connection with, or arising out of,
such conflicting demands or claims, including, without limitation, a suit in
interpleader brought by the Escrow Agent.

4.7 INDEMNITY. The Limbex Shareholders and Quarterdeck
hereby agree to jointly and severally indemnify the Escrow Agent for, and to
hold it harmless against any loss,

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<PAGE>

liability or expense arising out of or in connection with this Agreement and
carrying out its duties hereunder, including the costs and expenses of defending
itself against any claim of liability, except in those cases where the Escrow
Agent has been guilty of gross negligence or willful misconduct. Anything in
this Agreement to the contrary notwithstanding, in no event shall the Escrow
Agent be liable for special, indirect or consequential loss or damage of any
kind whatsoever (including, but not limited to, lost profits), even if the
Escrow Agent has been advised of the likelihood of such loss or damage and
regardless of the form of action.

ARTICLE V

MISCELLANEOUS

5.1 NOTICES. Unless otherwise provided, all notices or other
communications required or permitted to be given to the parties hereto shall be
in writing and shall be deemed to have been given if personally delivered
(including personal delivery by facsimile, provided that the sender receives
telephonic or electronic confirmation that the facsimile was received by the
recipient), or three (3) days after mailing by certified or registered mail,
return receipt requested, first class postage prepaid, addressed as follows (or
at such other address as the addressed party may have substituted by notice
pursuant to this Section 5.1):

(a) If to Quarterdeck or Acquisition Sub:

Quarterdeck Corporation
13160 Mindanao Way, 3rd Floor
Marina del Rey, CA 90292
Attention: Law Department
Facsimile:(310) 309-4218

(b) If to the Committee, to their respective addresses set
forth below their respective names in Schedule A attached hereto.

American Stock Transfer and Trust Company
6201 15th Avenue
Brooklyn, New York 11219
Attention: _______________________
Facsimile: _______________________

5.2 TERMINATION. This Agreement shall terminate upon the mutual
written express agreement of Quarterdeck and the Committee. In any event, this
Agreement shall terminate when all of the Escrow Consideration has been
distributed in accordance with the terms hereof.

5.3 INTERPRETATION. The validity, construction, interpretation
and enforcement of this Agreement shall be determined and governed by the laws
of the State of California. The invalidity or unenforceability of any provision
of this Agreement or the invalidity or unenforceability of any provision as
applied to a particular occurrence or circumstance shall not affect the validity
or enforceability of any of the other provisions of this Agreement or the
applicability of such provision, as the case may be. All capitalized terms used
in this Agreement, unless otherwise defined herein, shall have the meanings
ascribed to them in the Reorganization Agreement.

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<PAGE>

5.4 COUNTERPARTS. This Agreement may be signed in one or
more counterparts, each of which shall be deemed an original and all of which
shall constitute one agreement.

5.5 TRANSFER OF INTERESTS. None of the Limbex Shareholders
shall sell, transfer, pledge, hypothecate or otherwise dispose of any Escrow
Consideration, or any interest therein, prior to the distribution of such Escrow
Consideration in accordance with Section 2.1 above.

5.6 TAXES. For purposes of federal and state income taxation,
the Escrow Consideration shall be treated as owned by the Limbex Shareholders
and this Agreement shall be interpreted in a manner to effect the Limbex
Shareholders' ownership of the Escrow Consideration for such tax purposes as of
the date such Escrow Consideration is issued or paid by Quarterdeck to the
Limbex Shareholders.

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<PAGE>

IN WITNESS WHEREOF, the parties have signed this Agreement on
the day and year first above written.

AMERICAN STOCK TRANSFER AND TRUST
COMPANY, as Escrow Agent

By:
-------------------------------------

QUARTERDECK CORPORATION, a Delaware
corporation

By:
-------------------------------------

THE LIMBEX SHAREHOLDERS:

----------------------------------------
Bradley Allen

----------------------------------------
Alexander Jacobson

----------------------------------------
Howard Morgan

----------------------------------------
Thelma Birks

----------------------------------------
Michelle Kraus

----------------------------------------
Clay Chisum

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<PAGE>

THE COMMITTEE

----------------------------------------
Bradley Allen

----------------------------------------
Alexander Jacobson

Address:
c/o Limbex Corporation
13160 Mindanao Way, 2nd Floor
Marina del Rey, CA 90292

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<PAGE>

EXHIBIT A

MERGER CONSIDERATION TO BE RECEIVED AT CLOSING

SHARES TO BE RECEIVED
NAME IN MERGER
---- ---------
ESCROW NON-ESCROW TOTAL
------ ---------- -----
Inference -- 77,897(1) 77,897(1)
Corporation

Howard Morgan 3,498(2) 31,486(2) 34,984(2)

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<PAGE>

MERGER CONSIDERATION TO BE RECEIVED AFTER CLOSING

DATE TO BE SHARES TO BE RECEIVED CASH CONSIDERATION TO BE RECEIVED IN TOTAL
NAME RECEIVED IN MERGER MERGER CONSIDERATION
---- --------- --------- ------ -------------
NON-
ESCROW ESCROW TOTAL ESCROW NON-ESCROW TOTAL
------ ------ ----- ------ ---------- -----

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inference First -- (1) (1) -- -- -- (1)
Corporation Anniversary

Howard Tax Payment -- -- -- $14,765(2) $132,880(2) $147,645(2) (2)
Morgan Date

Brad Allen SEC 60,296 542,668 602,964 -- -- -- 602,964 shares
Effective
Date

Alex SEC 57,664 518,976 576,640 -- -- -- 576,640 shares
Jacobson Effective
Date

Thelma SEC 1,338 12,050 13,388 -- -- -- 13,388 shares
Birks Effective
Date

Clay SEC 268 2,410 2,678 -- -- -- 2,678 shares
Chisum Effective
Date

Michelle SEC 134 1,205 1,339 -- -- -- 1,339 shares
Kraus Effective
Date
</TABLE>

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<PAGE>

EXHIBIT C

REGISTRATION RIGHTS AGREEMENT

THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made
and entered into as of August 13, 1996, by and among Quarterdeck Corporation, a
Delaware corporation (the "Company"), and the holders of capital stock of Limbex
Corporation, a California corporation ("Limbex"), set forth on the signature
pages hereto (the "Holders").

WHEREAS, each Holder is or will become the owner of Shares (as
defined below) in connection with the acquisition of Limbex by Quarterdeck by
way of the merger of a subsidiary of Quarterdeck with and into Limbex (the
"Merger"), pursuant to the terms of the Agreement and Plan of Reorganization,
dated as of August 13, 1996 (the "Acquisition Agreement"), by and among the
Company, Limbex, and certain other parties; and

WHEREAS, pursuant to the terms of the Acquisition Agreement,
the Company has agreed to grant to the Holders the registration rights provided
for below.

NOW, THEREFORE, the parties hereto, in consideration of the
foregoing, the mutual covenants and agreements set forth in the Acquisition
Agreement and hereinafter set forth, and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, agree as follows:

1. Certain Definitions.

As used in this Agreement, the following capitalized defined
terms shall have the following meanings:

"Closing" shall have the meaning specified in the Acquisition
Agreement.

"Closing Date" shall have the meaning specified in the
Acquisition Agreement.

"Inference Preferred Consideration Date" shall have the meaning
specified in the Acquisition Agreement.

"Limbex Common Stock" shall mean the common stock, $.00001 par
value per share, of Limbex.

"Person" shall mean an individual or a corporation,
partnership, limited liability company, association, trust, or any other entity
or organization, including a government or political subdivision or an agency or
instrumentality thereof.

"Prospectus" shall mean any prospectus included in a
Registration Statement including any resale prospectus and any preliminary
prospectus, and any amendment or supplement thereto, and in each case including
all material incorporated by reference therein.

"Registration Expenses" shall mean any and all expenses
incident to performance of or compliance with this Agreement, including, without
limitation: (i) all

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<PAGE>

applicable registration and filing fees imposed by the SEC and such securities
exchange or exchanges on which securities of the same class are then listed or
the National Association of Securities Dealers, Inc. ("NASD"), (ii) all fees and
expenses incurred in connection with compliance with state securities or "blue
sky" laws (including reasonable fees and disbursements of counsel in connection
with qualification of any of the Shares under any state securities or blue sky
laws and the preparation of a blue sky memorandum) and compliance with the rules
of the NASD, (iii) all expenses of any Persons in preparing or assisting in
preparing, printing and distributing the Registration Statement, any Prospectus,
certificates and other documents relating to the performance of and compliance
with this Agreement, (iv) all fees and expenses incurred in connection with the
listing, if any, of any of the Shares on any securities exchange or exchanges
pursuant to Section 3(j) hereof, and (v) the fees and disbursements of counsel
for the Company and of the independent public accountants of the Company,
including the expenses of any special audits or "cold comfort" letters required
by or incident to such performance and compliance. Registration Expenses shall
specifically exclude underwriting discounts and commissions, the fees and
disbursements of counsel representing a Holder and transfer taxes, if any,
relating to the sale or disposition of Shares by a Holder, all of which shall be
borne by such Holder in all cases.

"Registration Statement" shall mean the registration statements
(or amendments to registration statements) filed by the Company pursuant to
Section 2(a) of this Agreement.

"SEC" shall mean the Securities and Exchange Commission or any
successor entity.

"SEC Effective Date" shall have the meaning specified in the
Acquisition Agreement.

"Securities Act" shall mean the Securities Act of 1933, as
amended from time to time.

"Shares" shall mean shares of common stock, par value $.001 per
share, ("Common Shares") of the Company, issued or issuable to the Holders as
consideration in the Merger, adjusted for any reclassification,
recapitalization, split, reverse split, stock dividend or combination.

2. Registration under the Securities Act.

(a) Registration.

(i) Inference Closing Shares and SEC
Effective Date Shares. The Company shall file a registration statement on Form
S-3 or an amendment to an existing registration statement on Form S-3 within
three business days following the Closing, relating to the sale by (A) Inference
Corporation, a Delaware corporation ("Inference"), of Shares received by it in
the Merger on the Closing Date with respect to shares of Limbex Common Stock
owned by it, and (B) the Holders of Shares to be received on the SEC Effective
Date, and shall use its best efforts to cause such registration statement or
amendment to be declared effective by the

55
<PAGE>

SEC on or before September 15, 1996 or as soon as practicable thereafter. The
Company agrees to use its best efforts to keep the registration statement filed
hereunder continuously effective (and to include a Prospectus at all times
meeting the requirements of the Securities Act) for a period of two years (or
one year if the SEC changes the holding period required under Rule 144 under the
Securities Act from two years to one year) from the SEC Effective Date.

(ii) Inference Preferred Consideration
Shares. The Company shall file a registration statement on Form S- 3 or an
amendment to an existing registration statement on Form S-3 on or before May 31,
1997 relating to the sale by Inference of the Shares reasonably expected to be
issued to Inference on the Inference Preferred Consideration Date, and shall use
its best efforts to cause such registration statement or amendment to be
declared effective by the SEC on the Inference Preferred Consideration Date or
as soon thereafter as practicable. The Company agrees to use its best efforts to
keep the registration statement (or amendment) filed hereunder continuously
effective (and to include a Prospectus at all times meeting the requirements of
the Securities Act) for a period of two years (or one year if the SEC changes
the holding period required under Rule 144 under the Securities Act from two
years to one year) from the Inference Preferred Consideration Date.

(b) Expenses. The Company shall pay all
Registration Expenses in connection with a registration pursuant to this
Agreement.

(c) Plan of Distribution. Subject to compliance
by Quarterdeck's employees with Quarterdeck's policies relating to trading in
Quarterdeck's Common Stock by employees and with applicable federal and state
securities law and regulations, any registration statement filed pursuant to
this Agreement shall include disclosure under the caption "Plan of Distribution"
or other appropriate caption that contemplates distribution of the Shares by the
selling stockholders and their permitted assignees, including hedging
transactions and/or short sales, option transactions and loans to secure such
transactions.

3. Registration Procedures.

In connection with the obligations of the Company under Section
2 hereof, the Company shall:

(a) prepare and file with the SEC, within the
time period set forth in Section 2 hereof, and use its best efforts to have
declared effective by the SEC, the Registration Statements, which shall (i) be
available for public resale of the Shares by the selling Holders, and (ii)
comply as to form in all material respects with the requirements of the
applicable form and include all company-related information and financial
statements required by the SEC to be filed therewith;

(b) (i) prepare and file with the SEC such
amendments to the Registration Statements as may be necessary to keep it
effective for the applicable period; (ii) cause any Prospectus to be amended or
supplemented as required and to be filed as required by Rule 424 or any similar
rule that may be adopted under the Securities Act; (iii) respond as promptly as
practicable to any comments received from the SEC with respect

56
<PAGE>

to the Registration Statement or any amendment thereto; and (iv) comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such Registration Statement during the applicable period
in accordance with the intended method or methods of distribution by the selling
Holders thereof;

(c) furnish to each Holder, upon request and
without charge, as many copies of any Prospectus and any amendment or supplement
thereto as is requested in order to facilitate the public sale or other
disposition of the Shares;

(d) use its best efforts to register or qualify
the Shares under all applicable state securities or blue sky laws of such
jurisdictions in the United States and its territories and possessions as any
Holder shall reasonably request in writing and keep such registration or
qualification effective during the period the Registration Statement is required
to be kept effective; provided, however, that in connection therewith, the
Company shall not be required to (i) qualify as a foreign corporation to do
business or to register as a broker or dealer in any such jurisdiction where it
would not otherwise be required to qualify or register but for this Section
3(d), (ii) subject itself to taxation in any such jurisdiction with respect to
such registration or qualification, or (iii) file a general consent to service
of process in any such jurisdiction;

(e) notify each Holder promptly and, if requested
by a Holder, confirm in writing, (i) when the Registration Statement and any
post-effective amendments thereto have become effective, (ii) when any amendment
or supplement to a Prospectus has been filed with the SEC, (iii) of the issuance
by the SEC or any state securities authority of any stop order suspending the
effectiveness of the Registration Statement or any part thereof or the
initiation of any proceedings for that purpose, (iv) if the Company receives any
notification with respect to the suspension of the qualification of the Shares
for offer or sale in any jurisdiction or the initiation of any proceeding for
such purpose, and (v) of the happening of any event during the period the
Registration Statement is effective as a result of which (A) such Registration
Statement contains any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading or (B) a Prospectus as then amended or supplemented
contains any untrue statement of a material fact or omits to state any material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading;

(f) use best efforts to obtain the withdrawal of
any order suspending the effectiveness of the Registration Statement by the SEC
or any state securities authority as promptly as possible and to amend and cure
any deficiencies resulting in such suspension;

(g) furnish to each Holder upon request, without
charge, at least one conformed copy of the Registration Statement and any
post-effective amendment thereto (without documents incorporated therein by
reference or exhibits thereto, unless requested);

(h) cooperate with the Holders to facilitate the
timely preparation and delivery of certificates representing Shares to be sold
and not bearing any Securities Act legend

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<PAGE>

and enable certificates for such Shares to be issued for such numbers of Shares
and registered in such names as the Holders may reasonably request; and

(i) use its best efforts to cause all Shares to
be listed on any securities exchange or NASD Automatic Quotation System on
which the Common Shares are then listed;

4. Certain Agreements of Holders.

(a) Each Holder agrees to furnish to the Company
in writing such information regarding the Holder and such Holder's proposed
distribution of Shares as the Company may from time to time reasonably request
in connection with the preparation of the Registration Statement, or
registration or qualification of the Shares under state securities or blue sky
laws and, furnish to the Company in writing such information regarding all sales
or other dispositions of Shares made by the Holder as the Company may from time
to time reasonably request.

(b) Each Holder agrees, if requested by the
Company in the case of a Company initiated non-underwritten offering or if
requested by the managing underwriter or underwriters in a Company initiated
underwritten offering, not to effect any public sale or distribution of any
Shares, including a sale pursuant to Rule 144 under the Securities Act (except
as part of such Company initiated registration), during the ten day period prior
to, and during the ninety day period beginning on, the date of effectiveness of
each Company initiated offering made pursuant to its registration statement, to
the extent timely notified in writing by the Company or the managing
underwriters.

5. Indemnification, Contribution.

(a) Indemnification by the Company. The Company
agrees to indemnify and hold harmless each Holder and its officers, directors,
partners, agents, brokers and underwriters and each Person, if any, who controls
any Holder within the meaning of Section 15 of the Securities Act, as follows
with respect to any Registration Statement covering the resale by such Holder of
any Shares:

(i) against any and all loss, liability,
claim, damage and expense whatsoever, as incurred, to which such Holder,
officer, director, partner, agent, broker, underwriter or controlling Person may
become subject under the Securities Act or otherwise (A) that arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or any amendment thereto, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading or (B)
that arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in any Prospectus or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading;

58
<PAGE>

(ii) against any and all loss, liability,
claim, damage and expense whatsoever, as incurred, to the extent of the
aggregate amount paid in settlement of any litigation, investigation or
proceeding by any governmental agency or body, commenced or threatened, or of
any claim whatsoever, based upon any such untrue statement or alleged untrue
statement, or any such omission or alleged omission, if such settlement is
effected with the written consent of the Company; and

(iii) subject to the limitations set forth
in Section 5(c), against any and all expense whatsoever, as incurred (including
reasonable fees and disbursements of counsel), reasonably incurred in
investigating, preparing or defending against any litigation, investigation or
proceeding by any governmental agency or body, commenced or threatened, in each
case whether or not a party, or any claim whatsoever, based upon any such untrue
statement or alleged untrue statement, omission or alleged omission that relates
to the sale by a Holder of Shares under the Registration Statement, to the
extent that any such expense is not paid under subparagraph (i) or (ii) above;
provided, however, that the indemnity provided pursuant to this Section 5(a)
shall not apply to any Holder with respect to any loss, liability, claim, damage
or expense that arises out of or is based upon (1) any untrue statement or
alleged untrue statement or omission or alleged omission made in reliance upon
and in conformity with written information furnished to the Company by such
Holder expressly for use in the Registration Statement or any amendment thereto
or a Prospectus or any amendment or supplement thereto or (2) trades made by
such Holder in violation of Section 6 below.

(b) Indemnification by Holders. Each Holder
severally, in proportion of the number of Shares to be sold by such Holder
pursuant to such Registration Statement, agrees to indemnify and hold harmless
the Company and the other selling holders, and each of their respective
directors, officers and partners (including each director of the Company and
each officer of the Company who signed the Registration Statement), and each
Person, if any, who controls the Company or any other selling holder within the
meaning of Section 15 of the Securities Act, to the same extent as the indemnity
contained in Section 5(a) hereof, but only insofar as such loss, liability,
claim, damage or expense arises out of or is based upon any untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement or any amendment thereto or the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by such selling Holder expressly for use
therein; provided, that, with respect to the Holders' indemnification
obligations set forth in this Section 5(b) with respect to Section 5(a)(ii)
above, such settlement is effected with the written consent of the Holders
against which indemnification is sought.

(c) Conduct of Indemnification Proceedings. Each
indemnified party shall give reasonably prompt notice to each indemnifying party
of any action or proceeding commenced against it in respect of which indemnity
may be sought hereunder, but failure to so notify an indemnifying party (i)
shall not relieve it from any liability which it may have under the indemnity
agreement provided in Section 5(a) or (b) above, unless and to the extent it did
not otherwise learn of such action and the lack of notice by the indemnified
party materially prejudices the indemnifying party or results in the forfeiture
by the indemnifying party of

59
<PAGE>

substantial rights and defenses and (ii) shall not, in any event, relieve the
indemnifying party from any obligations to any indemnified party other than the
indemnification obligation provided under Section 5(a) or (b) above. After
receipt of such notice, the indemnifying party shall be entitled to participate
in and, at its option, jointly with any other indemnifying party so notified, to
assume the defense of such action or proceeding at such indemnifying party's own
expense with counsel chosen by such indemnifying party and approved by the
indemnified party, which approval shall not be unreasonably withheld; provided,
however, that, if the defendants in any such action or proceeding include both
the indemnified party and the indemnifying party and the indemnified party
reasonably determines, upon advice of counsel, that a conflict of interest
exists or that there may be legal defenses available to it or other indemnified
parties that are different from or in addition to those available to the
indemnifying party, then the indemnified party shall be entitled to counsel
(which shall be limited to a single law firm) the reasonable fees and expenses
of which shall be paid by the indemnifying party. If the indemnifying party does
not assume the defense of any such action or proceeding, after having received
the notice referred to in the first sentence of this paragraph, the indemnifying
party will pay the reasonable fees and expenses of counsel (which shall be
limited to a single law firm) for the indemnified party. In such event, however,
the indemnifying party will not be liable for any settlement effected without
the written consent of such indemnifying party. If the indemnifying party
assumes the defense of any such action or proceeding in accordance with this
paragraph, such indemnifying party shall not be liable for any fees and expenses
of counsel for the indemnified party incurred thereafter in connection with such
action or proceeding except as set forth in the proviso in the second sentence
of this Section 5(c).

(d) Contribution. In order to provide for just
and equitable contribution in circumstances in which the indemnity agreement
provided for in this Section 5 is for any reason held to be unenforceable
although applicable in accordance with its terms, the indemnifying party shall
contribute to the aggregate losses, liabilities, claims, damages and expenses of
the nature contemplated by such indemnity agreement incurred by the indemnified
party, in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and the indemnified party on the other, in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and
indemnified parties shall be determined by reference to, among other things,
whether the action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact, has
been made by, or relates to information supplied by, such indemnifying party or
the indemnified parties, and the parties' relative intent, access to information
and opportunity to correct or prevent such action.

The parties hereto agree that it would not be just or equitable
if contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.

Notwithstanding the foregoing, no Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution

60
<PAGE>

from any Person who was not guilty of such fraudulent misrepresentation. For
purposes of this Section 5(d), each Person, if any, who controls a Holder within
the meaning of Section 15 of the Securities Act and directors, officers and
partners of a Holder shall have the same rights to contribution as such Holder,
and each director of the Company, each officer of the Company who signed the
Registration Statement and each Person, if any, who controls the Company within
the meaning of Section 15 of the Securities Act shall have the same rights to
contribution as the Company.

(e) Notwithstanding any term or condition to the
contrary, the liability of any Holder pursuant to this Section 5 shall be
limited to the gross proceeds received by such Holder as a result of the sale
giving rise to the liability.

(f) The obligations of the Company and the
Holders under this Section 5 shall survive the completion of any offering of the
Shares pursuant to a Registration Statement.

6. Suspension of Registration Requirement.

(a) Each Holder agrees that he, she or it will
not effect any sales of Shares pursuant to a Registration Statement after such
Holder has received notice from the Company to suspend sales as a result of the
occurrence or existence of any Suspension Event (as defined in Section 6(b)
below) until the Company provides notice to such Holder that all Suspension
Events have ceased to exist. In addition, each Holder agrees that he, she or it
will not effect any sales of Shares pursuant to the Registration Statement after
such Holder has received notice from the Company to suspend sales because (i)
the Registration Statement, any Prospectus or any supplement thereto contains an
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or (ii) the Company has filed a
post-effective amendment to the Registration Statement that has not been
declared effective, until the Company notifies such Holder that the misstatement
or omission has been corrected or the post-effective amendment has been declared
effective, as the case may be.

(b) Notwithstanding anything to the contrary set
forth in this Agreement, the Company's obligation to file a Registration
Statement and make any filings with any state securities authority, to use its
best efforts to cause a Registration Statement or any state securities filings
to become effective, or to amend or supplement a Registration Statement or any
state securities filings shall be temporarily suspended in the event of and
during a Suspension Event. A "Suspension Event" shall exist at such times (i)
that the Company is not eligible to use Form S-3 for the registration
contemplated by Section 2(a) hereof or (ii) as circumstances exist that the
Company determines make it impractical or inadvisable for the Company to file,
amend or supplement a Registration Statement or such filings or to cause a
Registration Statement or such filings to become effective (such circumstances
to include, without limitation, (A) the Company conducting an underwritten
primary offering and being advised by the underwriters that sale of Shares under
the Registration Statement would have a material adverse effect on the Company's
offering or

61
<PAGE>

(B) pending negotiations relating to, or consummation of, a transaction or the
occurrence of some other event (x) where any of the foregoing would require
disclosure under applicable securities laws of material information in a
Registration Statement (or any other document incorporated into a Registration
Statement by reference) or such state securities filings and (y) as to which the
Company has a bona fide business purpose for preserving confidentiality or which
renders the Company unable to comply with SEC requirements). Suspension of the
Company's obligations pursuant to this Section 6(b) shall continue only for so
long as a Suspension Event or its effect is continuing; provided, however, that
in no event shall any Suspension Event pursuant to clause (ii) of the preceding
sentence exceed more than ninety (90) days in any one hundred eighty (180) day
period. The Company shall notify each Holder promptly after any Suspension Event
occurs or ceases to exist.

7. Miscellaneous.

(a) Amendments and Waivers. The provisions of
this Agreement, including the provisions of this sentence, may not be amended,
modified, supplemented or waived, nor may consent to departures therefrom be
given, without the written consent of the Company and the Holders of more than
50% of the outstanding Shares owned beneficially by Holders at the date of any
such amendment, modification, supplement or waiver.

(b) Notices. All notices and other
communications provided for or permitted hereunder shall be made in writing by
hand delivery, registered first-class mail, telex, telecopier, or any courier
guaranteeing overnight delivery, (i) if to a Holder, at such Holder's registered
address appearing on the share register of the Company or (ii) if to the
Company, at 13160 Mindanao Way, 3rd Floor, Marina del Rey, California,
Attention: Law Department.

All such notices and communications shall be deemed to have
been duly given: at the time delivered by hand, if personally delivered; five
(5) business days after being deposited in the mail, postage prepaid, if mailed;
when answered back, if telexed; when receipt is acknowledged, if telecopied; or
at the time delivered if delivered by an air courier guaranteeing overnight
delivery.

(c) Successors and Assigns. This Agreement shall
inure to the benefit of and be binding upon the successors and assigns of the
Company. This Agreement and the registration rights granted hereunder may not be
assigned by a Holder without the consent of the Company and such assignee
agreeing to be bound by the provisions of this Agreement.

(d) Counterparts. This Agreement may be executed
in any number of counterparts and by the parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.

(e) Headings. The headings in this Agreement are
for convenience of reference only and shall not limit or otherwise affect the
meaning hereof.

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<PAGE>

(f) Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the State of California
without giving effect to the conflicts of law provisions thereof.

(g) Entire Agreement. This Agreement is intended
by the parties as a final expression of their agreement and intended to be a
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein. This Agreement
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.

(h) Attorneys' Fees. In the event of any suit or
other proceeding to construe or enforce any provision of this Agreement, or
otherwise in connection with this Agreement, the prevailing party's or parties'
reasonable attorneys' fees and costs (in addition to all other amounts and
relief to which such party or parties may be entitled) shall be paid by the
other party or parties.

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<PAGE>

IN WITNESS WHEREOF, the parties have signed this Agreement on
the day and year first above written.

QUARTERDECK CORPORATION

By:
-------------------------------------

THE SHAREHOLDERS:

----------------------------------------
Bradley Allen

----------------------------------------
Alexander Jacobson

----------------------------------------
Howard Morgan

----------------------------------------
Thelma Birks

----------------------------------------
Michelle Kraus

----------------------------------------
Clay Chisum

INFERENCE CORPORATION

By:
-------------------------------------

<PAGE>

Exhibit 10.43

INDEMNIFICATION AGREEMENT
-------------------------

This Indemnification Agreement (this "Agreement") is made as of the 30th
day of May 1996, between Inference Corporation, a California corporation (the
"Company"), Christopher M. McKee ("Indemnitee").

BACKGROUND FACTS
----------------

The Indemnitee currently is serving as a director and/or officer of the
Company and the Company wishes the Indemnitee to continue in such capacity.
Article VI of the Company's Restated Articles of Incorporation authorize the
Company to indemnify Indemnitee to the full extent permitted by the laws of the
State of California and to enter into binding agreements with Indemnitee to
provide such indemnification. In order to induce the Indemnitee to continue to
serve as a director and/or officer of the Company and in consideration of
Indemnitee's continued service, the Company and the Indemnitee hereby agree as
follows:

Section 1: Definitions
- -----------------------

As used in this Agreement:

1.1 Proceeding. The term "Proceeding" includes any threatened, pending or
----------
completed action, suit or proceeding, any appeal therefrom and any inquiry or
investigation, whether conducted by the Company or otherwise, that the
Indemnitee in good faith believes might lead to the institution of any such
action, suit or proceeding, whether brought by or in the right of the Company to
procure a judgment in its favor or brought by any third party or otherwise and
whether of a civil, criminal, administrative or investigative nature, in which
the Indemnitee is or may be or may have been involved as a party or otherwise by
reason of any action taken by Indemnitee or of any inaction on Indemnitee's part
while acting as a director or officer of the Company, or while acting at the
request of the Company as a director, officer, employee, partner, trustee or
agent of any other corporation, partnership, joint venture, trust or other
enterprise (as defined in Section 1.3, below), regardless of whether Indemnitee
is acting or serving in any such capacity at the time any Expenses (as defined
in Section 1.2, below) are incurred for which indemnification may be provided
under this Agreement.

1.2 Expenses. The term "Expenses" includes all costs, charges and expenses
--------
actually and reasonably incurred by or on behalf of the Indemnitee in connection
with any Proceeding, including, without limitation, attorneys' fees,
disbursements and retainers, accounting and witness fees, travel and deposition
costs, expenses of investigations, judicial or administrative proceedings or
appeals, amounts paid in settlement by or on behalf of the Indemnitee, and any
expenses of establishing a right to indemnification pursuant to this Agreement
or otherwise, including reasonable compensation for time spent by the Indemnitee
in connection with the investigation, defense or appeal of a Proceeding or
action for indemnification for which Indemnitee is not otherwise compensated by
the Company or any third party; provided, however, that the term "Expenses"
shall not include (i) any judgments and fines and similar penalties against the
Indemnitee or (ii) any expenses, amounts paid in settlement, attorneys' fees or
disbursements, or any other costs whatsoever incurred in connection with any
Proceeding insofar as such Proceeding is based on a violation by the Indemnitee
of Section 16 of the Securities Exchange Act of 1934, as amended.
<PAGE>

1.3 Other Terms. The term "other enterprise" includes employee benefit
-----------
plans; the term "fines" includes any excise tax assessed with respect to any
employee benefit plan; the term "serving at the request of the Company" includes
any service as a director, officer, employee or agent of the Company or any of
its subsidiaries that imposes duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner such person reasonably believed to be in the interests of the
participants and beneficiaries of any employee benefit plan shall be deemed to
have acted in a manner "reasonably believed to be in the best interests" of the
Company or any of its subsidiaries as such term is used in this Agreement.

Section 2: General Right to Indemnification
- --------------------------------------------

The Company shall indemnify the Indemnitee against Expenses, judgments and
fines and other amounts actually and reasonably incurred in connection with any
Proceedings to the full extent permitted by federal law and the laws of the
State of California as from time to time in effect. Without limiting the
generality of the foregoing, the Company shall also indemnify the Indemnitee in
accordance with the provisions set forth below.

Section 3: Proceedings Other than by or in the Right of the Company
- --------------------------------------------------------------------

If the Indemnitee was or is a party or is threatened to be made a party to,
or is otherwise involved in, any Proceeding (other than an action by or in the
right of the Company to procure a judgment in its favor), the Company shall
indemnify Indemnitee against all Expenses, judgments, fines, settlements and
other amounts actually and reasonably incurred in connection with such
Proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in the best interests of the Company and, in the case
of a criminal proceeding, had no reasonable cause to believe Indemnitee's
conduct was unlawful. The termination of any Proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent shall
not, of itself, create a presumption that the Indemnitee did not act in good
faith and in a manner the Indemnitee reasonably believed to be in the best
interests of the Company or that the Indemnitee had reasonable cause to believe
that Indemnitee's conduct was unlawful.

Section 4: Proceedings by or in the Right of the Company
- -----------------------------------------------------------

If the Indemnitee was or is a party or is threatened to be made a party to,
or is otherwise involved in, any Proceeding by or in the right of the Company to
procure a judgment in its favor, the Company shall indemnify Indemnitee against
all Expenses relating to the Proceeding if Indemnitee acted in good faith in a
manner Indemnitee reasonably believed to be in the best interests of the Company
and its shareholders; however, no indemnification shall be made with respect to
any claim, issue or matter as to which Indemnitee shall have been adjudged to be
liable to the Company in the performance of Indemnitee's duty to the Company and
its shareholders unless the court in which such Proceeding is or was pending
shall determine upon application that in view of all the circumstances of the
case, Indemnitee is fairly and reasonably entitled to indemnity for Expenses,
and then only to the extent that the court shall determine. In addition, no
indemnification shall be made (i) with respect to amounts paid in settling or
otherwise disposing of a pending action without court approval and (ii) with
respect to Expenses incurred in defending a pending action which is settled or
otherwise disposed of without court approval.

2
<PAGE>

Section 5: Indemnification for Expenses of Successful Party
- ------------------------------------------------------------

Notwithstanding the other provisions of this Agreement, to the extent that
Indemnitee has been successful on the merits in defense of any Proceeding or of
any claim, issue or matter forming part of any Proceeding, Indemnitee shall be
indemnified against Expenses actually and reasonably incurred by Indemnitee in
connection therewith to the fullest extent permitted by applicable law.

Section 6: Adverse Determination
- ---------------------------------

Any indemnification under Sections 3 and 4 hereof shall be paid by the
Company in accordance with Section 8 unless (i) a determination is made that
indemnification is not proper because the Indemnitee has not met the applicable
standard of conduct set forth in Sections 3 and 4, such a determination being
made no later than the end of the thirty-day period set forth in Section 8.2 by
any of the following: (a) a majority vote of a quorum consisting of directors
who are not parties to such Proceeding, (b) if such a quorum of directors is not
obtainable, a written opinion by independent legal counsel, (c) approval of the
Company's shareholders with the shares owned by the Indemnitee not being
entitled to vote thereon or (d) the court in which such Proceeding is or was
pending, if such is the case, upon application made by the Company or the
Indemnitee or the attorney or other person rendering services in connection with
the defense, whether or not such application by the Indemnitee, attorney or
other person is opposed by the Company; or (ii) with respect to indemnification
under Section 4, the Indemnitee shall have been adjudged to be liable to the
Company, and the court in which such Proceeding is or was pending has determined
upon application that, in view of all the circumstances of the case, the
Indemnitee is not entitled to indemnity.

Section 7: Reliance on Books, Records and Other Information
- ------------------------------------------------------------

The Indemnitee shall be presumed to have acted in good faith and in a
manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company, or, with respect to any criminal action or proceeding,
to have had no reasonable cause to believe Indemnitee's conduct was unlawful, if
Indemnitee's action is or was based on the records or books of account of the
Company (other than such records or such books of account which the Indemnitee
prepared or was responsible for preparing) with respect to which the Indemnitee
may be affected by a Proceeding, including financial statements, or on
information supplied to Indemnitee by executive officers of the Company in the
course of their duties, or on the written advice of legal counsel for the
Company or on information or records given or reports made to the Company by an
independent certified public accountant or by other expert selected with
reasonable care by the Company. The provisions of this Section shall not be
deemed exclusive or to limit in any way the other circumstances in which the
Indemnitee may be deemed to have met any applicable standard of conduct. For
purposes of this Section 7, the term "Company" includes any other enterprise.

3
<PAGE>

Section 8: Procedure for Indemnification
- -----------------------------------------

8.1 Advances. Expenses to which an Indemnitee is entitled to
--------
indemnification under Sections 2, 3 and 4 shall be paid promptly by the Company
in advance of any final disposition of the Proceeding upon receipt by the
Company of written documentation of the Indemnitee's obligation to pay such
Expenses; provided, however, that Indemnitee hereby undertakes to repay all
amounts so advanced if it shall be determined ultimately that the Indemnitee is
not entitled to be indemnified pursuant to this Agreement.

8.2 Payment Within 30 Days. After the final disposition of any Proceeding,
----------------------
the Indemnitee may send to the Company a written request for indemnification,
accompanied by written documentation of the Indemnitee's obligation to pay the
Expenses, judgments and fines and similar penalties for which indemnification is
requested. No later than 30 days following receipt by the Company of such
request, the Company shall pay the Expenses, judgments and fines and similar
penalties or reimburse the Indemnitee therefor (as the case may be) unless,
during such 30-day period (i) the Company determines that the indemnification
request is not permitted by the laws of the State of California then in effect,
or (ii) with respect to indemnification under Sections 3 and 4, the adverse
determination described in Section 6 is made.

8.3 Actions to Enforce this Agreement. In any action by the Indemnitee to
---------------------------------
enforce this Agreement, the Company shall bear the burden of proving that any
applicable standard of conduct has not been met by the Indemnitee. Neither the
failure of the Company to have made the determination required pursuant to
Section 6, nor any determination made pursuant to Section 6 shall create a
presumption that the Indemnitee has or has not met any applicable standard of
conduct.

Section 9: Other Rights
- ------------------------

The rights of the Indemnitee under this Agreement shall not be deemed
exclusive of any other rights to which Indemnitee may be entitled under any law
(common or statutory), provision of the Company's Articles of Incorporation or
Bylaws, vote of shareholders or Board of Directors of the Company or otherwise,
both as to action in Indemnitee's official capacity and as to action in another
capacity while holding such office or while employed by or acting as agent for
the Company in any capacity.

Section 10: Notice to the Company; Defense of Proceeding
- ---------------------------------------------------------

10.1 Notice. The Indemnitee shall, as a condition precedent to
-------
Indemnitee's right to indemnification hereunder, provide prompt written notice
to the Company of any Proceeding in connection with which Indemnitee may assert
a right to be indemnified under this Agreement. Such notice shall be deemed to
have been provided if mailed by domestic certified mail, postage prepaid, to
Inference Corporation, at 550 North Continental Boulevard, El Segundo,
California 90245 and at 100 Rowland Way, Novato, California 94945 (or to such
other address as the Company may specify in writing to the Indemnitee).
Indemnitee shall give the Company such information and cooperation as it may
reasonably require. The omission to so notify the Company will not relieve the
Company from any liability which it may have to Indemnitee under this Agreement
or otherwise.

4
<PAGE>

10.2 Defense of Proceeding. With respect to any Proceeding:
----------------------

(i) The Company shall be entitled to participate in the Proceeding at
its own expense.

(ii) Except as otherwise provided below, the Company shall be
entitled to assume the defense of such Proceeding, with counsel reasonably
satisfactory to the Indemnitee, to the extent that it may wish. After
notice from the Company to the Indemnitee of such assumption, during the
Company's good faith active defense the Company shall not be liable to the
Indemnitee under this Agreement for any Expenses subsequently incurred by
Indemnitee in connection with such defense. The Indemnitee shall have the
right to employ separate counsel in the Proceeding, but the fees and
expenses of such counsel incurred after such assumption shall be at the
expense of the Indemnitee, unless (a) such employment has been authorized
in writing by the Company, or (b) the Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and
the Indemnitee in the conduct of the defense of the Proceeding.

(iii) The Company shall not be required to indemnify the Indemnitee
under this Agreement for any amounts paid in settlement of any Proceeding
effected without its prior written consent. If the Indemnitee does not
promptly offer to settle a Proceeding on a basis that the Board of
Directors has approved, the Company shall not be liable to pay any Expenses
incurred thereafter in connection with that Proceeding.

(iv) The Company shall not settle any Proceeding which would impose
any penalty or limitation on the Indemnitee without the Indemnitee's
written consent.

Section 11: Claims Initiated by Indemnitee
- -------------------------------------------

Any other provision herein to the contrary notwithstanding the Company
shall not be obligated to indemnify or advance Expenses to Indemnitee with
respect to Proceedings initiated or brought voluntarily by Indemnitee and not by
way of defense, except with respect to Proceedings brought to establish or
enforce a right to indemnification under this Agreement or any other statute or
law or otherwise as required under Section 317 of the California Corporation
Law, but such indemnification or advancement of Expenses may be provided by the
Company in specific cases if the Board of Directors has approved the initiation
or bringing of such Proceeding.

Section 12: Miscellaneous
- --------------------------

12.1 Amendments. This Agreement may be amended only by means of a writing
-----------
signed by both the Company and the Indemnitee.

12.2 Retroactive Effect. This Agreement covers all Proceedings that either
-------------------
now have been or later may be commenced, including any Proceeding relating to
any past act or omission of the Indemnitee that has not yet resulted in
commencement or threat of a Proceeding.

5
<PAGE>

12.3 Savings Clause. Each provision of this Agreement is a separate and
---------------
distinct agreement, independent of all other provisions. If this Agreement or
any such provision shall be deemed invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
shall not be affected or impaired in any way, and the Company shall nevertheless
indemnify the Indemnitee as to Expenses, judgments and fines and similar
penalties with respect to any Proceeding to the full extent permitted by any
applicable portion of this Agreement that shall not have been invalidated and to
the full extent permitted by applicable law. In the event of any whole or
partial invalidation, illegality or unenforceability of this Agreement, there
shall be added automatically to this Agreement a provision or provisions as
similar to such invalid, illegal or unenforceable provision, both in terms and
effect, as may be possible and be valid, legal and enforceable.

12.4 Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
----------------------
that in certain instances, federal law or applicable public policy may prohibit
the Company from indemnifying Indemnitee under this Agreement or otherwise.
Indemnitee understands and acknowledges that the Company has undertaken or may
be required in the future to undertake to the Securities and Exchange Commission
to submit the question of indemnification to a court in certain circumstances
for a determination of the Company's right under public policy to indemnify
Indemnitee.

12.5 Successors and Assigns. This Agreement shall be binding on, and inure
-----------------------
to the benefit of, the successors and assigns of the Company, whether by
operation of law or otherwise, and the estate, heirs and personal
representatives of the Indemnitee.

12.6 Governing Law. This Agreement shall be governed in all respects,
--------------
including validity, interpretation and effect, by the laws of this State of
California.

12.7 Merger Clause. Except for the Company's Restated Articles of
--------------
Incorporation and Restated Bylaws, this Agreement constitutes the entire
understanding of the parties and supersedes all prior understanding and
agreements, written or oral, between the parties with respect to the subject
matter of this Agreement.

12.8 No Duplication of Payments. The Company shall not be liable under
---------------------------
this Agreement to make any payment in connection with any claim made against the
Indemnitee to the extent that the Indemnitee has otherwise received payment
(under any insurance policy, Bylaw, or otherwise) of the amounts otherwise
indemnifiable hereunder.

12.9 Subrogation. In the event of payment under this Agreement, the
------------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Indemnitee, who shall execute all papers required and shall
do everything that may be necessary or appropriate to enable the Company
effectively to bring suit to enforce such rights.

12.10 Counterparts. This Agreement may be executed in counterparts, eac h
-------------
of which shall be deemed an original, but all of which taken together shall
constitute but one and the same instrument.

6
<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.

INFERENCE CORPORATION
(a California corporation)

By:
-------------------------------------
Peter R. Tierney
Chief Executive Officer and President

INDEMNITEE

-------------------------------------
Christopher M. McKee

<PAGE>

EXHIBIT 10.44

INDEMNIFICATION AGREEMENT
-------------------------

This Indemnification Agreement (this "Agreement") is made as of the 7th day
of February 1997, between Inference Corporation, a Delaware corporation (the
"Company"), Glen D. Vondrick ("Indemnitee").

BACKGROUND FACTS
----------------

The Indemnitee currently is serving as a director and/or officer of the
Company and the Company wishes the Indemnitee to continue in such capacity.
Article VI of the Company's Restated Articles of Incorporation authorize the
Company to indemnify Indemnitee to the full extent permitted by the laws of the
State of Delaware and to enter into binding agreements with Indemnitee to
provide such indemnification. In order to induce the Indemnitee to continue to
serve as a director and/or officer of the Company and in consideration of
Indemnitee's continued service, the Company and the Indemnitee hereby agree as
follows:

Section 1: Definitions
- -----------------------

As used in this Agreement:

1.1 Proceeding. The term "Proceeding" includes any threatened, pending
----------
or completed action, suit or proceeding, any appeal therefrom and any inquiry or
investigation, whether conducted by the Company or otherwise, that the
Indemnitee in good faith believes might lead to the institution of any such
action, suit or proceeding, whether brought by or in the right of the Company to
procure a judgment in its favor or brought by any third party or otherwise and
whether of a civil, criminal, administrative or investigative nature, in which
the Indemnitee is or may be or may have been involved as a party or otherwise by
reason of any action taken by Indemnitee or of any inaction on Indemnitee's part
while acting as a director or officer of the Company, or while acting at the
request of the Company as a director, officer, employee, partner, trustee or
agent of any other corporation, partnership, joint venture, trust or other
enterprise (as defined in Section 1.3, below), regardless of whether Indemnitee
is acting or serving in any such capacity at the time any Expenses (as defined
in Section 1.2, below) are incurred for which indemnification may be provided
under this Agreement.

1.2 Expenses. The term "Expenses" includes all costs, charges and
--------
expenses actually and reasonably incurred by or on behalf of the Indemnitee in
connection with any Proceeding, including, without limitation, attorneys' fees,
disbursements and retainers, accounting and witness fees, travel and deposition
costs, expenses of investigations, judicial or administrative proceedings or
appeals, amounts paid in settlement by or on behalf of the Indemnitee, and any
expenses of establishing a right to indemnification pursuant to this Agreement
or otherwise, including reasonable compensation for time spent by the Indemnitee
in connection with the investigation, defense or appeal of a Proceeding or
action for indemnification for which Indemnitee is not otherwise compensated by
the Company or any third party; provided, however, that the term "Expenses"
shall not include (i) any judgments and fines and similar penalties against the
Indemnitee or (ii) any expenses, amounts paid in settlement, attorneys' fees or
disbursements, or any other costs whatsoever incurred in connection with any
Proceeding insofar as such Proceeding is based on a violation by the Indemnitee
of Section 16 of the Securities Exchange Act of 1934, as amended.

-1-
<PAGE>

Section 2: General Right to Indemnification
- --------------------------------------------

The Company shall indemnify the Indemnitee against Expenses, judgments and
fines and other amounts actually and reasonably incurred in connection with any
Proceedings to the full extent permitted by federal law and any applicable law
as from time to time in effect. Without limiting the generality of the
foregoing, the Company shall also indemnify the Indemnitee in accordance with
the provisions set forth below.

Section 3: Proceedings Other than by or in the Right of the Company
- --------------------------------------------------------------------

Section 4: Proceedings by or in the Right of the Company
- -----------------------------------------------------------

-2-
<PAGE>

Section 5: Indemnification for Expenses of Successful Party
- ------------------------------------------------------------

Section 6: Adverse Determination
- ---------------------------------

Section 7: Reliance on Books, Records and Other Information
- ------------------------------------------------------------

The Indemnitee shall be presumed to have acted in good faith and in a manner
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company, or, with respect to any criminal action or proceeding, to have had
no reasonable cause to believe Indemnitee's conduct was unlawful, if
Indemnitee's action is or was based on the records or books of account of the
Company (other than such records or such books of account which the Indemnitee
prepared or was responsible for preparing) with respect to which the Indemnitee
may be affected by a Proceeding, including financial statements, or on
information supplied to Indemnitee by executive officers of the Company in the
course of their duties, or on the written advice of legal counsel for the
Company or on information or records given or reports made to the Company by an
independent certified public accountant or by other expert selected with
reasonable care by the Company. The provisions of this Section shall not be
deemed exclusive or to limit in any way the other circumstances in which the
Indemnitee may be deemed to have met any applicable standard of conduct. For
purposes of this Section 7, the term "Company" includes any other enterprise.

Section 8: Procedure for Indemnification
- -----------------------------------------

-3-
<PAGE>

8.2 Payment Within 30 Days. After the final disposition of any
----------------------
Proceeding, the Indemnitee may send to the Company a written request for
indemnification, accompanied by written documentation of the Indemnitee's
obligation to pay the Expenses, judgments and fines and similar penalties for
which indemnification is requested. No later than 30 days following receipt by
the Company of such request, the Company shall pay the Expenses, judgments and
fines and similar penalties or reimburse the Indemnitee therefor (as the case
may be) unless, during such 30-day period (i) the Company determines that the
indemnification request is not permitted by the laws of the State of Delaware
then in effect, or (ii) with respect to indemnification under Sections 3 and 4,
the adverse determination described in Section 6 is made.

8.3 Actions to Enforce this Agreement. In any action by the Indemnitee
---------------------------------
to enforce this Agreement, the Company shall bear the burden of proving that any
applicable standard of conduct has not been met by the Indemnitee. Neither the
failure of the Company to have made the determination required pursuant to
Section 6, nor any determination made pursuant to Section 6 shall create a
presumption that the Indemnitee has or has not met any applicable standard of
conduct.

Section 9: Other Rights
- --------------------------

Section 10: Notice to the Company; Defense of Proceeding
- ---------------------------------------------------------

10.1 Notice. The Indemnitee shall, as a condition precedent to
------
Indemnitee's right to indemnification hereunder, provide prompt written notice
to the Company of any Proceeding in connection with which Indemnitee may assert
a right to be indemnified under this Agreement. Such notice shall be deemed to
have been provided if mailed by domestic certified mail, postage prepaid, to
Inference Corporation, at 100 Rowland Way, Novato, California 94945 (or to such
other address as the Company may specify in writing to the Indemnitee).
Indemnitee shall give the Company such information and cooperation as it may
reasonably require. The omission to so notify the Company will not relieve the
Company from any liability which it may have to Indemnitee under this Agreement
or otherwise.

-4-
<PAGE>

10.2 Defense of Proceeding. With respect to any Proceeding:
---------------------

(i) The Company shall be entitled to participate in the Proceeding at its
own expense.

(ii) Except as otherwise provided below, the Company shall be entitled to
assume the defense of such Proceeding, with counsel reasonably satisfactory
to the Indemnitee, to the extent that it may wish. After notice from the
Company to the Indemnitee of such assumption, during the Company's good
faith active defense the Company shall not be liable to the Indemnitee
under this Agreement for any Expenses subsequently incurred by Indemnitee
in connection with such defense. The Indemnitee shall have the right to
employ separate counsel in the Proceeding, but the fees and expenses of
such counsel incurred after such assumption shall be at the expense of the
Indemnitee, unless (a) such employment has been authorized in writing by
the Company, or (b) the Indemnitee shall have reasonably concluded that
there may be a conflict of interest between the Company and the Indemnitee
in the conduct of the defense of the Proceeding.

(iii) The Company shall not be required to indemnify the Indemnitee under
this Agreement for any amounts paid in settlement of any Proceeding
effected without its prior written consent. If the Indemnitee does not
promptly offer to settle a Proceeding on a basis that the Board of
Directors has approved, the Company shall not be liable to pay any Expenses
incurred thereafter in connection with that Proceeding.

(iv) The Company shall not settle any Proceeding which would impose any
penalty or limitation on the Indemnitee without the Indemnitee's written
consent.

Section 11: Claims Initiated by Indemnitee
- -------------------------------------------

Any other provision herein to the contrary notwithstanding the Company shall
not be obligated to indemnify or advance Expenses to Indemnitee with respect to
Proceedings initiated or brought voluntarily by Indemnitee and not by way of
defense, except with respect to Proceedings brought to establish or enforce a
right to indemnification under this Agreement or any other statute or law or
otherwise as required under Section 317 of the Delaware Corporation Law, but
such indemnification or advancement of Expenses may be provided by the Company
in specific cases if the Board of Directors has approved the initiation or
bringing of such Proceeding.

Section 12: Miscellaneous
- --------------------------

12.1 Amendments. This Agreement may be amended only by means of a writing
----------
signed by both the Company and the Indemnitee.

12.2 Retroactive Effect. This Agreement covers all Proceedings that either
------------------
now have been or later may be commenced, including any Proceeding relating to
any past act or omission of the Indemnitee that has not yet resulted in
commencement or threat of a Proceeding.

-5-
<PAGE>

12.3 Savings Clause. Each provision of this Agreement is a separate and
--------------
distinct agreement, independent of all other provisions. If this Agreement or
any such provision shall be deemed invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
shall not be affected or impaired in any way, and the Company shall nevertheless
indemnify the Indemnitee as to Expenses, judgments and fines and similar
penalties with respect to any Proceeding to the full extent permitted by any
applicable portion of this Agreement that shall not have been invalidated and to
the full extent permitted by applicable law. In the event of any whole or
partial invalidation, illegality or unenforceability of this Agreement, there
shall be added automatically to this Agreement a provision or provisions as
similar to such invalid, illegal or unenforceable provision, both in terms and
effect, as may be possible and be valid, legal and enforceable.

12.4 Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, federal law or applicable public policy may prohibit
the Company from indemnifying Indemnitee under this Agreement or otherwise.
Indemnitee understands and acknowledges that the Company has undertaken or may
be required in the future to undertake to the Securities and Exchange Commission
to submit the question of indemnification to a court in certain circumstances
for a determination of the Company's right under public policy to indemnify
Indemnitee.

12.5 Successors and Assigns. This Agreement shall be binding on, and inure
----------------------
to the benefit of, the successors and assigns of the Company, whether by
operation of law or otherwise, and the estate, heirs and personal
representatives of the Indemnitee.

12.6 Governing Law. This Agreement shall be governed in all respects,
-------------
including validity, interpretation and effect, by the laws of this State of
Delaware.

12.7 Merger Clause. Except for the Company's Restated Articles of
-------------
Incorporation and Restated Bylaws, this Agreement constitutes the entire
understanding of the parties and supersedes all prior understandings and
agreements, written or oral, between the parties with respect to the subject
matter of this Agreement.

12.8 No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any claim made against the
Indemnitee to the extent that the Indemnitee has otherwise received payment
(under any insurance policy, Bylaw, or otherwise) of the amounts otherwise
indemnifiable hereunder.

12.9 Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Indemnitee, who shall execute all papers required and shall
do everything that may be necessary or appropriate to enable the Company
effectively to bring suit to enforce such rights.

12.10 Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which taken together shall
constitute but one and the same instrument.

-6-
<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.

INFERENCE CORPORATION
(a Delaware corporation)

By:
-----------------------------------
Peter R. Tierney
Chief Executive Officer and President

INDEMNITEE

-----------------------------------
Glen D. Vondrick

-7-

<PAGE>

EXHIBIT 10.46

INDEMNIFICATION AGREEMENT
-------------------------

This Indemnification Agreement (this "Agreement") is made as of the 7th day
of February 1997, between Inference Corporation, a Delaware corporation (the
"Company"), Thomas Davenport ("Indemnitee").

BACKGROUND FACTS
----------------

The Indemnitee currently is serving as a director and/or officer of the
Company and the Company wishes the Indemnitee to continue in such capacity.
Article VI of the Company's Restated Articles of Incorporation authorize the
Company to indemnify Indemnitee to the full extent permitted by the laws of the
State of Delaware and to enter into binding agreements with Indemnitee to
provide such indemnification. In order to induce the Indemnitee to continue to
serve as a director and/or officer of the Company and in consideration of
Indemnitee's continued service, the Company and the Indemnitee hereby agree as
follows:

Section 1: Definitions
- -----------------------

As used in this Agreement:

-1-
<PAGE>

Section 2: General Right to Indemnification
- --------------------------------------------

The Company shall indemnify the Indemnitee against Expenses, judgments and
fines and other amounts actually and reasonably incurred in connection with any
Proceedings to the full extent permitted by federal law and any applicable law
as from time to time in effect. Without limiting the generality of the
foregoing, the Company shall also indemnify the Indemnitee in accordance with
the provisions set forth below.

Section 3: Proceedings Other than by or in the Right of the Company
- --------------------------------------------------------------------

Section 4: Proceedings by or in the Right of the Company
- -----------------------------------------------------------

-2-
<PAGE>

Section 5: Indemnification for Expenses of Successful Party
- ------------------------------------------------------------

Section 6: Adverse Determination
- ---------------------------------

Section 7: Reliance on Books, Records and Other Information
- ------------------------------------------------------------

The Indemnitee shall be presumed to have acted in good faith and in a manner
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company, or, with respect to any criminal action or proceeding, to have had
no reasonable cause to believe Indemnitee's conduct was unlawful, if
Indemnitee's action is or was based on the records or books of account of the
Company (other than such records or such books of account which the Indemnitee
prepared or was responsible for preparing) with respect to which the Indemnitee
may be affected by a Proceeding, including financial statements, or on
information supplied to Indemnitee by executive officers of the Company in the
course of their duties, or on the written advice of legal counsel for the
Company or on information or records given or reports made to the Company by an
independent certified public accountant or by other expert selected with
reasonable care by the Company. The provisions of this Section shall not be
deemed exclusive or to limit in any way the other circumstances in which the
Indemnitee may be deemed to have met any applicable standard of conduct. For
purposes of this Section 7, the term "Company" includes any other enterprise.

Section 8: Procedure for Indemnification
- -----------------------------------------

-3-
<PAGE>

Section 9: Other Rights
- --------------------------

Section 10: Notice to the Company; Defense of Proceeding
- ---------------------------------------------------------

-4-
<PAGE>

10.2 Defense of Proceeding. With respect to any Proceeding:
---------------------

(i) The Company shall be entitled to participate in the Proceeding at its
own expense.

(ii) Except as otherwise provided below, the Company shall be entitled to
assume the defense of such Proceeding, with counsel reasonably satisfactory
to the Indemnitee, to the extent that it may wish. After notice from the
Company to the Indemnitee of such assumption, during the Company's good
faith active defense the Company shall not be liable to the Indemnitee
under this Agreement for any Expenses subsequently incurred by Indemnitee
in connection with such defense. The Indemnitee shall have the right to
employ separate counsel in the Proceeding, but the fees and expenses of
such counsel incurred after such assumption shall be at the expense of the
Indemnitee, unless (a) such employment has been authorized in writing by
the Company, or (b) the Indemnitee shall have reasonably concluded that
there may be a conflict of interest between the Company and the Indemnitee
in the conduct of the defense of the Proceeding.

(iii) The Company shall not be required to indemnify the Indemnitee under
this Agreement for any amounts paid in settlement of any Proceeding
effected without its prior written consent. If the Indemnitee does not
promptly offer to settle a Proceeding on a basis that the Board of
Directors has approved, the Company shall not be liable to pay any Expenses
incurred thereafter in connection with that Proceeding.

(iv) The Company shall not settle any Proceeding which would impose any
penalty or limitation on the Indemnitee without the Indemnitee's written
consent.

Section 11: Claims Initiated by Indemnitee
- -------------------------------------------

Any other provision herein to the contrary notwithstanding the Company shall
not be obligated to indemnify or advance Expenses to Indemnitee with respect to
Proceedings initiated or brought voluntarily by Indemnitee and not by way of
defense, except with respect to Proceedings brought to establish or enforce a
right to indemnification under this Agreement or any other statute or law or
otherwise as required under Section 317 of the Delaware Corporation Law, but
such indemnification or advancement of Expenses may be provided by the Company
in specific cases if the Board of Directors has approved the initiation or
bringing of such Proceeding.

Section 12: Miscellaneous
- --------------------------

12.1 Amendments. This Agreement may be amended only by means of a writing
----------
signed by both the Company and the Indemnitee.

-5-
<PAGE>

12.6 Governing Law. This Agreement shall be governed in all respects,
-------------
including validity, interpretation and effect, by the laws of this State of
Delaware.

-6-
<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.

INFERENCE CORPORATION
(a Delaware corporation)

By:
----------------------------
Peter R. Tierney
Chief Executive Officer and President

INDEMNITEE

-----------------------------
Thomas Davenport

-7-

<PAGE>

EXHIBIT 11.1

INFERENCE CORPORATION

STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>

FISCAL YEAR ENDED JANUARY 31,
-------------------------------------------
1997 1996 1995
----------- -------------- ------------
<S> <C> <C> <C>
PRIMARY -

Weighted average common shares outstanding............... 8,077,681 6,344,204 756,580
Conversion of preferred stock using the if
converted method....................................... -- -- 4,235,784
Options and warrants issued during twelve-
month period prior to the initial public
offering at an exercise price below the
assumed public offering price in accordance
with Staff Accounting Bulletin No. 83.................. -- -- 138,947
Net effect of dilutive options and warrants -
based on the treasury stock method
using average market price............................. 623,859 1,048,946 96,410
---------- ---------- ----------
8,701,540 7,393,150 5,227,721
========== ========== ==========

Net income............................................... $2,432,000 $3,773,000 $ 209,000
========== ========== ==========

Net income per share..................................... $ 0.28 $ 0.51 $0.04
========== ========== ==========

FULLY DILUTED -

Weighted average common shares outstanding............... 8,077,681 6,344,204 756,580
Conversion of preferred stock using the if
converted method....................................... -- -- 4,235,784
Options and warrants issued during twelve-
month period prior to the initial public
offering at an exercise price below the
assumed public offering price in accordance
with Staff Accounting Bulletin No. 83.................. -- -- 138,947
Net effect of dilutive options and warrants -
based on the treasury stock method
using average market price............................. 626,248 1,350,114 96,410
---------- ---------- ----------
8,703,929 7,694,318 5,227,721
========== ========== ==========

Net income............................................... $2,432,000 $3,773,000 $ 209,000
========== ========== ==========

Net income per share..................................... $ 0.28 $ 0.49 $0.04
========== ========== ==========
</TABLE>

<PAGE>

EXHIBIT 21.1

SUBSIDIARIES OF THE REGISTRANT
------------------------------

INFERENCE LTD.
A Company organized under the laws of the United Kingdom

INFERENCE GMBH
A Company organized under the laws of Germany

INFERENCE SARL
A Company organized under the laws of France

INFERENCE BV
A Company organized under the laws of Holland

<PAGE>

EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-14843) pertaining to the Amended and Restated Inference
Corporation 1993 Stock Option Plan, (Form S-8 No. 333-01416 pertaining to the
Amended and Restated Inference Corporation 1993 Stock Option Plan, Fourth
Amended and Restated Inference Corporation Incentive Stock Option Plan and
Inference Corporation Nonstatutory Stock Option Plan and Stock Option
Agreements, and (Form S-8 No. 333-08451) pertaining to the Inference Corporation
Employee Stock Purchase Plan of our report dated February 17, 1997, with respect
to the consolidated financial statements of Inference Corporation included in
the Annual Report (Form 10-K) for the year ended January 31, 1997.

ERNST & YOUNG LLP

Sacramento, California
April 21, 1997

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 28,620,000
<SECURITIES> 987,000
<RECEIVABLES> 9,959,000
<ALLOWANCES> 165,000
<INVENTORY> 0
<CURRENT-ASSETS> 40,093,000
<PP&E> 3,806,000
<DEPRECIATION> 1,751,000
<TOTAL-ASSETS> 42,241,000
<CURRENT-LIABILITIES> 10,130,000
<BONDS> 0
0
0
<COMMON> 82,000
<OTHER-SE> 32,029,000
<TOTAL-LIABILITY-AND-EQUITY> 42,241,000
<SALES> 35,990,000
<TOTAL-REVENUES> 35,990,000
<CGS> 10,485,000
<TOTAL-COSTS> 16,909,000
<OTHER-EXPENSES> 456,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,186,000)
<INCOME-PRETAX> 2,342,000
<INCOME-TAX> (90,000)
<INCOME-CONTINUING> 2,432,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,432,000
<EPS-PRIMARY> .28
<EPS-DILUTED> .28

</TABLE>