<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549



                                    FORM 10-K

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996

                           COMMISSION FILE NO. 0-19207


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

       DELAWARE                                    95-4320650
       (State or other jurisdiction of            (I.R.S. Employer
       incorporation or organization)            Identification No.)

        13160 MINDANAO WAY, MARINA DEL REY, CALIFORNIA    90292
            (Address of principal executive offices)        (Zip Code)

       Registrant's telephone number, including area code: (310) 309-3700
        Securities registered pursuant to Section 12(b) of the Act: NONE
           Securities registered pursuant to Section 12(g) of the Act:
                         COMMON STOCK, PAR VALUE $0.001

           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 such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for 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 (based on the last
sale price of such stock as reported by the National Association of Securities
Dealers Automated Quotation National Market System) held by non-affiliates of
the registrant as of November 30, 1996 was $233,497,695.

           The number of shares of the Registrant's common stock outstanding as
of November 30, 1996 was 37,665,882.

                      DOCUMENTS INCORPORATED BY REFERENCE:

           Portions of the Company's definitive Proxy Statement for the annual
meeting to be held on February 12, 1997 (the "Proxy Statement") are incorporated
by reference into Part III of this Form 10-K.


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PART I

ITEM 1.  BUSINESS

GENERAL

           Quarterdeck Corporation develops, markets and supports computer
software products and offers services in two strategic business units: Utilities
and Communications and Internet Solutions. Quarterdeck creates smart tools that
enhance computing on Desktop PC's, the Internet, and intranet.  The Company
offers software solutions for corporate, small business, government, education
and individual users in a number of areas including performance enhancement;
disk, file and space management; software and hardware diagnostics/conflict
resolution; communications; internet search and enablement; and graphics
conversion.

           The Company was incorporated in California in 1982 as Quarterdeck
Office Systems. In June 1991, the Company changed its state of incorporation
from California to Delaware. In February 1995, the Company changed its name to
Quarterdeck Corporation. The Company's principal offices are located at 13160
Mindanao Way, Marina del Rey, California, 90292; its telephone number is (310)
309-3700. Quarterdeck's Internet home page can be located on the World Wide Web
at http://www.quarterdeck.com/.  Quarterdeck also has offices in England and
Australia, with its European headquarters based in Dublin, Ireland. Unless the
context otherwise indicates, the "Company" and "Quarterdeck" refer to
Quarterdeck Corporation, its predecessor and its subsidiaries.


           During the last two years, management pursued a strategy to expand
the number of products offered by the Company in the utilities market and to
enter the Internet/intranet related markets and reduce reliance on memory
management products. This strategy was effected, in part, through eleven
significant acquisitions including two which also provided direct marketing
capabilities to supplement the established distributor network upon which the
Company had historically relied. Along with the technology and products obtained
by the Company, it also acquired a much larger administrative organization. The
expenses associated with the acquisitions are reflected in the accompanying
financial statements and contributed to the significant losses incurred in the
fourth quarter and for the fiscal year ended September 30, 1996. As a result,
management has focused on accelerating the slower than anticipated acquisition
integration process during the last quarter of fiscal 1996 culminating in the
announcement and adoption of a comprehensive corporate-wide restructuring plan.
The Company is currently completing such restructuring which includes a
reduction of approximately 40% of the workforce, elimination of redundant
functions, integration of redundant operations, reduction and elimination of
development and marketing efforts in certain non-core product lines, and is
focusing on improving its ability to develop and release new products or
enhanced versions of its existing products to better compete in a rapidly
changing marketplace.

ACQUISITIONS

           One element of Quarterdeck's current strategy is to focus on the
integration of the acquisitions that have been completed over the past two
years. Partially as a result of the acquisitions and subsequent restructuring,
the Company believes it is now well positioned to provide a broad range of
software products that enhance computing on desktop PCs, the Internet and
intranet. Quarterdeck, though it has no current plans to do so, may continue
to make strategic acquisitions and investments, as necessary, to provide
certain technology and products for its overall product strategy.




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      In the last fiscal year, the Company has completed acquisitions of the
following companies:

<TABLE>
<CAPTION>
Company Acquired                                      Date of Acquisition             Software or Activity Acquired
----------------                                      -------------------             -----------------------------
<S>                                                   <C>                             <C> 
Inset Systems, Inc. ("Inset")                         December 29, 1995               Utility applications (Hijaak)
Datastorm Technologies, Inc.                          March 28, 1996                  Data communications
(and Limited)  ("Datastorm")                                                          (Procomm)
Future Labs, Inc. ("Future Labs")                     May 15, 1996                    Collaborative technology
                                                                                      (TALKShow)
Interlink Technology ("Interlink")                    July 16, 1996                   Remote control software
Vertisoft Systems, Inc. ("Vertisoft")                 July 18, 1996                   Utility products and
                                                                                      Direct mail distribution
Limbex Corporation ("Limbex")                         August 14, 1996                 Metasearch technology,
                                                                                      WebCompass product line
</TABLE>

Additionally, on June 6, 1996, the Company acquired the CleanSweep utility
technology from Pinnacle Software, Inc. ("Pinnacle")

During the fiscal year ended September 30, 1995, the Company completed
acquisitions of the following companies:

<TABLE>
<CAPTION>
Company Acquired                                      Date of Acquisition             Software or Activity Acquired
----------------                                      -------------------             -----------------------------
<S>                                                   <C>                             <C>                                
Landmark Research International Corporation           June 30, 1995                   Utilities software (MagnaRAM and WINProbe) and
("Landmark")                                                                          direct marketing organization
Internetware, Inc. ("Internetware")                   August 28, 1995                 Internet software for Novell networks (IWare
                                                                                      Connect) and development resources
Prospero Systems Research,Inc. ("Prospero")           September 28, 1995              Internet Relay Chat software and development
                                                                                      resources
StarNine Technologies, Inc. ("StarNine")              September 29, 1995              Macintosh based Internet server software
                                                                                      (WebStar) and on-line marketing capabilities
</TABLE>


PRODUCTS

           The following table summarizes Quarterdeck's principal products by
its two strategic business units and the operating system(s) on which they run:

<TABLE>
<CAPTION>
           PRINCIPAL PRODUCTS                       OPERATING SYSTEMS
           ----------------------------------------------------------
<S>                                                 <C>
           UTILITIES PRODUCTS
             QEMM (Quarterdeck Expanded
               Memory Manager)                      Windows 95, Windows 3.x, DOS
             MagnaRAM 97                            Windows 95, Windows 3.x
             SpeedyROM                              Windows 95
             DESQview                               DOS
             WINProbe 95                            Windows 95, Windows 3.x
             Fix-It                                 Windows 95
             CleanSweep                             Windows NT, Windows 95, Windows 3.x
             Remove-It                              Windows 95, Windows 3.x
             Partition-It                           Windows 95, Windows 3.x
             Zip-It                                 Windows NT, Windows 95, Windows 3.x
</TABLE>

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<TABLE>
<S>                                                 <C>
             Name-It                                Windows 95
             Hijaak 95                              Windows 95
             Hijaak Pro                             Windows 95


           COMMUNICATIONS AND INTERNET PRODUCTS

             Procomm Plus 95                        Windows 95
             Procomm Plus                           Windows 3.x, Windows 95 compatible
             Procomm Rapid Remote                   Windows 95
             WebCompass                             Windows NT, Windows 95, Windows 3.x
             WebTalk                                Windows 3.x, Windows 95 compatible
             Quarterdeck WebSTAR for Windows 95/NT  Windows 95, Windows NT
             Quarterdeck WebSTAR for Macintosh      Apple Macintosh
             Quarterdeck WebAuthor                  Windows 3.x, Windows 95 compatible
             Quarterdeck TotalWeb                   Windows NT, Windows 95, Windows 3.x
             Quarterdeck Iware Connect              Novell NetWare 3.x and above, Windows
                                                    3.x, Windows
                                                    95 compatible
             Iware InternetSuite                    Novell NetWare 3.x and above, Windows
                                                    3.x, Windows 95 compatible
             DESQview/X                             DOS
</TABLE>

UTILITIES -

Quarterdeck's utility products are designed to enhance the performance of
personal computers running Microsoft Windows 3.x, Windows 95, Windows NT and DOS
software.

The Company produces utility products in four primary categories: Performance
Enhancement; Software and Hardware Diagnostics/Conflict Resolution; Disk, File
and Space Management; and Graphic Utilities.

Performance Enhancement

QEMM (QUARTERDECK EXPANDED MEMORY MANAGER)

QEMM(R), Quarterdeck's flagship memory management product, is a memory manager
for personal computers providing more available memory for applications running
under Windows 95, Windows 3.x and DOS. The latest version, QEMM 8, was released
in November 1995. Version 8 includes memory solutions and reporting utilities
for Windows 95 and Windows 3.x, as well as continued support for DOS systems.
QEMM 8 incorporates memory optimizing technology which helps both Windows 95 and
Windows 3.x users maximize their available memory for applications, as well as
the Resource Manager, which allows more applications to run and multitask under
Windows 3.x. Incorporated within QEMM is Manifest, a system reporting
information utility program that runs under Windows and DOS. Manifest displays
memory usage and recommends changes to make more efficient use of available
memory resources. Under Windows 95 or Windows 3.x, Manifest gives detailed
reports on memory usage by the operating system itself and the programs running
under it.

MAGNARAM 97

In September 1996, Quarterdeck began shipping MagnaRAM(TM) 97, an updated
version of MagnaRAM 2. This 32-bit program combines data compression technology
with other technologies that are designed to improve the operating performance
of personal computers running Windows 95. The resultant gains allow most users
to run more and larger programs and, in many cases, load and run programs
faster. The benefits of MagnaRAM 97 accrue primarily to users of Pentium-based
Windows 95 systems with 16 mega bytes or more of memory.

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SPEEDYROM

Released in March 1996, SpeedyROM(TM) is a performance enhancement utility for
CD-ROMs running under Windows 95. Using caching technology, SpeedyROM is
designed to intelligently access frequently used information from CD-ROMs,
automatically providing user performance improvements.


Software and Hardware Diagnostics/Conflict Resolution

FIX-IT

Launched in July 1996, Vertisoft Fix-It(TM) is a comprehensive troubleshooter
and problem solver for Windows 95. Fix-It automatically detects and corrects
errors in hundreds of applications including games, utilities, and Internet
software, utilizing an extensive problem-solving database of over 1,000 popular
applications. Fix-It also provides automatic detection and correction of
application conflicts, hardware configuration problems, and Windows environment
problems. Fix-It is designed to automatically alert a user when new conflicts or
problems arise and provide a solution to many problems. Fix-It also includes a
crash-protection system that intercepts many fatal errors caused by applications
before those errors cause a system to crash. As a result, many system crashes
are prevented. The product also includes an online directory of support contact
information for hundreds of leading software and hardware manufacturers.

WINPROBE 95

WINProbe(TM) is a troubleshooting toolbox designed to diagnose hardware problems
in Windows 95 and Windows 3.1 systems. Quarterdeck began shipping the latest
version, WINProbe 95, in June 1996. WINProbe 95 provides over 200 comprehensive
tests that let users determine the cause of many hardware problems.


Disk, File and Space Management

PARTITION-IT

Partition-It(TM) for Windows 95 and Windows 3.1 is a new utility specifically
designed for today's large hard drives. Partition-It is designed to 
improve a computer's storage capacity by dividing it into
more manageable sections, without putting the users data at risk.
Partition-It automatically calculates the optimal cluster size for maximum
storage; divides a high-capacity drive into many smaller partitions; and moves
data and applications between partitions utilizing the Move-It(TM) technology.

CLEANSWEEP 3.0

CleanSweep(R) is designed to enhance the performance of Windows by safely
finding and removing outdated, unnecessary or unwanted files, applications and
system components, thus freeing up valuable disk space. 

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Quarterdeck began shipping CleanSweep 3.0, the first Internet-enabled 32-bit
application removal and system clean-up utility, in October 1996. The new
version incorporates SafetySweep(TM) technology designed to provide safe,
effective removal of unwanted files and programs. Automatic wizards, which can
be accessed from the program or directly from within the Windows 95 Explorer,
can be used to easily uninstall, backup or move most applications. Its Registry 
Genie(TM) guides the user through understanding and editing the windows system
Registry that contains the inner-workings of Windows 95 and NT. CleanSweep is
currently the only application removal software that supports Windows 95, NT and
3.1. Finally, the program's new Update-It(TM) feature is designed to
automatically download updated versions of CleanSweep and its Application
Knowledge Base from the Internet. The Update-It technology is planned to be
incorporated into future versions of other Quarterdeck products. Update-It and
WebCompass, illustrate Quarterdeck's efforts into the area of intelligent
agent technology.

REMOVE-IT

Vertisoft Remove-It(TM) for Windows 95 is a comprehensive application and file
removal system. It is specifically designed to remove any 32-bit or 16-bit
application, duplicate or orphaned file, old faxes, unneeded backups and a host
of other electronic debris that builds up on the hard drive. Remove-It's Log-It
feature automatically records new installations for accurate removal. It's
Cleanup Coach guides the user through cleaning unneeded applications and files
off the hard drive. It's Smart Disk Agent is designed to automatically keep the
system efficient by alerting users to new unneeded applications and files, and
low system resources. Both Remove-It for Windows 95 and Remove-It 2 for Windows
3.1 are included.

ZIP-IT

Vertisoft Zip-It(TM) makes creating PKZIP-compatible compressed files as easy as
dragging and dropping, letting users quickly view and extract compressed files
downloaded from online services or the Internet by simply pointing and clicking.
Files can be reduced in size by up to 98% in Windows 95, 3.1 or NT. Zip-It
features Windows drag-and-drop file compression; point-and-click file unzipping;
a built-in viewer for popular Windows file types; and the ability to view, edit,
and run zipped files without extracting them. Internet functionality is provided
through a Netscape Navigator(R) plug-in module. The product is fully integrated
with Windows 95 Explorer and File Manager.




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<PAGE>   7
Graphic Utilities

HIJAAK PRO

Quarterdeck shipped HiJAAK(R) Pro 4.0 in July 1996. HiJAAK Pro is designed to
provide an extensive set of graphic tools to aid productivity. The product
allows the user to convert, view and manage graphics in over 85 raster, vector
and metafile formats. Shortcut menus provide access to view and convert most
graphics file, including complex formats such as Postscript, DXF, DWG, IGES, 3DS
and VRML. Extensive screen capture functionality enables users to capture
portions of their screen and save it as a graphic file. Cataloging and
thumbnailing features allow users to create personalized catalogs within the
Windows 95 Explorer containing detailed information on graphics files, including
user-defined key words.


COMMUNICATIONS AND INTERNET SOLUTIONS

Quarterdeck's Internet and Communications products are designed to provide
solutions for users to view, share, find and communicate information over the
Internet, inside intranets (private distributed data networks) or through other
standard communications methods. Key categories include Communications and
Internet Search and Enabling.

Communications:

PROCOMM PLUS FOR WINDOWS 95

ProComm Plus(R) for Windows 95, which started shipping in September 1996, is the
latest iteration of the PC communications program, ProComm Plus. The product is
specifically designed to provide a wide range of communication options,
including a new remote control feature, fax, data communications and Internet
support. Each communications module is accessible from within a single intuitive
interface, and can run concurrently by utilizing Windows 95 multitasking
technology. Fax capabilities include OCR, annotation, fax viewer, broadcast fax,
and fax request. Extensive data communications support includes 11 file
transfers and 36 terminal emulations, as well as RIPscript support. The included
remote control functionality allows control of a remote PC, with a host of
advanced security features including data encryption and Turbo Transfer(TM)
technology for high speed file transfers. Extensive Internet functionality is
provided, including news, mail, Microsoft(R) Internet Explorer browser, FTP and
Telnet.



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<PAGE>   8
PROCOMM PLUS 3.0 (WINDOWS 3.1)

ProComm Plus(R) 3.0, for users of Windows 3.1 systems, includes all the
functionality of the Windows 95 version, without the inclusion of Microsoft
Internet Explorer and the remote control software.

PROCOMM RAPIDREMOTE

ProComm(R) RapidRemote(TM) is targeted at the market for departmental and small
business telecommunications. Shipped in December 1996, the product is designed
to be an effective method to control another PC, including copying files or
opening remote applications. The initial version supports Windows 95, while
subsequent versions are expected to support Windows 3.1 and Windows NT. The
product features a broad range of remote control technologies, including
advanced fast screen refresh technology, high-speed access, SmartWizards, which
automatically walk the user through set-up to get connected securely and easily,
and a host of security features.



Internet Search & Enabling:

WEBCOMPASS

WebCompass(TM) 2.0, first shipped in December 1996, is a PC-based metasearch
tool for the World Wide Web, capable of simultaneously accessing and retrieving
information from multiple information sources. Once a subject has been searched,
WebCompass is designed to create detailed summaries of the data, rank the
results for relevancy, and allow the user to update the subject(s)
automatically. Organization options allow the user to further categorize a
search subject, and fine-tune subsequent searches. Search results can also be
posted to a web page, allowing users to maintain a constantly updated
information source published to other users. The new version provides a Windows
Explorer-style interface and a significant increase in speed.

IWARE CONNECT 2.0

Quarterdeck IWare Connect(TM), is designed to provide secure and cost-effective
Internet access for Novell NetWare LANs. It installs onto a single central
NetWare server using resident TCP/IP, eliminating the need for installation on
each networked PC. Quarterdeck IWare Connect provides network security, and can
hide the identity of each workstation and safeguard against most break-in
attempts. The network administrator can control Internet access by user, group,
time-of-day, application and destination. Quarterdeck IWare Connect also
provides Intranet access, so users can distribute internal information on local
NetWare networks.


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WEBSTAR FOR MACINTOSH

StarNine began shipping WebSTAR(R) for Macintosh 2.0 in November 1996. WebSTAR
is designed to allow the user to publish and serve information onto the World
Wide Web using a Macintosh. Key features of WebSTAR for Macintosh include: (i)
compatibility with Microsoft and Netscape, (ii) support for forms and clickable
maps, (iii) integration with both Macintosh and SQL databases, (iv) scriptable
and recordable with AppleScript, (v) domain and IP address level access
controls, (vi) support for thousands of connections per hour, (vii) remote
administration from anywhere on the Internet, (viii) control of multiple servers
from one Macintosh, and (ix) the ability to publish information from many
sources. Through the power of AppleScript, WebSTAR for Macintosh can communicate
with other applications on the user's Macintosh to publish many items contained
in those programs. The WebSTAR Security Toolkit is specifically designed to
provide authentication and encryption using the Secure Sockets Layer (SSL)
standard to ensure that Web connections are completely private. This enables
WebSTAR for Macintosh to encrypt the data transmitted.



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Product Development

Quarterdeck plans to focus its internal development efforts and service
offerings in the areas of Utilities and Communications and Internet Solutions
and to license and publish tactical and opportunistic products to leverage
Quarterdeck's channels of distribution. Quarterdeck's products and services are
planned, designed, developed, documented, and tested using both internal
resources and outside contracting.

The Company's product development activities expanded and diversified during
fiscal 1996. The Company continued to enhance its proprietary core software
technologies and released a number of new products and new product versions. In
particular, development activities were focused on delivering products which
enhance Windows 95 and Windows NT operating systems. The Company believes its
expertise and experience in DOS and Windows operating systems and communications
give it a strong technology foundation from which to achieve it's goal of
delivering products that enhance the user's computing experience.

The Company focused substantial development efforts on the Internet market in
the past year. The Company is now moving its focus away from providing
infrastructure technology for the Internet as this area continues to be in flux
and is dominated by Microsoft and other major companies who in many cases
provide this technology free. The Company is refocusing its efforts on Internet
development in two areas; making all products Internet aware and making use of
the Internet to expand the capabilities of products, and marketing products that
add value to the Internet/intranet. These value-added products directly address
use of the Internet and intranet by managing, connecting, searching, and
organizing Internet/intranet information.

The Company has developed and acquired certain technologies which will help it
achieve its goals. The memory management technology provides expertise in
delivering capabilities aimed at controlling software conflicts and
automatically resolving certain problems in Microsoft Windows. The intelligent
search agent technology in WebCompass provides a core for searching and managing
information from the Internet and intranets.

The Company anticipates that its development activities over the next year will
continue to focus on products for the Microsoft Windows environments, including
products for Windows 95 and its successors, and Windows NT. The Company is
investing in expanding its development using COM, ActiveX, and Java and expects
these tools and approaches to positively impact the Company's development
schedules to better compete in a rapidly changing competitive environment.


           Research and development expenses were $21,314,000, $14,286,000 and
$7,520,000 in fiscal 1996, 1995 and 1994 and represented 16.0%, 12.1%, and 8.9%
of net revenues, respectively.

           Although the Company believes that its product planning and
development strategies and processes will result in successful development of
technology innovations in the future, because of the inherent uncertainties of
software development projects and the software market in general, there can be
no assurance that the Company's software development efforts will result in
successful product introductions or increased revenues. Even with normal
development cycles, the market environment can change so quickly that features
in certain products can become outdated before or soon after market
introduction.

MARKETING AND SALES

           Quarterdeck uses multiple distribution channels to deliver its
products worldwide, including software distributors and dealers, value added
resellers, system integrators, original equipment manufacturers, direct
telemarketing, direct mail, as well as over the Internet.

           Quarterdeck supports its distributors and dealers by targeting end
users directly through a variety of programs designed to create demand for its
products. The Company seeks to educate individuals and key decision makers in
corporations, and in the SOHO (small office/home office) and home markets, as
well as government and independent software vendors about the uses for and
benefits of its products. Programs include the following: (i) extensive
worldwide advertising in industry magazines, local computer newspapers, trade
journals and the internet; (ii) targeted direct mail campaigns using customer
response cards, sales 

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<PAGE>   11
brochures and postcards; (iii) cooperative channel market development and
promotional activities, and (iv) trade show and user group participation.

           The Company's sales force specializes in educating corporate and
government end users as well as dealers about the Company's products. The sales
organization develops leads and introduces potential customers and corporate
accounts to dealers in their geographic area. In situations where large site
license sales are required, the sales organization will offer the customer the
option to purchase products directly from the Company. The sales organization
also provides basic product support and training directly to end users.

           The Company sells its products to major software distributors for
resale through software dealers. Quarterdeck's principal North American
distributors are Ingram Micro, Inc., Tech Data Corporation, and Merisel, Inc.
See Note 11 to the Company's Consolidated Financial Statements. Each of these
distributors resells the Company's products on a non-exclusive basis. Pursuant
to its domestic distribution agreements with these distributors, the Company
licenses the resale of its products in the United States for one-year terms with
automatic one-year renewal periods. The Company retains ownership of its
proprietary rights associated with its products and agrees to indemnify the
distributor for third party claims of proprietary rights infringement to the
extent such claims are brought against the distributor. The distribution
agreements are terminable by either party, without cause, upon written notice in
advance. The Company also distributes internationally through foreign based
subsidiaries of Ingram Micro, Inc., and Merisel, Inc. as well as a variety of
other international distributors. The Company estimates it has more than 35,000
distribution outlets selling its products on a worldwide basis, including
computer superstores, office warehouse clubs, software specialty stores,
consumer electronics stores, mass merchants, general warehouse clubs, value
added resellers (VAR's) and corporate resellers. Stores selling the Company's
products include Egghead, CompUSA, Computer City, Best Buy, Staples, Sam's Club,
Wal-Mart, Price-Costco, Stream, Software Spectrum, Harvey Norman, FNAC, Dixons,
and Vobis among others. Quarterdeck trains and supports distributors and key
dealers and sponsors joint marketing programs.

          The Company's return and exchange policies generally allow its
distributors to return, within a contractually defined period of time,
contractually limited amounts of any immediately-prior product releases in
exchange for new releases. In addition, distributors may participate, quarterly,
in a stock balancing program which, subject to certain limitations, allows them
to return purchased products for full credit toward future purchases. The
Company may also elect to accept additional returns based upon market conditions
and other factors. The Company also provides its distributors with price
protection rights for a contractually defined period of time from the date of
purchase. End users may return defective products at any time to their dealer or
distributor and the Company will make a full refund or exchange through the
distributor. The Company provides allowances against trade accounts receivable
for the estimated amount of product that will be returned or exchanged in
accordance with these policies.

          DIRECT MARKETING: With the acquisition of Landmark in fiscal 1995, the
Company obtained a direct telemarketing organization now called Quarterdeck
Select. This organization was further bolstered by the direct mail organization
acquired with Vertisoft in fiscal 1996. Through direct telemarketing, the
Company is able to target and reach the expanding SOHO and home markets.
Quarterdeck Select sells Quarterdeck software products directly to businesses
and individuals. Its outbound sales division conducts telemarketing campaigns to
existing and new customers using a state-of-the-art Predictive Dialing System
(PDS). Its mail order sales division mails millions of pieces of direct mail
annually to individuals and small businesses. Both outbound and mail order sales
representatives receive on-going product and sales training, and are well-versed
in effective, proprietary selling techniques for cross-selling Quarterdeck
products to maximize average order revenue. Orders are entered using an on-line
order entry system that promotes efficient processing, and a high level of
customer service. Quarterdeck Select's Clearwater, Florida facility also houses
a large warehouse, and is fully-staffed with customer service and administrative
personnel dedicated to servicing and supporting the direct-selling activities.




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           INTERNATIONAL SALES: The Company's European operations are
headquartered in Dublin, Ireland, with a marketing support office in Slough,
England. The Company also has a sales office in Sydney, Australia, and
agreements with third parties to distribute its products in Japan, Asia Pacific
and Latin America.

           The Company's international marketing support offices, along with
third party representatives in countries where the Company does not have
marketing support offices, prepare marketing programs for each local market,
educate end users and support the international distributor and dealer networks.
The Company's Dublin office was established to handle order processing,
technical support, localization and production for European and other
international sales. The Company ships international english language versions
and translated foreign language versions of its products from its Dublin
facilities.

           Sales by the Company to European and other international
distributors, dealers and end users outside of North America represented
approximately 18%, 16% and 11% of the Company's total net revenues for fiscal
years 1996, 1995 and 1994, respectively. See Note 11 of Notes to the Company's
Consolidated Financial Statements for information regarding the Company's
domestic and foreign operations and export sales.

           CUSTOMER SUPPORT: The Company believes a significant competitive
factor in the personal computer software business is the ability to provide a
high level of technical customer support. The Company provides extensive
customer support to its distributors, dealers and end users. All registered
users receive 90 days of pre-paid telephone technical support, which commences
upon the user's initial inquiry. The Company offers several levels of paid-for
telephone support programs including special "priority" programs for corporate
customers.

           The Company provides 24-hour end-user support through its Q/Fax
service and 1-800 ROBOTECH automated voice-response system, from which users can
receive up-to-date technical information including troubleshooting techniques
for advanced applications of Quarterdeck's products. Technical support notes are
also available worldwide on the Company's own Bulletin Board System (BBS) and
via other on-line services including the Internet and CompuServe.

COMPETITION

           The personal computer market is intensely competitive, subject to
strategic alliances of hardware and software companies and characterized by
rapid changes in technology and frequent introductions of new products and
features. The Company's primary competitors include utility, communications and
Internet software vendors. The Company's current revenues and profitability are
dependent on the viability of Microsoft Windows, including Windows 95 and
Windows NT, and Apple Macintosh operating systems. Additionally, the continued
viability and growth of the Internet and the Worldwide Web may have an
influence on revenue and revenue growth although the Company's revenues and
profitability are not as dependent on Internet and Worldwide Web growth. The
Company expects to encounter continued competition both from the established
companies and from new companies that are now developing, or may develop,
competing products. Many of Quarterdeck's existing and potential competitors
have financial, marketing and technological resources significantly greater than
those of Quarterdeck.

           The Company's products are designed to provide added features and
functions for users of DOS, Microsoft Windows, Windows 95, Windows NT and Apple
Macintosh operating systems. In some cases the Company's products compete
directly with features of those operating systems. In most cases, however, the
Company's products compete directly with products from other utility and
communications software vendors.

           Since the introduction of Windows 95, the software market has
experienced a shift to this platform. In addition, Windows NT is showing
significant increased acceptance as a server and desktop operating system in

                                       12
<PAGE>   13
corporate settings. As application programs and device drivers have been
developed to take advantage of these 32-bit operating environments, the
perceived need for software specifically designed to address the memory
limitations inherent in DOS and Windows 3.x and in DOS-based applications has
declined, resulting in a decline in the memory management segment of
Quarterdeck's business. In response to these changing market conditions, the
Company is now focusing substantial development efforts on new value-added
products for Windows 95 and Windows NT, while continuing to support Windows 3.x,
Apple Macintosh and DOS platforms. Quarterdeck released several new products for
Windows 95 in fiscal 1996, including MagnaRAM 97, Fix-It 1.0, WinProbe95, Hijaak
Pro 4.0, WebCompass and Procomm Plus 95 among others. However, Microsoft may
incorporate advanced utilities or other features in Windows 95 or Windows NT
that could have the effect of decreasing the demand for certain of the Company's
products, including certain of those under development. Should Quarterdeck not
be able to successfully and timely develop products that function under 
Windows 95 and Windows NT, and offer perceived value to Windows 95 and 
Windows NT users, future revenues would be adversely affected.

           Future competitive product releases may cause disruptions in orders
for the Company's products while users and the marketplace evaluate the
competitive products. The extent of the disruption in orders and the impact on
future orders of the Company's products will depend on various factors that are
not known at this time, including the level of functionality, performance and
features included in the final release of these competitive products and the
market's evaluation of competitive products compared to the then current
functionality, performance and features of the Company's products.

           The Company's Internet-related products may compete with tools from a
variety of companies, including networking and Internet software application
developers. Internet access providers, on-line service providers, and Microsoft
have made versions of their Internet access, creation and server products
available on the Internet for users to download at no charge or for extended
evaluation. This practice has adversely impacted Quarterdeck's market for
comparable products. Quarterdeck is dedicating its efforts in the areas of
communications and Internet Solutions towards providing value-added products and
services as opposed to Internet infrastructure products. Quarterdeck is also
focusing on leveraging the existence of the Internet in all of its products to
provide extended capabilities for its products through the use of the Internet.
Quarterdeck expects that its Procomm product line, together with its other
Communications and Internet products, will provide a significant portion of
future revenues. However, the revenues from such new products and services may
be less than Quarterdeck anticipates due to various factors including the timing
of release in relation to competitive products and services, and uncertainties
surrounding the rate and extent of development of these new and emerging
markets.

           The Company anticipates that the type and level of competition
experienced to date will continue and may increase and that future sales of its
products will be dependent upon the Company's ability to timely and successfully
develop or acquire new products or enhanced versions of its existing products
for Windows 95 and Windows NT, Apple Macintosh and/or other operating systems
that may gain market acceptance, and to demonstrate to the user a need for the
Company's products while developers of operating systems and competitive
software products continue to enhance their products. To the extent that
operating system enhancements, competitive products or bundling of competitive
products with operating systems or computer hardware reduce the number of users
who perceive a benefit from the Company's products, sales of the Company's
products in the future would be adversely impacted. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

           The Company believes that the primary competitive factors in the
personal computer software market are product features and performance, time to
market, product reliability, ease of use, product and vendor reputation, price,
timeliness of product upgrades and the quality of customer support and service.
Of these, time to market and price are becoming increasingly significant
factors.



           The Company also competes with other companies in the personal
computer software market for distributors and dealers, as well as for alliances
with hardware and software vendors. The Company competes 

                                       13
<PAGE>   14
for distributors and dealers on the basis of the revenue opportunities presented
by the Company's products, in addition to discounts, credit terms and
promotional support.


PRODUCTION AND BACKLOG

           The principal materials and components used in the Company's products
include CD-ROM, diskettes, user manuals and product display boxes, and are
purchased directly from third party vendors. The Company currently utilizes both
internal and third party contracted resources for the assembly, warehousing and
fulfillment of its products. Outside vendors perform in accordance with Company
specifications, and material quality is ensured prior to the assembly of its
products. Capacity shortages for components, assembly, warehousing and
fulfillment are not anticipated due to multiple third party resources available
for contract; however, if such shortages did occur the Company's operating
results could be materially impacted. The Company believes there are adequate
supplies of and sources for the raw materials used in its products and that
multiple sources are available for CD and diskette duplication, manual printing
and final packaging.

           Customer order turnaround is generally within one week of receipt of
the order, unless such orders are pre-orders for unreleased products. Generally
the Company has relatively little, if any, order backlog at any given time and
does not consider backlog to be a significant or important measure of sales for
any future period.


PATENTS, TRADEMARKS AND PRODUCT PROTECTION

           Quarterdeck protects its products and technology under a combination
of trade secret, patent, copyright, unfair competition and trademark laws.
Quarterdeck holds two United States patents relating to memory management, one
of which expires in 2010 and the other of which expires in 2011, and one of
Quarterdeck's subsidiaries holds a patent relating to virtual screen overlays
that expires in 2013. Quarterdeck provides its products to end users under a
non-exclusive license that limits the warranties provided by and liability of
Quarterdeck. The ability of software companies to enforce such licenses has not
been finally determined by the United States Supreme Court, although Quarterdeck
believes that its licenses are enforceable. Quarterdeck's trademark and service
mark rights include rights associated with its use of its trademarks and service
marks, and rights obtained by registrations of its trademarks and service marks
("marks"). Quarterdeck has applied for or obtained United States trademark
registrations for certain marks and has applied for or obtained registrations in
various international jurisdictions. The use and registration rights of
Quarterdeck for its marks do not assure that Quarterdeck has superior rights to
others that may have registered or used identical or related marks on related
goods or services.

           The extent to which U.S. and foreign copyright and patent laws
protect software has not been fully determined. In addition, changes in the
interpretation of copyright and patent laws could expand or reduce the extent to
which the Company or its competitors are able to protect their software and
related intellectual property.

           Because the computer industry is characterized by technological
changes, the policing of the unauthorized use of computer software is a
difficult task. Software piracy is expected to continue to be a persistent
problem for the packaged software industry. Despite steps taken by Quarterdeck
to protect its software products, third parties still make unauthorized copies
of Quarterdeck's products for their own use or for sale to others. These
concerns are particularly acute in certain international markets. The Company
believes that the knowledge, abilities and experience of its employees, its
timely product enhancements and upgrades and the availability and quality of its
support services provided to users are as significant in protecting its software
products as patent, trade secret and copyright protection laws.




                                       14
<PAGE>   15
EMPLOYEES

           As of September 30, 1996, Quarterdeck employed 960 people worldwide.
None of the Company's employees are represented by a labor union or subject to a
collective bargaining agreement. Quarterdeck has never experienced a work
stoppage due to labor difficulties and believes that its employee relations are
good. During September 1996, the Company commenced a comprehensive restructuring
program and as of November 30, 1996 the Company employed approximately 600
people worldwide.

           Recruitment of personnel in the computer software industry is highly
competitive. The Company believes that its future success will depend, in part,
on its ability to continue to attract and retain highly skilled technical,
marketing and management personnel.

ITEM 2. PROPERTIES

           The Company's principal administrative, production, marketing product
development and support facilities are presently located in Marina del Rey,
California, occupying approximately 75,500 square feet. The Company owns a
building in Columbia, Missouri, which was acquired as part of the acquisition of
Datastorm. The building is approximately 152,000 square feet of which
approximately 30,000 square feet is occupied by the Company. The Company also
leases office space amounting to 47,900 square feet in Clearwater, Florida, and
12,500 square feet in Northern California for research and development,
marketing and certain administrative functions. In addition, the Company leases
space for production, sales and support offices in Dublin, Ireland, and
marketing offices in Slough, England and Sydney, Australia.

           The Company is currently seeking to terminate certain existing lease
obligations or sub-lease certain space as part of the comprehensive
restructuring program.

ITEM 3. LEGAL PROCEEDINGS

           In November and December, two shareholder complaints were filed in
the Superior Court of the State of California, County of Los Angeles, against
Quarterdeck Corporation and a former officer and current officer of the Company
alleging among other things, violations of certain provisions of California
securities laws relating to statements made about the Company. The suits are
purportedly brought on behalf of all persons who purchased the Company's common
stock during the period of January 26, 1996 through June 13, 1996 and seeks
damages in an unspecified amount and other relief. The Company intends to
vigorously defend these actions.

           On or about September 3, 1996, a purported class action lawsuit,
Marjorie Williams, et al. v. Quarterdeck Corporation, Case No. 96-3041, was
filed in the Circuit Court of the Eighth Judicial Circuit, Alachua County,
Florida. The complaint purports to allege claims against Quarterdeck on behalf
of all licensees of MagnaRAM2 residing in the United States. The complaint
alleges, among other things that MagnaRAM2 fails to significantly increase
Random Access Memory or otherwise help Windows 95 and Windows 3.x users. The
plaintiffs seek compensatory damages in an unspecified amount, injunctive
relief, and attorney fees and costs. On October 10, 1996, Quarterdeck filed a
motion seeking dismissal of the entire action pursuant to the forum non
conveniens doctrine and, in the alternative, dismissal of certain allegations
and causes of action for failure to state a claim. On November 25, 1996 
(the date upon which Quarterdeck's motion was scheduled to be heard), counsel
for plaintiffs agreed to dismiss the entire action, without prejudice. A
stipulation to this effect was entered on the record before the Court. Pursuant
to Florida law, plaintiffs may, within 120 days of November 25, 1996, refile the
action in California and have the complaint "relate back" to the original
September 3, 1996 filing date. Quarterdeck has received no communication from
plaintiffs' counsel since the dismissal and cannot determine whether plaintiffs
intend to refile in California. If a new class action complaint is filed,
Quartedeck intends to defend the case vigorously and to oppose any effort to
certify the claims for class resolution.

           The Company is a defendant in various other pending claims (including
intellectual property disputes and employee claims), none of which is expected
to have a material adverse impact on the results of operations or financial
position of the Company.

                                       15
<PAGE>   16
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

           No matters were submitted to a vote of security holders during the
last quarter of fiscal 1996.

EXECUTIVE OFFICERS OF THE REGISTRANT

           The executive officers of the Company are as follows:

<TABLE>
<CAPTION>
     NAME                         AGE              POSITION
     ----                         ---              --------
<S>                               <C>              <C>    
     King R. Lee                  56               Office of the President
     Anatoly Tikhman              40               Office of the President
     James Moise                  42               Senior Vice President and President - Quarterdeck U.S.A.
     Frank R. Greico              39               Senior Vice President and Chief Financial Officer
     Bradley D. Schwartz          37               Senior Vice President, General Counsel and Secretary
     Joseph Fusco                 46               Vice President - Utilities
     Suzanne Dickson              36               Vice President - Communications and Internet Solutions
</TABLE>


Mr. Lee was appointed as a member of the Office of the President of the Company
on August 27, 1996 and currently serves in such capacity. Mr. Lee served as
Interim Chief Executive Officer of the Company from December 1994 until February
1995 and served as Interim Chief Operating Officer of the Company between July
and December 1994. He was elected to the Board of Directors of the Company in
July 1994. Mr. Lee is the Chief Executive Officer and Chairman of Wynd
Communications Corporation, a two-way wireless messaging service provider and is
President of King R. Lee & Associates, Inc., a management consulting firm, which
provides consulting services to the Company. From 1987 to 1993, Mr. Lee was
President and Chief Executive Officer of XTree Company, a developer of computer
systems software. He serves as a director of NetSoft, Inc., Nettech Systems,
Inc., Outback Resource Group, Inc., Boss Entertainment and World Childrens
Transplant Fund.

Mr. Tikhman was appointed as a Senior Vice President in July 1996 and as a
member of the Office of the President on August 27, 1996. Prior to July 1996,
Mr. Tikhman was the Chief Executive Officer of Vertisoft Systems, Inc., a
software company, which he founded in 1987 and which was acquired by the Company
in July 1996.

Mr. Moise was appointed Senior Vice President and President -- Quarterdeck
U.S.A. in December 1995. Mr. Moise joined Quarterdeck as Senior Vice President
World Wide Sales in January 1995. Prior to joining Quarterdeck, Mr. Moise
worked as a consultant for a variety of companies in the computer software
industry. Mr. Moise was Vice President of Sales with XTree Corporation from
April 1990 to October 1993, where he was responsible for sales and channel
marketing. Earlier he had been the North American Sales Manager for Aldus
Corporation. Mr. Moise was also founder and President of Market Share, a
manufacturer's representative firm specializing in PC hardware and software
products. Other assignments included Channel Sales Manager with Fujitsu Business
Communications and Marketing Representative with IBM.

Mr. Greico joined the Company in January 1996 as Senior Vice President and Chief
Financial Officer. Prior to joining the Company, Mr. Greico was Chief Financial
Officer and Vice President of Finance and Operations at Knowledge Adventure, 
Inc., an educational software publisher. Mr. Greico, a certified public
accountant, has also held several MIS and finance positions within W.R. Grace's
distributor units, most notably as Chief Financial Officer and Vice President of
Finance for their B&T Software distribution company (formerly Soft-Kat). He was
also a senior accountant with Price Waterhouse in New York.


                                       16
<PAGE>   17
Mr. Schwartz joined the Company in February 1996 as Senior Vice President,
General Counsel and Secretary. During 1994 and 1995, Mr. Schwartz was a partner
in the law firm of Gibson, Dunn & Crutcher LLP and from 1985 through 1993 he was
an associate of that law firm.

Mr. Fusco was appointed as a Vice President of the Company after his hiring in
September 1996. Prior thereto, Mr. Fusco held various positions with Symantec
Corporation commencing in 1992, most recently the General Manager of Symantec's
Strategic Technologies business unit. Prior to Symantec, Mr. Fusco held various
positions with Peter Norton Computing commencing in 1989 until its acquisition
by Symantec in 1992.

Ms. Dickson was appointed as a Vice President of the Company in September 1996,
and prior thereto held other positions with the Company commencing in February
1995. Ms. Dickson had held several product and marketing positions with other
software utility companies, including XTree Corporation, Fifth Generation
Systems and Symantec Corporation.




                                       17
<PAGE>   18
                                     PART II

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

           The Company's common stock trades on the Nasdaq National Market,
under the symbol QDEK. The following table sets forth, for the periods
indicated, the high and low closing sales prices of the common stock on the
Nasdaq National Market as reported by the National Association of Securities
Dealers, Inc.

<TABLE>
<CAPTION>
                                                         HIGH            LOW 
                                                         ----            --- 
<S>                                                    <C>             <C> 
           Fiscal 1995:
             First Quarter ......................      $ 3-1/4         $ 1-7/8
             Second Quarter .....................      $ 4-7/16        $ 2-7/8
             Third Quarter ......................      $12-1/2         $ 3-5/8
             Fourth Quarter .....................      $21-7/16        $10-3/8
                                                                              
           Fiscal 1996:                                                       
             First Quarter ......................      $38-1/4         $17-1/8
             Second Quarter .....................      $26-3/8         $12    
             Third Quarter ......................      $16-1/2         $ 8    
             Fourth Quarter .....................      $ 9-7/8         $ 6    
</TABLE>                                               


           As of November 30, 1996, Quarterdeck Corporation had 37,665,882
shares outstanding and 589 shareholders of record. The Company estimates there
are more than 20,000 shareholders represented through accounts held by clearing
agencies.

           The Company paid no dividends during fiscal 1996. However, the
Company acquired certain entities in pooling of interest transactions who made
certain distributions to their shareholders prior to being acquired by the
Company. Those distributions are reflected in the accompanying consolidated
financial statements. The Company intends to retain earnings for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future. The Company is a party to certain financing agreements in connection
with certain borrowings which prohibit the payment of cash dividends.




                                       18
<PAGE>   19
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

           The following selected consolidated financial data are derived from
the Company's consolidated financial statements. Historical results should not
be taken as necessarily indicative of the results that may be expected for any
future period. This consolidated data should be read in conjunction with the
consolidated financial statements and notes thereto. Certain items in the prior
years' consolidated financial statements have been reclassified to conform to
the 1996 presentation. During fiscal 1996, Quarterdeck acquired Inset,
Datastorm, Futurelabs, and Vertisoft in transactions accounted for as poolings
of interests. During fiscal 1995, Quarterdeck acquired Landmark Research
International, Inc., Internetware, Inc. and StarNine Technologies, Inc. in
transactions accounted for as poolings of interest. All financial information
subsequent to October 1, 1992 has been restated to reflect the combined
operations of Landmark, Datastorm, Inset and Quarterdeck. StarNine and
Internetware had results of operations that were not material to Quarterdeck's
consolidated financial statements and therefore, periods prior to October 1,
1994 were not restated for these two transactions. Vertisoft and Futurelabs had
results of operations that were not material to Quarterdeck's consolidated
financial statements and therefore, periods prior to October 1, 1995 were not
restated for these two transactions. However the number of shares of the
Company's common stock issued in the Vertisoft acquisition are material and
accordingly shares outstanding and earnings per share have been restated to
reflect those shares. All amounts shown are in thousands, except per share data.

<TABLE>
<CAPTION>
                                                                                YEAR ENDED SEPTEMBER 30,
                                                          ---------------------------------------------------------------------
                                                             1996            1995           1994           1993           1992
                                                             ----            ----           ----           ----           ----
<S>                                                       <C>              <C>            <C>             <C>           <C>    
STATEMENTS OF OPERATIONS DATA:
Net revenues ......................................       $ 133,100        $117,606       $ 84,715        $83,578       $88,602
Cost of revenues ..................................          49,600          34,884         27,403         24,534        21,247
                                                          ---------        --------       --------        -------       -------
      Gross margin ................................          83,500          82,722         57,312         59,044        67,355

Operating expenses:
      Research and development ....................          21,314          14,286          7,520          2,589         1,414
      Sales and marketing .........................          66,355          30,624         27,107         25,775        27,170
      General and administrative ..................          32,128          20,704         20,908         20,716        17,671
      Acquisition, restructuring
       and other charges ..........................          37,789           7,409         12,863             --            --
      Litigation settlement .......................              --              --            615             --            --
                                                          ---------        --------       --------        -------       -------
      Total operating expenses ....................         157,586          73,023         69,013         49,080        46,255

Operating income (loss) ...........................         (74,086)          9,699        (11,701)         9,964        21,100
Other income (expense), net .......................              38             (38)          (271)            --            --    
Interest income (expense), net ....................            (105)          1,922          1,365          1,144         1,331
                                                          ---------        --------       --------        -------       -------
Income (loss) before income  taxes ................         (74,153)         11,583        (10,607)        11,108        22,431
Provision (benefit) for income  taxes .............             806             331         (5,982)           639         4,820
                                                          ---------        --------       --------        -------       -------

Net income (loss) .................................       $ (74,959)       $ 11,252      $  (4,625)       $10,469       $17,611
                                                          =========        ========       ========        =======       =======

Net income (loss) per share:

      Primary .....................................       $   (2.15)       $   0.32       $  (0.15)       $  0.32       $  0.53
                                                          =========        ========       ========        =======       =======
      Fully diluted ...............................       $   (2.15)       $   0.31       $  (0.15)       $  0.32       $  0.53
                                                          =========        ========       ========        =======       =======

Shares used to compute net income (loss) per share:
      Primary .....................................          34,894          35,557         31,825         33,221        33,261
                                                          =========        ========       ========        =======       =======
      Fully diluted ...............................          34,894          36,499         31,825         33,221        33,261
                                                          =========        ========       ========        =======       =======

Additional unaudited pro forma data:
      Income (loss) before income taxes ...........       $ (74,153)       $ 11,583       $(10,607)       $11,108       $22,431
      Pro forma income taxes ......................             806           3,406            576          3,977         7,764
                                                          ---------        --------       --------        -------       -------
      Pro forma net income (loss) .................       $ (74,959)       $  8,177       $(11,183)       $ 7,131       $14,667
                                                          =========        ========       ========        =======       =======

Pro forma income (loss) per share:
      Primary .....................................       $   (2.15)       $   0.23       $  (0.35)       $  0.21       $  0.44
                                                          ---------        --------       --------        -------       -------
      Fully diluted ...............................       $   (2.15)       $   0.22       $  (0.35)       $  0.21       $  0.44
                                                          =========        ========       ========        =======       =======
</TABLE>


<TABLE>
<CAPTION>
                                                                                     AS OF SEPTEMBER 30,
                                                          ---------------------------------------------------------------------
                                                             1996            1995           1994           1993           1992
                                                             ----            ----           ----           ----           ----
<S>                                                       <C>              <C>            <C>             <C>           <C>    
BALANCE SHEET DATA:

Working capital (deficiency) ......................       $  (4,684)       $ 29,490       $ 29,147        $35,619       $38,661
Total assets ......................................          76,781          76,699         62,471         64,673        65,499
Long-term obligations .............................          25,108             164            701            130           598
Stockholders' equity ..............................           4,425          44,270         36,606         53,606        52,937
</TABLE>

                                       19
<PAGE>   20
Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

General

           Management's discussion and analysis of financial condition and
results of operations focuses primarily on liquidity, capital resources and the
results of the Company's operations. This Item should be read in conjunction
with the Consolidated Financial Statements and the notes thereto. The
historical results of operations are not necessarily indicative of results to
be expected from future performance.

           The Company has invested substantial equity and effort to evolve from
a one-product (QEMM) provider to a more diversified software producer.
Quarterdeck has recently commenced a substantial restructuring of its operations
and has experienced, and anticipates further, substantial changes to its
competitive environment. Elements of Quarterdeck's strategy are to focus on the
integration of the acquisitions that have been completed since June 1995 and to
improve the speed of development and release of new products or enhanced
versions of existing products to better compete in a rapidly changing
marketplace. Partially as a result of the acquisitions and subsequent
restructuring, the Company believes it is now well positioned to provide
a broad range of software products that enhance computing on desktop PC's, the
Internet and intranet.


                                       20
<PAGE>   21
           In addition to an analysis of recent and historical financial
results, the following discussion includes an analysis of certain of the
Company's business risks, including risks which are inherent to software
development as well as specific trends and uncertainties relating to the
competitive environment in which the Company operates. The Company has sought to
identify the most significant risks to its business. However, the Company cannot
predict whether, or to what extent any of such risks may be realized nor can
there be any assurance that the Company has identified all possible issues which
the Company might face. In particular, the Company has recently completed a
number of acquisitions and made investments in certain companies and is in the
process of restructuring its operations in an attempt to maximize the benefit of
such acquisitions. There can be no guarantee that such acquisitions will
ultimately be beneficial.

           This Form 10-K contains forward-looking statements which are made
pursuant to the safe-harbor provisions of the Private Securities Litigation
Reform Act of 1995. Within this Form 10-K, words such as "believes",
"anticipates", "plans", "expects", "intends", "designed to" and similar
expressions reflecting something other than historical fact are intended to
identify forward-looking statements, but are not the exclusive means of
identifying such statements. These forward-looking statements involve a number
of risks and uncertainties, including the timely development and market
acceptance of products and technologies, sell-through of products in the sales
channel, successful integration of acquisitions, the ability to secure
additional sources of financing, the ability to reduce operating expenses and
other factors described throughout this Form 10-K and in the Company's other
filings with the Securities and Exchange Commission. The actual results that the
Company achieves may differ materially from any forward-looking statements due
to such risks and uncertainties. The Company undertakes no obligations to revise
or update any forward-looking statements in order to reflect events or
circumstances that may arise after the date of this report.

RESULTS OF OPERATIONS

           The following table sets forth, for the periods indicated, the
percentage of net revenues represented by certain data derived from the
Company's Consolidated Statements of Operations:

<TABLE>
<CAPTION>
                                                                                 YEAR ENDED
                                                                                SEPTEMBER 30,
                                                                     --------------------------------
                                                                      1996          1995         1994
                                                                     -----         -----        -----
<S>                                                                  <C>           <C>          <C>   
           Net revenues ......................................       100.0%        100.0%       100.0%
           Cost of revenues ..................................        37.3          29.7         32.3
                                                                     -----         -----        -----
                  Gross margin ...............................        62.7          70.3         67.7
           Operating expenses:
                  Research and development ...................        16.0          12.1          8.9
                  Sales and marketing ........................        49.9          26.0         32.0
                  General and administrative .................        24.1          17.6         24.7
                  Acquisition, restructuring and other
                     charges..................................        28.4           6.3         15.2
                  Litigation settlement ......................           0             0          0.7
                                                                     -----         -----        -----
                  Total operating expenses ...................       118.4          62.1         81.5
           Operating income (loss) ...........................       (55.7)          8.2        (13.8)
           Interest income, net ..............................        (0.0)          1.6          1.3
                                                                     -----         -----        -----

           Income (loss) before income taxes .................       (55.7)          9.8        (12.5)
           Provision (benefit) for income taxes ..............         0.6           0.3         (7.1)
                                                                     -----         -----        -----
           Net income (loss) .................................       (56.3)%         9.6%        (5.5%)
                                                                     =====         =====        =====
</TABLE>

FISCAL 1996 COMPARED TO FISCAL 1995

           Net Revenues: Net revenues for the fiscal year ended September 30,
1996 increased by 13.2% or $15,494,000 over the fiscal year ended September 30,
1995. The increase in net revenues compared with the prior year period resulted
primarily from broadening the Company's product portfolio throughout fiscal 1996
through acquisitions and product development. After adding back returns and
allowances, gross revenues for the year were $165,000,000 representing a 30.2%
increase or $38,200,000 over the prior fiscal year. The $31,900,000 difference
between net and gross revenues for the fiscal year ended September 30, 1996
primarily represents returns and allowances charged to operations during
the fiscal year with $7,213,000 remaining in the reserve for returns at fiscal
year-end versus $3,302,000 at the prior fiscal year-end. The increase in
revenues is also the result of the Company's efforts to broaden its distribution
competency through expansion of its distribution network and acquisition of a
direct sales organization. However, the Company experienced a significant
decline in net revenues in the second half of fiscal 1996 as compared to the
first half of the year primarily due to reduced demand for many of its products
(particularly memory management products). This decline continued during the
September quarter which resulted in the recording of $8,400,000 of additional
return reserves for fiscal 1996.

           The Company believes that the decline in sell-through of memory
management products is primarily attributed to the continuing decrease in the
cost of memory (DRAM), controversy surrounding the efficacy of a competitor's
product (SoftRAM), together with the fact that current versions of the Company's
memory management products are nearing the end of their product life-cycle (see
page 27 for further discussion). The Company released a new version of MagnaRAM
in September of 1996 and 

                                       21
<PAGE>   22
plans to release an updated version of QEMM in the coming months. The delayed
release of PROCOMM 3.0 from Fall 1995 to February 1996, among other factors, led
to unusually high initial sell-through levels during the quarter ended March 31
1996. A return to normal sales levels during the third and fourth quarters of
fiscal 1996 negatively impacted net revenue in the second half of fiscal 1996.
The Company released a new version of PROCOMM for Windows95 at the end of the
fiscal year. Continued weakness in sales of the Company's memory management
and/or communications products would have a material adverse effect on future
revenues.

           The reduction in sell-through of the Company's memory management and
communication products resulted in higher channel inventory levels. In order to
bring inventory levels in line with current and anticipated sell-through levels
the Company reduced shipments of these products during the second half of fiscal
1996. In addition to the revenue reductions resulting from the reduced shipment
levels during the second half of fiscal 1996, the Company recorded an
additional reserve for sales returns to provide for estimated returns as well as
actual returns during the September quarter. This additional reserve further
reduced net revenues for the three months ended September 30, 1996 to
approximately $19.7 million. Consistent with prior years, the Company
establishes allowances for estimated returns and exchanges as a reserve against
revenues. Once the Company recognized that sell-through was less than
anticipated, additional reserves were recorded. Quarterdeck is taking steps to
improve its ability to receive accurate, sell-through information on a timely
basis.

           Net revenues from European and other international distributors, 
dealers and end users outside of the United States amounted to $23,900,000 and
$19,015,000 for the fiscal years ended September 30, 1996 and 1995 respectively.

           Due to the inherent uncertainties in software development and in the
microcomputer software industry, the Company is unable to predict whether the
net revenue trends noted above will continue.

           Cost of Revenues: The Company's cost of revenues includes product
packaging, documentation and media, manufacturing expenses, amortization of
capitalized software costs, technical support and production costs as well as
translation costs and certain license fees paid to third parties. Cost of
revenues amounted to $49,600,000 in fiscal 1996 and $34,884,000 in fiscal 1995.
The cost of revenues increased from 29.7% of net revenues in fiscal 1995 to
37.3% of net revenues in fiscal 1996. This increase was primarily due to higher
production and support costs as a result of slower than expected integration of
acquired operations. In addition, the Company increased reserves for obsolete or
slow-moving inventory by $3,914,000. The increase primarily resulted from
increased levels of product in inventory with respect to the Company's memory
management, communication and other utility products the Company has and is
continuing to release updates for, in addition to Internet products the Company
no longer plans to actively market.

           Capitalized software development and purchased software costs are
generally amortized over one to three year periods, commencing upon initial
product release. Fluctuations in amortization expense between periods may arise
depending on the amount of software costs incurred and capitalized for
particular software products and their respective release dates. Amortization of
capitalized software costs increased to $3,711,000 in fiscal 1996 from
$1,575,000 in fiscal 1995. The increase in cost of revenues is also due to
amortization acceleration or write-off of $1,746,000 of capitalized third party
software development costs relating to products that have experienced reductions
in demand or Internet products the Company no longer plans to actively market.
See further discussion under Research and Development.

           Future cost of revenues as a percentage of net revenues will depend,
in addition to the amount of amortization of capitalized software, on the mix of
sales by product, by domestic versus international, by single unit versus
multiple license packages, and the mix of third party developed and licensed
products versus internally developed products, among other things. In accordance
with generally accepted accounting principles, cost of revenues includes certain
expenses that do not vary directly with sales; therefore higher net revenues may
produce a lower percentage of cost of revenues and vice versa.

                                       22
<PAGE>   23
           The microcomputer software industry has experienced increased price
competition in recent years. The Company anticipates that increased price
competition will continue in the future and may result in reduced average unit
selling prices and corresponding reduced margins.

           Operating Expenses: Approximately $12,200,000 of fiscal 1996 expenses
relating to certain acquisitions consummated during the year were treated as
immaterial poolings. Consequently, prior year results of operations exclude
comparable prior year expenses.

           Research and Development: Research and development expenses consist
primarily of salaries and benefits and consulting fees to support product
development, including product testing and documentation. Research and
development expense increased by $7,028,000 from fiscal 1995, while increasing
as a percentage of net revenues from 12.1% to 16.0%. The increase in research
and development expense is due in part to increased research and development
staffing levels and to increases in payments to third parties for contracted
product development required to support the Company's expanded product
development efforts. The increased expense as a percent of net revenues is also
due to investment R&D spending for Internet products which did not have revenue
in proportion to development spending as compared to more established utility
products. Additionally, in fiscal 1996, development resources continued to focus
on products for which technological feasibility had not yet been established and
therefore development costs were expensed, rather than capitalized.

           The costs of software product development are capitalized once
technological feasibility is achieved. Costs incurred prior to attaining
technological feasibility are expensed in the period incurred as research and
development expenses. During fiscal 1996 and 1995, the Company did not
capitalize any internal software development costs, since the majority of
development efforts incurred during the period related to new products for which
technological feasibility had not been established. Software development costs
relating to products for which technological feasibility had been established
during 1996 were immaterial. In addition, the recoverability of the cost of new
product development, including products in lines of business the Company has not
engaged in previously, is more uncertain than that for product upgrades
resulting in expense rather than capitalization. During fiscal 1996 and 1995,
the Company purchased and capitalized software costs amounting to $4,262,000 and
$2,563,000, respectively. The increase was primarily due to the addition of
$1,800,000 of capitalized software relating to the Pinnacle technology
acquisition (Cleansweep) and $900,000 relating to the Limbex acquisition
(WebCompass) partially offset by write-offs relating to restructuring, and
acquisition related expenses and accelerated amortization due primarily to
Internet products which the company does not intend to actively market.

           The Company believes that to remain competitive it is necessary to
continue to invest in software development efforts while at the same time
considering the acquisition and/or license of complementary software products.
The Company anticipates that spending for software development and purchased
software will continue as a significant expense in the future. However, because
of the inherent uncertainties of software development projects and the software
market in general, there can be no assurance that software development efforts
or additional purchased software will result in successful product introductions
or increased sales.

           Sales and Marketing, and General and Administrative: Sales and
marketing, and general and administrative expenses consist of salaries and
related costs of administrative, sales and marketing, customer service and
support personnel as well as advertising, trade show and promotional expenses
and facilities costs. Sales and marketing expenses increased by $35,731,000 from
fiscal 1995, while increasing as a percentage of net revenues from 26.0% to
49.9%. Market development funds, advertising and other variable sales and
marketing expenses were budgeted based upon expected sales levels which did not
occur and as a result such expenses significantly increased as a percentage of
net revenues. The Company has since changed its practice such that variable
sales and marketing expenses are based to a greater extent upon underlying
sell-through levels and to a lesser extent upon future sales estimates. The
increase in dollars primarily consists of increases in sales and marketing
salaries of $10,400,000 relating in part to increases in telemarketing staff. In
addition, direct and channel marketing expenses increased by $7,100,000 over the
prior year primarily relating to increased direct mail activities at the
Company's Clearwater, Florida telemarketing facility as well as the Vertisoft
acquisition which included a direct mail operation. Channel marketing increases
are primarily due to increased spending relating to the launch of new products
in the retail market as well as the outsourcing of the sales function for
Vertisoft products. Finally, marketing development funds, packaging and
collateral related expenses increased by approximately $9,000,000 and $2,400,000
versus prior year respectively, which also contributed to the increase.

                                       23
<PAGE>   24
           Quarterdeck believes substantial sales and marketing efforts are
essential to achieve revenue growth and to maintain and enhance the Company's
competitive position. Accordingly, with the continued expansion of its product
lines and international operations, as well as the introduction of new and
upgraded products, including products recently released and currently being
developed for Windows 95 and Windows NT, Quarterdeck expects the expenses
associated with these efforts to continue to constitute its most significant
operating expense. There can be no assurance that these sales and marketing
efforts will be successful in achieving their intended results.

           General and administrative expenses increased by $11,424,000 from
fiscal 1995 and also increased as a percentage of net revenues from 17.6% to
24.1%. General and administrative expenses were adversely impacted by
redundancies relating to acquisitions which were not integrated as quickly as
expected. Components of the increase include $3,500,000 relating to increased
facilities costs including rent, depreciation/amortization and associated costs,
$2,000,000 of increased corporate communications, public and investor relations
costs, $1,500,000 of increased salary expense primarily relating to finance and
MIS functions that were not integrated, $1,000,000 of increased outside legal
services and $1,000,000 of increased telephone, insurance and travel related
spending. Primarily as a result of operations integration and overall spending
reductions, general and administrative expenses may decrease during fiscal 1997.

           Acquisition and Other Charges: In connection with the various
acquisitions completed in fiscal 1996 (see above, and Summary of Significant
Accounting Policies and Note 2 of Notes to Consolidated Financial Statements),
significant acquisition costs were incurred. Through the first nine months of
fiscal 1996 the Company incurred acquisition charges of $8,688,000 related
primarily to the acquisitions of Inset, Datastorm and Future Labs versus
$7,190,000 as a result of the 1995 acquisitions. During the fourth quarter the
Company incurred an additional $16,106,000 of acquisition charges related to
Vertisoft, Limbex, Interlink, and Pinnacle technology. Of that amount,
$14,993,000 was incurred as a result of the write off of acquired in process
research and development.

           Restructuring Costs: During September of 1996 the Company began 
the implementation of a comprehensive corporate-wide restructuring plan. The
plan is designed to focus the Company's development and marketing efforts on
those products and technologies with the most significant growth opportunities
while optimizing profitability on certain of the Company's products that have
experienced lower demand and are at the end of their product life cycle. The
plan focuses on the reduction and elimination of development and marketing
efforts in areas where the market has either not materialized, the product has
become a commodity or a part of the operating system or browser. In addition,
the plan calls for the Company to minimize redundancies resulting from the
recent acquisitions through integration of the finance, administrative, sales,
marketing and operations related functions.

           The Company recorded a charge of $12,995,000 for fiscal 1996 relating
to restructuring. Restructuring charges include $6,200,000 of severance,
$3,500,000 of facility related costs to reserve for estimated lease obligations
(net of estimated sublease income or negotiated settlements) as well as closing,
consolidating or relocating offices and related costs including write-offs of
excess equipment, furniture, fixtures and leasehold improvements. Charges also
include write-offs of $2,700,000 of prepaid royalties and capitalized software
costs relating to products the Company no longer plans to actively market. As
part of the plan, the Company reduced its work force by approximately 40%,
eliminating approximately 500 positions. The Company believes the focusing of
the development and marketing efforts combined with the cost structure
reductions will improve its competitiveness and position the Company to return
to profitability.

           Income Taxes: At September 30, 1996, the Company did not have a net
deferred tax asset on the balance sheet due to a valuation allowance of 100% of
the net deferred tax asset of $26.6 million. (See also Note 5 to the
accompanying financial statements). The net deferred tax asset of $26.6 million
(before applying the valuation allowance) is comprised of the estimated tax
effect of expected future reversing temporary differences and tax net operating
losses, relating in part to charges taken for book purposes that are not
deductible for federal income tax purposes until the amounts are paid in the
future. Management believes that in light of recent financial results it is not
appropriate to record a deferred tax asset until such time that the Company is
able to establish that it becomes more likely than not that the Company will
realize some or all of the benefit of the net deferred tax asset.


                                       24
<PAGE>   25
FISCAL 1995 COMPARED TO FISCAL 1994

           Net Revenues: Net revenues for the fiscal year ended September 30,
1995 increased by 38.8% or $32,891,000 over the fiscal year ended September 30,
1994. The increase in net revenues compared with the prior year period results
primarily from broadening the Company's product portfolio throughout fiscal 1995
through product development and acquisitions. The Company has also broadened its
distribution capabilities through expansion of its distribution network and
acquisition of a direct sales organization.

           The Company released several new products during fiscal 1995
including a complete line of products for use on the Internet and private
distributed data networks. The first of these products, Quarterdeck WebAuthor,
was released in March 1995. Three other Internet related applications,
Quarterdeck Mosaic, Quarterdeck InternetSuite, and Quarterdeck WebServer, were
released in June 1995. The Company also released several new utility products
during fiscal 1995 which included MagnaRAM 2, CleanSweep 95, WINProbe 4, and
GameRunner. The Company's largest subsidiary, Datastorm, did not have any new
releases during fiscal 1995.

           Net revenues from European and other international distributors,
dealers and end users outside of the United States amounted to $19,015,000 and
$9,290,000 representing 16.2% and 11.0% of the Company's total net revenues for
the 1995 and 1994 fiscal years, respectively.

                  Cost of Revenues: Cost of revenues amounted to $34,884,000 in
fiscal 1995 and $27,403,000 in fiscal 1994. The cost of revenues decreased from
32.3% of net revenues in fiscal 1994 to 29.7% of net revenues in fiscal 1995.
This decrease was primarily due to a decrease in the amortization of capitalized
software costs, as well as substantially higher revenues in fiscal 1995 over
which indirect costs and expenses, including production and technical support
costs, were spread.

                  Capitalized software development and purchased software costs
are generally amortized over one to three year periods, commencing upon initial
product release. Fluctuations in amortization expense between periods may arise
depending on the amount of software costs incurred and capitalized for
particular software products and their respective release dates. Amortization of
capitalized software costs decreased from $3,171,000 in fiscal 1994 to
$1,575,000 in fiscal 1995. The decrease in amortization of software development
costs resulted primarily from the shift in the nature of product development
from 1994 to 1995. See further discussion under Research and Development.

           Research and Development: Research and development expense increased
by $6,766,000 from fiscal 1994, while increasing as a percentage of net revenues
from 8.9% to 12.1%. The increase in research and development expense is due in
part to increases in research and development staffing levels and to increases
in payments to third parties for contracted product development required to
support the Company's expanded product development efforts. Additionally, in
fiscal 1995, development resources were shifted to products for which
technological feasibility had not been established and therefore more
development costs were expensed, rather than capitalized, in the periods
incurred.

           The Company capitalized $3,617,000 of internal software development 
and purchased software costs during fiscal 1994. During fiscal 1995, the 
Company did not capitalize any internal software development costs, since
the majority of development efforts incurred during the period related to new
products for which technological feasibility had not been established. Software
development costs relating to new products for which technological feasibility
had been established during fiscal 1995 are immaterial. The development of new
products requires significantly more resources to reach technological
feasibility as compared to the development effort required to reach
technological feasibility for upgraded products. 

                                       25
<PAGE>   26
Accordingly, the decrease in the amounts capitalized from 1994 to 1995 was
attributable to the development during fiscal 1995 of a number of new products
which had not yet reached technological feasibility as compared to prior year
product development consisting primarily of upgrades to existing products. In
addition, the recoverability of the cost of new product development, including
products in lines of business the Company has not engaged in previously, is more
uncertain than that for product upgrades. During fiscal 1995, the Company
purchased and capitalized software amounting to $2,564,000.

                  Sales and Marketing, and General and Administrative Expense:
Sales and marketing expenses increased by $3,517,000 from fiscal 1994, while
decreasing as a percentage of net revenues from 32.0% to 26.0%. General and
administrative expenses decreased by $204,000 from fiscal 1994 and also
decreased as a percentage of net revenues from 24.7% to 17.6%, primarily
resulting from the benefits realized in 1995 relating to the fiscal 1994
restructuring.

                  Acquisition, Restructuring and Other Charges: In connection
with the various acquisitions completed in fiscal 1995 (see Summary of
Significant Accounting Policies and Note 2 of Notes to Consolidated Financial
Statements), significant acquisition costs were incurred. In connection with the
acquisition of Landmark in June 1995, acquisition costs amounting to $3,600,000
were recorded. In connection with the acquisitions of StarNine and Internetware
in September 1995, acquisition costs amounting to $1,200,000 and $300,000 were
recorded. These expenses principally include fees for financial advisory, legal
and accounting services, personnel severance and benefits, and other related
expenses. In connection with the acquisition of assets from Prospero Systems
Research, Inc. in September 1995, $2,578,000 of purchased, in-process research
and development was charged to Acquisition, Restructuring and Other Charges.

                  The results for fiscal 1994 included a pretax charge totaling
$12,863,000 relating to restructuring activities and other non recurring
charges. The charges related to the reduction or elimination of non-core product
lines and related development efforts. Capitalized costs of $4,367,000 relating
to the reductions and eliminations were written down or written off as
restructuring and non-recurring charges at September 30, 1994. Other related
restructuring costs of $5,320,000 included the estimated lease obligations for
offices and facilities which were or planned to be closed, consolidated or
relocated and the costs of closing as well as other related costs.

                  As part of the 1994 restructuring plan, the company
reorganized its staff and reduced its workforce from approximately 300 at June
30, 1994 to approximately 200 at September 30, 1994. Restructuring costs
relating to the reduction in workforce amounted to $586,000, consisting of
severance and termination payments and related costs. The Company also wrote-off
excess equipment and recorded other pretax charges amounting to $2,590,000 which
resulted from the above restructuring activities.

           Income Taxes: At September 30, 1995, the Company had a net deferred
tax asset of $2,178,000, net of a valuation allowance of $3,336,000. This net
deferred tax asset is comprised of the estimated tax effect of expected future
reversing temporary differences, relating in part to charges taken for book
purposes that are not deductible for federal income tax purposes until the
amounts are paid in the future, net of the valuation allowance.


TRENDS AND UNCERTAINTIES:

              The computer software industry is subject to rapid technological
changes often evidenced by new competing products and improvements in existing
products. Quarterdeck depends on the successful development or acquisition and
resulting sales of new products, including upgrades of existing products, to
replace revenues from products introduced in prior periods that may have begun
to experience reduced revenues. If Quarterdeck's current leading products become
outdated and lose market share faster than those revenues are replaced by new
products, or if new products or existing product upgrades are not introduced
when planned or do not achieve the revenues anticipated by Quarterdeck,
Quarterdeck's operating results could be materially adversely affected. Even
with normal development cycles, the market environment can 

                                       26
<PAGE>   27
change so quickly that features in products can become outdated soon after
market introduction. These events may occur in the future and may have an
adverse effect on future revenues and operating results.

           While Quarterdeck expects that memory management will continue to
provide benefit to users of Windows 95 and legacy systems, the Company has
expanded its focus from a sole reliance on memory management to a broader base
of desktop utilities. In September 1995, Quarterdeck released the first of
several new desktop utility products for Windows 95, including: WinProbe (a
system and hardware diagnostic tool), CleanSweep (a disk management utility) and
MagnaRAM (a memory compression utility). QEMM, Quarterdeck's leading memory
management product, was upgraded to version 8.0 with the inclusion of several
new technologies and is targeted to provide solutions for Windows 95 as well as
new enhanced support for Windows 3.1 and continued support for DOS. With the
acquisition of Datastorm Technologies in March 1996, the Company acquired the
PROCOMM communications product line. In July 1996, Quarterdeck released a new
utility for Windows 95 with the release of Fix-IT (a Software and Hardware
Diagnostic/Conflict Resolution tool). Also in July, the Company released a new
version of Winprobe for Windows 95. With the acquisition of Vertisoft in July
1996, Quarterdeck acquired additional utility products including Zip-IT (a
drag-and-drop utility for creating and maintaining compressed files), Name-IT (a
utility to allow Windows 95 long filenames in 16-bit applications) and Remove-IT
(a windows uninstaller utility). The combination of Remove-IT and CleanSweep
give Quarterdeck a leading position in the Windows uninstaller market. While
Quarterdeck has reduced its reliance on memory management with the acquisition
of additional utility and communications products, there can be no assurance
that any of these products and/or technologies will continue to provide
sufficient benefit to the user over and above what the base operating systems,
applications and hardware can provide.

           Quarterdeck is devoting substantial efforts to the development of
software products that are designed to operate on Windows 95 and Windows NT.
Microsoft Corporation may incorporate advanced utilities or other features in
Windows 95 or Windows NT that may decrease the demand for certain of the
Company's products, including those under development. If Quarterdeck is not
able to continue to successfully, and timely develop and market products that
function under Windows 95 and Windows NT, and offer value to Windows 95 and
Windows NT users beyond that which is offered in the base operating systems,
future revenues would be adversely affected.

           Future competitive product releases may cause disruptions in orders
for the Company's products while users and the marketplace evaluate the
competitive products. The extent of the disruption in orders and the impact on
future orders of the Company's products will depend on various factors that are
not fully known at this time. Among those factors are the level of
functionality, performance and features included in the final release of
competitive products and the market's evaluation of those products as compared
to the then current functionality, performance and features of the Company's
products.

           The Company's Internet-related products compete with Internet
connectivity, search, information management, access, creation and server tools
from a variety of companies, including Microsoft Corporation, Netscape
Communications Corporation and other connectivity, networking and Internet
software application developers, Internet access providers and other on-line
service providers, as well as operating system vendors, including Microsoft
Corporation and IBM. Certain competitors have also made versions of their
Internet connectivity, search, access, information management, creation and
server products available on the Internet for users to download at no charge or
for extended evaluation. In addition, the market for Internet products has been
adversely impacted as a result of PC hardware, PC operating system and browser
vendors incorporating Internet tools, functions or capabilities within their
software or PC hardware and thereby reducing the market for stand-alone Internet
products.

           Quarterdeck is dedicating substantial efforts on products and
services for the communications and Internet markets and expects that a
significant portion of future revenues will come from these products and
services. The revenues from such new products and services may be less than
Quarterdeck anticipates due to various factors including the timing of release
in relation to competitive products and services, and uncertainties surrounding
the rate and extent of development of these new and emerging markets.
Quarterdeck's Internet-related products and services are dependent on the
viability and continued growth of 

                                       27
<PAGE>   28
the Internet and World Wide Web, and its expanded use by businesses and
individuals for networking and communications.

           There are currently few laws or regulations directly applicable to
access or to commerce on the Internet. However, due to the increasing popularity
and use of the Internet, it is possible that a number of laws and regulations
may be adopted with respect to the Internet. Such laws and regulations may cover
issues such as user privacy, pricing and characteristics and quality of products
and services. The Telecommunications Act of 1996 (the "1996 Act"), which was
recently enacted and the judicial interpretation of which is uncertain, imposes
criminal penalties for transmission of or allowing access to certain obscene
communications over the Internet and other computer services and contains
additional provisions intended to protect minors. The enactment of the 1996 Act,
and of any similar laws or regulations in the future, may decrease the growth or
use of the Internet, which could in turn decrease the demand for the Company's
services and products and increase the Company's cost of doing business or
otherwise have an adverse effect on the Company's business, operating results
and financial condition.

           The acquisition of Limbex, Vertisoft, Future Labs, Datastorm, Inset,
and other acquisitions completed during fiscal 1996 have broadened the Company's
product portfolio and sales distribution channels. However, the acquisitions
have resulted in the Company competing with other companies and in markets where
it has not previously competed. The Company has also made investments in certain
companies and technologies. There are significant business risks associated with
acquisitions, including the successful integration of the companies in an
efficient and timely manner, the coordination of research and development and
sales efforts, the retention of key personnel, diversion of management's
attention away from day-to-day matters and the integration of the acquired
products. Additionally, there may be an adverse impact on revenues of acquired
companies due to the transition of products' sales and marketing and research
and development activities. The Company's results for fiscal 1996 were
negatively impacted by slower than anticipated integration and the Company's
future success will depend, in part, on its ability to integrate the operations
of acquired companies and effectively utilize the acquired intellectual
property.

           The Company's distributor and reseller customers also carry the
products of Microsoft Corporation and other of the Company's competitors, many
of whom have substantially greater financial resources than the Company. The
distributors and resellers have limited capital to invest in inventory and their
decisions to purchase the Company's products and in the case of resellers, to
give them critical shelf space, is partly a function of pricing, terms and
special promotions offered by the Company's competitors, over which the Company
has no control and which it cannot predict. There can be no assurance that the
Company will negotiate successfully with resellers to obtain shelf space and
other terms needed to sell company's products at the levels currently
anticipated.

           The Company's pattern of revenues and earnings were affected during
the third and fourth quarters of fiscal 1996, and may be affected in the future,
by the phenomenon known as "channel fill." Channel fill occurs following the
introduction of a new product or a new version of products as distributors buy
significant quantities of the new product or version in anticipation of sales of
such product or version. Following such purchases, the rate of distributors'
purchases often declines, depending on the rates of purchases by end users or
"sell-through." The phenomenon of "channel fill" may also occur in anticipation
of price increases or in response to sales promotions or incentives, some of
which may be designed to encourage customers to accelerate purchases that might
otherwise occur in later periods. Channels may also become filled simply because
the distributors are unable to, or do not, sell their inventories to retail
distribution or end users as anticipated. If sell-through does not occur at a
sufficient rate, distributors will delay purchases or cancel orders in later
periods or return prior purchases in order to reduce their inventories.
Consequently, there can be no assurance that existing inventories will not
adversely impact the sales in future periods. In addition, between the date the
Company announces a new version or new product and the date of release,
distributors, dealers and end users often delay purchases, cancel orders or
return products in anticipation of the availability of the new version or new
product. Such order delays or cancellations may cause material fluctuations in
revenues from one quarter to the next. Net revenues may be materially affected
favorably or adversely by these effects.

           The Company operates with relatively little order backlog; therefore,
if near-term demand for the Company's products weaken in a given quarter, there
could be a material adverse effect on revenues and on 

                                       28
<PAGE>   29
the Company's operating results. Like other manufacturers of packaged software
products, Quarterdeck is exposed to the risk of product returns from
distributors, reseller and individual customers. There can be no assurance that
actual returns in excess of recorded allowances will not result in a material
adverse effect on business, operating results and financial condition.

FACTORS AFFECTING QUARTERLY RESULTS AND STOCK PRICE

           The Company has in the past experienced wide fluctuations in its
operating results and stock price, and the Company's future operating results
and stock price could be subject to significant volatility, particularly on a
quarterly basis. The Company's revenues and quarterly operating results may
experience significant fluctuations and be unpredictable as the result of a
number of factors including, among others, introduction of new or enhanced
products by the Company or its competitors, rapid technological changes in the
Company's markets, seasonality of revenues, changes in operating expenses and
general economic conditions. Any shortfalls in revenues or quarterly results
could have an immediate and significant adverse effect on the trading price of
the Company's common stock in any given period.

           Net income per share is calculated using the treasury stock method
(see Note 1 of Notes to Consolidated Financial Statements). Increases in the
price of Quarterdeck's stock can have an adverse impact on the calculation of
net income per share in that period as more outstanding instruments are included
as common shares outstanding.

           As a result of the foregoing factors and other factors that may arise
in the future, the market price of the Company's common stock may be subject to
significant fluctuations over a short period of time. These fluctuations may be
due to factors specific to the Company, to changes in analysts' earnings
estimates, or to factors affecting the computer industry or the securities
markets in general.

LIQUIDITY AND CAPITAL RESOURCES

           At September 30, 1996, cash and cash equivalents totaled $25,554,000,
and had further declined to approximately $10,500,000 as of December 15, 1996.
These amounts can be compared to $39,669,000 at September 30, 1995. Working
capital at September 30, 1996 amounted to a deficit of $4,684,000 a decrease of
$34,174,000 as compared to $29,490,000 at September 30, 1995.

           During the year ended September 30, 1996 the Company's total cash and
short term investments has declined by the net amount of $14,115,000. The
decrease in cash and short-term investment balances resulted primarily from the
Company's losses for fiscal 1996, including significant acquisition and
restructuring costs, payment of distributions to stockholders of acquired
companies prior to acquisition, approximately $5.9 million of investments made
by the Company in strategic technologies, including the stock of certain
companies possessing such technology, and $18.0 million in capital investments,
including $10.6 million for the construction of a new facility in Columbia,
Missouri. On August 6, 1996, the Company's Datastorm subsidiary secured
construction financing for its new facility (the "Datastorm Facility") from a
bank for up to $5.0 million with an interest rate equal to the bank's commercial
base rate, currently 8.25%, secured by the Datastorm Facility. The loan is
guaranteed by Quarterdeck and is believed to be sufficient to complete
construction. The principal amount outstanding as of September 30, 1996 was
$2,730,000. The principal amount plus any unpaid interest is due February 7,
1997. It is the Company's intention to extend the term of this loan and it has
received a preliminary commitment from the lender to do so. Management is
presently exploring the potential of a sale-leaseback transaction and other
long-term financing options with respect to the Datastorm Facility. There can be
no assurance that the Company will be successful in obtaining such long-term
financing with acceptable terms and conditions.

On September 30, 1996, the Company issued 200,000 shares of Series B Convertible
Preferred Stock, stated value $100 per share (the "Series B Preferred Stock"),
and a Warrant (the "Warrant") to acquire shares of common stock for $20 million
in cash. The securities were issued to an institutional investor in an overseas
offering pursuant to Regulation S of the Securities Act of 1933, as amended. The
Series B Preferred Stock became convertible into shares of common stock on 
November 15, 1996, and will automatically convert into common stock on September
30, 2002 to the extent any shares of Series B Preferred Stock remain outstanding

                                       29
<PAGE>   30
at that time. Each share of Series B Preferred Stock is convertible into the
number of shares of common stock equal to the quotient of (i) $100.00 divided by
(ii) the conversion price. The conversion price is the lesser of (i) 101% of the
average of the daily volume-weighted average prices of the common stock on the
NASDAQ national market system (the "market price") during the 40 trading day
period ending two trading days before the date on which the company receives a
notice of conversion from a holder of the Series B Preferred Stock (the
"conversion date"), and (ii) 125% of the average of the market price of the
common stock during the first five trading days of the 40 trading day period
ending two trading days before the conversion date. Assuming a conversion price
of $5.3365 (based on 101% of the average of the market price for the 40 trading
day periods ending on December 12, 1996), each share of Series B Preferred Stock
would be convertible into 18.74 shares of common stock, or an aggregate of
3,747,802 shares of common stock upon conversion of all shares of Series B
Preferred Stock.

                     On March 28, 1996, the Company issued $25.0 million
principal amount of 6% Convertible Senior Subordinated Notes, due 2001, to a
single institutional investor in a private placement pursuant to the terms of a
Note Agreement, dated March 1, 1996 (the "Note Agreement"). The Notes are
convertible generally after April 1, 1997, at an initial conversion price of
$21.18 per share. The conversion price is adjustable for certain below market
equity issuances and the Notes contain other customary anti-dilution provisions.
The Notes may be prepaid without penalty, subject to conversion, anytime between
April 1997 and April 1999 if the Company's Common Stock had been trading, for 20
of the 30 trading days preceding notice of prepayment, at approximately 18%
above the then current conversion price. The Note Agreement limits the Company's
indebtedness for borrowed funds, other than the Notes, to 50% of Consolidated
Net Worth (as defined in the Note Agreement.)

           In April 1996, the Company's Datastorm subsidiary borrowed $2.0
million from a bank to partially finance the completion of the Datastorm
Facility. The loan is secured by Datastorm's equipment and bears interest at a
rate of 4.5% per annum. The rate was subsidized, in part by the State of
Missouri in exchange for certain local employment targets. As part of the
Company's restructuring the Company has revised downward the level of personnel
at this location. In addition, as a result of the restructuring it has written
off a significant portion of the equipment collateral. The Company and the
lender have agreed to a repayment plan providing for the repayment of $750,000
between January 1997 and March 1997 with the balance payable by April 7, 1997.

           On December 19, 1996, the Company's revolving credit facility with
Bank of America was amended, and the bank waived the Company's non-compliance
with certain financial covenants therein for the quarter ended September 30,
1996. The Company may borrow 65% of Eligible Accounts Receivable (as defined in
the credit agreement) up to $15.0 million. As of September 30, 1996, the maximum
borrowing the Company was eligible for under this line was approximately $4.1
million. The line is secured by Quarterdeck's domestic accounts receivable and
inventory. The current term of the line of credit matures June 30, 1997. The
line can be used for general corporate purposes, including investments and
acquisitions, and bears interest at the bank's reference (prime) interest rate
plus 0.50%. The line is subject to the Company complying with certain customary
financial covenants and restrictions, including a compensating balance of $3.0
million, a prohibition of the payment of dividends, other than those payable
solely in capital stock, and a prohibition of any stock repurchase activity. As
of September 30, 1996, the Company had borrowings of $3.55 million outstanding
under the line.

           The Company believes existing cash and cash equivalents, plus funds
provided by operations, borrowing capacity under the line of credit and
projected borrowing against, or sale of, the Datastorm Facility should be
sufficient to fund operations for the coming twelve months. Nevertheless, the
Company is presently exploring various financing alternatives, including
equipment financing, secured debt, convertible debt, additional sales of equity
securities and the sale of certain of its prior investments in order to finance
the core business of the Company and help provide adequate working capital for
operations. In addition, the expense reductions resulting from the restructuring
are anticipated to provide additional funds from operations in future quarters.
However, there is no assurance that increased sales will occur or that any such
increase will result in adequate operating funds, or that such additional
financing will be available, or if available, will be available on acceptable
terms. Should product shipments be delayed or should the Company experience
significant 

                                       30
<PAGE>   31
shortfalls in planned revenues, or not achieve sufficient cost savings as a
result of the restructuring, or experience unforeseen fixed expenses, the
Company believes it has the ability to make additional reductions to variable
expenses to extend its capital. Any decision to obtain financing through debt or
through equity investment will depend on various factors, including, among
others, financial market conditions, strategic acquisition and investment
opportunities, and developments in the Company's markets. The sale of additional
equity securities or future conversion of any convertible debt would result in
additional dilution to the Company's stockholders.

           The Company conducts business in various foreign currencies and is
therefore subject to the transaction exposures that arise from foreign exchange
rate movements between the dates that foreign currency transactions are recorded
and the date that they are consummated. The Company is also subject to certain
exposures arising from the translation and consolidation of the financial
results of its foreign subsidiaries. There can be no assurance that actions
taken to manage such exposures will be successful or that future changes 
in currency exchange rates will not have a material impact on the Company's 
future operating results. The Company does not hedge either its translation 
risk or its economic risk.



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

           The Company's financial statements included with this Form 10-K are
set forth under Item 14 hereof.

ITEM 9.  DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

           None.




                                       31
<PAGE>   32
                                    PART III

ITEM 10.   EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT

           The information required by Item 10 is set forth in the Proxy
Statement under the caption "Directors" and is incorporated herein by reference
except that the information regarding the Company's executive officers is
included in Part I under the heading "Executive Officers".

ITEM 11.  EXECUTIVE COMPENSATION

           The information required by Item 11 is set forth in the Proxy
Statement under the caption "Executive Compensation" and is incorporated herein
by this reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

           The information required by Item 12 is set forth in the Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by this reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

           The information required by Item 13 is set forth in the Proxy
Statement under the caption "Certain Relationships and Related Transactions" and
is incorporated herein by this reference.




                                       32
<PAGE>   33
                                     PART IV

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

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

                  1.   Consolidated Financial Statements

                       Consolidated Balance Sheets at September 30, 1996 and
                          1995

                       Consolidated Statements of Operations for fiscal years
                          ended September 30, 1996, 1995 and 1994

                       Consolidated Statements of Stockholders' Equity for
                          fiscal years ended September 30, 1996, 1995 and 1994

                       Consolidated Statements of Cash Flows for fiscal years
                          ended September 30, 1996, 1995 and 1994

                       Notes to Consolidated Financial Statements

                  2.   Consolidated Financial Statement Schedule

                       Schedule II--Valuation and Qualifying Accounts

                       All other schedules are omitted because they are not
                       required, or are not applicable, or because the required
                       information is included in Item 8.

                  3.   Exhibits

                          EXHIBIT
                          NUMBER                       DESCRIPTION
                          ------                       -----------

                           3.1(2)         Certificate of Incorporation of the
                                          Company.

                           3.2(1)         Certificate of Amendment of
                                          Certificate of Incorporation of the
                                          Company.

                           3.3(16)        Certificate of Designations of Series
                                          B Convertible Preferred Stock.

                           3.4(1)         Amended Designations of Series A 
                                          Junior Participating Preferred Stock
                                          of the Company.

                           3.5(6)         Amended and Restated Bylaws of the
                                          Company.

                           4.1(4)         Rights Agreement, dated as of August
                                          11, 1992, between Registrant and Bank
                                          of America NT & SA (the "Rights
                                          Agreement").

                           4.2(16)        Form of Amendment to the Rights
                                          Agreement.

                         *10.1(2)         Amended and Restated 1990 Stock Plan,
                                          as amended to date.

                         *10.2(3)         Form of Option Agreement utilized with
                                          1990 Stock Plan.

                         *10.3(5)         Amended and Restated 1990 Directors
                                          Stock Option Plan and Form of Option
                                          Agreement.

                         *10.4(12)        1996 Acquisition Stock Incentive Plan.

                         *10.5(1)         Consulting Agreement between the
                                          Company, King R. Lee & Associates,
                                          Inc., and King R. Lee, dated as of
                                          August 27, 1996.

                                       33
<PAGE>   34
                         *10.6(2)         Form of Indemnification Agreement
                                          between the Company and certain of its
                                          officers and directors.

                         *10.7(10)        Management Employment Contract between
                                          the Company and Gaston Bastiaens,
                                          dated as of January 13, 1995.

                         *10.8(10)        Management Employment Contract between
                                          the Company and Jim Moise, dated as of
                                          January 27, 1995.

                         *10.9(10)        Management Employment Contract between
                                          Company and Steve Tropp, dated as
                                          of February 14, 1995.

                         *10.10(1)        Employment Agreement between the
                                          Company and Bradley D. Schwartz, dated
                                          as of January 16, 1995.

                         *10.11(1)        Employment Agreement between the
                                          Company and Anatoly Tikhman, dated as
                                          of July 24, 1996.

                         *10.12(1)        Employment Agreement between the
                                          Company and Joe Fusco, dated as of
                                          September 19, 1996.

                          10.13(10)       Lease between the Company and Marina
                                          Business Center, dated as of July 17,
                                          1995, with respect to headquarters
                                          property.

                          10.14(10)       Lease between Landmark Research
                                          International Corporation, a
                                          subsidiary of the Company, and Chase
                                          Federal Bank, dated as of March 15,
                                          1995, with respect to property used by
                                          Quarterdeck Select.

                          10.15(2)        Domestic (U.S.) Distribution License
                                          Agreement between the Company and
                                          Merisel, Inc., dated as of April 4,
                                          1991.

                          10.16(2)        Domestic (U.S.) Distribution License
                                          Agreement between the Company and
                                          Ingram Micro, Inc., dated as of May
                                          16, 1991.

                          10.17(7)        Agreement and Plan of Reorganization
                                          among the Company, Landmark
                                          Acquisition Corporation, Landmark
                                          Research International Corporation,
                                          and certain of the shareholders of
                                          Landmark Research International
                                          Corporation, dated as of June 30,
                                          1995.

                          10.18(8)        Agreement and Plan of Reorganization
                                          among the Company, IW/QD Acquisition
                                          Corporation, Internetware, Inc., Mango
                                          Systems, Inc., Mango Acquisition
                                          Corporation, and certain of the
                                          shareholders of Internetware, Inc. and
                                          Mango Systems, Inc., dated as of
                                          August 25, 1995.

                          10.19(9)        Amended and Restated Agreement and
                                          Plan of Reorganization among the
                                          Company, Inset Acquisition
                                          Corporation, Inset Systems, Inc., and
                                          certain of the shareholders of Inset
                                          Systems, Inc., dated as of September
                                          5, 1995.

                          10.20(10)       Agreement and Plan of Reorganization
                                          among the Company, StarNine
                                          Acquisition Corporation, StarNine
                                          Technologies, Inc., and certain of the
                                          shareholders of StarNine Technologies,
                                          Inc. dated as of September 27, 1995.

                          10.21(10)       Amended and Restated Asset Purchase
                                          Agreement and Plan of Reorganization
                                          among the Company, Prospero Systems
                                          Research, Inc., and certain of the
                                          shareholders of Prospero Systems
                                          Research, Inc., dated as of September
                                          28, 1995.

                                       34
<PAGE>   35
                          10.22(11)       Agreement and Plan of Reorganization
                                          among the Company, DTI Acquisition
                                          Corporation, Datastorm Technologies,
                                          Inc., and the shareholders of
                                          Datastorm Technologies, Inc. listed on
                                          the execution pages thereto, dated as
                                          of March 28, 1996.

                          10.23(13)       Asset Purchase Agreement and Plan of
                                          Reorganization among the Company, FLS
                                          Acquisition Corp., FutureLabs, Inc.,
                                          and the shareholders of FutureLabs
                                          listed on the execution pages thereto,
                                          dated as of May 15, 1996.

                          10.24(14)       Agreement and Plan of Reorganization
                                          among the Company, VSI Acquisition
                                          Corporation, Vertisoft Systems, Inc.
                                          ("Vertisoft"), Vertisoft Direct, Inc.
                                          ("Direct"), and the shareholders of
                                          each of Vertisoft and Direct, dated
                                          July 15, 1996.

                          10.25(15)       Agreement and Plan of Reorganization
                                          among the Company, Limbex Corporation,
                                          and the shareholders of Limbex
                                          Corporation, dated as of August 13,
                                          1996.

                          10.26(16)       Credit Agreement (the "Credit
                                          Agreement") between the Company and
                                          Bank of America National Trust and
                                          Savings Association, dated as of
                                          February 14, 1996.

                          10.27(17)       First Amendment to the Credit
                                          Agreement, dated as of March 28, 1996,
                                          and incorporated herein by reference.

                          10.28(18)       Waiver and Second Amendment to the
                                          Credit Agreement, dated as of August
                                          13, 1996, and incorporated herein by
                                          reference.

                          10.29(1)        Third Amendment to the Credit
                                          Agreement, dated as of September 30,
                                          1996, and incorporated herein by
                                          reference.

                          10.30(1)        Waiver and Fourth Amendment to the
                                          Credit Agreement, dated as of December
                                          17, 1996.

                          21.1(1)         Subsidiaries of the Company.

                          23.1(1)         Consent of KPMG Peat Marwick LLP,
                                          independent certified public
                                          accountants.

                          27(1)           Financial Data Schedule   

                     *                    Denotes a compensation plan or other
                                          arrangement under which directors or
                                          executive officers may participate.

                     (1)                  Filed herewith.

                     (2)                  Filed as an exhibit to the Company's
                                          Registration Statement on Form S-1, as
                                          amended (File No. 33-40094) and
                                          incorporated herein by reference.

                     (3)                  Filed as an exhibit to the Company's
                                          Form 10-Q for the quarter ended March
                                          31, 1992, and incorporated herein by
                                          reference.

                     (4)                  Filed as an exhibit to the Company's
                                          Current Report on Form 8-K dated
                                          August 11, 1992, and incorporated
                                          herein by reference.

                     (5)                  Filed as an exhibit to the Company's
                                          Form 10-K for the year ended September
                                          30, 1993, and incorporated herein by
                                          reference.

                     (6)                  Filed as an exhibit to the Company's
                                          Form 10-K for the year ended September
                                          30, 1994, and incorporated herein by
                                          reference.

                     (7)                  Filed as an exhibit to the Company's
                                          Current Report on Form 8-K dated June
                                          30, 1995, and incorporated herein by
                                          reference.

                     (8)                  Filed as an exhibit to the Company's
                                          Current Report on Form 8-K dated
                                          August 28, 1995, and incorporated
                                          herein by reference.

                     (9)                  Filed as an exhibit to the Company's
                                          Registration Statement on Form S-4, as
                                          amended (File No. 33-984456), and
                                          incorporated herein by reference.




                                       35
<PAGE>   36
(10)      Filed as an exhibit to the Company's Annual Report on Form 10-K for
          the year ended September 30, 1995, and incorporated herein by
          reference.

(11)      Filed as an exhibit to the Company's Current Report on Form 8-K dated
          March 28, 1996, and incorporated herein by reference.

(12)      Filed as an exhibit to the Company's Registration Statement on Form
          S-8 (File No. 333-4602), and incorporated herein by reference.

(13)      Filed as an exhibit to the Company's Current Report on Form 8-K dated
          May 15, 1996, and incorporated herein by reference.

(14)      Filed as an exhibit to the Company's Current Report on Form 8-K, dated
          July 18, 1996, and incorporated herein by reference.

(15)      Filed as an exhibit to the Company's Current Report on Form 8-K, dated
          August 14, 1996, and incorporated herein by reference.

(16)      Filed as an exhibit to the Company's Current Report on Form 8-K dated
          November 25, 1996, and incorporated herein by reference.

(17)      Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
          the quarter ended March 31, 1996, and incorporated herein by
          reference.

(18)      Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
          the quarter ended June 30, 1996, and incorporated herein by reference.


                                       36
<PAGE>   37
                                   SIGNATURES

           Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Marina del Rey, State of California, on December 29, 1996.

                             Quarterdeck Corporation

                          By  /s/   KING R. LEE
                              --------------------------
                                    King R. Lee
                              Office of the President

           Pursuant to the requirements of the Securities Exchange Act of 1934
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE                                 TITLE                           DATE
---------                                 -----                           ----
<S>                               <C>                               <C>    
/s/  KING R. LEE                  Office of the President           December 29 1996
-----------------------------     (Principal Executive Officer),     
King R. Lee                       Director                
                                  
                                                   
/s/  FRANK W.T. LAHAYE                           
-----------------------------     
Frank W.T. LaHaye                 Chairman of the Board             December 29, 1996
                                  
/s/  HOWARD L. MORGAN                             
----------------------------      
Howard L. Morgan                  Director                          December 29, 1996
                                  
                                  
/s/  WILLIAM H. LANE III                             
----------------------------      
William H. Lane III               Director                          December 29, 1996
                                  
                                  
/s/  FRANK R. GREICO                             
----------------------------      
Frank R. Greico                   Senior Vice President and         December 29, 1996
                                  Chief Financial Officer
</TABLE>




                                       37
<PAGE>   38
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                       CONSOLIDATED FINANCIAL STATEMENTS

                                                                             PAGE
                                                                             ----
<S>                                                                           <C>

Independent Auditors' Report.............................................     39
                                                                              
Consolidated Balance Sheets at                                                
           September 30, 1996 and 1995...................................     40
                                                                              
Consolidated Statements of Operations                                         
           for fiscal years ended September 30, 1996, 1995 and 1994......     41
                                                                              
Consolidated Statements of Stockholders' Equity                               
           for fiscal years ended September 30, 1996, 1995 and 1994......     42
                                                                              
Consolidated Statements of Cash Flows                                         
           for fiscal years ended September 30, 1996, 1995 and 1994......     45
                                                                              
Notes to Consolidated Financial Statements...............................     46
                                                                              

                    CONSOLIDATED FINANCIAL STATEMENT SCHEDULE                 
                                                                              
Schedule II   - Valuation and Qualifying Accounts........................     69
</TABLE>




                                       38
<PAGE>   39
                          INDEPENDENT AUDITORS' REPORT




The Board of Directors and Stockholders
Quarterdeck Corporation:

           We have audited the consolidated financial statements of Quarterdeck
Corporation and subsidiaries as of September 30, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended September 30, 1996. In
connection with our audits of the consolidated financial statements, we have
audited the financial statement schedule. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits. We did not audit the financial statements of Datastorm Technologies,
Inc., a wholly-owned subsidiary, for 1995 and 1994, which statements reflect
total assets constituting 28 percent of the related consolidated totals at
September 30, 1995 and total revenues constituting 34 percent and 50 percent for
each of the years in the two-year period ended September 30, 1995, respectively,
of the related consolidated totals. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Datastorm Technologies, Inc. is based solely
on the report of the other auditors.

           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, based on our audits and the report of the other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Quarterdeck
Corporation and subsidiaries as of September 30, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended September 30, 1996, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.




\s\ KPMG Peat Marwick LLP
-------------------------

Los Angeles, California
November 22, 1996,
except as to the 
last paragraph of 
Note 13, which is as 
of December 19, 1996




                                       39
<PAGE>   40
                    QUARTERDECK CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                     ASSETS

                                                                                          SEPTEMBER 30,
                                                                                     ------------------------
                                                                                       1996            1995  
                                                                                     --------        --------
<S>                                                                                  <C>             <C>     
Current assets:
        Cash and short-term investments ......................................       $ 25,554        $ 39,669
        Trade accounts receivable ............................................          9,265          13,621
        Inventories ..........................................................          2,151           2,281
        Deferred income taxes ................................................             --           2,178
        Other current assets .................................................          5,594           4,006
                                                                                     --------        --------
               Total current assets ..........................................         42,564          61,755

Property, plant and equipment ................................................         21,252           8,335
Capitalized software costs, net ..............................................          3,448           2,807
Note receivable from related party - building ................................             --             469
Other assets .................................................................          9,517           3,333
                                                                                     --------        --------
                                                                                     $ 76,781        $ 76,699
                                                                                     ========        ========

                                     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
        Notes payable to banks ...............................................       $  8,280        $     -- 
        Accounts payable .....................................................         10,685          13,582
        Accrued liabilities ..................................................         17,232          13,880
        Accrued acquisition and restructuring charges ........................         10,940           3,455
        Notes payable to related parties .....................................             --           1,093
        Current portion of long-term obligations .............................            111             255
                                                                                     --------        --------
               Total current liabilities .....................................         47,248          32,265

Convertible notes ............................................................         25,000              --
Other long-term obligations, less current portion ............................            108             164
                                                                                     --------        --------

               Total liabilities .............................................         72,356          32,429

Liquidity (Note 16)
Commitments and litigation (Notes 7 and 10) 
        Stockholders' equity:
        Series B preferred stock (authorized: 2,000; issued and
           outstanding: 200 and 0 shares, liquidation preference $20,000) ....         20,000              --
        Common stock (authorized: 50,000 shares;
           issued and outstanding: 37,666 and 34,673 shares) .................             38              35
        Treasury stock .......................................................           (559)           (559)
        Additional paid-in capital ...........................................         64,819          39,873
        Retained earnings (accumulated deficit) ..............................        (79,766)          5,359
        Foreign currency translation adjustment ..............................           (468)           (563)
        Notes receivable from directors for sale of stock ....................            (18)            (70)
        Net unrealized gain on marketable securities .........................            379             195
                                                                                     --------        --------

               Total stockholders' equity ....................................          4,425          44,270
                                                                                     --------        --------
                                                                                     $ 76,781        $ 76,699
                                                                                     ========        ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       40
<PAGE>   41
                    QUARTERDECK CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                          YEAR ENDED
                                                                         SEPTEMBER 30,
                                                          ----------------------------------------
                                                             1996            1995           1994  
                                                          ---------        --------       --------
<S>                                                       <C>              <C>            <C>     
Net revenues ......................................       $ 133,100        $117,606       $ 84,715
Cost of revenues ..................................          49,600          34,884         27,403
                                                          ---------        --------       --------

        Gross profit ..............................          83,500          82,722         57,312

Operating expenses:
        Research and development ..................          21,314          14,286          7,520
        Sales and marketing .......................          66,355          30,624         27,107
        General and administrative ................          32,128          20,704         20,908
        Acquisition, restructuring and other
          charges .................................          37,789           7,409         12,863
        Litigation settlement .....................              --              --            615
                                                          ---------        --------       --------

        Total operating expenses ..................         157,586          73,023         69,013

Operating income (loss) ...........................         (74,086)          9,699        (11,701)
Other income (expense), net .......................              38             (38)          (271)
Interest income (expense), net ....................            (105)          1,922          1,365
                                                          ---------        --------       --------
Income (loss) before income taxes .................         (74,153)         11,583        (10,607)

Provision (benefit) for income taxes ..............             806             331         (5,982)
                                                          ---------        --------       --------

Net income (loss) .................................      $  (74,959)       $ 11,252      $  (4,625)
                                                          =========        ========       ========

Net income (loss) per share:
        Primary ...................................      $    (2.15)       $   0.32      $   (0.15)
                                                          ---------        --------       --------
        Fully diluted .............................      $    (2.15)       $   0.31      $   (0.15)
                                                          ---------        --------       --------

Shares used to compute net income (loss) per share:
        Primary ...................................          34,894          35,557         31,825
                                                          ---------        --------       --------
        Fully diluted .............................          34,894          36,499         31,825
                                                          ---------        --------       --------

Additional unaudited pro forma data:
        Income (loss) before taxes ................      $  (74,153)       $ 11,583      $ (10,607)
        Pro forma income tax expense ..............             806           3,406            576
                                                          ---------        --------       --------
               Pro forma net income (loss) ........      $  (74,959)       $  8,177      $ (11,183)
                                                          =========        ========       ========

Pro forma income (loss) per share:                                                          
        Primary ...................................      $    (2.15)       $   0.23      $   (0.35)
                                                          ---------        --------       --------
        Fully diluted .............................      $    (2.15)       $   0.22      $   (0.35)
                                                          =========        ========       ========
</TABLE>


           See accompanying notes to consolidated financial statements.




                                       41
<PAGE>   42
                    QUARTERDECK CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                         SERIES B                                                       ADDITIONAL     RETAINED     
                                      PREFERRED STOCK               COMMON STOCK                          PAID-        EARNINGS
                                      ---------------               ------------            TREASURY       IN         (ACCUMULATED
                                    SHARES        AMOUNT        SHARES        AMOUNT          STOCK      CAPITAL        DEFICIT) 
                                    ------        ------        ------        ------          -----      -------        -------     
<S>                                 <C>           <C>            <C>           <C>           <C>        <C>            <C>          
Balance, September 30, 1993,
  as reported in June 25, 1996   
  Form 8K........................      --         $  --          29,503        $29           $(27)      $28,408        $25,565      
Adjustments to reflect                                                                                                              
  acquisitions, .................      --            --           3,500          4             --            --             --      
Common stock options                                                                                                                
  exercised......................      --            --              30         --             --            10             --      
Tax benefits arising from                                                                                                           
  exercise of nonqualified stock                                                                                                    
  options .......................      --            --              --         --             --            16             --      
Net loss.........................      --            --              --         --             --            --         (4,625)     
Undistributed earnings of                                                                                                           
  subchapter-S subsidiaries......      --            --              --         --             --        18,476        (18,476)     
Distributions to shareholders....      --            --              --         --             --       (12,215)            --      
Foreign currency translation                                                                                                        
  adjustment.....................      --            --              --         --             --             --            --      
                                    ------        ------         ------        ---            ---       --------       -------      
Balance, September 30, 1994            --         $  --          33,033        $33           $(27)      $34,695        $ 2,464      
                                    ======        ======         ======        ===            ===       =======        =======      
</TABLE>

<TABLE>
<CAPTION>
                                                        NOTES
                                                     RECEIVABLE       NET
                                       FOREIGN          FROM       UNREALIZED
                                       CURRENCY       DIRECTORS     GAIN ON            TOTAL 
                                     TRANSLATION      FOR SALE     MARKETABLE      STOCKHOLDERS'
                                      ADJUSTMENT      OF STOCK     SECURITIES         EQUITY
                                      ----------      --------     ----------         ------
<S>                                   <C>                 <C>          <C>           <C>    
Balance, September 30, 1993,
  as reported in June 25, 1996
  Form 8K........................      $(581)           $ --         $ --            $53,394
Adjustments to reflect                                                               
  acquisitions, .................        --               --           --                  4
Common stock options                                                                      
  exercised......................        --               --           --                 10
Tax benefits arising from                                                            
  exercise of nonqualified stock                                                     
  options .......................        --               --           --                 16
Net loss.........................        --               --           --             (4,625)
Undistributed earnings of                                                            
  subchapter-S subsidiaries......        --               --           --                 --
Distributions to shareholders....        --               --           --            (12,215)
Foreign currency translation                                                         
  adjustment.....................        25               --           --                 25
                                       ----              ---          ---            -------
Balance, September 30, 1994           $(556)            $ --         $ --            $36,609
                                       ====              ===          ===            =======
</TABLE>




         See accompanying notes to consolidated financial statements.




                                      42
<PAGE>   43
                    QUARTERDECK CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                                           RETAINED              
                                                  SERIES B                                                 EARNINGS    FOREIGN   
                                               PREFERRED STOCK      COMMON STOCK              ADDITIONAL   (ACCUMU-    CURRENCY  
                                               ---------------      ------------    TREASURY   PAID-IN      LATED     TRANSLATION
                                               SHARES   AMOUNT     SHARES   AMOUNT   STOCK     CAPITAL     DEFICIT)   ADJUSTMENT 
                                               ------   ------     ------   ------   -----     -------     --------   ---------- 
<S>                                            <C>       <C>       <C>       <C>    <C>        <C>         <C>         <C>       
Balance, September 30, 1994 ..........            --      $ --     33,033    $33     $ (27)    $ 34,695    $  2,464    $ (556)   
Adjustment for Internetware, Inc. ....                                                                                      
  pooling of interest ................            --        --        460      1        --            9         (46)       --    
Adjustment for StarNine Technologies,                                                                                            
  Inc. pooling of interest ...........            --        --        524      1        --          223         245        --    
Adjustment for Datastorm, Ltd. .......                                                                                       
   pooling of interest ...............            --        --         --     --        --          441          --        --    
Acquisition of assets from Prospero ..            --        --        155     --        --        2,900          --        --    
Exercise of StarNine Technologies,                                                                                               
  Inc. stock options .................            --        --        149     --        --          224          --        --    
Issuance of common stock by                                                                                                      
  Inset Systems, Inc. ................            --        --         63     --        --            5          --        --    
Common stock options exercised .......            --        --        351     --        --          579          --        --    
Treasury shares, at cost .............            --        --        (62)    --      (532)          22          --        --    
Tax benefits arising from exercise                                                                                               
  of nonqualified stock options ......            --        --         --     --        --           59          --        --    
Undistributed earnings of subchapter-S                                                                                           
  subsidiaries .......................            --        --         --     --        --        8,154      (8,154)       --    
Capital contribution .................            --        --         --     --        --          450          --        --    
Net income ...........................            --        --         --     --        --           --      11,252        --    
Distributions to shareholders ........            --        --         --     --        --       (7,888)        (18)       --    
Duplicate earnings elimination                                                                                                   
  for Landmark pooling ...............            --        --         --     --        --           --        (384)       --    
Net increase in unrealized gain ......            --        --         --     --        --           --          --        --    
Foreign currency                                                                                                                 
  translation adjustment .............            --        --         --     --        --           --          --        (7)   
                                               ------   ------     ------    ---     -----     --------    --------     -----    
Balance, September 30, 1995 ..........            --      $ --     34,673    $35     $(559)    $ 39,873    $  5,359     $(563)   
                                               ======   ======     ======    ===     =====     ========    ========     =====    
</TABLE>

<TABLE>
<CAPTION>
                                                 NOTES
                                              RECEIVABLE    NET
                                                 FROM    UNREALIZED
                                               DIRECTORS  GAIN ON        TOTAL
                                               FOR SALE  MARKETABLE  STOCKHOLDERS'
                                               OF STOCK  SECURITIES     EQUITY  
                                               --------  ----------     ------  
<S>                                             <C>         <C>        <C>
Balance, September 30, 1994 ..........          $ --        $ --       $ 36,609
Adjustment for Internetware, Inc. ....
  pooling of interests ...............            --          --            (36)
Adjustment for StarNine Technologies,
  Inc. pooling of interest ...........            --          33            502
Adjustment for Datastorm, Ltd. .......
   pooling of interest ...............            --          --            441
Acquisition of assets from Prospero ..            --          --          2,900
Exercise of StarNine Technologies,
  Inc. stock options .................            --          --            224
Issuance of common stock by
  Inset Systems, Inc. ................            --          --              5
Common stock options exercised .......           (70)         --            509
Treasury shares, at cost .............            --          --           (510)
Tax benefits arising from exercise
  of nonqualified stock options ......            --          --             59
Undistributed earnings of subchapter-S
  subsidiaries .......................            --          --             --
Capital contribution .................            --          --            450
Net income ...........................            --          --         11,252
Distributions to shareholders ........            --          --         (7,906)
Duplicate earnings elimination
  for poolings .......................            --          --           (384)
Net increase in unrealized gain ......            --         162            162
Foreign currency
  translation adjustment .............            --          --             (7)
                                                ----        ----       --------
Balance, September 30, 1995 ..........         $ (70)       $195       $ 44,270
                                                ====        ====       ========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       43
<PAGE>   44
                    QUARTERDECK CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                                             RETAINED
                                          SERIES B                                                           EARNINGS
                                       PREFERRED STOCK        COMMON STOCK                     ADDITIONAL    (ACCUMU-
                                       ---------------        ------------        TREASURY      PAID-IN       LATED  
                                      SHARES    AMOUNT      SHARES     AMOUNT       STOCK       CAPITAL      DEFICIT)
                                      ------    ------      ------     ------       -----       -------      --------    
<S>                                   <C>       <C>        <C>           <C>      <C>          <C>         <C>          
Balance, September 30, 1995......       --         $--      34,673        $35      $(559)       $39,873     $ 5,359      
Adjustment for Datastorm and Inset      
  poolings of interest...........       --          --          35         --         --            385          --
Adjustment for Vertisoft pooling                                                                                         
  of interests...................       --          --          --         --         --             40         999      
Adjustment for Future Labs                                                            --                                 
  pooling of interests...........       --          --         664          1                     1,987      (1,481)
Duplicate earnings elimination                                                                                           
  for Datastorm pooling..........       --          --          --         --         --             --        (717)
Purchase of Limbex...............       --          --       1,310          1         --         14,370          --      
Stock issuance for purchase of
  InterLink......................       --          --         205         --         --          3,000          --      
Stock issuance for purchase of
  assets from Pinnacle...........       --          --         198         --         --          1,800          --      
Net loss.........................       --          --          --         --         --             --     (74,959)     
Undistributed earnings of
  subchapter-S subsidiaries......       --          --          --         --         --          8,967      (8,967)     
Distribution to shareholders.....       --          --          --         --         --         (7,307)         --      
Net increase in unrealized gain..       --          --          --         --         --             --          --      
Common stock options exercised...       --          --         581          1         --          2,979          --      
Foreign currency                                         
  translation adjustment.........       --          --          --         --         --             --          --    
Issuance of convertible
  preferred stock................      200      20,000          --         --         --             --          --      
                                                                                                                         
Cost of preferred stock issuance.       --          --          --         --         --         (1,275)         --      
                                       ---     -------     -------       ----     ------        -------     --------
Balance, September 30, 1996......      200     $20,000      37,666        $38      $(559)       $64,819     $(79,766)    
                                       ===     =======     =======       ====     ======        =======     ========    
</TABLE>


<TABLE>
<CAPTION>
                                                         NOTES
                                                       RECEIVABLE        NET
                                         CURRENCY         FROM        UNREALIZED
                                          FOREIGN      DIRECTORS       GAIN ON           TOTAL
                                        TRANSLATION     FOR SALE      MARKETABLE     STOCKHOLDERS'
                                        ADJUSTMENT      OF STOCK      SECURITIES        EQUITY
                                        ----------      --------      ----------        ------
<S>                                        <C>          <C>             <C>            <C>    
Balance, September 30, 1995......            $(563)       $(70)           $195         $ 44,270
Adjustment for Datastorm and Inset
  poolings of interest...........               23          --              --              408
Adjustment for Vertisoft pooling                                                               
  of interests...................               --          --              --            1,039
Adjustment for Future Labs                                                                     
  pooling of interests...........               --          --              --              507
Duplicate earnings elimination                                                                 
  for poolings ..................               --          --              --             (717)
Purchase of Limbex...............               --          --              --           14,371
Stock issuance for purchase of
  Interlink......................               --          --              --            3,000
Stock issuance for purchase of
  assets from Pinnacle...........               --          --              --            1,800
Net loss.........................               --          --              --          (74,959)
Undistributed earnings of
  subchapter-S subsidiaries......               --          --              --               --
Distribution to shareholders.....               --          --              --           (7,307)
Net increase in unrealized gain..               --          --             184              184
Common stock options exercised...               --          52              --            3,032
Foreign currency                 
  translation adjustment.........               72          --              --               72
Issuance of convertible
  preferred stock................               --          --              --           20,000
Cost of preferred stock issuance.               --          --              --           (1,275)
                                             -----        ----            ----         --------
Balance, September 30, 1996......            $(468)       $(18)           $379         $  4,425
                                             =====        ====            ====         ========
</TABLE>

          See accompanying notes to consolidated financial statements.




                                       44
<PAGE>   45
                    QUARTERDECK CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
         INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                             YEAR ENDED SEPTEMBER 30,
                                                                                       -------------------------------------
                                                                                       1996            1995             1994
                                                                                       ----            ----             ----
<S>                                                                                  <C>            <C>              <C>      
Cash flows from operating activities:
 Net income (loss) ..........................................................       $(74,959)       $  11,252         $(4,625)
 Adjustments to reconcile net income (loss)
   to net cash provided by operating activities:
   Depreciation and amortization of equipment
     and leasehold improvements .............................................          6,063            3,610           3,960
   Amortization of capitalized software cost & other intangibles ............          3,770            1,575           3,171
   Write-off of property and equipment ......................................          1,409               --           1,719
   Write-off of capitalized software costs and prepaid royalties ............          4,860               --           3,701
   Stock compensation .......................................................             --               59              -- 
   Elimination of duplicate net income from acquired entities ...............           (717)            (384)             -- 
   Loss on sale or abandonment of assets ....................................             --               38             271
   Write-off of in process research and development .........................         14,993            2,900              -- 
 Changes in assets and liabilities:
      Trade accounts receivable .............................................          4,591           (7,749)          5,333
      Refundable income taxes ...............................................             --            6,301          (6,301)
      Deferred income taxes .................................................          3,072           (2,178)             -- 
      Inventories ...........................................................            130             (435)            937
      Other current assets ..................................................         (3,420)          (1,565)          7,079
      Other assets ..........................................................         (4,092)            (203)         (5,453)
      Accounts payable ......................................................         (6,171)           5,342           4,267
      Accrued liabilities ...................................................             68            1,865           4,526
      Accrued restructuring charges .........................................            558           (3,476)          5,321
      Foreign currency translation adjustment ...............................             95               16              25
                                                                                    --------        ---------        --------
           Net cash provided by (used in) operating activities ..............        (49,750)          16,968          23,931
                                                                                    --------        ---------        --------
Cash flows from investing activities:
  Purchases of short-term investments .......................................             --         (111,989)        (61,351)
  Proceeds from sales and maturities of
   short-term investments ...................................................         34,285          106,289          59,131
  Capital expenditures ......................................................        (19,669)          (6,029)         (3,396)
  Capitalized software costs ................................................         (4,504)          (2,564)         (3,617)
  Purchase of minority interest in affiliates ...............................             --           (2,700)             -- 
  Loan to related party for note receivable - building ......................             --             (469)             -- 
  Advances (to) from affiliates .............................................             52             (100)            137
  Opening cash balance of previously unconsolidated subsidiaries ............          5,054              559              --    
  Proceeds from sale of assets ..............................................             --               12               5
  Accrued acquisition charges, net of cash acquired .........................          6,493            2,525              -- 
                                                                                    --------        ---------        --------
           Net cash provided by (used in) investing activities ..............         21,711          (14,466)         (9,091)
                                                                                    --------        ---------        --------
Cash flows from financing activities:
  Net proceeds from issuance of preferred stock .............................         20,000               --              --
  Net proceeds from issuance of common stock ................................          3,529            1,439              11
  Proceeds from issuance of long-term convertible notes .....................         25,000               43             544
  Proceeds from issuance of bank debt .......................................          8,280               --              --
  Principal payments under long-term obligations ............................           (200)            (482)           (555)
  Notes payable to related parties ..........................................         (1,093)             441             635
  Acquisition of treasury stock .............................................             --             (532)             -- 
  Distributions to stockholders .............................................         (7,307)          (7,906)        (12,215)
                                                                                    --------        ---------        --------
           Net cash provided by (used in) financing activities ..............         48,209           (6,997)        (11,580)
                                                                                    --------        ---------        --------
           Net increase (decrease) in cash and
            cash equivalents ................................................         20,170           (4,495)          3,260
Cash and cash equivalents at beginning of period ............................          5,384            9,879           6,619
                                                                                    --------        ---------        --------
Cash and cash equivalents at end of period ..................................       $ 25,554        $   5,384        $  9,879
                                                                                    ========        =========        ========

Supplemental disclosure of cash flow information: 
  Cash paid during the period for:
    Interest ................................................................       $    468        $      20        $     34
    Income taxes ............................................................          1,993            1,534              -- 
</TABLE>

          See accompanying notes to consolidated financial statements.




                                       45
<PAGE>   46



                    QUARTERDECK CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        SEPTEMBER 30, 1996, 1995 AND 1994

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

           Quarterdeck Corporation ("the Company") commenced operations as a
      California corporation on September 16, 1982, and was reincorporated in
      Delaware in 1991. The consolidated financial statements include the
      accounts of the Company and its wholly owned subsidiaries. See note 2 for
      a description of pooling of interests and purchase transactions. All
      significant intercompany transactions have been eliminated in 
      consolidation.

      Revenue Recognition

           Revenue from the sale of software products is recognized upon
      shipment, where collection of the resulting receivable is probable and
      there are no significant obligations remaining. The estimated cost to
      fulfill technical support obligations to end users arising from the sale
      of software is accrued upon shipment. Certain limited rights of return and
      exchange from customers exist as defined by the Company's general
      distributor agreements. The Company establishes allowances for estimated
      product returns and exchanges as a reserve against revenues. Provisions
      for sales returns and exchanges were approximately $31,889,000, $9,136,000
      and $7,510,000 in fiscal 1996, 1995 and 1994, respectively. Revenue from
      the sale or licensing of intellectual property is recognized when all
      significant obligations of the Company have been met and no customer right
      of return exists.

      Capitalized Software Costs

            Statement of Financial Accounting Standards No. 86, "Accounting for
      the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
      requires the capitalization of certain software development and production
      costs once technological feasibility has been achieved. The cost of
      purchased software is capitalized when related to a product which has
      achieved technological feasibility or that has an alternative future use.
      For the year ended September 30, 1996, the Company did not capitalize any
      internal software development costs. Internal software development costs
      related to new products reaching technological feasibility during fiscal
      1996 were immaterial. During fiscal 1996, the Company purchased and
      capitalized software amounting to $4,504,000. For the years ended
      September 30, 1995 and 1994, the Company capitalized $2,564,000 and
      $3,617,000, respectively, of software development and purchased software
      costs. Software development costs incurred prior to achieving
      technological feasibility as well as certain licensing costs are charged
      to research and development expense as incurred.

            Capitalized software development and purchased software costs are
      reported at the lower of unamortized cost or net realizable value.
      Commencing upon initial product release, these costs are amortized based
      on the straight-line method over the estimated life, generally one year
      for internal software development costs and twelve to thirty-six months
      for purchased software. Fully amortized software costs are removed from
      the financial records. For the years ended September 30, 1996, 1995 and
      1994, the Company recorded $3,711,000, $1,575,000 and $3,171,000 of
      amortization of capitalized software costs, respectively, based on the
      straight-line method. Amortization of capitalized software costs is
      included in cost of revenues in the accompanying consolidated statement of
      operations.


                                       46
<PAGE>   47
      Inventories

           Inventories, consisting primarily of product packaging, documentation
      and media, is stated at the lower of cost or market (net realizable
      value). Cost is determined by the first-in, first-out (FIFO) method.

      Cash Equivalents and Short-Term Investments

           The Company considers all highly liquid investments purchased with an
      original maturity of three months or less to be cash equivalents. Cash and
      cash equivalents at September 30, 1996 and 1995 amounted to $25,554,000
      and $5,384,000, respectively. $20 million of the September 30, 1996
      balance of $25,554,000 was received pursuant to the Series B Convertible
      Preferred Stock (note 15) issuance on September 30, 1996.

            As of September 30, 1996, $22,226,000 of the total cash and cash
      equivalent balance was invested in interest bearing bank accounts and cash
      equivalent money funds.

           Short-term investments at September 30, 1995 amounted to $34,285,000
      consisting of municipal bonds of $31,755,000, U.S. debt securities of
      $2,375,000 and corporate securities of $155,000. Effective October 1,
      1994, the Company adopted the provisions of Statement of Financial
      Accounting Standards No. 115 (FAS 115), "Accounting for Certain
      Investments in Debt and Equity Securities." Under FAS 115, the Company has
      classified its short-term investments and long-term marketable securities
      as available-for-sale. Available-for-sale securities are stated at market
      value and unrealized holding gains and losses, net of the related tax
      effect, are excluded from earnings and are reported as a separate
      component of stockholders' equity until realized. A decline in the market
      value of the security below cost that is deemed other than temporary is
      charged to earnings resulting in the establishment of a new cost basis for
      the security.

           Since the market value of short-term investments at October 1, 1994
      approximated cost, the adoption of FAS 115 did not have a material effect
      on the Company's consolidated financial statements.

      Computation of Net Income (Loss) per Share

           The primary net income (loss) per common and common equivalent share
      for the years ended September 30, 1996, 1995 and 1994 has been computed
      using the weighted average number of common and dilutive common stock
      equivalent shares outstanding for each year as summarized below:

<TABLE>
<CAPTION>
                                             YEAR ENDED SEPTEMBER 30,
                                       --------------------------------------
                                       1996             1995             1994
                                       ----             ----             ----
<S>                                 <C>              <C>              <C>       
Weighted average common stock
  outstanding during the year       34,893,937       34,112,914       31,824,560
Common stock equivalents of
  stock options and warrants
  outstanding ...............               --        1,443,997               --
                                    ----------       ----------       ----------
Shares used in primary EPS
  calculation ...............       34,893,937       35,556,911       31,824,560
                                    ==========       ==========       ==========
Shares used in fully diluted
  EPS calculation ...........       34,893,937       36,498,634       31,824,560
                                    ==========       ==========       ==========
</TABLE>

           The weighted average number of shares of common stock outstanding
      during each of the years has been adjusted to reflect the issuance of
      common stock in connection with the following acquisitions which are
      accounted for as poolings of interest: 3,500,000 shares for Landmark
      Research International Corporation ("Landmark") (note 2), 921,218 shares
      for Inset Systems, Inc. ("Inset") (note 2), 5,200,000 shares for Datastorm
      Technologies, Inc. and Datastorm Limited (together "Datastorm") (note 2),


                                       47
<PAGE>   48
      and 3,499,999 shares for Vertisoft Systems, Inc. ("Vertisoft") (note 2).
      The weighted average number of shares of common stock outstanding during
      fiscal 1996 includes 663,768 shares issued in the Future Labs, Inc.
      ("Future Labs") pooling of interests as if the shares were issued at the
      beginning of fiscal 1996. Additionally the following shares were issued in
      connection with purchase acquisitions and are included as of the
      respective acquisition dates: 1,309,890 shares for Limbex Corporation
      ("Limbex"), 205,000 shares for InterLink Technology, Inc. ("InterLink"),
      and 198,000 shares for the Pinnacle Software, Inc. ("Pinnacle") technology
      purchase. The weighted average number of shares of common stock
      outstanding for the year ended September 30, 1996 excludes 1,028,000
      shares issued in connection with the above acquisitions, which are held in
      escrow, as their inclusion would be anti-dilutive to the loss per share.
      The weighted average number of shares of common stock outstanding for the
      year ended September 30, 1994, excluded 962,000 shares issued in
      connection with the above acquisitions, which are held in escrow, as their
      inclusion would be anti-dilutive.

           Additionally, effective October 1, 1994 (fiscal 1995), the weighted
      average number of common shares has been adjusted to reflect the issuance
      of 459,950 and 523,667 shares of common stock issued in connection with
      the Internetware, Inc. and a related party (together "Internetware") and
      StarNine Technologies, Inc. ("StarNine") mergers, accounted for as
      immaterial pooling of interests, respectively, and 149,000 shares of
      common stock issued during the year ended September 30, 1995 relating to
      the Company equivalent shares issued on the exercise of StarNine options.

      Reclassification

           Certain items in prior year's consolidated financial statements 
      have been reclassified to conform to the current year's presentation.

      Use of Estimates

           Management of the Company has made a number of estimates and
      assumptions relating to the reporting of assets and liabilities to prepare
      these financial statements in conformity with generally accepted
      accounting principles. Significant estimates are primarily related to
      provisions for sales returns, inventory reserve, allowance for doubtful 
      accounts and valuation of long-term investments. Actual results could 
      differ from these estimates.

      Concentrations of Credit Risk

           Financial instruments which potentially subject the Company to
      concentrations of credit risk consist primarily of short-term investments
      and trade accounts receivable. As of September 30, 1996, the Company had
      no short-term investments. As of September 30, 1995, the Company's
      investment portfolio was diversified and consisted of investment grade
      securities. The credit risk associated with trade accounts receivable is
      mitigated by the Company's credit evaluation process, reasonably short
      collection terms and the geographical dispersion of sales transactions.

      Depreciation and Amortization

           Depreciation and amortization of equipment and leasehold improvements
      is provided by the straight-line method over the estimated useful lives of
      the related assets as follows:

<TABLE>
<S>                                                                                 <C>     
           Building  .......................................................              40 years
           Computer equipment...............................................          3 to 7 years
           Office furniture and equipment...................................          5 to 7 years
           Leasehold improvements ..........................................          Shorter of lease or useful life of asset
           Equipment under capital lease ...................................          3 to 7 years
</TABLE>


                                       48
<PAGE>   49
      Income Taxes

           The Company accounts for income taxes in accordance with Financial
      Accounting Standards Board Statement No. 109 "Accounting for Income Taxes"
      (FAS 109). SFAS 109 requires the assets and liability method of accounting
      for income taxes. Under SFAS 109, deferred tax assets and liabilities are
      recognized with respect to the tax consequences attributable to
      differences between the financial statement carrying values and the tax
      bases of existing assets and liabilities. Deferred tax assets and
      liabilities are measured using enacted tax rates expected to apply to the
      taxable income in the years in which these temporary differences are
      expected to be recovered or settled. Further, the effect on deferred tax
      assets and liabilities of a change in tax rates is recognized in income in
      the period that includes the enactment date.

      Stock-Based Compensation

           In October 1995, the Financial Accounting Standards Board issued SFAS
      No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 will be
      effective for fiscal years beginning after December 15, 1995, and will
      require that the Company either recognize in its financial statements
      costs related to its employee stock-based compensation plans, such as
      stock option and stock purchase plans, or make pro forma disclosures of
      such costs in a footnote to the financial statements.

           The Company expects to continue to use the intrinsic value-based
      method of Accounting Principles Board Opinion No. 25, as allowed under
      SFAS No. 123, to account for all of its employee stock-based compensation
      plans. Therefore, in its financial statements for fiscal 1997, the Company
      will make the required pro forma disclosures in a footnote to the
      financial statements. SFAS No. 123 is not expected to have a material
      effect on the Company's results of operations or financial position.

      Non-Cash Transactions

           The Company has recorded certain significant non-cash transactions
      relating to certain mergers and purchases which included Common
      Stock as all or a portion of the consideration and has commenced a
      restructuring program which includes recording certain non-cash 
      charges. See also Notes 2 and 4 herein.

      Fair Value of Financial Instruments

           The fair values of the Company's cash and cash equivalents, trade
      accounts receivable, accounts payable, accrued liabilities and accrued
      acquisition and restructuring charges approximate their carrying value due
      to the relatively short maturities of these instruments. The fair value of
      the loans payable to banks approximate the fair value of the instruments
      due to the stated interest rates on such notes and the collateral
      supporting the notes. The fair value of the convertible debentures
      approximates face value due to the stated interest rate on such instrument
      and the indeterminate nature of the value of the convertibility feature of
      such debt instrument.

      Long-Lived Assets

      In March 1995, Statement of Financial Accounting Standards No. 121,
      "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
      Assets to Be Disposed Of" (SFAS No. 121), was issued. This statement
      provides guidelines for the recognition of impairment losses related to
      long-term assets and is effective for fiscal years beginning after
      December 15, 1995, with earlier application encouraged. The Company will
      adopt SFAS No. 121 during fiscal 1997. The Company believes that such 
      adoption will not have a material impact on the consolidated financial 
      statements.

      Foreign Currency Translation

           Assets and liabilities denominated in foreign currencies are
      translated to U.S. dollars at the exchange rate on the balance sheet date.
      Revenues, costs and expenses are translated at average rates of exchange
      prevailing during the year. Translation adjustments resulting from this
      process are shown separately in stockholders' equity. Foreign currency
      transaction gains and losses are not material and are included in the
      determination of net income (loss).


      NOTE 2.  ACQUISITIONS AND STRATEGIC INVESTMENTS

      Poolings of Interests

      Fiscal 1996:

           On December 29, 1995, the Company merged with Inset, a developer of
      utility application software for personal computers. The Company issued
      921,218 shares of common stock in exchange for all of the outstanding
      common stock of Inset. This merger has been accounted for as a pooling of
      interests combination and accordingly, the consolidated financial
      statements for all periods presented herein have been restated to include
      the accounts and results of operations of Inset.


                                       49
<PAGE>   50

        On March 28, 1996, the Company consummated a merger with Datastorm. The
      Company issued 5.2 million shares of common stock in exchange for all of
      the outstanding stock of Datastorm. The merger has been accounted for as a
      pooling of interests and therefore, the consolidated financial statements
      for all periods presented herein have been restated to reflect the
      combined operations of the Company and Datastorm.

        Datastorm had a calendar year end and accordingly, the Datastorm
      statement of operations for the year ended December 31, 1995, was restated
      and combined with the Company's statement of operations for the fiscal
      year ended September 30, 1995. In order to conform Datastorm's year end to
      the Company's fiscal year end, the consolidated statement of operations
      for the year ended September 30, 1996, includes three months (October 1995
      through December 1995) for Datastorm, which are included in the
      consolidated statement of operations for the fiscal year ended September
      30, 1995. Accordingly an adjustment has been made to retained earnings
      during fiscal 1996 to eliminate the duplication of net income of $717,000
      for the three month period ended December 31, 1995. Financial information
      related to Datastorm's fiscal years ended December 31, 1994 and 1993 were
      combined with financial information related to the Company's fiscal years
      ended September 30, 1994 and 1993, respectively.

        Datastorm's S corporation status terminated upon consummation of the
      merger and undistributed earnings at March 28, 1996, and all prior
      periods, have been reclassified to additional paid-in-capital.

        The Company's Datastorm subsidiary leased office and warehouse space
      from Three Guys With a Building partnership, a company that was affiliated
      to Datastorm through common ownership. As a result of the acquisition and
      completion of a new office building for the Company by the partnership,
      the existing lease has been terminated at no cost to the Company (see note
      14). Lease expense for 1996, 1995 and 1994 totaled $698,000, $686,000 and
      $667,000 respectively.

        The Company's Datastorm subsidiary owed Intersoft, Inc., an Interest
      Charge Domestic International Sales Corporation ("IC-DISC") affiliated
      with Datastorm through common ownership, $1,015,000 and $527,000 as of
      December 31, 1995 and 1994, respectively, for commission expenses and
      interest related to international sales. These amounts are included in
      notes payable to related parties.

        On May 15, 1996, the Company acquired substantially all of the assets of
      Future Labs, a developer of real-time collaborative technology. The
      Company issued 663,768 shares of common stock in exchange for all of the
      outstanding stock of Future Labs. The transaction was accounted for as an
      immaterial pooling of interests and therefore, the consolidated financial
      statements for all periods beginning on or after October 1, 1995 have been
      restated to reflect the combined operations of the Company and Future
      Labs.

        On July 18, 1996, the Company acquired 100% of the common stock of
      Vertisoft in exchange for 3,499,999 shares of Company common stock. This
      transaction has been accounted for as an immaterial 


                                       50
<PAGE>   51
      pooling of interests, and as a result, the accompanying financial
      statements are presented as if the combining companies had been combined
      commencing October 1, 1995. The number of shares issued in the Vertisoft
      pooling of interests is material to the Company for all periods, and
      accordingly the number of common shares outstanding and earnings per share
      have been restated for all periods after October 1, 1992, to reflect the
      3,499,999 shares issued in such transaction.

      Fiscal 1995:

        On June 30, 1995, the Company acquired Landmark, a developer of utility
      application software for personal computers. The Company issued 3,500,000
      shares of common stock in exchange for all of the outstanding common stock
      of Landmark. The transaction was accounted for as a pooling of interests
      and therefore, the consolidated financial statements for all periods
      presented herein reflect the combined operations of the Company and
      Landmark.

        Landmark's S corporation status terminated upon acquisition by the
      Company. Landmark's undistributed earnings at September 30, 1995, and
      1994, have been re-classified to additional paid-in capital. Distributions
      to Landmark's stockholders, amounting to $2,114,000, and $587,000 for the
      years ended September 30, 1995, and 1994, respectively have been charged
      to additional paid-in capital.

        On August 28, 1995, the Company issued 459,950 shares of its common
      stock in exchange for 100% of the outstanding shares of Internetware. The
      transaction was accounted for as an immaterial pooling of interests, and
      accordingly, the consolidated financial statements have been prepared as
      if Internetware had been combined beginning October 1, 1994. The Company
      recorded an adjustment to beginning equity to reflect the 459,950 shares
      issued in the transaction and Internetware's stockholders' deficiency of
      $36,000 at September 30, 1994. Acquisition costs paid by certain
      stockholders of Internetware, amounting to $450,000 have been recorded as
      acquisition expenses of the combined entities and a capital contribution.

        On September 29, 1995, the Company issued 672,667 shares of its common
      stock in exchange for 100% of the outstanding shares of StarNine. This
      transaction was accounted for as an immaterial pooling of interests, and
      accordingly, the consolidated financial statements have been prepared as
      if StarNine had been combined beginning October 1, 1994.


                                       51
<PAGE>   52
        In connection with the 1996 mergers, the following merger transaction
      costs and expenses were recorded and have been charged to expense in
      fiscal 1996. These merger transaction costs and expenses include the
      following (in thousands):


<TABLE>
<CAPTION>
                                    INSET       DATASTORM     FUTURELABS      VERTISOFT       TOTAL

<S>                               <C>            <C>            <C>             <C>           <C>
Acquisition costs...............  $ 1,846        $ 4,782        $ 1,417         $1,l75        $ 9,220
Non-cash charges................       --           (863)            --             --           (863)
Cash payments...................   (1,746)        (3,040)        (1,058)          (400)        (6,244)
                                  -------        -------        -------        -------        -------
Balance, September 30, 1996       $   100        $   879        $   359        $   775        $ 2,113
                                  =======        =======        =======        =======        =======
</TABLE>



        In connection with the 1995 mergers, the following merger transaction
      costs and expenses were recorded and charged to expense in fiscal 1995.
      These merger transaction costs and expenses include the following (in
      thousands):

<TABLE>
<CAPTION>
                                         LANDMARK        STARNINE     INTERNETWARE      TOTAL
                                         --------        --------     ------------      -----

<S>                                       <C>            <C>            <C>            <C>    
      Acquisition costs                   $ 3,600        $ 1,200        $   300        $ 5,100
      Non-cash charges                         --           (450)            --           (450)
      Cash payments                        (1,860)           (98)          (175)        (2,133)
      Reversal of acquisition costs          (488)            --             --           (488)
                                          -------        -------        -------        -------
      Balance, September 30, 1995           1,252            652            125          2,029
      Cash payments                        (1,688)          (565)          (125)        (2,378)
      Additional acquisition costs            482             99             --            581
                                          -------        -------        -------        -------

      Balance, September 30, 1996         $    46        $   186        $    --        $   232
                                          =======        =======        =======        =======
</TABLE>


        The results of operations previously reported by the separate
      enterprises, that are discussed above and the combined amounts presented
      in the accompanying consolidated financial statements are summarized below
      (in thousands):



                                       52
<PAGE>   53
<TABLE>
<CAPTION>
                                                         YEAR ENDED SEPTEMBER 30,
                         --------------------------------------------------------------------------------------
                                  1996                           1995                            1994
                         -----------------------         ----------------------        ------------------------
                                           NET                            NET                          NET
                            NET          INCOME            NET           INCOME          NET          INCOME
                         REVENUES        (LOSS)          REVENUES        (LOSS)        REVENUES       (LOSS)
                         --------       --------         --------        ------        --------       ------
<S>                       <C>           <C>              <C>           <C>            <C>           <C>      
Quarterdeck...........     $92,030        $(86,856)       $54,986       $2,744         $26,753       $(21,171)
Landmark..............          --             --          11,236        1,309          11,953          2,323
StarNine  ............          --             --           3,981           38              --             --
Internetware .........          --             --             444         (202)             --             --
Inset  ...............       2,669             424          6,394          134           4,022         (1,929)
Datastorm ............      29,413          12,576         40,499        6,990          42,402         16,242
Future Labs...........       1,312           (335)             --           --              --             --
Vertisoft.............       7,676           (623)             --           --              --             --
Pooling Adjustments...          --           (145)             66          239            (415)           (90)
                          --------       --------        --------      -------         -------        ------- 
Restated Quarterdeck...   $133,100       $(74,959)       $117,606      $11,252         $84,715        $(4,625)
                          ========       =========       ========      =======         =======       ========
</TABLE>


        Net revenues and net income(loss) for Vertisoft, Future Labs,
      Datastorm, Inset, Landmark, StarNine and Internetware for the years ended
      September 30, 1996 and 1995 reflect the results of each entity for only
      the period prior to the date of acquisition by the Company. Results
      subsequent to the date of the mergers are included with the Company's
      operations. Net revenue and net income (loss) for 1994 reflect the
      separate results of Landmark, Inset and Datastorm. Pooling adjustments
      were made primarily to conform accounting policies to those of the
      Company.

      Purchases

      Fiscal 1996:

        On June 6, 1996, the Company acquired certain software and related
      intellectual property rights from Pinnacle in exchange for common stock
      with a market value, as defined, of $1,800,000, or 198,000 shares. The
      entire amount has been recorded as capitalized software. This transaction
      has been accounted for using the purchase method of accounting. The
      Company is also obligated to pay certain minimum royalties of $200,000 per
      year for four years commencing no later than March 31, 1997. The Company
      has paid $100,000 and is obligated for an additional $200,000, as payment
      for consulting services and a non-competition agreement with the principal
      of Pinnacle. 

        On July 16, 1996, the Company purchased certain assets and technology 
      relating to remote control software from InterLink as an essential part 
      of the Company's communication product line. The Company issued 205,000
      shares of common stock and is obligated to issue approximately $1,381,000
      worth of additional shares, up to a maximum of 205,000 additional shares,
      on the six month anniversary of the closing date based on the trading
      price of the Company common stock at such time. The acquisition has been
      accounted for as a purchase. The total consideration for the InterLink
      acquisition was $3,155,000, including the Company's obligation to issue an
      additional $1,381,000 of Common Stock.

        On August 14, 1996, the Company acquired the remaining shares of Limbex
      not owned by the Company. Prior to such acquisition the Company owned
      approximately 20% of Limbex. Limbex is the developer of WebCompass product
      line. As a result of the merger, the Company owns 100% of Limbex. The
      total consideration for the acquisition was $16,295,000, including
      approximately $3,300,000 of consideration to be settled one year from the
      closing in cash or common stock of the Company, at the Company's option.
      The Company's previous investment of 20% was allocated using the
      historical cost of the investment.

        The purchase price allocation for the acquisitions of InterLink and
      Limbex was made among the identifiable tangible and intangible assets,
      based on the fair market value of those assets utilizing the discounted
      cash flow of the technology acquired, as well as applying a factor
      incorporating the cost of the working capital employed. Specifically,
      purchased in process research and development was identified and valued 
      through extensive interviews and analysis of data concerning each
      InterLink or Limbex development project. Expected future cash flows of
      each development project were discounted taking into account risks
      associated with the inherent difficulties and uncertainties in completing
      the project, and thereby achieving technological feasibility, and risks
      related to the viability of and potential changes in future target
      markets. 

        This analysis resulted in an allocation of $2,872,000 and $12,121,000 of
      purchased research and development for InterLink and Limbex, respectively,
      which had not yet reached technological feasibility and did not have
      alternative future uses. The $2,872,000 and $12,121,000 of purchased
      research and development is included in acquisition, restructuring and
      other charges in the accompanying consolidated statements of operations.
      Using the same methodology, goodwill for InterLink and Limbex was
      calculated to be $283,000 and $2,546,000, respectively, and is included in
      other assets, to be amortized over 10 years. In addition, the Company
      allocated $328,000 of the Limbex purchase price to intangible assets which
      will be amortized over a period of 24 to 36 months and $396,000 to a
      capitalized software technology which will be amortized over 14 months.

        The results of operations of these purchased entities for the periods
      prior to the acquisitions were immaterial to the Company and, accordingly,
      pro forma disclosures of the effect of such transactions have not been
      presented.

                                       53
<PAGE>   54

      Fiscal 1995:

        On September 28, 1995, the Company acquired the intellectual property
      assets of Prospero in exchange for common stock with a market value, as
      defined, of $2,950,000, or 154,693 shares, plus the assumption of $60,000
      of liabilities, and transaction costs amounting to approximately $125,000.
      This transaction has been accounted for using the purchase method of
      accounting. At September 30, 1995, 


                                       54
<PAGE>   55
      accrued transaction costs, assumed liabilities and stock registration fees
      amounted to approximately $196,000 and were classified as accrued
      acquisition and restructuring charges.

        An allocation of the purchase price was made among the identifiable
      tangible and intangible assets, using the same methodology previously
      discussed for the Limbex and InterLink purchase price allocations. This
      allocation resulted in $2,578,000 of purchased research and development
      which had not yet reached technological feasibility and did not have
      alternative future uses. Therefore, in accordance with generally accepted
      accounting principles, the $2,578,000 of purchased research and
      development is included in acquisition, restructuring and other charges in
      the accompanying consolidated statements of operations.

        Using the same methodology, purchased software was identified and
      valued. This analysis resulted in $557,000 of purchased software which had
      reached technological feasibility, and therefore was capitalized. The
      purchased software will be amortized over a period of 24 months.

      Other Investments

        On February 7, 1996, the Company acquired, in a private placement of
      common stock, less than a 5% interest in Infonautics Corporation
      ("Infonautics") in exchange for $3,250,000. This transaction is accounted
      for under the cost method of accounting and the investment is included on
      the balance sheet in other assets and is carried at lower of cost or 
      market. Infonautics consummated an initial public offering of its common 
      stock during May of 1996. The Company's shares in Infonautics were not
      registered at that time and therefore remain subject to certain
      limitations on resale. Infonautics stock has traded at prices below the
      Company's cost basis for several months prior to September 30, 1996. The
      Company determined that a portion of the reduction in the stock price was
      due to an other than temporary decline and accordingly recorded a charge
      to other income (expense) of $720,000 to reduce the carrying value of the
      investment.

        During fiscal 1996, the Company also recorded a charge in other income
      (expense) for $727,000 to write off its investment in Streetwise, a 
      software development firm.

        On December 24, 1995, the Company and a Belgian venture capital group
      formed a new entity, Quarterdeck Flanders N.V. ("QDF"). The Company 
      entered into an agreement to purchase 50.002% of QDF in exchange for an 
      agreement to make a capital contribution of $900,000. In September 1996,
      the Company transferred its interest in QDF to a third party who assumed
      the Company's obligation to make the capital contribution.

        In June 1995, the Company purchased a minority equity position in LHSP,
      a company that develops and licenses speech compression technology. The
      cash investment of $1,500,000 was accounted for using the cost method.
      During the year, LHSP completed an initial public offering. During fiscal 
      1996, the company sold a portion of this investment for $2,346,000 and 
      recorded a gain of $1,435,000 which is included in other income (expense)
      on the statement of operations. The Company wrote up the value of the 
      remaining


                                       55
<PAGE>   56
      investment by $379,000 during the period ended September 30, 1996. This 
      increase is recorded directly to the equity section of the balance sheet
      and does not affect net income. Therefore, the Company's remaining
      investment is carried at $968,000 and included in other assets on the 
      balance sheet.

        In June 1995, the Company agreed to purchase a minority equity position
      in Intelligence at Large, Inc. ("IAL"), a company that develops Internet
      audio technology. The agreement required the Company to make a total
      investment of $1,250,000, payable upon IAL achieving specified development
      milestones. The Company has accounted for this investment using the cost
      method. As of September 30, 1996, the Company had remitted $1,250,000 to
      IAL. This investment is carried at cost and is included in other assets.


                                       56
<PAGE>   57
      NOTE 3.  BALANCE SHEET AND INCOME STATEMENT INFORMATION

<TABLE>
<CAPTION>
                                                                  SEPTEMBER 30,
                                                            ------------------------
                                                              1996            1995
                                                            --------        --------
                                                                  (in thousands)

<S>                                                         <C>             <C>     
  Cash and short-term investments:
  Cash and cash equivalents .........................       $ 25,554        $  5,384
  Short-term investments ............................             --          34,285
                                                            --------        --------
                                                            $ 25,554        $ 39,669
                                                            ========        ========

  Trade accounts receivable:
  Receivables .......................................       $ 22,284        $ 18,822
  Less:  allowance for doubtful accounts ............         (2,032)           (870)
  Less:  allowance for sales returns and marketing
          development funds .........................        (10,987)         (4,331)
                                                            --------        --------
                                                            $  9,265        $ 13,621
                                                            ========        ========

  Other current assets:
  Prepaid royalties .................................       $    901        $  1,427
  Income tax receivable .............................          2,825              --
  Other prepaid expenses ............................          1,150           1,345
  Notes receivable ..................................              1             100
  Advances to employees .............................             26               5
  Acquisition costs .................................             --             287
  Other .............................................            691             842
                                                            --------        --------
                                                            $  5,594        $  4,006
                                                            ========        ========

  Property, plant and equipment:    
  Construction in progress (building)................        $11,069        $     -- 
  Computer equipment.................................         20,406          14,710
  Office furniture and equipment ....................          2,252           3,046
  Office furniture and equipment under capital leases            252              26
  Leasehold improvements ............................          1,586           1,696
                                                            --------        --------
                                                              35,565          19,478
  Less:  accumulated depreciation and amortization ..        (14,313)        (11,143)
                                                            --------        --------
                                                            $ 21,252        $  8,335
                                                            ========        ========

  Capitalized software costs:
  Capitalized software costs ........................       $  5,254        $  4,184
  Less:  accumulated amortization ...................         (1,806)         (1,377)
                                                            --------        --------
                                                            $  3,448        $  2,807
                                                            ========        ========

  Other assets:
  Marketable securities .............................       $    968        $     --
  Other investments .................................          3,788           2,700
  Notes receivable from employee ....................             13             125
  Goodwill and other intangible assets acquired, net.          3,125              --
  Other .............................................          1,623             508
                                                            --------        --------
                                                            $  9,517        $  3,333
                                                            ========        ========

  Accrued liabilities:

  Accrued expenses ..................................       $ 13,824        $  7,447
  Accrued postcontract customer support .............            456             584
  Accrued vacation ..................................          1,460           1,877
  Accrued advertising ...............................          1,121           1,608
  Deferred revenue ..................................            273             431
  Other .............................................             98           1,387
  Income taxes payable ..............................             --             546
                                                            --------        --------
                                                            $ 17,232        $ 13,880
                                                            ========        ========

</TABLE>


                                       57
<PAGE>   58
<TABLE>
<S>                                                         <C>             <C>     
Accrued acquisition and restructuring charges:
  Acquisitions ......................................       $  2,345        $  2,029
  Restructurings ....................................          8,280           1,230
  Purchase transaction costs ........................            315             196
                                                            --------        --------
                                                            $ 10,940        $  3,455
                                                            ========        ========

Income Statement:
Acquisition, restructuring and other charges:
  Restructuring .....................................       $ 12,995        $    219
  Acquisitions ......................................          9,801           4,612
  In-process research and development ...............         14,993           2,578
                                                            --------        --------
                                                            $ 37,789        $  7,409
                                                            ========        ========
</TABLE>


                                       58
<PAGE>   59
      NOTE 4.  RESTRUCTURING AND OTHER CHARGES

        During fiscal 1996, the Company implemented a comprehensive, corporate
      wide restructuring plan. As a result of the plan, the Company recorded a
      charge of $12,995,000 and reduced its workforce by approximately 40%,
      eliminating nearly 500 positions. As a component of the restructuring, the
      Company will also close offices or reduce the amount of space utilized at
      its current locations. The restructuring charge includes an estimate of
      the impact of the affected lease obligations (net of estimated sublease
      income or settlements). The Company also wrote off excess equipment,
      furniture and leasehold improvement in connection with the employee and
      space reductions. Finally, the charge includes write-offs of capitalized
      software and prepaid royalties relating to products which the Company no
      longer plans to actively market. This restructuring focuses the Company
      around two core business units (utilities and communications and Internet
      solutions) and a direct marketing unit. As part of the restructuring, the
      Company has centralized operations and eliminated duplicate functions that
      resulted from certain acquisitions. The Company believes that these
      actions should improve its competitive position.

        The following is an analysis of the significant components of the fiscal
      1996 restructuring and other charges and 1996 activity (in thousands):

<TABLE>
<CAPTION>
                                         TOTAL                                CASH PAID
                                  RESTRUCTURING AND         NON-CASH          IN FISCAL         ACCRUED AS OF
                                 NON-RECURRING COSTS         COSTS               1996        SEPTEMBER 30, 1996
                                 -------------------        --------          ---------      ------------------

<S>                                      <C>                <C>                <C>                <C>    
Reduction of non-core
  product lines .............            $ 2,754            $ 2,754            $    --            $    --
Discontinuance and
  consolidation of offices ..              1,420                 --                 --              1,420
Severance costs .............              6,513                 --                550              5,963
Write-off property and
  equipment and other charges              2,308              1,240                413                655
                                         -------            -------            -------            -------

       Total ................            $12,995            $ 3,994            $   963            $ 8,038
                                         =======            =======            =======            =======
</TABLE>


        During the fourth fiscal quarter of 1994, management adopted a
      Company-wide restructuring plan designed to focus the Company's efforts on
      strategic product and market opportunities. The results for the fourth
      quarter and fiscal year 1994 included a pre-tax charge totaling
      $12,863,000 relating to the restructuring activities and other
      non-recurring charges. Of the total, $7,416,000 were non-cash charges and
      $741,000 of the remaining charges were paid prior to September 30, 1994.
      During fiscal 1995, $219,000 of additional restructuring charges were
      recorded and $3,695,000 of the restructuring charges were paid during
      fiscal 1995, leaving an accrual as of September 30, 1995 of $1,230,000.
      During fiscal 1996, $890,000 of this amount was paid prior to September
      30, 1996, while $98,000 of prior accrual was reversed leaving a balance of
      $242,000 at September 30, 1996.

        NOTE 5.  INCOME TAXES

        The components of the provision (benefit) for income taxes for the
      fiscal years ended September 30, 1996, 1995 and 1994, respectively, are as
      follows (in thousands):

<TABLE>
<CAPTION>
                     FEDERAL          STATE           TOTAL
                     -------          -----           -----

<S>                    <C>             <C>             <C> 
1996:
  Current ..........   $201            $  0            $201
  Deferred .........    605               0             605
                       ----            ----            ----
      Total ........   $806            $  0            $806
                       ====            ====            ====
</TABLE>


                                       59
<PAGE>   60
<TABLE>
<S>                    <C>                 <C>                 <C>    
1995:
  Current ..........   $ 2,330             $   179             $ 2,509
  Deferred .........    (2,021)               (157)             (2,178)
                       -------             -------             -------
      Total ........   $   309             $    22             $   331
                       =======             =======             =======

1994:
  Current ..........   $(5,984)            $     2             $(5,982)
  Deferred .........        --                  --                  --
                       -------             -------             -------
      Total ........   $(5,984)            $     2             $(5,982)
                       =======             =======             =======
</TABLE>


        The actual income tax expense (benefit) differs from the "expected"
      income tax expense (benefit) computed by applying the effective Federal
      income tax rate of 34% to income (loss) before income taxes as follows (in
      thousands):

<TABLE>
<CAPTION>
                                                                       YEAR ENDED SEPTEMBER 30,
                                                         --------------------------------------------------
                                                           1996                 1995                 1994
                                                           ----                 ----                 ----

<S>                                                      <C>                  <C>                  <C>      
Expected income tax expense (benefit) .......            $(25,212)            $  3,938             $( 3,606)
Change in valuation allowance ...............              20,294                  483                2,853
State income taxes, net of Federal
  income tax benefit ........................              (2,393)                  14                   --
Net (income) loss on foreign subsidiary .....               3,005                 (608)               1,510
Net income of Subchapter S subsidiary .......              (3,300)              (3,014)              (6,444)
Tax exempt income benefit ...................                (106)                (339)                (250)
Alternative minimum tax and other tax credits                 300                 (257)                  --
Acquisition costs ...........................               9,916                   --                   --
Other .......................................              (1,698)                 114                  (45)
                                                         --------             --------             --------
                                                         $    806             $    331             $( 5,982)
                                                         ========             ========             ========
</TABLE>

        At September 30, 1994, the Company had deferred tax assets amounting to
      $2,853,000, for which a full valuation allowance was provided. The
      deferred tax assets consisted of the tax effect from the expected future
      reversal of temporary differences, resulting in part from restructuring
      charges in fiscal 1994, which were not deductible for federal income tax
      purposes until the amounts are actually paid. Recognition of the deferred
      tax assets is dependent on a number of factors, including the timing of
      reversal of the temporary differences and an assessment of the future
      realizability of the deferred tax assets.

        The net change in the total valuation allowance for the twelve months
      ended September 30, 1995 was an increase of $483,000. Of this amount,
      $2,661,000 resulted from increases in gross deferred tax assets offset by
      an increase in the total net deferred assets of $2,178,000. The increase
      in total net deferred assets resulted from the Company's revaluation of
      the realizability of the future income tax benefit occasioned by various
      events which occurred during the third and fourth quarters of fiscal 1995.
      The acquisition of four new businesses in the third and fourth quarters of
      fiscal 1995, which significantly increased revenues and the occurrence of
      other events, made it more likely than not that the various tax benefits
      would be realized. As a result, the carrying value of the net deferred tax
      benefit was increased by $2,178,000, which was recognized as a current
      period income tax benefit.

        The net change in the total valuation allowance for the twelve months
      ended September 30, 1996, was an increase of $20,294,000. Of this amount,
      $18,116,000 resulted from an increase in gross deferred tax assets and
      $2,178,000 resulted from a decrease in net deferred tax assets. Management
      has concluded that the future realization of the deferred tax asset is
      uncertain. Accordingly, a full valuation allowance has been applied.


                                       60
<PAGE>   61
        Under FAS 109, deferred tax assets and liabilities are recognized for
      the expected future tax consequences of differences between the carrying
      amount of assets and liabilities and their respective tax bases using
      enacted tax rates in effect for the year in which the differences are
      expected to reverse. Deferred tax assets (liabilities) consist of the
      following (in thousands):

<TABLE>
<CAPTION>
                                                            YEAR ENDED SEPTEMBER 30,
                                                      ------------------------------------
                                                      1996            1995            1994
                                                      ----            ----            ----

<S>                                                 <C>             <C>             <C>     
Accrued restructuring charges ...............       $  2,222        $    311        $    684
Software development costs recognized
  as incurred for tax purposes ..............           (223)             12            (401)
State taxes .................................          2,393               7             486
Allowance for sales returns .................          1,819             837             669
Depreciation ................................            834             825             563
Allowance for doubtful accounts
  and other reserves ........................          3,111             997             879
Acquisition costs ...........................             --           1,591              --
Tax net operating losses ....................         17,265              --              --
Other, net ..................................           (782)            934             (27)

Deferred tax assets, valuation allowance.....        (26,639)         (3,336)         (2,853)
                                                    --------        --------        --------

  Total net deferred tax assets .............       $     --        $  2,178        $     --
                                                    ========        ========        ========
</TABLE>

        The valuation allowance at September 30, 1996 of $26,639,000 includes
      $3,009,000 of tax benefits related to stock options exercised. These tax
      benefits will be credited to equity when realized.

        Prior to June 30, 1995, Landmark elected to be taxed as an S corporation
      whereby the income tax effects of Landmark's activities accrued directly
      to its shareholders. Landmark's S corporation election terminated on June
      30, 1995, at the time of the acquisition. Prior to being acquired by the
      Company, Datastorm elected to be taxed as an S corporation whereby the
      income tax effects of Datastorm's activities accrued directly to the
      shareholders. Datastorm's S corporation election terminated at the time of
      acquisition. As a result, deferred income taxes for both Landmark and
      Datastorm, under the provisions of FAS 109 were established and the
      effects are included in the accompanying consolidated financial
      statements.

        The Company has a Federal tax net operating loss of $50,779,000 expiring
      in 2011.


                                       61
<PAGE>   62
      NOTE 6.  STOCK OPTIONS AND WARRANTS

        In fiscal 1990, the Company adopted two stock option plans, the 1990
      Directors' Stock Option Plan and the 1990 Stock Plan. Both plans have
      subsequently been amended. During 1995, the Company's Board of Directors
      approved an amendment to increase the number of shares of stock authorized
      for issuance under the 1990 Stock Plan from 3,000,000 to 6,000,000 shares,
      which amendment was approved by the shareholders on February 2, 1996.
      Under the amended terms of the 1990 Stock Plan, shares of common stock are
      reserved for issuance to employees and consultants pursuant to incentive
      stock options, nonqualified stock options, stock appreciation rights,
      restricted stock awards or stock bonuses. The Company has never issued a
      stock appreciation right, a restricted stock award or a stock bonus. Under
      the terms of the 1990 Directors' Stock Option Plan, 300,000 shares are
      reserved for issuance to non-employee directors. In fiscal 1996, the
      Company adopted the 1996 Acquisition Stock Incentive Plan.

        1996 ACQUISITION STOCK INCENTIVE PLAN. Under the terms of the 1996
      Acquisition Stock Incentive Plan, options may not exceed 10 years in
      length. All grants under this plan must be non-qualified stock options.
      These options may not be granted at less than 85% of fair market value at
      the time the option is granted, unless utilized in exchange for options
      previously issued by a combining company in conjunction with a pooling
      transaction. During fiscal 1996, the Company granted 105,610 stock options
      at exercise prices between $0.00 and $7.75 per share, 297,600 stock
      options at an exercise price of $8.81 per share, 665,000 stock options at
      an exercise price of $13.63 per share, and 67,715 stock options at
      exercise prices between $13.94 and $35.50 per share. During fiscal 1996,
      64,036 options were exercised and 164,037 options were cancelled. At
      September 30, 1996, 1,117,844 options were outstanding and 68,154 options
      were exercisable under the 1996 Acquisition Stock Incentive Plan.

        1990 STOCK PLAN. Under the terms of the 1990 Stock Plan, options may not
      exceed 10 years in length. Incentive stock options are granted at 100% of
      fair market value. Non-qualified stock options may not be granted at less
      than 85% of fair market value. Options outstanding under the 1990 Stock
      Plan are exercisable in varying increments commencing one year after date
      of grant and expire five to ten years from date of grant or upon earlier
      termination. During fiscal 1996, the Company granted 769,500 stock options
      at exercise prices between $5.00 and $10.00, 353,500 stock options at
      exercise prices between $10.01 and $15.00, 756,641 stock options at
      exercise prices between $15.01 and $20.00, and 181,946 stock options at
      exercise prices between $20.01 and $34.63. During fiscal 1995, the Company
      granted 522,772 stock options at exercise prices between $2.50 and $5.00
      per share, 40,000 stock options at exercise prices between $5.01 and
      $10.37 per share, and 1,639,583 stock options at exercise prices between
      $10.38 and $17.50 per share. During fiscal 1994, the Company granted
      10,000 stock options at an exercise price of $2.50, 485,700 stock options
      at an exercise price of $2.00 per share and 503,600 stock options at an
      exercise price of $2.25 per share.

        During fiscal 1996, 516,767 options were exercised and 738,207 options
      were cancelled. During fiscal 1995, 205,650 options were exercised and
      268,550 options were cancelled. During fiscal 1994, 7,501 options were
      exercised and 481,399 options were cancelled. At September 30, 1996,
      4,828,037 options were outstanding and 1,077,431 options were exercisable
      under the 1990 Stock Plan.

        1990 DIRECTORS' STOCK OPTION PLAN. Under the terms of the 1990
      Directors' Stock Option Plan, options are exercisable in varying
      increments and expire within five years or upon earlier directorship
      termination. During fiscal 1996, 52,500 stock options were granted at
      exercise prices between $8.00 and $16.50 per share, zero options were
      exercised, and zero options were cancelled. During fiscal 1995, 15,000
      stock options were granted at an exercise price of $4.00 per share, 52,500
      options were exercised, and no options were cancelled. During fiscal 1994,
      30,000 options were granted at an exercise price of $2.625 per share and
      15,000 options were granted at an exercise price of $2.25 per share.
      During fiscal 1994, 2,500 options were exercised and no options were
      cancelled. At September 30, 1996, 102,500 options were outstanding under
      the 1990 Directors' Stock Option Plan and 50,000 options were exercisable.

        1989 NON-QUALIFIED STOCK PLAN. In October 1989, the Company adopted its
      1989 Non-Qualified Stock Plan pursuant to which options were granted at
      prices determined by the Board of Directors. The options were exercisable
      in varying increments and expire five years from date of grant or upon
      earlier 


                                       62
<PAGE>   63
      termination of employment. No additional options may be granted under this
      plan. A total of 385,000 option shares at an option price of $0.10 per
      share have been granted pursuant to the plan, all of which were granted in
      October 1989. During fiscal 1995, 93,125 options were exercised and no
      options were cancelled. During fiscal 1994, 20,250 options were exercised
      and no options were cancelled. At September 30, 1995, no options were
      outstanding and exercisable under the 1989 Non-Qualified Stock Plan and
      accordingly, the plan was terminated.

        To the extent the Company derives a tax benefit from options exercised
      by employees, such benefit is credited to paid-in capital when realized on
      the Company's income tax return. Tax benefits realized totaling $0,
      $59,000 and $16,000 were credited to additional paid-in capital in fiscal
      1996, 1995 and 1994, respectively.

        A summary of all stock option and warrant activity in the three-year
      period ended September 30, 1996 is as follows:

<TABLE>
<CAPTION>
                                          SHARES          OPTION RANGE
                                          ------          ------------

<S>                                      <C>             <C>             
Outstanding at September 30, 1993        1,302,200       $0.10 - $17.50
  Options granted ...............        1,044,300        2.00 -   2.63
  Options exercised .............          (30,251)       0.10 -   3.56
  Options cancelled .............         (481,399)       0.62 -  17.50
                                         ---------

Outstanding at September 30, 1994        1,834,850       $0.10 - $17.50
  Options granted ...............        2,217,355        2.50 -  17.50
  Options exercised .............         (351,275)       0.10 -  17.50
  Options cancelled .............         (268,550)       2.00 -  17.50
                                         ---------

Outstanding at September 30, 1995        3,432,380       $2.00 - $17.50
  Options granted ...............        4,099,048        0.00 -  35.50
  Options exercised .............         (580,803)       6.25 -  39.00
  Options cancelled .............         (902,244)       0.25 -  27.50
                                         ---------

Outstanding at September 30, 1996        6,048,381       $0.25 - $34.63
                                         =========       =====   ======
</TABLE>


      NOTE 7.  COMMITMENTS

        The Company leases facilities under operating leases that expire through
      fiscal 2016. Rental expense for the years ended September 30, 1996, 1995
      and 1994 amounted to approximately $4,367,000, $3,076,000, and $3,468,000
      respectively.

        Minimum annual rental payments under these leases are as follows (in
      thousands):

<TABLE>
<CAPTION>
        Year ending September 30:

<S>                                                                              <C>    
              1997.............................................................. $ 2,421
              1998..............................................................   2,367
              1999..............................................................   2,257
              2000..............................................................   1,954
              2001..............................................................     408
              Thereafter........................................................   4,643
                                                                                 -------
                Total........................................................... $14,050
                                                                                 =======
</TABLE>

        Accumulated depreciation related to equipment under capital leases was
      $143,000 at September 30, 1994. The Company has no equipment under capital
      leases as of September 30, 1996 and 1995.

      NOTE 8.  STOCKHOLDER RIGHTS PLAN


                                       63
<PAGE>   64
        In September 1992, the Company made a dividend distribution of one
      preferred share purchase right for each outstanding share of common stock.
      The rights trade with the common stock and only become exercisable, or
      transferable apart from the common stock, ten business days after a person
      or group (Acquiring Person) acquires beneficial ownership of, or commences
      a tender or exchange offer for, 15% or more of the Company's common stock.
      Each right, under certain circumstances, entitles its holder to acquire
      one one-hundredth of a share of a newly created Series A Junior
      Participating Preferred Stock, par value $0.001 per share, at a price of
      $35, subject to adjustment. If 15% of the Company's common stock is
      acquired, or a tender offer to acquire 15% of the Company's common stock
      is made, each right not owned by an Acquiring Person will entitle the
      holder to purchase at the exercise price, Company common stock having a
      market value of twice the exercise price of the rights. In addition, if
      the Company is acquired in a merger or other business combination, the
      rights will entitle a holder to buy a number of shares of common stock of
      the acquiring Company having a market value of twice the exercise price of
      each right. The rights may be redeemed by the Company at $0.01 per right
      at any time until a 15% position has been acquired. The rights expire on
      August 22, 2002, and at no time have voting power.

        In connection with the issuance of the Series B Preferred Stock and the
      Warrant during fiscal 1996, (see Note 15), the Company amended the Rights
      Agreement dated August 11, 1992 (the "Rights Agreement") between the
      Company and Bank of America, National Trust and Savings Association, as
      rights agent, to provide that the institutional investor that acquired the
      Series B Preferred Stock and Warrant will not be deemed to be an Acquiring
      Person (as defined in the Rights Agreement) as a result of its acquisition
      of the Series B Preferred Stock, the Warrant or any shares of Common Stock
      received upon conversion of the Series B Preferred Stock or exercise of
      the Warrants; provided, however, if the institutional investor becomes the
      Beneficial Owner (as defined in the Rights Agreement) of any additional
      number of shares of Common Stock in excess of 5% of the outstanding shares
      of Common Stock other than as a result of the conversion of the Series B
      Preferred Stock and/or exercise of the Warrant, then the institutional
      investor will be deemed to be an Acquiring Person.

      NOTE 9.  EMPLOYEE BENEFIT PLANS

        In January 1991, the Company adopted a defined contribution 401(k) plan.
      Employees must work a minimum of 1,000 hours per year and be at least 21
      years of age and must have completed at least 12 consecutive months of
      service to be eligible for the plan. Participants may contribute 1% to 15%
      of their compensation. During fiscal 1993, the Board of Directors approved
      a Company match of 25% of employee contributions up to 5% of eligible
      compensation. The Company match was increased to 50% of employee
      contributions up to 5% of eligible compensation for calendar 1995. As of
      January 1996, the plan was amended to allow employee participation in the
      plan after at least 3 consecutive months of service. Additionally, the
      Company matching was increased to 50% of employee contributions up to 6%
      of eligible compensation for calendar 1996. The Company's matching
      contributions totaled $1,243,000, $112,000 and $96,000 for fiscal 1996,
      1995 and 1994, respectively.

        Employees of the Company's Datastorm subsidiary participated in the
      Datastorm Technologies, Inc., Integrated Profit Sharing Plan and Trust
      ("Plan"). Annually, Datastorm contributed to the Plan an amount determined
      by the Datastorm Board of Directors at its discretion. Profit sharing
      expense totaled $713,000 and $451,000 for the years ended September 30,
      1995 and 1994, respectively. To participate in the Plan, an employee must
      have completed six months of service with Datastorm and attain the age of
      20.5 years. To qualify for the Employer Contribution to the Plan,
      participants must complete 1,000 hours of service during a Plan year and
      be employed by the Company on the last day of the Plan year. For each Plan
      year the Employer contributes to the Plan, the Trustees will allocate this
      contribution to the separate accounts maintained for participants. An
      employee-participant may (but is not required to) contribute to the Plan.
      Participant accounts are invested among five investment funds as directed
      by the participant. As of March 29, 1996 the Datastorm Plan was suspended
      and all Datastorm employees became eligible to participate in the
      Company's 401k plan as of June 1, 1996.

        Subsequent to the acquisition of Datastorm, the Plan has been modified
      and merged with the Company plan discussed above.


                                       64
<PAGE>   65
      NOTE 10.  LITIGATION

        On May 26, 1995, a Final Judgment and Order of Dismissal was entered in
      the In Re Quarterdeck Office Systems, Inc. securities litigation in the
      United States District Court, Central District of California. The judgment
      approved the settlement of the litigation. The settlement involved a
      payment of $3,900,000 of which approximately $585,000 was paid by the
      Company in 1995 and the balance was paid directly by the Company's
      insurance carrier.

        The Company was a defendant in an action initially commenced on June 29,
      1995 by Corum Group Ltd., in King County (Washington) Superior Court
      against Landmark. On July 7, 1995, Corum filed an amended complaint
      asserting tort and breach of contract claims against the Company and two
      former shareholders of Landmark. The lawsuit arose from the Company's
      acquisition of Landmark on June 30, 1995. Corum claimed that it acted as a
      "broker" in the transaction and sought approximately $2,900,000 it claimed
      it was owed a commission with respect to the acquisition. The Company
      removed the action to U.S. District Court (Case No. 95-1126WD, United
      States District Court, Western District of Washington) and asserted
      affirmative defenses, counter claims and third-party claims. During fiscal
      1996, the Company settled the case. The settlement of this matter did not
      have a material impact on the results of operations of the Company.

        On or about September 3, 1996, a class action lawsuit, Marjorie
                                                               -------- 
      William's, et al. v. Quarterdeck Corporation, was filed in the Circuit
      --------------------------------------------
      Court of the Eighth Judicial Circuit, Alachua County, Florida (Case No.
      96-3041), by Marjorie William's and Penelope Claire Satterwhite on behalf
      of all licensees of MagnaRAM2 residing in the United States. The 
      complaint alleged that MagnaRaAM2 fails to significantly increase Random
      Access Memory or otherwise help Windows 95 and Windows 3.x users.
      Plaintiffs asserted the following causes of action: breach of express
      contract; breach of implied contract; breach of express warranties; breach
      of implied warranty of merchantability; breach of implied warranty of
      fitness for particular purpose; fraudulent misrepresentation; negligence;
      and gross negligence. Plaintiffs sought compensatory damages in an
      unspecified amount, injunctive relief, and attorney fees and costs.

        On October 10, 1996, the Company filed a motion seeking dismissal of the
      entire action pursuant to the forum non conveniens doctrine and, in the
      alternative, dismissal of certain allegations and causes of action for
      failure to state a claim. On November 25, 1996 (the date upon which the
      Company's motion was scheduled to be heard), counsel for plaintiffs agreed
      to dismiss the entire action, without prejudice. A stipulation to this
      effect was entered on the record before the Court. Pursuant to Florida
      law, plaintiffs may, within 120 days of November 25, 1996, refile the
      action in California and have the complaint "relate back" to the original
      September 3, 1996 filing date. Counsel for the Company has received no
      communication from plaintiffs' counsel since the dismissal and cannot
      determine whether plaintiffs intend to refile in California. If a new
      class action complaint is filed, the Company intends to defend the case
      vigorously and to oppose any effort to certify the claims for class
      resolution.

        Shareholder complaints were filed in November and December 1996 in the
      Superior Court of the State of California, County of Los Angeles, against
      the Company and one former and one current officer of the Company
      alleging, among other things, violations of certain provisions of
      California securities laws relating to statements made about the Company.
      The suits are purportedly brought on behalf of all persons who purchased
      the Company's common stock during the period January 26, 1996 through June
      13, 1996 and seeks damages in an unspecified amount and other relief. The
      Company intends to vigorously defend against these actions.

        The Company is a defendant in various other pending claims and lawsuits.
      Management believes that the disposition of such matters will not have a
      material adverse impact on the results of operation or financial position
      of the Company.

      NOTE 11.  MAJOR CUSTOMERS AND SEGMENT INFORMATION

        The Company sells its products primarily through distributors and
      dealers. Sales to the two largest distributors by the Company individually
      account for 20% and 11%; 31% and 14%; and 39% and 19% of the Company's
      consolidated net revenues for the years ended September 30, 1996, 1995 and
      1994, respectively.


                                       65
<PAGE>   66
        The Company is engaged in a single business segment - the development
and marketing of personal computer software.

        Geographic information is as follows (in thousands):

<TABLE>
<CAPTION>
                                                 YEAR ENDED SEPTEMBER 30,
                                            ----------------------------------
                                            1996           1995           1994
                                            ----           ----           ----
                <S>                       <C>            <C>            <C>     
                Net revenues:
                  United States ......... $109,200       $ 98,591       $ 75,425
                  Europe ................   18,700         13,809          5,833
                  Other..................    5,200          5,206          3,457
                                          --------       --------       --------
                                          $133,100       $117,606       $ 84,715
                                          ========       ========       ========

                  Net revenues from all foreign locations are attributable to export
                shipments from the Company's United States operations of $1,486,000,
                $4,968,000 and $3,184,000, respectively, and $22,414,000, $14,047,000, 
                and $6,106,000, respectively of shipments from the Company's European 
                operations based in Ireland during fiscal 1996, 1995 and 1994.

                <S>                       <C>            <C>            <C>      
                Operating income (loss):
                  United States ......... $(65,444)      $  7,342       $( 7,589)
                  Europe ................   (8,642)         2,357         (4,112)
                                           --------       --------       --------
                                          $(74,086)      $  9,699       $(11,701)
                                           ========       ========       ========

                Identifiable assets:
                  United States ......... $ 73,184       $ 71,130       $ 60,215
                  Europe ................    3,597          5,569          2,256
                                          --------        --------      --------
                                          $ 76,781        $ 76,699      $ 62,471
                                          ========        ========      ========
</TABLE>


      NOTE 12.  CONVERTIBLE NOTES

        On March 28, 1996, the Company issued $25 million principal amount of 6%
      Convertible Senior Subordinated Notes, due 2001 ("Notes"), to an
      institutional investor in a private placement pursuant to the terms of a
      Note Agreement, dated March 1, 1996. The Notes are convertible generally
      after April 1, 1997, at an initial conversion price of $21.18 per share.
      The conversion price is adjustable for certain below market equity
      issuances and the Notes contain other customary anti-dilution provisions.
      Subject to complying with other certain terms, the Notes may be prepaid
      without penalty, subject to conversion, anytime between April 1997 and
      April 1999 if the Company's Common Stock had been trading, for 20 of the
      30 trading days preceding notice of prepayment, approximately 18% above
      the then current conversion price.

      NOTE 13.   NOTES PAYABLE TO BANKS

        Notes payable to banks at September 30, 1996 was comprised of:

                <TABLE>
                <S>                                     <C>
                Revolving credit facility.............. $3,550,000
                Building loan..........................  2,000,000
                Secured construction financing.........  2,730,000
                                                        ----------
                                                        $8,280,000
                                                        ==========
</TABLE>

        As of September 30, 1996, the maximum borrowing the Company was eligible
      for under this line was approximately $4.1 million. The line is secured by
      the Company's domestic accounts receivable and inventory. The current term
      of the line of credit matures June 30, 1997. The line can be used for
      general corporate purposes, including investments and acquisitions, and
      bears interest, at the bank's reference (prime) interest rate plus 0.50%.
      The line is subject to the Company complying with certain customary
      financial covenants and restrictions, including a compensating balance of
      $3.0 million, the prohibition of the payment of dividends, other than
      those payable solely in capital stock, and a prohibition of any stock
      repurchase activity.


                                       66
<PAGE>   67
        In April 1996, the Company borrowed $2.0 million from a bank to
      partially finance the completion of the building in Columbia, Missouri.
      The loan is secured by Datastorm's equipment and bears interest, at a rate
      of 4.5% per annum. The rate was subsidized, in part, by the State of
      Missouri in exchange for certain local employment targets. As part of the
      Company's restructuring, the Company has revised downward the personnel
      complement at this location. This loan will not be renewed upon maturity.
      The Company has agreed with the bank to repay $750,000 between January
      1997 and March 1997, and to repay the remainder by April 7, 1997.

        On August 6, 1996, the Company's Datastorm subsidiary secured
      construction financing from a bank of up to $5.0 million with an interest
      rate equal to the bank's commercial base rate, currently 8.25%, secured by
      the Columbia, Missouri building and guaranteed by the Company. The
      principal amount plus any unpaid interest is due February 7, 1997.

        On December 19, 1996, the Company's revolving credit facility with Bank
      of America was amended, and the bank waived the Company's non-compliance
      with certain financial covenants therein for the quarter ended September
      30, 1996. The Company may borrow the lesser of 65% of Eligible Accounts
      Receivable or $15 million.

      NOTE 14.  BUILDING AND NOTE RECEIVABLE FROM RELATED PARTY

        Prior to merging with the Company, Datastorm loaned to a partnership,
      whose partners were Datastorm shareholders, funds which the partnership
      used to commence the construction of a new building which now houses
      Datastorm. At September 30, 1995, the partnership owned the building. The
      note bore interest at the applicable federal midterm rate and was payable
      on demand. The advances were carried in note receivable from related party
      on the balance sheet. The partners are now shareholders and consultants of
      the Company. In connection with the acquisition, the Company was obligated
      to acquire the building from the partnership. During the quarter ended
      June 30, 1996, the Company completed the acquisition of the building in
      exchange for, among other things, cancellation of the note receivable.

      NOTE 15.  CONVERTIBLE PREFERRED STOCK

        On September 30, 1996, the Company issued 200,000 shares of Series B
      Convertible Preferred Stock, stated value $100 per share (the "Series B
      Preferred Stock"), and a warrant (the "Warrant") to acquire shares of
      Common Stock of the Company for $20 million in cash. The securities were
      issued to an institutional investor in an overseas offering pursuant to
      Regulation S of the Securities Act of 1933, as amended.

        The Series B Preferred Stock is convertible into shares of Common Stock
      on or after November 15, 1996 and will automatically convert into Common
      Stock on September 30, 2002 to the extent any shares of Series B Preferred
      Stock remain outstanding at that time. Each share of Series B Preferred
      Stock is convertible into the number of shares of Common Stock equal to
      the quotient of (i) $100.00 divided by (ii) the Conversion Price. The
      Conversion Price is the lesser of (i) 101% of the average of the daily
      volume-weighted average prices of the Common Stock on the Nasdaq National
      Market System (the "Market Price") during the 40 trading day period ending
      two trading days before the date on which the Company receives a notice of
      conversion from a holder of the Series B Preferred Stock (the "Conversion
      Date"), and (ii) 125% of the average of the Market Price of the Common
      Stock during the first five trading days of the 40 trading day period
      ending two trading days before the Conversion Date. Assuming a Conversion
      Price of $5.3365 (based on 101% of the average of the Market Price for the
      40 trading day period ending on December 12, 1996), each share of Series
      B Preferred Stock would be convertible into 18.74 shares of Common Stock,
      or an aggregate of 3,747,802 shares of Common Stock upon conversion of all
      shares of Series B Preferred Stock.

        If stockholder approval of the issuance of Common Stock pursuant to the
      conversion of the Series B Preferred Stock and exercise of the Warrant is
      required either because the number of shares so issuable would equal or
      exceed 20% of the number of shares of Common Stock outstanding on
      September 30, 1996, or the number of shares issuable pursuant to
      conversion or exercise notices received would exceed the number of then
      authorized but unissued shares of Common Stock not reserved for other
      issuances, the Series B Preferred Stock will not be convertible with
      respect to the number of shares of Common Stock that would cause either
      (a) the 20% threshold to be exceeded or (b) the number of authorized but
      unissued shares to be exceeded, and the 


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<PAGE>   68
      Company will be required to seek the necessary stockholder approval. If
      such stockholder approval is not obtained within specified periods of
      time, the Company will be required, to the extent permitted by applicable
      law, to redeem the number of shares of Series B Preferred Stock that could
      not be converted for a redemption price of $100.00 per share as soon as
      practicable, but in no event no later than September 30, 2001. Although
      the Preferred Stock was not convertible at September 30, 1996, the Company
      would have had adequate shares to satisfy a conversion, based upon the
      closing stock price at that date. In the event the Company does not have
      adequate shares, the amount of Preferred Stock which could not be
      converted would be reclassified to redeemable Preferred Stock.

        The Warrant may be exercised from and after March 30, 1998 (or earlier
      if certain mergers, acquisitions or combinations (a "Combination") occur
      prior to that date) for a number of shares of Common Stock determined by
      dividing (i) 12,666,667 by (ii) the Exercise Price; provided that the
      number of shares of Common Stock issuable upon exercise in full of the
      Warrant shall not be less than 567,885 nor greater than 1,703,653. The
      Exercise Price per share will be equal to 150% of the daily
      volume-weighted average prices of the Common Stock for the period from,
      and including September 30, 1996, to, and including, April 30, 1997, but
      in any event shall not be less than $7.435 per share nor greater than
      $22.305 per share. Notwithstanding the foregoing, if the Warrant becomes
      exercisable prior to April 30, 1997 as a result of the occurrence of a
      Combination, the Exercise Price shall be $10.037 and the number of shares
      of Common Stock to be issued upon exercise of the Warrant shall be
      1,200,000 shares.

        In connection with the issuance of the Series B Preferred Stock and the
      Warrant, the Company amended the Rights Agreement dated August 11, 1992
      (the "Rights Agreement") (Note 8) between the Company and Bank of America,
      National Trust and Savings Association, as rights agent, to provide that
      the institutional investor that acquired the Series B Preferred Stock and
      Warrant will not be deemed to be an Acquiring Person (as defined in the
      Rights Agreement) as a result of its acquisition of the Series B Preferred
      Stock, the Warrant or any shares of Common Stock received upon conversion
      of the Series B Preferred Stock or exercise of the Warrants; provided,
      however, if the institutional investor becomes the Beneficial Owner (as
      defined in the Rights Agreement) of any additional number of shares of
      Common Stock in excess of 5% of the outstanding shares of Common Stock
      other than as a result of the conversion of the Series B Preferred Stock
      and/or exercise of this Warrant, then the institutional investor will be
      deemed to be an Acquiring Person.

      NOTE 16.  LIQUIDITY

        At September 30, 1996, the Company's cash and short-term investments
      totaled $25,554,000, compared to $39,669,000 at September 30, 1995. In
      addition, working capital at September 30, 1996 amounted to a deficit of
      $4,684,000, a decrease of $34,174,000 as compared to $29,490,000 at
      September 30, 1995.

        During 1996, the Company utilized $49,750,000 of cash in operating
      activities. In addition, approximately $24,173,000 of cash was utilized
      relating to fixed asset and software additions. This was financed by sales
      of marketable securities of $34,285,000, the issuance of $25,000,000 of
      convertible notes, $20,000,000 of Series B preferred stock and notes
      payable to banks of $8,280,000.

        Although the Company has negative working capital at September 30, 1996,
      and has incurred significant operating losses, the Company believes
      existing cash and cash equivalents, plus funds provided by operations,
      borrowing capacity under the line of credit and projected borrowing
      against, or sale of, real estate should be sufficient to fund operations
      for the coming twelve months. Nevertheless, the Company is presently
      exploring various financing alternatives, including equipment financing,
      secured debt, convertible debt, additional sales of equity securities and
      the sale of certain of its prior investments in order to finance the core
      business of the Company and help provide adequate working capital for
      operations. In addition, the expense reductions resulting from the
      restructuring are anticipated to provide additional funds from operations
      in future quarters. However, there is no assurance that increased sales
      will occur or that any such increase will result in adequate operating
      funds, or that such additional financing will be available, or if
      available, will be available on acceptable terms. Should product shipments
      be delayed or should the Company experience significant shortfalls in
      planned revenues, or not achieve sufficient cost savings as a result of
      the restructuring, or experience unforeseen fixed expenses, the Company
      believes it has the ability to make additional reductions to variable
      expenses to extend its capital. Accordingly, the Company believes it has
      sufficient capital to fund operations through Fiscal 1997. Any decision or
      ability to obtain financing through debt or through equity investment will
      depend on various factors, including, among others, financial market
      conditions, strategic acquisition and investment opportunities, and
      developments in the Company's markets. The sale of additional equity
      securities or future conversion of any convertible debt would result in
      additional dilution to the Company's stockholders.


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<PAGE>   69
                    QUARTERDECK CORPORATION AND SUBSIDIARIES
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                  YEAR ENDED SEPTEMBER 30, 1996, 1995 AND 1994
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                      BALANCE      ADDITIONS
                                                                        AT           CHARGED                            BALANCE
SEPTEMBER                                                            BEGINNING         TO                                AT END
   30,                         ITEM                                 OF THE YEAR     EXPENSES        DEDUCTIONS        OF THE YEAR
---------                      ----                                 -----------    ----------       ----------        -----------
<S>                                                                    <C>          <C>             <C>                <C>    
     1996            Allowance for
                       doubtful accounts...........................    $  870       $ 1,903         $  (741)(1)        $ 2,032
     1995            Allowance for
                       doubtful accounts...........................       803           333            (266)(1)            870
     1994            Allowance for
                       doubtful accounts...........................       724           265            (186)(1)            803

     1996            Inventory obsolescence
                       reserve.....................................       676         3,914            (612)             3,978
     1995            Inventory obsolescence
                       reserve.....................................     1,086           119            (529)               676
     1994            Inventory obsolescence
                       reserve.....................................       633           453              --              1,086

     1996            Sales returns and marketing
                       development fund reserve....................     4,331        43,562         (36,906)(2)         10,987
     1995            Sales returns and marketing
                       development fund reserve....................     2,823         8,205          (6,697)(2)          4,331
     1994            Sales returns and marketing
                       development fund reserve....................     3,941         7,510          (8,628)(2)          2,823
</TABLE>



(1)  Uncollectible accounts written off, net of recoveries.

(2)  Products returned and reduction of reserve.


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<PAGE>   70
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                                              SEQUENTIAL
EXHIBIT                                DESCRIPTION                            PAGE NUMBER
-------                                -----------                            -----------
<S>                    <C>                                                    <C>
 3.2          Certificate of Amendment of Certificate of Incorporation
              of the Company

 3.4          Amended Designations of Series A Junior Participating
              Preferred Stock of the Company

10.5          Consulting Agreement between the Company, King R. Lee &
              Associates, Inc. and King R. Lee, dated as of August 27,
              1996.

10.10         Employment Agreement between the Company and Bradley D.
              Schwartz, dated as of January 16, 1995.

10.11         Employment Agreement between the Company and Anatoly
              Tikhman, dated as of July 24, 1996.

10.12         Employment Agreement between the Company and Joe Fusco,
              dated as of September 16, 1996.

10.29         Third Amendment to the Credit Agreement dated as of
              September 30, 1996, and incorporated by reference.

10.30         Waiver and Fourth Amendment to the Credit Agreement dated as of
              December 17, 1996.

21.1          Subsidiaries of the Company.

23.1          Accountant's Consent

27            Financial Data Schedule
</TABLE>


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