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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K
                            ------------------------
(MARK ONE)

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                       OR

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

         FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .

                         COMMISSION FILE NO. 000-26937

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

<TABLE>
<S>                                            <C>
                 CALIFORNIA                                     33-0231678
       (STATE OR OTHER JURISDICTION OF                       (I.R.S. EMPLOYER
       INCORPORATION OR ORGANIZATION)                       IDENTIFICATION NO.)
          8001 IRVINE CENTER DRIVE
             IRVINE, CALIFORNIA                                    92618
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 754-8000

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

    SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK

     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.  [ ]

     As of March 19, 2001, 87,199,236 shares of the Registrant's Common Stock
were outstanding. The aggregate market value of the common stock held by
nonaffiliates of the Registrant as of March 19, 2001 was approximately $668.2
million.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant's definitive proxy statement, to be delivered to
shareholders in connection with the Registrant's 2001 Annual Meeting of
Shareholders, are incorporated by reference into Part III of this Report.

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                               TABLE OF CONTENTS

<TABLE>
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                                                                        PAGE
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<S>       <C>                                                           <C>
                                   PART I
Item 1.   Business....................................................    1
Item 2.   Properties..................................................    9
Item 3.   Legal Proceedings...........................................    9
Item 4.   Submission of Matters to a Vote of Security Holders.........    9
                                  PART II
Item 5.   Market for the Registrant's Common Equity and Related
          Shareholder Matters.........................................   10
Item 6.   Selected Financial Data.....................................   11
Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations...................................   12
Item 7a.  Quantitative and Qualitative Disclosures About Market
          Risk........................................................   23
Item 8.   Financial Statements and Supplementary Data.................   25
Item 9.   Changes in and Disagreements With Accountants on Accounting
          and Financial Disclosures...................................   25
                                  PART III
Item 10.  Directors and Executive Officers of the Registrant..........   26
Item 11.  Executive Compensation......................................   26
Item 12.  Security Ownership of Certain Beneficial Owners and
          Management..................................................   26
Item 13.  Certain Relationships and Related Transactions..............   26
                                  PART IV
Item 14.  Exhibits, Financial Statement Schedule, and Reports on Form
          8-K.........................................................   26
SIGNATURES............................................................   28
FINANCIAL STATEMENTS..................................................  F-1
FINANCIAL STATEMENT SCHEDULE
</TABLE>

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FORWARD-LOOKING INFORMATION

     Some of the matters discussed under the captions "Business," "Risk
Factors," and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" include or may include forward-looking statements within
the meaning of the federal securities laws. We have based these forward-looking
statements on currently available information and our current beliefs,
expectations and projections about future events. All forward-looking statements
contained herein are subject to numerous risks and uncertainties. Our actual
results and the timing of certain events could differ materially from those
projected in the forward looking statements due to a number of factors discussed
under the heading "Risk Factors" in this Report and in our other filings with
the Securities and Exchange Commission. Should one or more of these risks or
uncertainties materialize, or should the underlying estimates or assumptions
prove incorrect, actual results or outcomes may vary significantly from those
suggested by forward looking information.

                                     PART I

ITEM 1. BUSINESS

OVERVIEW

     Quest Software provides application and database management software
solutions that enhance our customers' return on their information technology
("IT") investments by maximizing availability, improving performance, maximizing
the effectiveness of IT personnel and improving the quality of business critical
applications. Our product families are designed to meet the availability and
performance requirements of our customers' most critical applications. Each
product family consists of an integrated suite of software tools that enable IT
organizations to manage and administer packaged and internally developed
business applications and the databases on which they run. The types of
applications Quest supports with its products include: financial reporting
systems, ERP (enterprise resource planning) systems, CRM (customer relationship
management) systems, B2B (business to business) e-commerce systems, human
resources systems, supply chain management systems and corporate messaging
systems. These applications all run on large, complex and constantly expanding
databases, primarily Oracle, Microsoft SQL Server and IBM's DB2 systems.

     Over the course of the last five years, Quest has evolved its leadership
position in the Oracle tools and utilities market into leadership in providing a
wide range of application and information availability solutions. Quest now
provides a broad portfolio of products that are grouped into five solution
categories: High Availability, Application Monitoring, Database Management, SQL
Development, and Report Management. Quest has expanded its product portfolio
significantly through both internal development efforts and strategic
acquisitions. Key developments in 2000 included:

     - Our entry into the IBM DB2 market by introducing Quest Central for DB2, a
       suite of database management solutions with functionality focused on the
       performance monitoring, tuning, space management and administration
       elements of database management.

     - Our entry into the Windows systems management market by introducing
       monitoring and tuning solutions for Microsoft Exchange and SQL Server. In
       September 2000, we augmented our internal development efforts for the
       Microsoft platforms by acquiring FastLane Technologies, Inc., a provider
       of directory management software with solutions for Windows 2000
       migration, deployment and management. We believe FastLane's position in
       the directory management solutions market will serve as a foundation for
       our entry into the Microsoft solutions and systems management market.

     - Our introduction of LiveReorg, a unique software solution that provides
       users with the ability to perform non-intrusive, downtime-free
       maintenance of Oracle databases, and SQLab Vision(TM), a tuning solution
       designed to quickly identify and resolve performance problems in
       mission-critical, Oracle-based applications.

     - Our entry into the market for management and monitoring of heterogeneous,
       multi-platform customer environments by acquiring Foglight Software,
       Inc., a developer of application monitoring solutions. We

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       have significantly added or enhanced the core Foglight solutions by
       adding diagnostic, tuning and load testing capabilities. In addition, we
       have dedicated significant development resources to creating versions of
       Foglight for a variety of applications and database platforms.

     - Our strengthening and expansion of our performance and information
       availability solutions for leading ERP and CRM applications, e-commerce
       and Web applications and the underlying databases that support these
       applications.

INDUSTRY BACKGROUND

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

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

     - Internal end-users and customers demand relevant information immediately
       and without interruption, and have increasingly high expectations
       regarding response time;

     - New software applications must be developed, and existing applications
       need to be modified frequently to cope with changes in the business
       environment; and

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

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

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

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

  Application Availability

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

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  Information Availability

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

  Need for a Comprehensive Solution

     The effectiveness of an organization's information delivery system is
dependent on the reliability and constant availability of its applications. An
application is useless if it is not available to end-users. This criticality
becomes increasingly acute as networked computing, fueled by the Internet,
proliferates. Customers and employees require and expect full time access to a
company's IT systems. A user's ability to access information is linked to the
performance and reliability of the underlying application. Historically,
organizations have relied on a combination of manual processes and a
heterogeneous assortment of software tools to manage the performance and
reliability of their application infrastructure and to enable the distribution
of information throughout the enterprise. However, the requirements of today's
e-business initiatives have stretched the capabilities of these traditional
solutions. This dynamic environment has created the need for a comprehensive
solution that will address the breadth of these application and information
availability requirements:

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

     - Provide high performance and reliability for 24 X 7 X 365 access, and
       minimize the strain on existing systems and personnel;

     - Enable organizations to support an increasing number of business
       applications without adding significant new technical staff;

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

     - Adapt to accommodate rapidly changing business needs;

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

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

THE QUEST SOLUTION

     Quest Software is a leading provider of application management solutions
designed to maintain the integrity of mission-critical business transactions and
maximize the performance of enterprise applications. Our solutions address the
needs of today's around-the-clock businesses where demands on the information
technology infrastructure are high and tolerance for downtime is low. The
Internet has propagated the expectation of instant access to information, and
Quest delivers the solutions necessary to meet this demand.

     One of the most significant benefits afforded by Quest solutions is derived
from their ease of use and implementation. Software that is difficult to
implement or use often does not deliver the value promised. A primary design
goal for Quest products is to provide a quick return on investment. We believe
our products

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can, in many cases, allow for more efficient and productive use of employee and
IT resources. Key elements of our solution include:

  Application Availability

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

  Extend the Reach of Information

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

  Leverage the Web

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

  Maximize Investment in Existing Technology

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

  Easy to Deploy and Use

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

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  Architected to Scale

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

SALES, MARKETING AND DISTRIBUTION

     We market and sell our products and services worldwide to end users
primarily through our direct sales organization. At December 31, 2000, we had
333 direct sales representatives. Our direct sales force is multi-tiered,
ranging from named account enterprise sales representatives to a large telesales
organization that concentrates on lower price point products. We invested
significantly in our direct sales organization in 2000, both in headcount and in
expansion of offices. We opened six new field offices domestically in 2000 as
well as international offices in France, Spain, Sweden, Denmark, Norway, Brazil,
Mexico, Calgary, Nova Scotia and Ottawa. We are now actively supplementing this
direct sales organization with indirect sales channels such as resellers, value
added resellers, and systems integrators and are investing significantly in
building out this channel in 2001. We also market products through independent
distributors in international territories not covered by our direct sales
organization.

     Our domestic sales organization is headquartered in Irvine, California. We
have additional sales offices located in the metropolitan areas of Atlanta,
Boston, Chicago, Dallas, New York, San Francisco and Washington D.C. We also
have international sales offices in the metropolitan areas of Frankfurt, Munich,
Paris, Stockholm, Amsterdam, London and Melbourne. We are continuing to expand
our sales organization and establish additional sales offices domestically and
internationally. We also sell certain of our products through our Web site,
which allows our customers to conveniently download our products for evaluation
and direct purchase.

     Our sales and marketing approach is designed to help customers understand
both the business and technical benefits of our products. Much of our sales
activity involves cost-free product trials for a limited period, typically 30
days, during which a customer can experience the benefits of our products. We
complement the efforts of our sales organization with a pre-sale customer
support organization that is responsible for addressing technical questions
related to our products. The sales team for each customer is responsible for
maintaining appropriate contacts with key information technology personnel who
have planning and purchasing responsibility within the customer's organization.
Since a number of our products affect systems and employees throughout the
enterprise, our sales effort typically involves technology presentations and
pilot implementations, and many times involve numerous decision makers. As a
result, a key feature of our sales efforts is to establish relationships at all
appropriate levels in our customers' organizations. While the sales cycle varies
substantially from customer to customer, the typical sales cycle for our Vista
Plus and SharePlex products has ranged from three to nine months.

     Focusing on our target markets, our marketing efforts are designed to
create awareness for our products and generate sales leads. To achieve these
goals, we promote our technical leadership, participate in industry trade shows,
technical conferences and technology seminars, publish technical and educational
articles in industry journals and engage in a variety of other marketing
activities, including direct mailings and print and Web-based advertising.

     Our professional services organization complements our direct sales
organization by providing customers with a full range of support services,
including pre-sales demonstrations, evaluations, implementations, consulting
services, training and ongoing technical support. We believe that professional
services are becoming important to customer satisfaction and the development of
customer relationships.

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CUSTOMER SERVICE AND SUPPORT

     A high level of customer service and support is critical to the successful
marketing and sale of our products and the development of long-term customer
relationships. We have a reputation for providing the highest level of customer
support and believe this is a competitive differentiator. Our customer support
group provides ongoing technical support to our customers after implementation
of the product under support agreements entered into at the time of the initial
sale. Our base level of e-mail-, Internet-, fax-, and telephone-based support
includes ongoing support during normal business hours; and software maintenance
and upgrade releases. For an additional fee, we provide support on a 24 X 7
basis as well as training and other services.

     Customer support is provided domestically through our offices in Irvine and
internationally through our offices in Europe and Australia. In 2000 we
implemented a packaged CRM application to help maintain our high quality of
service as we continue to grow. We plan to hire additional support personnel
and, as needed, establish additional support sites domestically and
internationally to meet our customers' needs.

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

RESEARCH AND DEVELOPMENT

     We believe that strong research and product development capabilities are
essential to enhancing our core technologies and developing additional products
that combine ease of use and enhance return on IT infrastructure investments.
Highly innovative product design and strong product engineering are Quest
hallmarks. Our commitment to ongoing product development is reflected in our
level of investment in research and development, which we believe is at the high
end of the range for our peer companies. Research and development expenditures
were $8.0 million, $16.0 million and $39.7 million for the years ended December
31, 1998, 1999 and 2000, respectively. We have actively recruited key software
engineers and developers with expertise in the areas of Oracle technologies,
Java, Microsoft development technologies, ERP and CRM systems, IBM database
technologies and document management. Our engineers include several of the
industry's leading database management authorities. Complementing these
individuals, our senior management has extensive background in the database,
network infrastructure and enterprise and system software industries.

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

COMPETITION

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

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

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

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     - the quality of our customer support; and

     - the effectiveness of our sales and marketing efforts.

     Companies currently offering competitive products vary in the scope and
breadth of the products and services offered and include:

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

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

     - providers of database and database management products such as BMC,
       Compuware, Oracle, Computer Associates, Embarcadero and Precise; and

     - providers of Windows NT management and migration tools, such as NetIQ and
       BindView.

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

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

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

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

PROPRIETARY RIGHTS

     Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology. We rely on a combination
of trademark, trade secret, copyright law and contractual restrictions to
protect the proprietary aspects of our technology. We currently hold several
trademark registrations and have numerous trademark applications in the United
States and certain foreign countries. We seek to protect our source code for our
software, documentation and other written materials under trade secret and
copyright laws. We license our software pursuant to signed or shrink-wrap
license agreements, which impose restrictions on the licensee's ability to
utilize the software. Finally, we seek to avoid disclosure of our

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intellectual property by requiring employees and consultants with access to our
proprietary information to execute confidentiality agreements with us and by
restricting access to our source code.

EMPLOYEES

     As of December 31, 2000, we employed 1,431 full-time employees, including
658 in sales and marketing, 492 in research and development, 104 in customer
service and support and 177 in general and administrative. We believe that our
future success will depend in large part upon our continuing ability to attract
and retain highly skilled managerial, sales, marketing, customer support and
research and development personnel. Like other software companies, we face
intense competition for such personnel, and we have at times experienced and
continue to experience difficulty in recruiting qualified personnel. There can
be no assurance that we will be successful in attracting, assimilating and
retaining other qualified personnel in the future. We are not subject to any
collective bargaining agreement and we believe that our relationships with our
employees are good.

EXECUTIVE OFFICERS OF THE REGISTRANT

     The names of our executive officers and other information about them are
shown below.

<TABLE>
<CAPTION>
            NAME                AGE                         POSITION
            ----                ---                         --------
<S>                             <C>    <C>
Vincent C. Smith............    37     Chief Executive Officer and Chairman of the Board
David M. Doyle..............    40     President, Secretary and Director
M. Brinkley Morse...........    43     Vice President, Finance and Operations
Eyal M. Aronoff.............    37     Chief Technical Officer, DB Tools
Douglas F. Garn.............    42     Vice President, Worldwide Sales
Marshall I. Senk............    37     Vice President, Marketing
</TABLE>

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

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

     David M. Doyle is our President, Secretary, founder and a director. Mr.
Doyle has been President and a director since the formation of Quest in 1987 and
has been our Secretary since June 1999. Mr. Doyle was the primary designer and
developer of our products during the initial four years after the founding of
Quest. Prior to the founding of Quest, Mr. Doyle served as a consultant to a
variety of industries, specializing in the areas of system design and
application performance, and co-founded American Data Industries.

     M. Brinkley Morse is our Vice President, Finance and Operations. Mr. Morse
has held this position since January 2001. Before joining Quest, Mr. Morse
served as Senior Vice President, Corporate Development and Secretary of BMC
Software from September 1998 to August 2000, and he served as General Counsel
and Secretary of BMC from November 1988 to September 1998.

     Eyal M. Aronoff is our Chief Technical Officer, DB Tools, and has held this
position since September 2000. From March 1996 to September 2000, Mr. Aronoff
was our Vice President of Technology and Engineering. Mr. Aronoff founded R*Tech
Systems, a database management company, in 1992 and served as its President from
1992 to 1996, when we acquired this company. Prior to this, Mr. Aronoff worked
for John Bryce Ltd., an Oracle distributor in Israel, and served in the Israeli
Defense Force.

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

     Marshall I. Senk is our Vice President of Marketing. Prior to joining Quest
Software in August 2000, Mr. Senk spent five years as managing director and
senior research analyst covering the e-business software sector for Robertson
Stephens. Previous to Robertson Stephens, Mr. Senk held a number of positions at
Oracle Corporation over the span of six years, most recently director of product
management for the desktop product line as well as positions in corporate
marketing and application development.

ITEM 2. PROPERTIES

     Our principal administrative, sales, marketing, support and research and
development facilities are currently located in approximately 132,500 square
feet of space in Irvine, California. One of these facilities is under a six-year
lease which includes an option to renew this lease for an additional five-year
term. The other facility is under a 3 1/2 year lease.

     We also lease sales offices in several major metropolitan areas of the
U.S., including Atlanta, Boston, Chicago, Dallas, New York, San Francisco and
Washington, D.C. Our Canadian subsidiaries currently operate from three leased
facilities in Calgary, Alberta; Ottawa, Ontario and Halifax, Nova Scotia. Our
German subsidiary currently operates from two facilities in Frankfurt and
Dusseldorf. Our Australian subsidiary operates from two leased facilities in
Melbourne which total approximately 10,000 square feet. Our UK subsidiary leases
a 5,300 square-foot office in the London metropolitan area.

ITEM 3. LEGAL PROCEEDINGS

     We are involved from time to time in a variety of legal and administrative
proceedings and claims which arise in the ordinary course of business. While the
outcome of these claims can not be predicted with certainty, we do not believe
that the outcome of any currently pending legal matters will have a material
adverse effect on Quest.

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

     No matters were submitted to a vote of security holders during the fourth
quarter of 2000.

                                        9
<PAGE>   12

                                    PART II

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

     Our common stock has been listed on the Nasdaq National Market since August
13, 1999 under the symbol "QSFT." The following table sets forth the high and
low sale prices on the Nasdaq National Market for our common stock for the
periods indicated. All prices are adjusted to reflect our two-for-one stock
split effected in March 2000.

<TABLE>
<CAPTION>
                                                               PRICE RANGE
                                                             OF COMMON STOCK
                                                             ----------------
                                                              HIGH      LOW
                                                             ------    ------
<S>                                                          <C>       <C>
1999:
  Third Quarter (from August 13)...........................  $26.19    $16.28
  Fourth Quarter...........................................   58.25     27.94
2000:
  First Quarter............................................  $98.13    $36.50
  Second Quarter...........................................   60.63     23.63
  Third Quarter............................................   69.56     43.50
  Fourth Quarter...........................................   64.38     25.63
</TABLE>

     On March 19, 2001, the closing price of our common stock on the Nasdaq
National Market was $20.06 per share. As of March 19, 2001, there were 355
holders of record of our common stock (not including beneficial holders of
shares held in "street name").

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

                                        10
<PAGE>   13

ITEM 6. SELECTED FINANCIAL DATA

     You should read the following selected consolidated financial data in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
related notes thereto appearing elsewhere in this Report. The following selected
consolidated statement of operations data for the years ended December 31, 1998,
1999 and 2000, and the consolidated balance sheet data at December 31, 1999 and
2000, have been derived from audited consolidated financial statements included
elsewhere in this Report. The consolidated data presented below for the years
ended December 31, 1996 and 1997, and at December 31, 1996, 1997 and 1998, are
derived from audited consolidated financial statements that are not included in
this Report. The data presented below do not include pro forma adjustments to
reflect the income tax provision as if we were a C corporation in fiscal year
1996.

<TABLE>
<CAPTION>
                                                                        YEARS ENDED DECEMBER 31,
                                                            ------------------------------------------------
                                                             1996      1997      1998      1999       2000
                                                            -------   -------   -------   -------   --------
                                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                         <C>       <C>       <C>       <C>       <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
  Licenses................................................  $ 9,316   $12,158   $24,901   $54,269   $126,767
  Services................................................    3,546     6,157     9,889    16,599     38,820
                                                            -------   -------   -------   -------   --------
         Total revenues...................................   12,862    18,315    34,790    70,868    165,587
Cost of revenues:
  Licenses................................................      950     1,307     3,433     2,998      3,571
  Services................................................    1,467     1,972     2,507     4,195     10,695
  Amortization of purchased intangible assets.............       --        --        --        --      5,038
                                                            -------   -------   -------   -------   --------
         Total cost of revenues...........................    2,417     3,279     5,940     7,193     19,304
Gross profit..............................................   10,445    15,036    28,850    63,675    146,283
Operating expenses:
  Sales and marketing.....................................    4,328     5,845    11,836    32,078     77,641
  Research and development................................    2,995     4,293     8,047    15,980     39,747
  General and administrative..............................    3,494     3,450     5,278     9,906     17,679
  Other compensation costs and goodwill amortization......       --        --        --     1,243     41,092
                                                            -------   -------   -------   -------   --------
         Total operating expenses.........................   10,817    13,588    25,161    59,207    176,159
                                                            -------   -------   -------   -------   --------
Income (loss) from operations.............................     (372)    1,448     3,689     4,468    (29,876)
Interest income...........................................       17        72       372     1,501     13,535
Other income (expense), net...............................      372      (209)      (36)     (299)    (1,932)
                                                            -------   -------   -------   -------   --------
Income (loss) before income tax provision.................       17     1,311     4,025     5,670    (18,273)
Income tax provision......................................        1     1,022     1,679     2,273      6,805
                                                            -------   -------   -------   -------   --------
Net income (loss).........................................       16       289     2,346     3,397    (25,078)
Preferred stock dividends(1)..............................       --        --        --       590         --
                                                            -------   -------   -------   -------   --------
Net income (loss) applicable to common shareholders.......  $    16   $   289   $ 2,346   $ 2,807   $(25,078)
                                                            =======   =======   =======   =======   ========
Basic net income (loss) per common share..................  $  0.00   $  0.00   $  0.03   $  0.04   $  (0.29)
Diluted net income (loss) per common share................  $  0.00   $  0.00   $  0.03   $  0.03   $  (0.29)
Weighted-average common shares outstanding:
  Basic...................................................   76,700    80,746    88,522    75,354     85,332
  Diluted.................................................   76,700    81,234    88,918    83,600     85,332
</TABLE>

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

(1) Represents cash dividends paid in 1999 to holders of shares of Series B
    Redeemable Preferred Stock, all of which were redeemed in connection with
    our initial public offering in August 1999.

<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                            ------------------------------------------------
                                                             1996      1997      1998      1999       2000
                                                            -------   -------   -------   -------   --------
                                                                             (IN THOUSANDS)
<S>                                                         <C>       <C>       <C>       <C>       <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................................  $    --   $ 2,096   $ 8,981   $39,643   $ 25,155
Short-term marketable securities..........................       --        --        --    11,000      8,587
Working capital...........................................      553       374     2,771    38,670     29,887
Total assets..............................................    6,408     9,713    19,645    99,149    534,172
Long-term obligations.....................................       --        --        --       403      6,422
</TABLE>

                                        11
<PAGE>   14

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and notes to those statements included elsewhere in this Report.

OVERVIEW

     We provide application management software solutions that enhance our
customers' return on IT investment dollars by maximizing availability, improving
performance, maximizing the effectiveness of IT personnel and improving the
quality of business critical applications. Our product families are designed to
meet the availability and performance requirements of our customers' most
critical applications. Each product family consists of an integrated suite of
software tools that enable personnel to manage and administer complex database
systems and business applications, both packaged and custom developed. These
applications can include ERP (enterprise resource planning) systems, CRM
(customer relationship management) systems, B2B (business to business)
e-commerce systems, corporate messaging and Internet and web-based applications.
We enable organizations to leverage IT infrastructure investments by maximizing
the performance and availability of enterprise applications with solutions for
High Availability, Application Monitoring, Database Management, SQL Development,
and Report Management.

     Our acquisitions of Foglight Software, Inc. (Foglight) and FastLane
Technologies, Inc. (FastLane) were highlights of 2000, a year in which we
experienced significant growth in our sales, support, professional services and
research and development headcount and expanded our executive management and
administrative team to meet the needs of our customers and employees worldwide.
Our integration activities relative to these acquisitions during 2000 has been
primarily dedicated to modifying, enhancing, testing, documenting and otherwise
integrating acquired technologies into our product offerings. We have dedicated
significant development resources to create versions of Foglight for a variety
of applications and database platforms, and have used FastLane's position in the
directory management solutions market as a platform on which to promote our
entry into the Microsoft solutions and systems management market. We believe
these integration activities, together with our internal research and
development efforts, will help us position Quest as the leading provider of
application management solutions, with a comprehensive set of software solutions
supporting the leading database platform vendors with specific solutions for
leading business-critical applications.

     All of our acquisitions in 2000 were accounted for under the purchase
method of accounting, and our operating results reflect the activities of
acquired business only from their respective acquisition dates. As a result of
our acquisitions in 2000, we recorded goodwill and purchased intangible assets
of approximately $285.4 million in total. These assets are being amortized over
their estimated useful lives, and will result in charges to operations of at
least $15.0 million per quarter through the second quarter of 2003. For the year
ended December 31, 2000, we incurred a net loss due to the amortization of
goodwill and purchased intangible assets related to these acquisitions. These
acquisitions also contributed to increases in all operating expense categories,
and the impact of acquisitions on operating expenses may be greater in 2001,
which will reflect a full year of operations. Due to the integration that has
taken place to date, it is not possible to quantify the portion of increases in
revenues or operating expenses attributable to these acquisitions.

     We derive our revenues primarily from the sale of software licenses and
related annual maintenance fees. Our total revenues have increased over each of
the past five fiscal years, from $12.9 million in 1996 to $165.6 million in
2000. Pricing of our software licenses is based on the number of servers,
workstations and/or users of our products. Services consist primarily of annual
maintenance contracts for technical support and product enhancements, and
consulting services.

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

                                        12
<PAGE>   15

     International revenues from licenses and services sold to customers outside
of North America were $2.7 million in 1998, $15.3 million in 1999 and $28.7
million in 2000. We intend to expand our international sales activities as part
of our business strategy. All of our current international revenues are derived
from the operations of our wholly owned international subsidiaries, which
consist of both direct sales and sales through distributors. Our international
subsidiaries conduct business in the currency of the country in which they
operate (with the exception of Mexico and Brazil where the U.S. Dollar is used),
exposing us to currency fluctuations and currency transaction losses or gains
which are outside of our control. Historically, fluctuations in foreign currency
exchange rates have not had a material effect on our business. We have not, to
date, conducted any hedging transactions to reduce our risk to currency
fluctuations.

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

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                              --------------------------
                                                               1998      1999      2000
                                                              ------    ------    ------
<S>                                                           <C>       <C>       <C>
Revenues:
  Licenses..................................................   71.6%     76.6%     76.6%
  Services..................................................   28.4      23.4      23.4
                                                              -----     -----     -----
          Total revenues....................................  100.0     100.0     100.0
                                                              -----     -----     -----
Cost of revenues:
  Licenses..................................................    9.9       4.2       2.2
  Services..................................................    7.2       5.9       6.5
  Amortization of purchased intangible assets...............     --        --       3.0
                                                              -----     -----     -----
          Total cost of revenues............................   17.1      10.1      11.7
                                                              -----     -----     -----
Gross profit................................................   82.9      89.9      88.3
Operating expenses:
  Sales and marketing.......................................   34.0      45.3      46.9
  Research and development..................................   23.1      22.6      24.0
  General and administrative................................   15.2      14.0      10.7
  Other compensation costs and goodwill amortization........     --       1.8      24.8
                                                              -----     -----     -----
          Total operating expenses..........................   72.3      83.7     106.4
                                                              -----     -----     -----
Income (loss) from operations...............................   10.6       6.2     (18.1)
Interest income.............................................    0.9       2.1       8.2
Other expense, net..........................................   (0.0)     (0.4)     (1.2)
                                                              -----     -----     -----
Income (loss) before income tax provision...................   11.5       7.9     (11.1)
Income tax provision........................................    4.8       3.2       4.1
                                                              -----     -----     -----
Net income (loss)...........................................    6.7%      4.7%    (15.2)%
                                                              =====     =====     =====
</TABLE>

     YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000

REVENUES

     Revenues were $34.8 million, $70.9 million and $165.6 million in 1998, 1999
and 2000, respectively, representing increases of $36.1 million, or 103.7%, from
1998 to 1999, and $94.7 million, or 134%, from 1999 to 2000. International
revenues accounted for 7.8%, 21.6% and 17.4% of total revenues for 1998, 1999
and 2000, respectively. No single customer accounted for more than 10% of total
revenues in 1998, 1999 or 2000.

                                        13
<PAGE>   16

     Licenses -- Licenses were $24.9 million, $54.3 million and $126.8 million
in 1998, 1999 and 2000, respectively, representing increases of $29.4 million,
or 118.1%, from 1998 to 1999, and $72.5 million, or 134%, from 1999 to 2000.
Licenses represented 71.6%, 76.6% and 76.6% of total revenues in 1998, 1999 and
2000, respectively. International licenses accounted for 5.8%, 23.4% and 19.0%
of total licenses in 1998, 1999 and 2000, respectively. The increase in licenses
from 1998 to 1999 was due to expansion of our worldwide sales force, as well as
the introduction of new products in 1999. The increase in licenses from 1999 to
2000 was due to continued expansion of our worldwide sales force, as well as
increased market acceptance of our software products and introduction of new
products.

     Services -- Services were $9.9 million, $16.6 million and $38.8 million in
1998, 1999 and 2000, respectively, representing increases of $6.7 million, or
67.7%, from 1998 to 1999, and $22.2 million, or 134% from 1999 to 2000. Services
represented 28.4%, 23.4% and 23.4% of total revenues in 1998, 1999 and 2000,
respectively. The increases in services reflect an increase in the number of
software licenses sold with maintenance agreements and renewals of maintenance
agreements on existing licenses, as well as increased consulting and training
revenues. International services accounted for 12.7%, 16.0% and 12.0% of total
services in 1998, 1999 and 2000, respectively.

COST OF REVENUES

     Cost of Licenses -- Cost of licenses was $3.4 million, $3.0 million and
$3.6 million in 1998, 1999 and 2000, respectively, representing a decrease of
$0.4 million, or 11.8%, from 1998 to 1999, and an increase of $0.6 million, or
20%, from 1999 to 2000. Cost of licenses as a percentage of license revenue was
13.8%, 5.5% and 2.8% for 1998, 1999 and 2000, respectively. The decrease in cost
of licenses from 1998 to 1999 was due to decreases for both royalties and
amortization as a result of reaching several royalty maximums and completion of
amortization of certain purchased technology. The increase in cost of licenses
from 1999 to 2000 was principally a result of an increase in product media,
duplication and printing costs. The decreases in cost of licenses as a
percentage of license revenues in 2000 resulted from increased license revenues
without a corresponding increase in amortization of acquired software licenses,
which does not vary by the number of licenses sold.

     Cost of Services -- Cost of services was $2.5 million, $4.2 million and
$10.7 million in 1998, 1999 and 2000, respectively, representing increases of
$1.7 million, or 68.0%, from 1998 and 1999, and $6.5 million, or 155%, from 1999
to 2000. Cost of services as a percentage of service revenues was 25.4%, 25.3%
and 27.6% for 1998, 1999 and 2000, respectively. The increases in cost of
services in these periods are primarily due to the increase in the number of
technical support personnel required to manage and support our growing customer
base as well as increased product offerings. We also formed a professional
services consulting organization during the first half of 2000, which did not
exist in 1998 or 1999. Our gross margins on services revenues could fluctuate in
the future, reflecting the timing differences between increasing our
organization investments and the corresponding revenue growth that we expect as
a result. We expect the cost of services to increase in absolute dollars for the
foreseeable future as additional customer support and consulting personnel are
hired.

     Amortization of Purchased Intangible Assets -- Amortization of purchased
intangible assets was $5.0 million in 2000, which includes amortization of the
fair value of acquired technology, workforce and customer lists associated with
the acquisitions made during 2000. There were no similar costs during 1998 and
1999.

OPERATING EXPENSES

     Sales and Marketing -- Sales and marketing expenses were $11.8 million,
$32.1 million and $77.6 million in 1998, 1999 and 2000, respectively,
representing increases of $20.3 million, or 172.0%, from 1998 to 1999, and $45.5
million, or 142%, from 1999 to 2000. The increases reflect our increasing
investment in our sales and marketing organization, which from 1998 to 1999
included an increase in salaries and related expenses of $8.9 million, a $4.3
million increase in commissions and a $0.6 million increase in marketing
communications expenses. The increases from 1999 to 2000 included an increase in
salaries and related expenses of $20.3 million, a $8.9 million increase in
commissions, $5.3 million increase in travel and related costs, and a

                                        14
<PAGE>   17

$1.6 million increase in promotional, conference and tradeshow expenses. We
intend to continue to expand our sales and marketing infrastructure in 2001 and,
as a result, expect sales and marketing expenses to increase in absolute
dollars.

     Research and Development -- Research and development expenses were $8.0
million, $16.0 million and $39.7 million in 1998, 1999 and 2000, respectively,
representing increases of $8.0 million, or 100.0%, from 1998 to 1999, and $23.7
million, or 148%, from 1999 to 2000. The increases for these periods were
primarily related to a 138-person increase from 1998 to 1999, and a 268-person
increase from 1999 to 2000 in the number of software developers and quality
assurance personnel. We believe significant investments in research and
development are required to remain competitive, and expect these expenses to
continue to increase in absolute dollars in 2001.

     General and Administrative -- General and administrative expenses were $5.3
million, $9.9 million and $17.7 million in 1998, 1999 and 2000, respectively,
representing an increase of $4.6 million, or 86.8%, from 1998 to 1999, and $7.8
million, or 78%, from 1999 to 2000. The most significant expense increases
during both periods were for salaries and related expenses, rent and
depreciation, which were the result of increased number of related personnel. We
expect general and administrative expenses to increase in absolute dollars as we
continue to enhance our infrastructure and support expansion of our operations.

     Other Compensation Costs and Goodwill Amortization -- Other compensation
costs and goodwill amortization was $1.2 million in 1999 and $41.1 million in
2000. Included in 1999 was $0.7 million related to the severance package
provided to one of our founders and a director, which will be paid out over a
three-year period, $0.4 million of compensation costs related to the grant of
stock options at less than fair market value and $0.1 million of goodwill
amortization related to acquisitions. In 2000, these costs consisted of $36.0
million of goodwill amortization related to the various acquisitions primarily
made during 2000, and $5.1 million in compensation costs primarily related to
the grant of stock options at less than fair market value. The majority of the
option grants at less than fair market value were made in 1999.

     Interest Income -- Interest income was $0.4 million, $1.5 million and $13.5
million in 1998, 1999 and 2000, respectively. The increases in 1999 and 2000
reflected higher cash and short-term investments, which accelerated after the
receipt of the net proceeds of our initial public offering in August 1999 and
our secondary offering in March 2000.

     Other Expense, Net -- Other expense, net was ($36,000) in 1998, $(0.3)
million in 1999 and $(1.9) million. Increases in other expense, net are
primarily the result of increased interest expense and foreign currency
translation losses.

     Provision for Income Taxes -- Provision for income taxes was $1.7 million,
$2.3 million and $6.8 million in 1998, 1999 and 2000, respectively, representing
increases of $0.6 million, or 35.3%, from 1998 to 1999, and $4.5 million, or
199%, from 1999 to 2000. The effective income tax rate was 41.7%, 40.1% and
(37.2)% in 1998, 1999 and 2000, respectively. Excluding amortization of
purchased intangible assets and other compensation costs and goodwill
amortization, the effective income tax rate for 2000 was 40%. See Note 6 of the
notes to our consolidated financial statements.

INFLATION

     Inflation has not had a significant effect on our results of operations or
financial position for the years ended December 31, 1998, 1999 and 2000.

LIQUIDITY AND CAPITAL RESOURCES

     We have funded our business, to date, primarily from cash generated by our
operations, net proceeds of $64.9 million from our initial public offering in
August 1999 and net proceeds of $253.5 million from our secondary offering in
March 2000. Our sources of liquidity as of December 31, 2000 consisted
principally of cash and cash equivalents of $25.2 million, and $126.7 million in
both short-and long-term high grade corporate and government marketable
securities.

                                        15
<PAGE>   18

     Net cash provided by operating activities was $8.2 million, $11.4 million
and $25.9 million in 1998, 1999 and 2000, respectively. The increases were
primarily due to increases in net income after excluding non-cash depreciation
and amortization expense and increases in income taxes payable and deferred
revenue, offset by increases in accounts receivable and deferred income taxes.

     Net cash used in investing activities was $1.3 million, $24.1 million and
$241.8 million in 1998, 1999, and 2000, respectively. The increase in cash used
in investing activities in 2000 was primarily related to net purchases of
marketable securities of $111.0 million, acquisitions of $82.1 million and
capital expenditures of $39.2 million. See note 2 to the consolidated financial
statements for discussion on acquisitions. Capital expenditures primarily
consisted of equipment and related purchases to support our worldwide expansion
and related infrastructure needs.

     Financing activities used $8,000 in 1998, and generated $43.6 million and
$201.1 million in 1999 and 2000, respectively. In April 1999, we raised $25.0
million through the sale of preferred stock and an additional $10.0 million in
term debt from a commercial bank in order to purchase shares of common stock
from a shareholder and founder for $35.0 million. See Note 4 of the notes to our
consolidated financial statements. In August 1999, we raised net proceeds of
$64.9 million from our initial public offering. A portion of the proceeds was
utilized to retire debt of $10.9 million and redeem the outstanding Series B
Preferred Stock for $10.0 million. In March 2000, we raised net proceeds of
$253.6 million from a secondary public offering of 8.4 million shares of our
common stock at a price of $70.00 per share. Of the shares sold in the offering
3.8 million shares were sold by the Company and 4.6 million shares were sold by
existing shareholders. The Company did not receive any proceeds from the shares
sold by the selling shareholders.

     In December 2000, the Board of Directors authorized a stock repurchase
program under which the Company may purchase up to two million shares of its
common stock. Under the repurchase program, the Company may purchase shares from
time to time at varying prices in open market or private transactions. As of
December 31, 2000, the Company had repurchased 1.7 million shares for $57.4
million under the plan.

     We believe that our existing cash, cash equivalents and investment balances
and cash flows from operations will be sufficient to finance our working capital
and capital expenditure requirements through at least the next 12 months. We may
require additional funds to support our working capital requirements, or for
other purposes, and may seek to raise additional funds through public or private
equity or debt financing or from other sources. If additional financing is
needed, we cannot assure you that such financing will be available to us on
commercially reasonable terms or at all.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In September 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133, as amended, is
effective for all fiscal years beginning after June 15, 2000, and establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
Under SFAS No. 133, certain contracts that were not formerly considered
derivatives may now meet the definition of a derivative which would be required
to be reported as assets or liabilities and carried at fair value. The Company
adopted SFAS No. 133 effective January 1, 2001. The adoption of SFAS No. 133 did
not have a significant impact on the financial position, results of operations,
or cash flows of the Company.

     On December 6, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
SAB No. 101 summarizes the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB No.
101 is effective for the fourth quarter in fiscal year 2000. The adoption of SAB
No. 101 did not have a material impact on the Company's financial statements, as
the Company believes its revenue recognition policies comply with SAB No. 101.

     In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting
for Certain Transactions Involving Stock Compensation -- an interpretation of
APB Opinion No. 25. FIN 44 clarifies the definition of

                                        16
<PAGE>   19

an employee for purposes of applying Accounting Principles Board Opinion (APB)
No. 25, Accounting for Stock Issued to Employees, the criteria for determining
whether a plan qualifies as a noncompensatory plan, the accounting consequence
of various modifications to the terms of a previously fixed stock option or
award, and the accounting for an exchange of stock compensation awards in a
business combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998 or January 12, 2000. The provisions of FIN 44 change the
accounting for an exchange of unvested employee stock options and restricted
stock awards in a purchase business combination. The new rules require the
intrinsic value of the unvested awards be allocated to deferred compensation and
recognized as non-cash compensation expense over the remaining future vesting
period. The adoption of FIN 44 did not have a material impact on the Company's
financial statements, other than the effect of the application of FIN 44 as it
relates to the Company's acquisitions as described in Note 2.

                                  RISK FACTORS

     An investment in our shares involves risks and uncertainties. You should
carefully consider the factors described below before making an investment
decision in our securities. The risks described below are the risks that we
currently believe are material risks of business and the industry in which we
compete.

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

                         RISKS RELATED TO OUR BUSINESS

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

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

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

     - the unpredictability of the timing and level of sales through our
       indirect sales channel;

     - the timing of revenue recognition for sales of software products and
       services;

     - the extent to which our customers renew their maintenance contracts with
       us;

     - the possibility that our customers may cancel or defer purchases as a
       result of reduced IT budgets or in anticipation of new products or
       product updates by us or by our competitors;

     - the possibility of an economic slowdown generally;

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

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

     - lack of order backlog;

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

     - the relative growth rates of the Windows NT and UNIX markets, as well as
       the rate of adoption of Microsoft's release of Windows 2000 by users;

     - costs related to acquisitions of technologies or businesses, including
       amortization of goodwill and purchased intangible assets; and

     - the timing of releases of new versions of third-party software products
       that our products support.

                                        17
<PAGE>   20

     Fluctuations in our results of operations are likely to affect the market
price of our common stock that may not be related to our long-term performance.

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

     In any given quarter, sales of some of our products have involved large
financial commitments from a relatively small number of customers, and
cancellation or deferral of these large contracts would reduce our revenues. In
addition, the sales cycles for certain of our software products, such as Vista
Plus and SharePlex, can last from three to nine months and often require
pre-purchase evaluation periods and customer education. These relatively long
sales cycles may cause significant periodic variation in our license revenues.
Also, we have often booked a large amount of our sales in the last month or
weeks of each quarter and delays in the closing of sales near the end of a
quarter could cause quarterly revenue to fall short of anticipated levels.
Finally, while a portion of our revenues each quarter is recognized from
previously deferred revenue, our quarterly performance will depend primarily
upon entering into new contracts to generate revenues for that quarter.

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

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

MANY OF OUR PRODUCTS ARE VULNERABLE TO DIRECT COMPETITION FROM ORACLE

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

OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP NEW AND ENHANCED PRODUCTS THAT
ACHIEVE WIDESPREAD MARKET ACCEPTANCE

     Our future success depends on our ability to address the rapidly changing
needs of our customers by developing and introducing new products, product
updates and services on a timely basis, by extending the operation of our
products on new platforms and by keeping pace with technological developments
and emerging industry standards. In order to grow our business, we are
committing substantial resources to developing software products and services
for the applications management market. If this markets does not continue to
develop as anticipated, or demand for our products in these markets does not
materialize or occurs

                                        18
<PAGE>   21

more slowly that we expect, or if our development efforts are delayed or
unsuccessful, we will have expended substantial resources and capital without
realizing sufficient revenue, and our business and operating results could be
adversely affected.

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

     We have in the past made and we expect to continue to make acquisitions of
complementary companies, products or technologies. If we make any additional
acquisitions, we will be required to assimilate the operations, products and
personnel of the acquired businesses and train, retain and motivate key
personnel from the acquired businesses. We may be unable to maintain uniform
standards, controls, procedures and policies if we fail in these efforts.
Similarly, acquisitions may subject us to liabilities and risks that are not
known or identifiable at the time of the acquisition or may cause disruptions in
our operations and divert management's attention from day-to-day operations,
which could impair our relationships with our current employees, customers and
strategic partners. We may have to incur debt or issue equity securities to pay
for any future acquisitions. The issuance of equity securities for any
acquisition could be substantially dilutive to our shareholders. In addition,
our profitability may suffer because of acquisition-related costs or
amortization costs for acquired goodwill and other intangible assets. In
consummating acquisitions, we are also subject to risks of entering geographic
and business markets in which we have no or limited prior experience. If we are
unable to fully integrate acquired businesses, products or technologies with our
existing operations, we may not receive the intended benefits of acquisition.

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

     We intend to aggressively pursue expansion of our indirect sales channels
through arrangements with resellers, systems integrators and distributors. In
certain domestic and international markets we may miss sales opportunities if we
are unable to enter into successful relationships with locally based resellers.
We may become more dependent on these type of relationships. There can be no
assurance that we will successfully develop these relationships or that the
expansion of indirect sales distribution methods will increase revenues.

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

     We have recently experienced a period of rapid growth in our operations
that has placed and will continue to place a strain on our management,
administrative, operational and financial infrastructure. During this period, we
have experienced an increase in the number of our employees, increasing demands
on our operating and financial systems and personnel, and an expansion in the
geographic coverage of our operations. The number of our full-time employees
increased from 123 as of December 31, 1997 to 257 as of December 31, 1998, to
654 as of December 31, 1999 and to 1,431 as of December 31, 2000. Our ability to
manage our operations and growth requires us to continue to improve our
operational, financial and management controls, and reporting systems and
procedures. We may need to expand our facilities or relocate some or all of our
employees or operations from time to time to support growth. These relocations
could result in temporary disruptions of our operations or a diversion of
management's attention and resources. In addition, we will be required to hire
additional management, financial and sales and marketing personnel to manage our
expanding operations. If we are unable to manage this growth effectively, our
business, operating results and financial condition may be materially adversely
affected.

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

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

                                        19
<PAGE>   22

products. Moreover, if customers elect not to renew their maintenance
agreements, our service revenues would be materially adversely affected.

WE EXPECT TO INCUR SIGNIFICANT INCREASES IN OUR OPERATING EXPENSES IN THE
FORESEEABLE FUTURE, WHICH MAY AFFECT OUR FUTURE PROFITABILITY

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

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

     - increase our research and development activities;

     - expand our general and administrative activities; and

     - expand our customer support organizations.

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

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

     Substantially all of our current international revenues are derived from
the operations of three of our wholly-owned subsidiaries in Australia, the
United Kingdom and Germany. Revenues from licenses and services to customers
outside of North America were $5.8 million in 1998, representing 16.7% of total
revenues, $15.3 million in 1999, representing 21.6% of total revenues, and $28.7
million in 2000, representing 17.3% of total revenues. As a result, we face
increasing risks from doing business on an international basis, including, among
others:

     - difficulties in staffing and managing foreign operations;

     - longer payment cycles;

     - seasonal reductions in business activity in Europe;

     - increased financial accounting and reporting burdens and complexities;

     - potentially adverse tax consequences;

     - potential loss of proprietary information due to piracy, misappropriation
       or weaker laws regarding intellectual property protection;

     - delays in localizing our products;

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

     - licenses, tariffs and other trade barriers.

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

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

                                        20
<PAGE>   23

OUR RECENTLY-IMPLEMENTED STRATEGY OF INVESTING IN DEVELOPMENT STAGE COMPANIES
INVOLVES A NUMBER OF RISKS AND UNCERTAINTIES

     We have and may continue to make investments in development-stage companies
that we believe provide strategic opportunities for Quest. Each of these
investments involves a number of risks and uncertainties, including diversion of
management attention, inability to identify strategic opportunities, inability
to value investments appropriately, inability to manage investments effectively
and loss of cash invested. We intend that these investments will complement our
own research and development efforts, provide access to new technologies and
emerging markets, and create opportunities for additional sales of our products
and services. However, we cannot assure you that this initiative will have the
above mentioned desired results, or even that we will not lose all or any part
of these investments.

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

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

OUR PROPRIETARY RIGHTS MAY BE INADEQUATELY PROTECTED, AND THERE IS RISK OF
INFRINGEMENT CLAIMS OR INDEPENDENT DEVELOPMENT OF COMPETING TECHNOLOGY THAT
COULD HARM OUR COMPETITIVE POSITION

     Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology. We rely on a combination
of trademark, trade secret, copyright law and contractual restrictions to
protect the proprietary aspects of our technology.

     Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets, and to
determine the validity and scope of the proprietary rights of others. Any such
resulting litigation could result in substantial costs and diversion of
resources.

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

     Our success and ability to compete are also dependent on our ability to
operate without infringing upon the proprietary rights of others. Third parties
may claim infringement by us of their intellectual property rights. In the event
of a successful claim of product infringement against us and our failure or
inability to either license the infringed or similar technology or develop
alternative technology on a timely basis, we may incur substantial licensing
fees, be liable for infringement damage, or be unable to market our products.

                                        21
<PAGE>   24

OUR BUSINESS WILL SUFFER IF OUR SOFTWARE CONTAINS ERRORS

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

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

     - loss of customers;

     - damage to our reputation;

     - failure to achieve market acceptance;

     - diversion of development resources;

     - increased service and warranty costs;

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

     - increased insurance costs.

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

WE INCORPORATE SOFTWARE LICENSED FROM THIRD PARTIES INTO SOME OF OUR PRODUCTS
AND ANY SIGNIFICANT INTERRUPTION IN THE AVAILABILITY OF THESE THIRD-PARTY
SOFTWARE PRODUCTS OR DEFECTS IN THESE PRODUCTS COULD REDUCE THE DEMAND FOR, OR
PREVENT THE SHIPPING OF, OUR PRODUCTS

     Certain of our software products contain components developed and
maintained by third-party software vendors. We expect that we may have to
incorporate software from third-party vendors in our future products. We may not
be able to replace the functionality provided by the third-party software
currently offered with our products if that software becomes obsolete, defective
or incompatible with future versions of our products or is not adequately
maintained or updated. Any significant interruption in the availability of these
third-party software products or defects in these products could harm our sales
unless and until we can secure an alternative source. Although we believe there
are adequate alternate sources for the technology licensed to us, such alternate
sources may not provide us with the same functionality as that currently
provided to us.

NATURAL DISASTERS OR POWER OUTAGES COULD DISRUPT OUR BUSINESS

     A substantial portion of our operations are located in California, and we
are subject to risks of damage and business disruptions resulting from
earthquakes, floods and similar events, as well as from power outages. We have
recently experienced limited and temporary power losses in our California
facilities due to power shortages, and we expect in the future to experience
additional power losses. While the impact to our business and operating results
has not been material, we cannot assure you that power losses will not adversely
affect our business in the future, or that the cost of acquiring sufficient
power to run our business will not increase significantly. Since we do not have
sufficient redundancy in our networking infrastructure, a natural disaster or
other unanticipated problem could have an adverse effect on our business,
including both our internal operations and our ability to communicate with our
customers or sell and deliver our products.

                                        22
<PAGE>   25

                         RISKS RELATED TO OUR INDUSTRY

THE DEMAND FOR OUR PRODUCTS WILL DEPEND ON OUR ABILITY TO ADAPT TO RAPID
TECHNOLOGICAL CHANGE

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

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

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

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

WE MAY NOT BE ABLE TO ATTRACT AND RETAIN PERSONNEL

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

FOREIGN CURRENCY HEDGING INSTRUMENTS

     We transact business in various foreign currencies. Accordingly, we are
subject to exposure from adverse movements in foreign currency exchange rates.
This exposure is primarily related to revenues and operating expenses in
Australia, the United Kingdom and Germany denominated in the respective local
currency. To date, we have not used hedging contracts to hedge our
foreign-currency fluctuation risks. We will assess the need to utilize financial
instruments to hedge currency exposures on an ongoing basis. We also do not use
derivative financial instruments for speculative trading purposes.

INTEREST RATE RISK

     Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. We have not used derivative financial
instruments in our investment portfolio. We place our investments with
high-quality issuers and, by policy, limit the amount of credit exposure to any
one issuer. Our investments in marketable securities consist primarily of
high-grade corporate and government securities with maturities of

                                        23
<PAGE>   26

less than two years. Investments purchased with an original maturity of three
months or less are considered to be cash equivalents. We classify all of our
investments as available-for-sale. Available-for-sale securities are carried at
fair value, with unrealized gains and losses, net of tax, reported in a separate
component of shareholders' equity. At December 31, 2000, the net gain on
available-for-sale securities of $132,000 comprises 48 positions, of which 41
positions have unrealized gains and seven positions have unrealized losses.

     The following table provides information about our investment portfolio at
December 31, 2000. For investment securities, the table presents principal cash
flows and related weighted average interest rates by expected maturity dates
(dollars in thousands).

<TABLE>
<S>                                                           <C>
Cash and cash equivalents...................................  $ 25,155
Average interest rate.......................................      4.63%

Short-term marketable securities, available-for-sale........  $  8,587
Average interest rate.......................................      6.72%

Long-term marketable securities, available-for-sale
  (maturing in 2001)........................................  $118,084
Average interest rate.......................................      6.97%

Total portfolio.............................................  $151,826
Average interest rate.......................................      6.57%
</TABLE>

     We consider the carrying value of our investment securities to approximate
their fair value due to the relatively short period of time between origination
of the investments and their expected realization. Accordingly, changes in the
market interest rate would not have a material effect on the fair value of such
investments.

EUROPEAN MONETARY UNION

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

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

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

                                        24
<PAGE>   27

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements required by this item are included in Part IV,
Item 14 of this Form 10-K and are presented beginning on page F-1.

     The following table sets forth certain unaudited quarterly financial data
for the fiscal years ended December 31, 1999 and 2000. This information has been
prepared on the same basis as the Consolidated Financial Statements and all
necessary adjustments have been included in the amounts stated below to present
fairly the selected quarterly information when read in conjunction with the
Consolidated Financial Statements and Notes thereto. Historical quarterly
financial results and trends may not be indicative of future results.

<TABLE>
<CAPTION>
                                                                             QUARTERS ENDED
                                        -----------------------------------------------------------------------------------------
                                        MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,   MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,
                                          1999        1999       1999        1999       2000        2000       2000        2000
                                        ---------   --------   ---------   --------   ---------   --------   ---------   --------
                                                                  (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                     <C>         <C>        <C>         <C>        <C>         <C>        <C>         <C>
Revenues..............................   $12,839    $15,450     $18,308    $24,271     $28,725    $36,654     $44,122    $56,085
Gross profit..........................    11,251     13,896      16,420     22,108      25,563     32,431      39,093     49,197
Income (loss) before income tax
  provision...........................     1,632        641         902      2,495      (5,213)    (1,868)     (4,434)    (6,757)
Net income (loss).....................       943         31         272      1,561      (5,685)    (4,409)     (6,259)    (8,724)
                                         =======    =======     =======    =======     =======    =======     =======    =======
Basic and diluted net income (loss)
  per share...........................   $  0.01    $  0.00     $  0.00    $  0.02     $ (0.07)   $ (0.05)    $ (0.07)   $ (0.10)
                                         =======    =======     =======    =======     =======    =======     =======    =======
</TABLE>

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

     Not applicable.

                                        25
<PAGE>   28

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information regarding the Company's directors as required by this item will
be included in the Company's definitive proxy statement, to be delivered to
shareholders in connection with the Company's 2001 annual meeting. Such
information is incorporated herein by reference.

     Information with respect to executive officers may be found in Part I, Item
1, under the heading "Executive Officers of the Registrant."

ITEM 11. EXECUTIVE COMPENSATION

     Information required by this item will be included in the section captioned
"Executive Compensation" appearing in the Company's definitive proxy statement,
to be delivered to shareholders in connection with the Company's 2001 annual
meeting of shareholders. Such information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information required by this item will be included in the section captioned
"Security Ownership of Certain Beneficial Owners and Management" appearing in
the Company's definitive proxy statement, to be delivered to shareholders in
connection with the Company's 2001 annual meeting of shareholders. Such
information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information required by this item will be included in the section captioned
"Related Party Transactions" appearing in the Company's definitive proxy
statement, to be delivered to shareholders in connection with the Company's 2001
annual meeting of shareholders. Such information is incorporated herein by
reference.

                                    PART IV

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

(a) The following documents are filed as part of this Form 10-K.

     1. Financial Statements

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Independent Auditors' Report................................  F-1
Consolidated Balance Sheets as of December 31, 1999 and
  2000......................................................  F-2
Consolidated Statements of Operations for the Years Ended
  December 31, 1998, 1999 and 2000..........................  F-3
Consolidated Statements of Shareholders' Equity for the
  Years Ended December 31, 1998, 1999 and 2000..............  F-4
Consolidated Statements of Cash Flows for the Years Ended
  December 31, 1998, 1999 and 2000..........................  F-5
Notes to Consolidated Financial Statements..................  F-6
</TABLE>

     2. Financial Statement Schedules

     The following financial statement schedule should be read in conjunction
with the consolidated financial statements of Quest Software, Inc. filed as part
of this Report:

     - Schedule II -- Valuation and Qualifying Accounts

     Schedules other than that listed above have been omitted since they are
either not required or not applicable or because the information required is
included in the consolidated financial statements included elsewhere herein or
the notes thereto.

                                        26
<PAGE>   29

     3. Exhibits

<TABLE>
<CAPTION>
 EXHIBIT
  NUMBER                           EXHIBIT TITLE
 -------                           -------------
<S>         <C>
 3.1*       Second Amended and Restated Articles of Incorporation.
 3.2**      Second Amended and Restated Bylaws, as amended.
 3.3***     Certificate of Amendment of Second Amended and Restated
            Articles of Incorporation.
 4.1*       Form of Registrant's Specimen Common Stock Certificate.
10.1*++     Registrant's 1998 Stock Option/Stock Issuance Plan.
10.2*++     Registrant's 1999 Stock Incentive Plan.
10.3*++     Registrant's 1999 Employee Stock Purchase Plan.
10.4*       Form of Directors' and Officers' Indemnification Agreement.
10.5*+      Agreement, dated February 19, 1999, between Quest Software,
            Inc. and INSO Chicago Corporation, dba INSO Corporation.
10.6*+      OEM Agreement, dated March 3, 1998, by and between Quest
            Software, Inc. and Artifex Software Inc.
10.7*       Office Space Lease dated as of June 17, 1999 between The
            Irvine Company and Quest Software, Inc.
10.8**      Office Lease between The Northwestern Mutual Life Insurance
            Company (Landlord) and Quest Software, Inc. (Tenant) dated
            as of September 30, 1999.
10.9***+    Inxight/Resolute Software: Software Distribution and License
            Agreement -- Inxight Technology dated September 30, 1998
            between Resolute Software, Inc. and Inxight Software, Inc.
10.10       Office lease, dated June 2000, between Fund VIII and Fund IX
            Associates and Quest Software, Inc.
21.1        Subsidiaries of the Company.
23.1        Consent of Deloitte & Touche LLP.
</TABLE>

---------------
*    Incorporated herein by reference to the Company's Registration Statement on
     Form S-1 and all amendments thereto (File No. 333-80543).

**   Incorporated herein by reference to the Company's Registration Statement on
     Form S-1 and all amendments thereto (File No. 333-30816).

***  Incorporated herein by reference to the Company's Quarterly Report on Form
     10-Q for the period ended June 30, 2000.

+     Confidential treatment requested and received as to certain portions of
      this agreement.

++   Indicates a management contract or compensatory arrangement.

(b) Reports on Form 8-K

     No reports on Form 8-K were filed by Quest Software, Inc. during the
quarter ended December 31, 2000.

                                        27
<PAGE>   30

                                   SIGNATURES

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

                                          QUEST SOFTWARE, INC.

Dated: March 30, 2001                     By:      /s/ DAVID M. DOYLE
                                            ------------------------------------
                                                       David M. Doyle
                                                  President and Secretary

     Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below 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/ VINCENT C. SMITH                       Chief Executive Officer      March 30, 2001
-----------------------------------------------------   (principal executive officer)
                  Vincent C. Smith                        and Chairman of the Board

                 /s/ DAVID M. DOYLE                       President, Secretary and      March 30, 2001
-----------------------------------------------------             Director
                   David M. Doyle

                /s/ M. BRINKLEY MORSE                    Vice President, Finance and    March 30, 2001
-----------------------------------------------------            Operations
                  M. Brinkley Morse                     (principal financial officer)

                 /s/ KEVIN E. BROOKS                        Corporate Controller        March 30, 2001
-----------------------------------------------------  (principal accounting officer)
                   Kevin E. Brooks

                 /s/ DORAN G. MACHIN                              Director              March 30, 2001
-----------------------------------------------------
                   Doran G. Machin

                /s/ JERRY MURDOCK, JR                             Director              March 30, 2001
-----------------------------------------------------
                 Jerry Murdock, Jr.

                 /s/ RAYMOND J. LANE                              Director              March 30, 2001
-----------------------------------------------------
                   Raymond J. Lane
</TABLE>

                                        28
<PAGE>   31

                          INDEPENDENT AUDITORS' REPORT

The Shareholders and Board of Directors
Quest Software, Inc.

     We have audited the accompanying consolidated balance sheets of Quest
Software, Inc. and subsidiaries (the Company) as of December 31, 1999 and 2000,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Quest Software, Inc. and its
subsidiaries at December 31, 1999 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States of America.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California
January 30, 2001

                                       F-1
<PAGE>   32

                              QUEST SOFTWARE, INC.

                          CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

                                     ASSETS

<TABLE>
<CAPTION>
                                                              DECEMBER 31,    DECEMBER 31,
                                                                  1999            2000
                                                              ------------    ------------
<S>                                                           <C>             <C>
Current assets:
  Cash and cash equivalents.................................    $39,643         $ 25,155
  Short-term marketable securities..........................     11,000            8,587
  Accounts receivable, net..................................     18,771           38,443
  Prepaid expenses and other current assets.................      3,244           11,390
  Income taxes receivable...................................         --            1,558
  Deferred income taxes.....................................      2,089           14,833
                                                                -------         --------
          Total current assets..............................     74,747           99,966
Property and equipment, net.................................      7,179           46,840
Long-term marketable securities.............................      4,484          118,084
Goodwill and purchased intangible assets, net...............     11,452          255,858
Deferred income taxes.......................................        415            3,001
Other assets................................................        872           10,423
                                                                -------         --------
          Total assets......................................    $99,149         $534,172
                                                                =======         ========

                           LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable..........................................    $ 3,436         $  5,503
  Accrued compensation......................................      4,966            9,350
  Other accrued expenses....................................      7,062           22,491
  Income taxes payable......................................      2,030               --
  Deferred revenue..........................................     18,583           32,052
                                                                -------         --------
          Total current liabilities.........................     36,077           69,396
Long-term liabilities and other.............................        403            6,422
Commitment and contingencies (Note 9)
Shareholders' equity:
  Preferred stock, no par value, 10,000 shares authorized;
     no shares issued
     or outstanding.........................................         --               --
  Common stock, no par value, 150,000 shares authorized;
     77,810 and 86,710 shares issued and outstanding at
     December 31, 1999 and 2000.............................     63,946          500,324
  Retained earnings (deficit)...............................      1,864          (23,214)
  Accumulated other comprehensive (loss) income.............        (26)             132
  Notes receivable from sale of common stock................     (3,115)         (18,888)
                                                                -------         --------
          Total shareholders' equity........................     62,669          458,354
                                                                -------         --------
          Total liabilities and shareholders' equity........    $99,149         $534,172
                                                                =======         ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-2
<PAGE>   33

                              QUEST SOFTWARE, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                              ------------------------------
                                                               1998       1999        2000
                                                              -------    -------    --------
<S>                                                           <C>        <C>        <C>
Revenues:
  Licenses..................................................  $24,901    $54,269    $126,767
  Services..................................................    9,889     16,599      38,820
                                                              -------    -------    --------
          Total revenues....................................   34,790     70,868     165,587
Cost of revenues:
  Licenses..................................................    3,433      2,998       3,571
  Services..................................................    2,507      4,195      10,695
  Amortization of purchased intangible assets...............       --         --       5,038
                                                              -------    -------    --------
          Total cost of revenues............................    5,940      7,193      19,304
                                                              -------    -------    --------
Gross profit................................................   28,850     63,675     146,283
Operating expenses:
  Sales and marketing.......................................   11,836     32,078      77,641
  Research and development..................................    8,047     15,980      39,747
  General and administrative................................    5,278      9,906      17,679
  Other compensation costs and goodwill amortization........       --      1,243      41,092
                                                              -------    -------    --------
          Total operating expenses..........................   25,161     59,207     176,159
                                                              -------    -------    --------
Income (loss) from operations...............................    3,689      4,468     (29,876)
Interest income.............................................      372      1,501      13,535
Other expense, net..........................................      (36)      (299)     (1,932)
                                                              -------    -------    --------
Income (loss) before income tax provision...................    4,025      5,670     (18,273)
Income tax provision........................................    1,679      2,273       6,805
                                                              -------    -------    --------
Net income (loss)...........................................    2,346      3,397     (25,078)
Preferred stock dividends...................................       --        590          --
                                                              -------    -------    --------
Net income (loss) applicable to common shareholders.........  $ 2,346    $ 2,807    $(25,078)
                                                              =======    =======    ========
Net income (loss) per common share:
  Basic.....................................................  $  0.03    $  0.04    $  (0.29)
                                                              =======    =======    ========
  Diluted...................................................  $  0.03    $  0.03    $  (0.29)
                                                              =======    =======    ========
Weighted-average common shares:
  Basic.....................................................   88,522     75,354      85,332
  Diluted...................................................   88,918     83,600      85,332
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-3
<PAGE>   34

                              QUEST SOFTWARE, INC.

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                       CAPITAL
                                                                                         NOTES       DISTRIBUTION
                                                                      ACCUMULATED     RECEIVABLE     IN EXCESS OF
                                       COMMON STOCK      RETAINED        OTHER        AND ACCRUED      BASIS IN         TOTAL
                                    ------------------   EARNINGS    COMPREHENSIVE   INTEREST FROM      COMMON      SHAREHOLDERS'
                                    SHARES     AMOUNT    (DEFICIT)   INCOME (LOSS)   SHAREHOLDERS       STOCK          EQUITY
                                    -------   --------   ---------   -------------   -------------   ------------   -------------
<S>                                 <C>       <C>        <C>         <C>             <C>             <C>            <C>
BALANCE, January 1, 1998..........   86,994   $  3,425   $  1,645        $ --          $ (2,234)       $     --       $  2,836
Issuance of common stock..........      132         66         --          --                --              --             66
Notes receivable from shareholder
  for purchase of common stock....    1,950        750         --          --              (750)             --             --
Accrued interest receivable from
  shareholders....................       --         --         --          --              (174)             --           (174)
Net income........................       --         --      2,346          --                --              --          2,346
                                    -------   --------   --------        ----          --------        --------       --------
BALANCE, December 31, 1998........   89,076      4,241      3,991          --            (3,158)             --          5,074
Exercise of stock options,
  including tax benefit of $168...       68        201         --          --                --              --            201
Payment of notes receivable from
  shareholders for purchase of
  common stock....................       --         --         --          --               230              --            230
Accrued interest receivable from
  shareholders....................       --         --         --          --              (187)             --           (187)
Repurchase of common stock........  (29,640)        (2)    (4,934)         --                --         (30,064)       (35,000)
Conversion of Series A Redeemable
  Preferred Stock to common
  stock...........................    8,000     15,000         --          --                --              --         15,000
Issuance of common stock in the
  initial public offering, net....   10,120     64,856         --          --                --              --         64,856
Compensation expense associated
  with stock option grants........       --        432         --          --                --              --            432
Common stock issued for an
  acquisition.....................      186      9,282         --          --                --              --          9,282
Dividends on Series B Redeemable
  Preferred Stock.................       --         --       (590)         --                --              --           (590)
Unrealized loss on
  available-for-sale securities...       --         --         --         (26)               --              --            (26)
Reclassification of capital
  distribution in excess of basis
  in common stock.................       --    (30,064)        --          --                --          30,064             --
Net income........................       --         --      3,397          --                --              --          3,397
                                                                                                                      --------
Comprehensive income..............       --         --         --          --                --              --          3,371
                                    -------   --------   --------        ----          --------        --------       --------
BALANCE, December 31, 1999........   77,810     63,946      1,864         (26)           (3,115)             --         62,669
Exercise of stock options,
  including tax benefit of
  $28,786.........................    2,493     33,151         --          --                --              --         33,151
Notes receivable and accrued
  interest from shareholders for
  purchase of common stock........      339     15,773         --          --           (15,773)             --             --
Repurchase of common stock........   (1,718)   (57,964)        --          --                --              --        (57,964)
Issuance of common stock in the
  secondary public offering,
  net.............................    3,808    253,469         --          --                --              --        253,469
Common stock issued for employee
  stock purchase plan.............      288      3,438         --          --                --              --          3,438
Compensation expense associated
  with stock option grants........       --      3,441         --          --                --              --          3,441
Common stock issued for
  acquisitions....................    3,690    185,070         --          --                --              --        185,070
Unrealized gain on
  available-for-sale securities...       --         --                    158                --              --            158
Net loss..........................       --         --    (25,078)         --                --              --        (25,078)
                                                                                                                      --------
Comprehensive loss................       --         --         --          --                --              --        (24,920)
                                    -------   --------   --------        ----          --------        --------       --------
BALANCE, December 31, 2000........   86,710   $500,324   $(23,214)       $132          $(18,888)       $     --       $458,354
                                    =======   ========   ========        ====          ========        ========       ========
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       F-4
<PAGE>   35

                              QUEST SOFTWARE, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                              --------------------------------
                                                               1998        1999        2000
                                                              -------    --------    ---------
<S>                                                           <C>        <C>         <C>
Cash flows from operating activities:
  Net income (loss).........................................  $ 2,346    $  3,397    $ (25,078)
  Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
    Depreciation and amortization...........................    1,893       2,107       47,246
    Compensation expense associated with stock option
     grants.................................................       --         432        3,441
    Accrued interest receivable from shareholders...........     (174)       (187)        (611)
    Deferred income taxes...................................     (643)     (1,667)     (19,404)
    Provision for bad debts.................................      319         352          457
    Changes in operating assets and liabilities, net of
     effects of acquisitions:
      Accounts receivable...................................   (2,947)    (11,793)     (17,841)
      Income taxes receivable...............................      122          --           --
      Prepaid expenses and other current assets.............     (620)     (2,527)      (6,860)
      Other assets..........................................        5        (288)        (660)
      Accounts payable......................................      941       1,974          942
      Accrued compensation..................................    1,162       2,544        3,828
      Other accrued expenses................................    1,141       5,366        4,403
      Income taxes payable..................................       --       2,218       25,227
      Deferred revenue......................................    4,636       9,449       11,359
      Other liabilities.....................................       --          --         (561)
                                                              -------    --------    ---------
      Net cash provided by operating activities.............    8,181      11,377       25,888
Cash flows from investing activities:
  Purchases of property and equipment.......................   (1,231)     (7,143)     (39,167)
  Purchases of software licenses............................      (57)       (350)      (1,265)
  Cash paid for acquisitions, net of cash acquired..........       --      (1,094)     (82,138)
  Purchases of equity investments...........................       --          --       (8,166)
  Purchases of marketable securities........................       --     (15,510)    (293,852)
  Sales and maturities of marketable securities.............       --          --      182,824
                                                              -------    --------    ---------
      Net cash used in investing activities.................   (1,288)    (24,097)    (241,764)
Cash flows from financing activities:
  Proceeds from note payable................................       --      10,000           --
  Repayment of notes payable................................       --     (10,918)      (1,939)
  Repayment of capital lease obligations....................       --         (36)        (867)
  Proceeds from issuance of preferred stock.................       --      25,000           --
  Redemption of Series B Redeemable Preferred Stock.........       --     (10,000)          --
  Repurchase of common stock................................       --     (35,000)     (57,353)
  Net proceeds from the sale of common stock................       --      64,856      253,469
  Proceeds from the exercise of stock options...............       --          33        4,365
  Proceeds from employee stock purchase plan................       --          --        3,438
  Repayment of note payable to related party................       (8)         (8)          --
  Payment on notes receivable from shareholders for purchase
    of common stock.........................................       --         230           --
  Cash dividend paid on Series B Redeemable Preferred
    Stock...................................................       --        (590)          --
                                                              -------    --------    ---------
      Net cash (used in) provided by financing activities...       (8)     43,567      201,113
Effect of exchange rate changes on cash and cash
  equivalents...............................................       --        (185)         275
                                                              -------    --------    ---------
Net increase (decrease) in cash and cash equivalents........  $ 6,885    $ 30,662    $ (14,488)
Cash and cash equivalents, beginning of period..............    2,096       8,981       39,643
                                                              -------    --------    ---------
Cash and cash equivalents, end of period....................  $ 8,981    $ 39,643    $  25,155
                                                              =======    ========    =========
Supplemental disclosure of consolidated cash flow
  information:
  Cash paid for interest....................................  $     5    $    240    $      32
                                                              =======    ========    =========
  Cash paid (received) for income taxes.....................  $ 2,054    $  1,874    $     (59)
                                                              =======    ========    =========
Supplemental schedule of noncash investing and financing
  activities:
  Note receivable from shareholders for purchase of common
    stock...................................................  $   750                $  15,773
                                                              =======                =========
  Conversion of Series A Redeemable Preferred Stock to
    Common Stock............................................             $ 15,000
                                                                         ========
  Tax benefit related to stock option exercises.............             $    168    $  28,786
                                                                         ========    =========
  Unrealized (loss) gain on available-for-sale securities...             $    (26)   $     158
                                                                         ========    =========
</TABLE>

See Note 2 for details of assets acquired and liabilities assumed in purchase
transactions.
          See accompanying notes to consolidated financial statements.
                                       F-5
<PAGE>   36

                              QUEST SOFTWARE, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Nature of Operations and Basis of Presentation -- Quest Software, Inc., a
California corporation (the Parent) and its subsidiaries (collectively the
Company) provide application and information availability software solutions
that enhance the performance and reliability of an organization's e-business,
packaged and custom applications, and enable the delivery of information across
the entire enterprise. The Company also provides consulting, training, and
support services to its customers. The accompanying consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States and include the accounts of the Parent and its
wholly owned subsidiaries. All intercompany transactions and balances have been
eliminated in consolidation.

     Stock Split -- On March 9, 2000, the Company's Board of Directors approved
a 2-for-1 stock split of the Company's common stock. All share, per share and
conversion amounts relating to common stock, preferred stock, and stock options
included in the accompanying consolidated financial statements and footnotes
have been restated to reflect the effect of such stock split for all periods
presented.

     Foreign Currency Translation -- In accordance with Statement of Financial
Accounting Standards (SFAS) No. 52, Foreign Currency Translation, the United
States dollar is considered to be the functional currency for the Company's
foreign subsidiaries, as such subsidiaries act as sales offices for the Parent.
The Company translates assets and liabilities related to its foreign sales to
U.S. Dollars at rates of exchange in effect at the end of the year. Revenues and
expenses are translated at the average rates of exchange for the year.
Therefore, gains or losses from translation adjustments are included in other
income in the Company's consolidated statements of operations. Translation
adjustments were not material for the years ended December 31, 1998, 1999 and
2000.

     Fair Value of Financial Instruments -- The Company's consolidated balance
sheets include the following financial instruments: cash and marketable
securities, accounts receivable, investments, accounts payable, and accrued
liabilities. The Company considers the carrying value of all financial
instruments in the consolidated financial statements to approximate fair value
because of the relatively short period of time between origination of the
instruments and their expected realization, or because they are carried at fair
value.

     Cash and Cash Equivalents -- Cash equivalents include short-term, highly
liquid investments with original maturities of three months or less. Interest
income, included in other income in the accompanying consolidated statements of
operations, was, $372,000, $1.5 million and $13.5 million for the years ended
December 31, 1998, 1999 and 2000, respectively.

     Concentration of Credit Risk -- Financial instruments that potentially
expose the Company to credit risk include cash and cash equivalents, investments
and accounts receivable. The Company invests cash and cash equivalents through
high-credit quality financial institutions. The Company performs periodic
valuations of the relative credit standing of these financial institutions and
limits the amount of its credit exposure with any one institution. At December
31, 2000, the Company's cash and cash equivalents were principally invested with
three major financial institutions. Trade receivables potentially subject the
Company to concentrations of credit risk. The Company closely monitors
extensions of credit and has not experienced significant credit losses in the
past. The Company maintains reserves for potential credit losses and sales
returns and such reserves have historically been within management's
expectations. No single customer accounted for 10% or more of total revenues in
1998, 1999 or 2000.

     Investments -- The Company has classified all debt securities with original
maturities of greater than three months as available-for-sale.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses reported as a separate component of shareholders' equity net of
applicable income taxes. Realized gains and losses and declines in value judged
to be other-than-temporary on available-for-sale securities are included in
other income. The cost basis for realized gains and losses on available-for-sale
securities is determined on a specific identification basis. The Company has
classified available-for-sale securities as current or long-term based primarily
on the maturity date of the related securities.

                                       F-6
<PAGE>   37
                              QUEST SOFTWARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The Company also has certain other minority equity investments in
non-publicly traded companies. These investments are included in other assets on
the Company's consolidated balance sheet at December 31, 2000 and are carried at
cost. The Company monitors these investments for impairment and has concluded
that no impairment exists at December 31, 2000.

     The following table summarizes the Company's investments (in thousands):

<TABLE>
<CAPTION>
                                                                      GROSS        GROSS
                                                        AMORTIZED   UNREALIZED   UNREALIZED     FAIR
                                                          COST        GAINS        LOSSES      VALUE
                                                        ---------   ----------   ----------   --------
<S>                                                     <C>         <C>          <C>          <C>
DECEMBER 31, 2000
Euro dollar bonds.....................................  $ 32,904       $ 49         $ --      $ 32,953
Asset-backed securities (semi-annual).................     4,489          1           --         4,490
Medium and short-term notes...........................    12,445         26           --        12,471
Asset-backed securities (monthly).....................     6,812          9           --         6,821
Corporate bonds.......................................    59,643        110           --        59,753
Commercial paper......................................     5,158         --           --         5,158
U.S. government agencies -- coupon....................     5,000         25           --         5,025
                                                        --------       ----         ----      --------
          Total.......................................  $126,451       $220         $ --      $126,671
                                                        ========       ====         ====      ========
Reported As:
  Short-term marketable securities.........................................................   $  8,587
  Long-term marketable securities..........................................................    118,084
                                                                                              --------
          Total............................................................................   $126,671
                                                                                              ========
DECEMBER 31, 1999
Tax free auction securities...........................  $  8,900       $ --         $ --      $  8,900
Municipal bonds.......................................     4,510         --          (26)        4,484
Tax advantaged auction securities.....................     1,500         --           --         1,500
Fixed income..........................................       600         --           --           600
                                                        --------       ----         ----      --------
          Total.......................................  $ 15,510       $ --         $(26)     $ 15,484
                                                        ========       ====         ====      ========
Reported As:
  Short-term marketable securities.........................................................   $ 11,000
  Long-term marketable securities..........................................................      4,484
                                                                                              --------
          Total............................................................................   $ 15,484
                                                                                              ========
</TABLE>

     Long-Lived Assets -- The Company accounts for the impairment and
disposition of long-lived assets in accordance with SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
In accordance with SFAS No. 121, long-lived assets to be held are reviewed for
events or changes in circumstances which indicate that their carrying value may
not be recoverable. The Company periodically reviews the carrying value of
long-lived assets to determine whether or not impairment to such value has
occurred. At December 31, 1999 and 2000, there was no impairment of long-lived
assets based on the Company's most recent analysis.

     Property and Equipment -- Property and equipment are stated at cost, less
accumulated depreciation and amortization. Maintenance and repairs are expensed
as incurred. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives ranging from three to seven years.
Leasehold

                                       F-7
<PAGE>   38
                              QUEST SOFTWARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

improvements are amortized over the shorter of the estimated useful lives of the
improvements or the term of the related lease. Repair and maintenance costs are
expensed as incurred.

     Goodwill and Purchased Intangible Assets -- Goodwill arising from
acquisitions (Note 2) is recorded as the excess of the purchase price over the
fair value of assets acquired and amortized over a useful life of five years.
Accumulated goodwill amortization was $94,000 and $35.2 million at December 31,
1999 and 2000, respectively. Purchased intangible assets are recorded at the
appraised value of technology, workforce and customer lists acquired and
amortized using the straight-line method over estimated useful lives of three
years to six years. Accumulated amortization of purchased intangible assets was
at $5.9 million at December 31, 2000. The net carrying amount of goodwill and
purchased intangible assets was considered recoverable at December 31, 1999 and
2000, based on the undiscounted future cash flows expected to be realized from
continued sales of the related software products.

     Other Assets -- Other assets include software licenses, prepaid royalties
and other long-term investments. Software licenses are recorded at cost and are
amortized over the shorter of the estimated useful lives of the related products
or the term of the license, generally three years.

     Capital Distribution in Excess of Basis in Common Stock -- In connection
with the repurchase of common stock in April 1999 from a major shareholder (Note
4), the excess of the repurchase price over the original cost of the shares has
been recorded as a capital distribution in excess of the basis of the common
stock in the accompanying consolidated financial statements. The Company
reclassified the capital distribution in excess of basis in common stock against
common stock effective December 31, 1999.

     Revenue Recognition -- The Company records revenue in accordance with
Financial Accounting Standards Board (FASB) Statement of Position (SOP) 97-2,
Software Revenue Recognition, as amended.

     Software Licenses, Services, and Post-Contract Customer Support -- Revenues
from sales of software licenses, which generally do not contain multiple
elements, are recognized upon delivery of the related product if the
requirements of SOP 97-2, as amended, are met. If the requirements of SOP 97-2,
including evidence of an arrangement, customer acceptance, a fixed or
determinable fee, collectibility or vendor-specific objective evidence about the
value of an element are not met at the date of delivery, revenue recognition is
deferred until such items are known or resolved. Amounts recorded at December
31, 1999 and 2000 for deferred license revenue represent sales in which the
Company has received some payments but all of the requirements of SOP 97-2 have
not been met. Revenue from post-contract customer support is deferred and
recognized ratably over the term of the contract. Revenue from consulting and
training services are recognized as the services are performed.

     Software Development Costs -- Costs incurred in the research and
development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. After technological feasibility is established, any additional
costs are capitalized in accordance with SFAS No. 86, Accounting for the Costs
of Computer Software to Be Sold, Leased or Otherwise Marketed. Because the
Company believes that its current process for developing software is essentially
completed concurrently with the establishment of technical feasibility, no
software development costs have been capitalized as of December 31, 1999 and
2000.

     Other Compensation Costs -- The Company records compensation expense for
options to purchase the Company's common stock granted at below fair market
value. The expense equals the difference between the fair market value of the
Company's common stock on the grant date and the exercise price of the stock
options and is recognized ratably over the vesting period of the stock options,
which is currently four to five years. The following table shows the allocation
to Cost of Services Revenues, Sales and Marketing, Research and

                                       F-8
<PAGE>   39
                              QUEST SOFTWARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Development and General and Administrative expenses of such costs based on the
related headcount (in thousands):

<TABLE>
<CAPTION>
                                                                  COMPENSATION
                                                   AS REPORTED      EXPENSE        TOTAL
                                                   -----------    ------------    -------
<S>                                                <C>            <C>             <C>
Year Ended December 31, 1999
  Sales and marketing............................    $32,078         $  389       $32,467
  Research and development.......................     15,980             24        16,004
  General and administrative.....................      9,906             19         9,925
Year Ended December 31, 2000
  Cost of services revenues......................    $10,695         $  214       $10,909
  Sales and marketing............................     77,641          1,229        78,870
  Research and development.......................     39,747          1,739        41,486
  General and administrative.....................     17,679            259        17,938
</TABLE>

     There were no related compensation costs in 1998.

     Advertising Expenses -- The Company expenses all advertising costs as
incurred, and such costs were $594,000, $1.0 million, and $1.8 million for the
years ended December 31, 1998, 1999 and 2000, respectively.

     Income Taxes -- The Company accounts for its income taxes under the
provisions of SFAS No. 109, Accounting for Income Taxes. Deferred taxes on
income result from temporary differences between the reporting of income for
financial statements and tax reporting purposes. Measurement of the deferred
items is based on enacted tax laws. In the event the future consequences of
differences between financial reporting bases and tax bases of the Company's
assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an
evaluation of the probability of being able to realize the future benefits
indicated by such asset. A valuation allowance related to a deferred tax asset
is recorded when it is more likely than not that some portion or all of the
deferred tax asset will not be realized.

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

     Net Income (Loss) Per Share -- The Company computes net income (loss) per
share in accordance with SFAS No. 128, Earnings per Share. Basic earnings (loss)
per share is computed by dividing net income (loss) available to common
shareholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings (loss) per share reflects the potential dilution of
securities by including other common stock equivalents, including stock options,
in the weighted-average number of common shares outstanding for a period, if
dilutive. For the year ended December 31, 2000, all potential common stock
equivalents have been excluded from the computation of diluted net loss per
share because the effect would be anti-dilutive.

     The table below sets forth the reconciliation of the denominator of the
earnings (loss) per share calculation (in thousands):

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                              --------------------------
                                                               1998      1999      2000
                                                              ------    ------    ------
<S>                                                           <C>       <C>       <C>
Shares used in computing basic net income per share.........  88,522    75,354    85,332
Conversion of Series A Preferred Stock......................      --     2,476        --
Dilutive effect of stock options............................     396     5,770        --
                                                              ------    ------    ------
Shares used in computing diluted net income per share.......  88,918    83,600    85,332
                                                              ======    ======    ======
</TABLE>

                                       F-9
<PAGE>   40
                              QUEST SOFTWARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The diluted shares for the year ended December 31, 2000 excludes 5.8
million incremental shares related to stock options. These shares are excluded
due to their antidilutive effect as a result of the Company's loss during 2000.
There were no antidilutive shares in 1998 or 1999.

     The conversion of the Series A Preferred Stock into common stock reflects
the weighted average of such shares per SFAS No. 128.

     Comprehensive Income (Loss) -- There was no difference between net income
and comprehensive net income for the year ended December 31, 1998. The
difference between net income (loss) and comprehensive net income (loss) was an
unrealized loss on available-for-sale securities of $26,000 for the year ended
December 31, 1999 and an unrealized gain on available-for-sale securities of
$158,000 for the year ended December 31, 2000.

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

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

     Reclassifications -- Certain prior year amounts have been reclassified in
order to conform with current year presentation.

NEW ACCOUNTING PRONOUNCEMENTS:

     In September 1998, FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133, as amended, is effective for
all fiscal years beginning after June 15, 2000, and establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. Under SFAS
No. 133, certain contracts that were not formerly considered derivatives may now
meet the definition of a derivative which would be required to be reported as
assets or liabilities and carried at fair value. The Company adopted SFAS No.
133 effective January 1, 2001. The adoption of SFAS No. 133 did not have a
significant impact on the financial position, results of operations, or cash
flows of the Company.

     On December 6, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
SAB No. 101 summarizes the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB No.
101 is effective for the fourth quarter in fiscal year 2000. The adoption of SAB
No. 101 did not have a material impact on the Company's financial statements, as
the Company believes its revenue recognition policies comply with SAB No. 101.

     In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting
for Certain Transactions Involving Stock Compensation -- an interpretation of
APB Opinion No. 25. FIN 44 clarifies the definition of an employee for purposes
of applying Accounting Principles Board Opinion (APB) No. 25, Accounting for
Stock Issued to Employees, the criteria for determining whether a plan qualifies
as a noncompensatory plan, the accounting consequence of various modifications
to the terms of a previously fixed stock option or award, and the accounting for
an exchange of stock compensation awards in a business combination. This
Interpretation is effective July 1, 2000 but certain conclusions in this
Interpretation cover specific events that

                                       F-10
<PAGE>   41
                              QUEST SOFTWARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

occur after either December 15, 1998 or January 12, 2000. The provisions of FIN
44 change the accounting for an exchange of unvested employee stock options and
restricted stock awards in a purchase business combination. The new rules
require the intrinsic value of the unvested awards be allocated to deferred
compensation and recognized as non-cash compensation expense over the remaining
future vesting period. The adoption of FIN 44 did not have a material impact on
the Company's financial statements, other than the effect of the application of
FIN 44 as it relates to the Company's acquisitions as described in Note 2.

 2. ACQUISITIONS

     During 1999, the Company completed the acquisition of MBR Technologies,
Inc. for an aggregate purchase price of $10.8 million. The purchase price
consisted of stock valued at $9.3 million and cash of $1.3 million, and direct
acquisition costs were $112,000.

     During 2000, the Company completed a total of eight acquisitions for an
aggregate purchase price of $270.3 million. The aggregate purchase price
consisted of stock valued at $182.6 million and cash of $85.3 million, and
direct acquisition costs of $2.4 million. The Company excluded from the purchase
prices the aggregate intrinsic value of unvested stock options of $5.3 million,
which has been allocated to deferred compensation and will be recognized as
non-cash compensation expense over the remaining future vesting period of two
and one-half years. The Company, acting as escrow agent, has withheld an
aggregate of $2.3 million in cash for indemnification obligations of the former
principal shareholders of certain of the companies acquired.

     Significant acquisitions in 2000 were of Foglight Software, Inc.
(Foglight), acquired on January 7, 2000, and FastLane Technologies, Inc.
(FastLane), acquired on September 11, 2000. Foglight was acquired in exchange
for 2.4 million shares of the Company's common stock valued at $101.8 million,
cash payments of approximately $500,000 (including $400,000 in direct
acquisition costs) and the assumption of unvested Foglight stock options valued
at $2.2 million. FastLane was acquired in exchange for 1.1 million shares of the
Company's common stock valued at $63.1 million, cash payments of $34.1 million
(including $600,000 in direct acquisition costs) and the assumption of FastLane
stock options valued at $7.3 million (excluding intrinsic value of unvested
options of $5.3 million).

     The acquisitions in 1999 and 2000 were accounted as purchase business
combinations, and the results of each acquisitions' operations are included in
the Company's consolidated statements of operations from the date of
acquisition. The purchase prices of these acquisitions were allocated as follows
(in thousands):

<TABLE>
<CAPTION>
                                                                                                                          TOTAL
                                            CURRENT   FIXED ASSETS                 OTHER        ASSUMED      DEFERRED    PURCHASE
                                            ASSETS     AND OTHER     GOODWILL   INTANGIBLES   LIABILITIES     TAXES       PRICE
                                            -------   ------------   --------   -----------   -----------    --------    --------
<S>                                         <C>       <C>            <C>        <C>           <C>            <C>         <C>
Year Ended December 31, 1999
  MBR Technologies, Inc...................  $  308       $  123      $ 11,534     $    --      $ (1,554)     $   339     $ 10,750
                                            ======       ======      ========     =======      ========      =======     ========
Year Ended December 31, 2000
  Foglight Software, Inc..................  $  637       $  893      $ 99,285     $ 5,860      $ (5,728)     $ 3,542     $104,489
  FastLane Technologies, Inc..............   3,781        1,672       102,673      12,477       (10,639)      (5,469)     104,495
  Others..................................   2,733          377        58,065       7,067        (4,345)      (2,546)      61,351
                                            ------       ------      --------     -------      --------      -------     --------
                                            $7,151       $2,942      $260,023     $25,404      $(20,712)     $(4,473)    $270,335
                                            ======       ======      ========     =======      ========      =======     ========
</TABLE>

                                       F-11
<PAGE>   42
                              QUEST SOFTWARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The results of operations of the acquired companies are included in the
consolidated financial statements from the dates of acquisition. The pro forma
statement of operations data below assumes that each of the companies had been
acquired at the beginning of fiscal 1999. This pro forma data includes
amortization of goodwill and identified intangibles from that date. This pro
forma data is presented for informational purposes only, and is not necessarily
indicative of the results of future operations or the results that would have
been achieved had the acquisitions taken place at the beginning of fiscal 1999
(in thousands):

<TABLE>
<CAPTION>
                                                              TWELVE MONTHS ENDED
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1999        2000
                                                              --------    --------
<S>                                                           <C>         <C>
Revenues....................................................  $ 82,558    $175,419
Net loss....................................................   (55,430)    (56,227)
Net loss per share -- basic and diluted.....................  $  (0.70)   $  (0.66)
</TABLE>

     The Company has entered into performance agreements with certain former
shareholders of companies acquired whereby the Company is required to pay these
individuals up to 3% of net sales of the acquired company's products over
periods of up to three years from the date of acquisition, provided they are
still employed by the Company. To date, expenses related to these agreements
have not been material.

 3. PROPERTY AND EQUIPMENT

     Net property and equipment consist of the following at December 31 (in
thousands):

<TABLE>
<CAPTION>
                                                               1999       2000
                                                              -------    -------
<S>                                                           <C>        <C>
Furniture and fixtures......................................  $ 2,262    $ 6,911
Machinery and equipment.....................................      758     26,576
Computer equipment..........................................    5,311     15,085
Computer software...........................................      692      3,823
Leasehold improvements......................................      407      2,161
                                                              -------    -------
                                                                9,430     54,556
Less accumulated depreciation and amortization..............   (2,251)    (7,716)
                                                              -------    -------
Property and equipment, net.................................  $ 7,179    $46,840
                                                              =======    =======
</TABLE>

 4. RELATED-PARTY TRANSACTIONS

     During 1997, the Company received a full recourse note receivable from an
officer of the Company for the purchase of 7.8 million shares of the Company's
common stock at $0.28 per share. The note receivable plus accrued interest is
due April 2002 and bears interest at 6.2%. The note receivable and accrued
interest is secured by the common stock.

     During 1998, the Company received a full-recourse note receivable from
another officer of the Company for the purchase of 1.9 million shares of the
Company's common stock at $0.39 per share. The note receivable plus accrued
interest is due April 2003 and bears interest at 5.7%. Up to 25% of the unpaid
principal and accrued interest may be repaid in each year during the four-year
term of the note. The Company has the option to repurchase any shares at the
original issuance price associated with the unpaid principal balance if the
officer ceases to be employed by the Company. All of the outstanding unpaid
principal and interest may be prepaid at any time when the current Chief
Executive Officer of the Company ceases to be employed or immediately prior to a
sale of substantially all of the assets of the Company or a merger in which the
Company is not the surviving entity. The note receivable and accrued interest is
secured by the common stock and is deemed fully collectible at December 31,
2000.

                                       F-12
<PAGE>   43
                              QUEST SOFTWARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     In April 1999, the Company repurchased and cancelled 29.6 million shares of
common stock from a shareholder of the Company at a price of $1.18 per share.
The Company also entered into a severance agreement with the shareholder whereby
the shareholder will receive $200,000 per year through 2001 and provides for use
of a company car and related expenses and medical benefits. The Company recorded
approximately $700,000 of expense related to the agreement in April 1999, which
is included in compensation and other costs in the accompanying consolidated
financial statements.

     In August 2000, the Company received a full-recourse note receivable from
an officer of the Company for the purchase of 339,000 shares of the Company's
common stock at $46.50 per share. The note receivable plus accrued interest is
due August 2007 and bears interest at 6.33% per annum. The note receivable and
accrued interest is secured by the common stock and is deemed fully collectible
at December 31, 2000.

 5. LONG-TERM DEBT

     In connection with the repurchase of common stock from a shareholder in
April 1999 (Note 4), the Company borrowed $10.0 million under a term note with a
bank. The Company repaid the note after its initial public offering in August
1999.

     In conjunction with an acquisition, the Company assumed a $4.4 million
zero-interest loan related to a research and development funding arrangement
with the Province of Nova Scotia. The Company has imputed interest on the loan
of $1.2 million, which will be amortized to interest expense over the term of
the loan. The repayments have been fixed at $1.2 million in each of July 2001,
2002 and 2003, with the balance repayable in 2004.

 6. INCOME TAXES

     The provision for income taxes consists of the following for the years
ended December 31 (in thousands):

<TABLE>
<CAPTION>
                                                         1998      1999        2000
                                                        ------    -------    --------
<S>                                                     <C>       <C>        <C>
Current:
  Federal.............................................  $1,819    $ 2,763    $ 21,434
  State...............................................     425        402       4,516
  Foreign.............................................      78        808         109
                                                        ------    -------    --------
                                                         2,322      3,973      26,059
Deferred:
  Federal.............................................    (568)    (1,391)    (15,080)
  State...............................................     (75)      (309)     (4,277)
  Foreign.............................................    (165)      (122)        103
                                                        ------    -------    --------
                                                          (808)    (1,822)    (19,254)
  Change in valuation allowance.......................     165        122          --
                                                        ------    -------    --------
          Total income tax provision..................  $1,679    $ 2,273    $  6,805
                                                        ======    =======    ========
</TABLE>

                                       F-13
<PAGE>   44
                              QUEST SOFTWARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The reconciliation of the U.S. federal statutory rate to the effective
income tax rate for the years ended December 31, 1998, 1999 and 2000, is as
follows:

<TABLE>
<CAPTION>
                                                              1998    1999    2000
                                                              ----    ----    -----
<S>                                                           <C>     <C>     <C>
Tax provision (benefit) at U.S. federal statutory rates.....  35.0%   35.0%   (35.0)%
State taxes.................................................   5.7     1.1      0.8
Amortization................................................    --     0.6     67.6
Foreign taxes and foreign losses without tax benefit........   6.0     8.3      8.1
Research and development credits............................  (4.6)   (4.7)    (5.6)
Other.......................................................  (0.4)   (0.2)     1.3
                                                              ----    ----    -----
                                                              41.7%   40.1%    37.2%
                                                              ====    ====    =====
</TABLE>

     Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred taxes as of December 31, 1999 and 2000 are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                               1999        2000
                                                              -------    --------
<S>                                                           <C>        <C>
Deferred tax assets:
  Accounts receivable and sales returns reserves............  $   871    $  1,709
  Accrued liabilities.......................................      892       1,884
  Foreign net operating loss carryforwards..................      127      10,136
  U.S. net operating loss carryforwards.....................      339       9,330
  Intangibles...............................................      453          --
  Stock compensation........................................      184       1,655
  Tax credits...............................................       --       5,306
  Deferred revenue..........................................       --      11,313
  Other.....................................................       --         313
                                                              -------    --------
Total gross deferred assets.................................    2,866      41,646
Deferred tax liabilities:
  Cash to accrual adjustment................................     (150)         --
  Intangibles...............................................       --      (7,853)
  State taxes...............................................      (47)     (1,961)
  Fixed assets..............................................      (38)       (323)
                                                              -------    --------
Total gross deferred liabilities............................     (235)    (10,137)
Valuation allowance.........................................     (127)    (13,675)
                                                              -------    --------
Net deferred income taxes...................................  $ 2,504    $ 17,834
Less current portion........................................   (2,089)    (14,833)
                                                              -------    --------
                                                              $   415    $  3,001
                                                              =======    ========
</TABLE>

     At December 31, 2000, the Company has recorded a valuation allowance of
$13.7 million on its deferred tax assets. Based on the weight of available
evidence, the Company believes that it is more likely than not that these
deferred tax assets will not be realized. Approximately $8.9 million of the
change in the Company's valuation allowance relates to acquired deferred tax
assets. If these acquired deferred tax assets are realized in the future, the
tax benefit will be credited to goodwill. In addition, approximately $3.4
million of the change in valuation allowance relates to net operating losses
from stock option exercises. If these deferred tax assets are realized in the
future, the tax benefit will be credited to stockholder's equity.

                                       F-14
<PAGE>   45
                              QUEST SOFTWARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     At December 31, 2000 the Company has federal, state, and foreign net
operating loss carryforwards of $19.0 million, $32.0 million, and $23.0 million
which begin to expire in 2018, 2005, and 2002, respectively. Approximately $12.7
million of the federal and $12.0 million of the state net operating loss
carryforwards relate to acquired companies and are subject to limitations on
their utilization.

     At December 31, 2000 the Company had federal and state tax credit
carryforwards of $3.2 million and $1.7 million, respectively, which begin to
expire in 2018.

     Tax benefits associated with the exercise of stock options of $200,000 and
$28.8 million in 1999 and 2000 respectively, were credited to shareholders'
equity.

     Undistributed earnings of the Company's foreign subsidiaries were
immaterial as of December 31, 2000. Those earnings are considered to be
permanently reinvested. Accordingly, no provision for U.S. federal or state
income tax has been provided thereon.

 7. SHAREHOLDERS' EQUITY

     In April 1999, the Company issued 2.7 million shares of Series A Preferred
Stock for $15.0 million, and 1.8 million shares of Series B Redeemable Preferred
Stock for $10.0 million. In connection with the Company's initial public
offering in August 1999, all outstanding shares of Series A Preferred Stock were
converted into 8.0 million shares of common stock and all outstanding shares of
the Series B Redeemable Preferred Stock shares were redeemed for $10.0 million
plus dividends of $590,000.

     In August 1999, the Company completed an initial public offering of 8.8
million shares of its common stock. The Company received net proceeds of $64.9
million after deducting underwriting and offering expenses.

     In March 2000, the Company and certain selling shareholders sold 8.4
million shares of its common stock as part of a secondary offering. Of the
shares sold in the offering, 3.8 million shares were sold by the Company and 4.6
million shares were sold by selling shareholders. The Company's net proceeds
from its sale of stock were $253.5 million, after underwriting and offering
expenses. The Company did not receive any proceeds from the shares sold by
selling shareholders.

     In December 2000, the Board or Directors authorized a stock repurchase
program under which the Company may purchase up to 2 million shares of its
common stock. Under the repurchase program, the Company may purchases shares
from time to time at varying prices in open market or private transactions. As
of December 31, 2000, the Company had repurchased 1.7 million shares for
approximately $57.4 million. During 2000, the Company also repurchased
approximately 1,000 shares issued to former shareholders of an acquisition for
approximately $600,000. All shares repurchased have been cancelled and returned
to the status of authorized and unissued.

 8. EMPLOYEE BENEFIT PLANS

STOCK OPTION PLANS

     The Company's stock option plans provide for the issuance of stock options
to employees, directors and consultants of the Company. The options are
generally granted at the fair market value of the Company's common stock at the
grant date, expire ten years from the date of grant, and ratably vest over a
four- to five-year period. As of December 31, 2000, the Company has authorized
17.5 million shares for issuance under the plans, of which 4.6 million are
available for future grant.

                                       F-15
<PAGE>   46
                              QUEST SOFTWARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company has chosen to continue to account for its stock-based compensation plans
under APB Opinion No. 25 and provide the expanded disclosures specified in SFAS
No. 123. Had compensation cost been determined using the provisions of SFAS No.
123, the Company's net income (loss) available to common shareholders would have
been adjusted to the pro forma amounts indicated below (in thousands, except per
share data):

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                         ----------------------------
                                                          1998      1999       2000
                                                         ------    ------    --------
<S>                                                      <C>       <C>       <C>
Net income (loss) available to common shareholders:
  As reported..........................................  $2,346    $2,807    $(25,078)
                                                         ======    ======    ========
  Pro forma............................................  $2,177    $  202    $(47,691)
                                                         ======    ======    ========
Basic net income (loss) per share:
  As reported..........................................  $ 0.03    $ 0.04    $  (0.29)
                                                         ======    ======    ========
  Pro forma............................................  $ 0.02    $ 0.00    $  (0.56)
                                                         ======    ======    ========
Diluted net income (loss) per share:
  As reported..........................................  $ 0.03    $ 0.03    $  (0.29)
                                                         ======    ======    ========
  Pro forma............................................  $ 0.02    $ 0.00    $  (0.56)
                                                         ======    ======    ========
</TABLE>

     For purposes of estimating the compensation cost of the Company's option
grants in accordance with SFAS No. 123, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model,
with the following weighted-average assumptions used for grants in 1998 as a
private company: expected volatility of zero; risk-free interest rate of 6%; and
expected lives of ten years. Weighted-average assumptions for 1999 were:
expected volatility of 221%; risk-free interest rates of 6%; and expected lives
of five years. Weighted-average assumptions for 2000 were: expected volatility
of 122%; risk-free interest rates of 6%; and expected lives of five years.

     A summary of the status of the Company's stock option plans as of December
31, 1998, 1999 and 2000, and changes during the years ending on those dates is
presented below (in thousands, except per share data):

<TABLE>
<CAPTION>
                                      1998                        1999                        2000
                            -------------------------   -------------------------   -------------------------
                                        WEIGHTED-                   WEIGHTED-                   WEIGHTED-
                                         AVERAGE                     AVERAGE                     AVERAGE
                            SHARES    EXERCISE PRICE    SHARES    EXERCISE PRICE    SHARES    EXERCISE PRICE
                            ------   ----------------   ------   ----------------   ------   ----------------
<S>                         <C>      <C>                <C>      <C>                <C>      <C>
Outstanding, beginning of
  period..................   1,950        $0.39          6,734        $0.60         10,512        $ 3.44
Granted...................   6,766        $0.60          4,782        $7.03          4,142        $29.42
Exercised.................      --        $  --            (68)       $0.50         (2,493)       $ 1.81
Canceled..................  (1,982)       $0.39           (936)       $1.60         (1,520)       $13.03
                            ------                      ------                      ------
Balance, end of period....   6,734        $0.60         10,512        $3.44         10,641        $12.56
                            ======        =====         ======        =====         ======        ======
Exercisable, end of
  period..................      --        $  --          1,406        $1.03          1,684        $ 4.13
                            ======        =====         ======        =====         ======        ======
Weighted-average fair
  value of options granted
  during the year.........                $0.27                       $6.71                       $30.90
                                          =====                       =====                       ======
</TABLE>

     Certain of the options to purchase the Company's common stock have been
granted at below fair market value. Included in compensation and other costs in
the accompanying consolidated financial statements is $3.4 million of expense
recorded during the year ended December 31, 2000 associated with such option
grants. The expense equals the difference between the fair market value of the
Company's common stock on the grant date and the exercise price of the stock
options, and is recognized ratably over the vesting period of the stock options,
which is currently four to five years. The Company will record future
compensation expense of
                                       F-16
<PAGE>   47
                              QUEST SOFTWARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

$12.7 million relating to these options granted during the years ended December
31, 1999 and 2000, to purchase 1.7 million shares of common stock.

     The following tables summarizes information about stock options outstanding
at December 31, 2000 (in thousands, except per share data):

<TABLE>
<CAPTION>
                                OPTIONS OUTSTANDING
                 -------------------------------------------------        OPTIONS EXERCISABLE
                                  WEIGHTED-                          ------------------------------
                                   AVERAGE           WEIGHTED-                        WEIGHTED-
   RANGE OF        NUMBER         REMAINING           AVERAGE          NUMBER          AVERAGE
EXERCISE PRICES  OUTSTANDING   CONTRACTUAL LIFE    EXERCISE PRICE    EXERCISABLE    EXERCISE PRICE
---------------  -----------   ----------------   ----------------   -----------   ----------------
<S>              <C>           <C>                <C>                <C>           <C>
$ 0.50 -  0.50      2,851            7.49              $ 0.50             849           $ 0.50
$ 0.59 -  0.97        792            7.76              $ 0.59             195           $ 0.59
$ 1.19 -  1.19      1,231            7.81              $ 1.19             257           $ 1.19
$ 1.89 -  5.17      1,114            8.43              $ 2.71             140           $ 2.35
$ 6.00 - 25.38      1,447            8.91              $18.15             132           $12.83
$26.50 - 26.50      1,856            9.28              $26.50              --           $   --
$27.00 - 42.00      1,062            9.32              $35.85             110           $37.61
$46.50 - 53.63        288            9.61              $47.73               1           $53.42
                   ------                                               -----
                   10,641                              $12.56           1,684           $ 4.13
                   ======                              ======           =====           ======
</TABLE>

     Options to purchase 214,000 shares of common stock at exercise prices of
$0.50 to $25.38 per share were exercised in January 2001.

EMPLOYEE STOCK PURCHASE PLAN

     Under the Company's 1999 Employee Stock Purchase Plan, the Company is
authorized to issues up to 1.2 million shares of common stock to eligible
employees and the employees of participating subsidiaries. Individuals who are
scheduled to work more than 20 hours per week for more than five calendar months
per year are eligible to participate in the plan. A participant may contribute
up to 15% of their cash earnings, and the accumulated payroll deductions will be
applied to the purchase of shares on semi-annual purchase dates. The purchase
price per share will be equal to 85% the fair market value of the common stock
on the start date of the purchase period or, if lower, the fair market value on
the semi-annual purchase date. Semi-annual purchase dates will occur on the last
business day of January and July each year.

     At December 31, 2000, 1.2 million shares of common stock were reserved for
issuance. In January 2000, 238,000 shares of common stock were purchased under
the plan at $5.95 per share, and 50,000 shares of common stock were purchased
under the plan in July 2000 at $40.42 per share. At December 31, 2000, $2.9
million was recorded in accrued liabilities that employees had deposited for
purchases of common stock under the plan for the current offering period, which
expires on January 31, 2001.

EMPLOYEE 401(K) PLAN

     The Company sponsors the Quest Software, Inc. 401(k) Plan (the Plan)
covering substantially all employees. As allowed under Section 401(k) of the
Internal Revenue Code, the Plan provides tax-deferred salary deductions for
eligible employees. Employees may contribute from 1% to 15% of their annual
compensation to the Plan, limited to a maximum annual amount as set periodically
by the Internal Revenue Service. The Plan provides for discretionary
contributions as determined by the Board of Directors. Such contributions to the
Plan are allocated among eligible participants in the proportion of their
salaries to the total salaries of all participants. Participant contributions
vest immediately. Discretionary contributions made by the Company vest over a
three-year period. The Company's discretionary contributions to the Plan totaled
$466,000, $929,000 and $1.0 million for the years ended December 31, 1998, 1999
and 2000.

                                       F-17
<PAGE>   48
                              QUEST SOFTWARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 9. COMMITMENTS AND CONTINGENCIES

     The Company leases its office facilities and certain equipment under
various operating leases. A majority of these leases are non-cancelable and
obligate the Company to pay costs of maintenance, utilities, and applicable
taxes. The leases on most of the office facilities contain escalation clauses
and renewal options. Total rent expense was $1,038, $2,593 and $6,453, for the
years ending December 31, 1998, 1999, and 2000.

     Minimum lease commitments under non-cancelable operating leases as of
December 31, 2000 are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
------------------------
<S>                                                  <C>
2001...............................................  $ 7,864
2002...............................................    7,388
2003...............................................    6,605
2004...............................................    4,991
2005...............................................    4,495
Thereafter.........................................    3,683
                                                     -------
                                                     $35,026
                                                     =======
</TABLE>

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

10. GEOGRAPHIC AND SEGMENT INFORMATION

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

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

     The Company does not separately allocate operating expenses to these
segments, nor does it allocate specific assets to these segments. Therefore,
segment information reported includes only revenues, cost of sales and gross
profit, as this information and the geographic information described below is
the only separate segment information provided to the chief operating
decision-maker.

                                       F-18
<PAGE>   49
                              QUEST SOFTWARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Operating segment data for the three years in the period ended December 31,
2000, was as follows (in thousands):

<TABLE>
<CAPTION>
                                                              LICENSES    SERVICES     TOTAL
                                                              --------    --------    --------
<S>                                                           <C>         <C>         <C>
Year ended December 31, 1998:
  Revenues..................................................  $ 24,901    $ 9,889     $ 34,790
  Cost of revenues..........................................     3,433      2,507        5,940
                                                              --------    -------     --------
          Gross profit......................................  $ 21,468    $ 7,382     $ 28,850
                                                              ========    =======     ========
Year ended December 31, 1999:
  Revenues..................................................  $ 54,269    $16,599     $ 70,868
  Cost of revenues..........................................     2,998      4,195        7,193
                                                              --------    -------     --------
          Gross profit......................................  $ 51,271    $12,404     $ 63,675
                                                              ========    =======     ========
Year ended December 31, 2000:
  Revenues..................................................  $126,767    $38,820     $165,587
  Cost of revenues..........................................     8,609     10,695       19,304
                                                              --------    -------     --------
          Gross profit......................................  $118,158    $28,125     $146,283
                                                              ========    =======     ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                   NORTH                      OTHER
                                                 AMERICA(1)    EUROPE     INTERNATIONAL     TOTAL
                                                 ----------    -------    -------------    --------
<S>                                              <C>           <C>        <C>              <C>
Year ended December 31, 1998:
  Revenues.....................................   $ 32,090     $ 2,349       $   351       $ 34,790
  Gross profit.................................     26,495       2,120           235         28,850
  Income (loss) from operations................      3,737        (435)          387          3,689
  Long-lived assets............................      1,073         128           187          1,388
Year ended December 31, 1999:
  Revenues.....................................   $ 55,532     $13,213       $ 2,123       $ 70,868
  Gross profit.................................     55,389       6,862         1,424         63,675
  Income from operations.......................      3,270         498           700          4,468
  Long-lived assets............................     17,682         411           538         18,631
Year ended December 31, 2000:
  Revenues.....................................   $136,847     $25,901       $ 2,839       $165,587
  Gross profit.................................    132,195      13,732           356        146,283
  Loss from operations.........................    (20,070)       (264)       (9,542)       (29,876)
  Long-lived assets............................    302,120       1,202         1,360        304,682
</TABLE>

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

(1) Principally represents operations in the United States.

                                       F-19
<PAGE>   50

                              QUEST SOFTWARE, INC.

                          FINANCIAL STATEMENT SCHEDULE

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNT

<TABLE>
<CAPTION>
                                                         BALANCE AT    CHARGES                 BALANCE AT
                                                         BEGINNING    COSTS AND                  END OF
                      DESCRIPTION                        OF PERIOD    EXPENSES    DEDUCTIONS     PERIOD
                      -----------                        ----------   ---------   ----------   ----------
                                                                          (IN THOUSANDS)
<S>                                                      <C>          <C>         <C>          <C>
Year ended December 31, 1998:
  Allowance for doubtful accounts and sales returns....    $  783      $1,116      $  (847)      $1,052
Year ended December 31, 1999:
  Allowance for doubtful accounts and sales returns....    $1,052      $5,451      $(3,264)      $3,239
Year ended December 31, 2000:
  Allowance for doubtful accounts and sales returns....    $3,239      $9,990      $(3,253)      $9,976
</TABLE>

     All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission have been
omitted because they are not required under the related instructions or are
inapplicable, or because the information has been provided in the Consolidated
Financial Statements or Notes thereto.
<PAGE>   51

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 EXHIBIT
  NUMBER                           EXHIBIT TITLE
 -------                           -------------
<S>         <C>
 3.1*       Second Amended and Restated Articles of Incorporation.
 3.2**      Second Amended and Restated Bylaws, as amended.
 3.3***     Certificate of Amendment of Second Amended and Restated
            Articles of Incorporation.
 4.1*       Form of Registrant's Specimen Common Stock Certificate.
10.1*++     Registrant's 1998 Stock Option/Stock Issuance Plan.
10.2*++     Registrant's 1999 Stock Incentive Plan.
10.3*++     Registrant's 1999 Employee Stock Purchase Plan.
10.4*       Form of Directors' and Officers' Indemnification Agreement.
10.5*+      Agreement, dated February 19, 1999, between Quest Software,
            Inc. and INSO Chicago Corporation, dba INSO Corporation.
10.6*+      OEM Agreement, dated March 3, 1998, by and between Quest
            Software, Inc. and Artifex Software Inc.
10.7*       Office Space Lease dated as of June 17, 1999 between The
            Irvine Company and Quest Software, Inc.
10.8**      Office Lease between The Northwestern Mutual Life Insurance
            Company (Landlord) and Quest Software, Inc. (Tenant) dated
            as of September 30, 1999.
10.9***+    Inxight/Resolute Software: Software Distribution and License
            Agreement -- Inxight Technology dated September 30, 1998
            between Resolute Software, Inc. and Inxight Software, Inc.
10.10       Office lease, dated June 2000, between Fund VIII and Fund IX
            Associates and Quest Software, Inc.
21.1        Subsidiaries of the Company.
23.1        Consent of Deloitte & Touche LLP.
</TABLE>

---------------
*   Incorporated herein by reference to the Company's Registration Statement on
    Form S-1 and all amendments thereto (File No. 333-80543).

**  Incorporated herein by reference to the Company's Registration Statement on
    Form S-1 and all amendments thereto (File No. 333-30816).

*** Incorporated herein by reference to the Company's Quarterly Report on Form
    10-Q for the period ended June 30, 2000.

+   Confidential treatment requested and received as to certain portions of this
    agreement.

++  Indicates a management contract or compensatory arrangement.