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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-Q

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|x                                                                  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|------------------------------------------------------------------ | ----------------------------------------------------------------------------------------
|                                                                   |                                                                                         
|                                                                   | For the quarterly period ended September 30, 2002                                       
|                                                                   |                                                                                         
|                                                                   | OR                                                                                      
|                                                                   |                                                                                         
|o                                                                  | 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)            
|                                                                  
|California                                                         |                                                                                         
|(State or other jurisdiction of incorporation or organization)     |                                                                                         
|                                                                   |                                                                                         
|8001 Irvine Center Drive Irvine, California                        |                                                                                         
|(Address of principal executive offices)                           |                                                                                         
|                                                                   |                                                                                         
|Registrants telephone number, including area code: (949) 754-8000
|                                                                   |                                                                                         

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 | o
|--- | - | -- | -

The number of shares outstanding of the
Registrants Common Stock, no par value, as of November 1, 2002 was 90,804,540.

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QUEST SOFTWARE, INC.

FORM 10-Q

TABLE OF CONTENTS

|               |                                                                                                                                                          | Page  Number
|-------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------
|               |                                                                                                                                                          |             
|PART I.        | FINANCIAL INFORMATION                                                                                                                                    |             
|               |                                                                                                                                                          |             
|Item 1.        | Financial Statements                                                                                                                                     |             
|               |                                                                                                                                                          |             
|               | Condensed Consolidated Balance Sheets as of December 31, 2001 and September 30, 2002 (unaudited)                                                         | 3           
|               |                                                                                                                                                          |             
|               | Condensed Consolidated Statements of Operations and Comprehensive Operations for the Three and Nine Months Ended September 30, 2001 and 2002 (unaudited) | 4           
|               |                                                                                                                                                          |             
|               | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2002 (unaudited)                                        | 5           
|               |                                                                                                                                                          |             
|               | Condensed Consolidated Statements of Comprehensive Operations for the Three and Nine Months Ended September 30, 2001 and 2002 (unaudited)                | 6           
|               |                                                                                                                                                          |             
|               | Notes to Condensed Consolidated Financial Statements (unaudited)                                                                                         | 7           
|               |                                                                                                                                                          |             
|Item 2.        | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                    | 13          
|               |                                                                                                                                                          |             
|Item 3.        | Quantitative and Qualitative Disclosures about Market Risk                                                                                               | 26          
|               |                                                                                                                                                          |             
|Item 4.        | Controls and Procedures                                                                                                                                  | 27          
|               |                                                                                                                                                          |             
|PART II.       | OTHER INFORMATION                                                                                                                                        |             
|               |                                                                                                                                                          |             
|Item 1.        | Legal Proceedings                                                                                                                                        | 28          
|               |                                                                                                                                                          |             
|Item 5.        | Other Information                                                                                                                                        | 28          
|               |                                                                                                                                                          |             
|Item 6.        | Exhibits and Reports on Form 8-K                                                                                                                         | 28          
|               |                                                                                                                                                          |             
|SIGNATURES     | 29                                                                                                                                                      
|CERTIFICATIONS | 30                                                                                                                                                      

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PART I
FINANCIAL INFORMATION

Item 1:    
Financial Statements

QUEST SOFTWARE, INC.CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)  (Unaudited)

|                                        |                                                                                                                                                           | December 31,2001 |         | September 30, 2002 |  
|--------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | ------- | ------------------ | -
|                                        |                                                                                                                                                           |                  |         |                    |  
|ASSETS                                  |                                                                                                                                                           |                  |         |                    |  
|Current assets:                         |                                                                                                                                                           |                  |         |                    |  
|                                        | Cash and cash equivalents                                                                                                                                 |                  | $       | 30,279             |  
|                                        | Short-term marketable securities available for sale                                                                                                       |                  |         | 23,039             |  
|                                        | Accounts receivable, net                                                                                                                                  |                  |         | 35,783             |  
|                                        | Prepaid expenses and other current assets                                                                                                                 |                  |         | 8,230              |  
|                                        | Deferred income taxes                                                                                                                                     |                  |         | 12,085             |  
|                                        |                                                                                                                                                           |                  |         |                    |  
|                                        | Total current assets                                                                                                                                      |                  |         | 109,416            |  
|Property and equipment, net             |                                                                                                                                                           |                  | 57,496  |                    |  
|Long-term marketable securities         |                                                                                                                                                           |                  | 153,838 |                    |  
|Goodwill                                |                                                                                                                                                           |                  | 191,233 |                    |  
|Amortizing intangible assets, net       |                                                                                                                                                           |                  | 11,473  |                    |  
|Deferred income taxes                   |                                                                                                                                                           |                  | 10,902  |                    |  
|Other assets                            |                                                                                                                                                           |                  | 5,767   |                    |  
|                                        |                                                                                                                                                           |                  |         |                    |  
|                                        | Total assets                                                                                                                                              |                  | $       | 540,125            |  
|                                        |                                                                                                                                                           |                  |         |                    |  
|LIABILITIES AND SHAREHOLDERS EQUITY    |                                                                                                                                                           |                  |         |                    |  
|Current liabilities:                    |                                                                                                                                                           |                  |         |                    |  
|                                        | Accounts payable                                                                                                                                          |                  |         | 5,495              |  
|                                        | Accrued compensation                                                                                                                                      |                  |         | 12,764             |  
|                                        | Other accrued expenses                                                                                                                                    |                  |         | 21,720             |  
|                                        | Income taxes payable                                                                                                                                      |                  |         | 3,243              |  
|                                        | Deferred revenue                                                                                                                                          |                  |         | 50,395             |  
|                                        |                                                                                                                                                           |                  |         |                    |  
|                                        | Total current liabilities                                                                                                                                 |                  |         | 93,617             |  
|Long-term liabilities and other         |                                                                                                                                                           |                  | 5,140   |                    |  
|Commitments and contingencies (Note 11) |                                                                                                                                                           |                  |         |                    |  
|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; 89,226 and 90,393 issued and outstanding at December 31, 2001 and September 30, 2002, respectively |                  |         | 537,081            |  
|                                        | Accumulated deficit                                                                                                                                       |                  |         | (78,973            | )
|                                        | Accumulated other comprehensive income                                                                                                                    |                  |         | 522                |  
|                                        | Notes receivable from sale of common stock                                                                                                                |                  |         | (17,262            | )
|                                        |                                                                                                                                                           |                  |         |                    |  
|                                        | Net shareholders equity                                                                                                                                  |                  |         | 441,368            |  
|                                        |                                                                                                                                                           |                  |         |                    |  
|                                        | Total liabilities and shareholders equity                                                                                                                |                  | $       | 540,125            |  
|                                        |                                                                                                                                                           |                  |         |                    |  
|                                        |                                                                                                                                                           |                  |         |                    |  

See accompanying notes to condensed consolidated financial statements.

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QUEST SOFTWARE, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)

|                                          |                                                       | Three Months Ended  September 30, |         | Nine Months Ended  September30, |  
|----------------------------------------- | ----------------------------------------------------- | --------------------------------- | ------- | ------------------------------- | -
|                                          |                                                       |                                   |         |                                 |  
|                                          |                                                       | 2001                              |         | 2002                            |  
|                                          |                                                       |                                   |         |                                 |  
|Revenues:                                 |                                                       |                                   |         |                                 |  
|                                          | Licenses                                              |                                   | $       | 37,584                          |  
|                                          | Services                                              |                                   |         | 19,059                          |  
|                                          |                                                       |                                   |         |                                 |  
|                                          | Total revenues                                        |                                   |         | 56,643                          |  
|Cost of revenues:                         |                                                       |                                   |         |                                 |  
|                                          | Licenses                                              |                                   |         | 948                             |  
|                                          | Services                                              |                                   |         | 4,920                           |  
|                                          | Amortization of purchased intangible assets           |                                   |         | 1,894                           |  
|                                          |                                                       |                                   |         |                                 |  
|                                          | Total cost of revenues                                |                                   |         | 7,762                           |  
|                                          |                                                       |                                   |         |                                 |  
|Gross profit                              |                                                       |                                   | 48,881  |                                 |  
|Operating expenses:                       |                                                       |                                   |         |                                 |  
|                                          | Sales and marketing                                   |                                   |         | 29,593                          |  
|                                          | Research and development                              |                                   |         | 15,262                          |  
|                                          | General and administrative                            |                                   |         | 5,809                           |  
|                                          | Other compensation costs and intangibles amortization |                                   |         | 16,418                          |  
|                                          |                                                       |                                   |         |                                 |  
|                                          | Total operating expenses                              |                                   |         | 67,082                          |  
|                                          |                                                       |                                   |         |                                 |  
|Income (loss) from operations             |                                                       |                                   | (18,201 | )                               |  
|Other income, net                         |                                                       |                                   | 2,654   |                                 |  
|Loss on sale of aircraft                  |                                                       |                                   |        |                                 |  
|Write-down of investments                 |                                                       |                                   |        |                                 |  
|                                          |                                                       |                                   |         |                                 |  
|Income (loss) before income tax provision |                                                       |                                   | (15,547 | )                               |  
|Income tax provision (benefit)            |                                                       |                                   | (4,706  | )                               |  
|                                          |                                                       |                                   |         |                                 |  
|Net income (loss)                         |                                                       | $                                 | (10,841 | )                               | $
|                                          |                                                       |                                   |         |                                 |  
|Net income (loss) per share:              |                                                       |                                   |         |                                 |  
|                                          | Basic                                                 |                                   | $       | (0.12                           | )
|                                          |                                                       |                                   |         |                                 |  
|                                          | Diluted                                               |                                   | $       | (0.12                           | )
|                                          |                                                       |                                   |         |                                 |  
|Weighted average shares:                  |                                                       |                                   |         |                                 |  
|                                          | Basic                                                 |                                   |         | 88,299                          |  
|                                          | Diluted                                               |                                   |         | 88,299                          |  
|                                          |                                                       |                                   |         |                                 |  

See accompanying notes to condensed consolidated financial statements.

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QUEST SOFTWARE, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)

|                                                                      |                                                                                          | Nine Months Ended  September 30, |       
|--------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | -------------------------------- | ------
|                                                                      |                                                                                          |                                  |       
|                                                                      |                                                                                          | 2001                             |       
|                                                                      |                                                                                          |                                  |       
|Cash flows from operating activities:                                 |                                                                                          |                                  |       
|                                                                      | Net income (loss)                                                                        |                                  | $     
|                                                                      | Adjustments to reconcile net income (loss) to net cash provided by operating activities: |                                  |       
|                                                                      | Depreciation and amortization                                                            |                                  |       
|                                                                      | Compensation expense associated with stock option grants                                 |                                  |       
|                                                                      | Accrued interest receivable from shareholders                                            |                                  |       
|                                                                      | Deferred income taxes                                                                    |                                  |       
|                                                                      | Provision for bad debts                                                                  |                                  |       
|                                                                      | Loss on equity investments                                                               |                                  |       
|                                                                      | Loss on sale of aircraft                                                                 |                                  |       
|                                                                      | Changes in operating assets and liabilities, net of effects of acquisitions:             |                                  |       
|                                                                      | Accounts receivable                                                                      |                                  |       
|                                                                      | Prepaid expenses and other current assets                                                |                                  |       
|                                                                      | Other assets                                                                             |                                  |       
|                                                                      | Accounts payable                                                                         |                                  |       
|                                                                      | Accrued compensation                                                                     |                                  |       
|                                                                      | Other accrued expenses                                                                   |                                  |       
|                                                                      | Income taxes payable                                                                     |                                  |       
|                                                                      | Deferred revenue                                                                         |                                  |       
|                                                                      | Other liabilities                                                                        |                                  |       
|                                                                      |                                                                                          |                                  |       
|                                                                      | Net cash provided by operating activities                                                |                                  |       
|Cash flows from investing activities:                                 |                                                                                          |                                  |       
|                                                                      | Purchases of property and equipment                                                      |                                  |       
|                                                                      | Proceeds from sale of aircraft                                                           |                                  |       
|                                                                      | Cash paid for acquisition, net of cash acquired (Note 3)                                 |                                  |       
|                                                                      | Purchases of marketable securities                                                       |                                  |       
|                                                                      | Sales and maturities of marketable securities                                            |                                  |       
|                                                                      |                                                                                          |                                  |       
|                                                                      | Net cash used by investing activities                                                    |                                  |       
|Cash flows from financing activities:                                 |                                                                                          |                                  |       
|                                                                      | Repayment of notes payable                                                               |                                  |       
|                                                                      | Repayment of note receivable from shareholder                                            |                                  |       
|                                                                      | Repayment of capital lease obligations                                                   |                                  |       
|                                                                      | Proceeds from exercise of stock options                                                  |                                  |       
|                                                                      | Proceeds from employee stock purchase plan                                               |                                  |       
|                                                                      |                                                                                          |                                  |       
|                                                                      | Net cash provided by financing activities                                                |                                  |       
|Effect of exchange rate changes on cash and cash equivalents          |                                                                                          |                                  | (127  
|                                                                      |                                                                                          |                                  |       
|Net increase in cash and cash equivalents                             |                                                                                          |                                  | 34,769
|Cash and cash equivalents, beginning of period                        |                                                                                          |                                  | 25,155
|                                                                      |                                                                                          |                                  |       
|Cash and cash equivalents, end of period                              |                                                                                          | $                                | 59,924
|                                                                      |                                                                                          |                                  |       
|Supplemental disclosures of consolidated cash flow information:       |                                                                                          |                                  |       
|                                                                      | Cash paid for:                                                                           |                                  |       
|                                                                      | Interest                                                                                 |                                  | $     
|                                                                      |                                                                                          |                                  |       
|                                                                      | Income taxes, net of refunds ($(4,643) in 2001 and $(27) in 2002)                        |                                  | $     
|                                                                      |                                                                                          |                                  |       
|Supplemental schedule of non-cash investing and financing activities: |                                                                                          |                                  |       
|                                                                      | Unrealized gain on available-for-sale securities                                         |                                  | $     
|                                                                      |                                                                                          |                                  |       
|                                                                      | Tax benefit related to stock option exercises                                            |                                  | $     
|                                                                      |                                                                                          |                                  |       
|                                                                      |                                                                                          |                                  |       

See Note 3 for details of assets acquired and liabilities assumed in the purchase transaction of BB4 Technologies, Inc.

See accompanying notes to condensed consolidated financial statements.

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QUEST SOFTWARE, INC.CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (In thousands) (Unaudited)

|                            |                                                  | Three Months Ended  September 30, |         | Nine Months Ended  September 30, |  
|--------------------------- | ------------------------------------------------ | --------------------------------- | ------- | -------------------------------- | -
|                            |                                                  |                                   |         |                                  |  
|                            |                                                  | 2001                              |         | 2002                             |  
|                            |                                                  |                                   |         |                                  |  
|Net income (loss)           |                                                  | $                                 | (10,841 | )                                | $
|Other comprehensive income: |                                                  |                                   |         |                                  |  
|                            | Unrealized gain on available-for-sale securities |                                   |         | 1,280                            |  
|                            |                                                  |                                   |         |                                  |  
|Comprehensive income (loss) |                                                  | $                                 | (9,561  | )                                | $
|                            |                                                  |                                   |         |                                  |  
|                            |                                                  |                                   |         |                                  |  

See accompanying notes to condensed consolidated financial statements.

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QUEST SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Quest Software, Inc., a California corporation (the Company or
Quest), as of September 30, 2002 and for the three and nine months ended September 30, 2001 and 2002, reflect all adjustments (consisting of normal recurring accruals) that, in the opinion of management, are necessary for a fair
presentation of the results for the interim periods presented. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

Certain reclassifications have been made to the prior-years balances to conform to the current years presentation, which includes the adoption of Emerging
Issues Task Force (EITF) D-103, Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred. The result of this adoption was an increase in total services revenue with a
corresponding increase in cost of services revenue of $0.3 million and $0.9 million for the three and nine months ended September 30, 2001, respectively. The impact for the current year is higher services revenue and cost of services
revenue of $0.2 million and $0.6 million for the three and nine months ended September 30, 2002, respectively. These amounts were previously offset against cost of services revenue.

These financial statements should be read in conjunction with the audited financial statements included in the Companys Annual Report on Form 10-K for the year
ended December 31, 2001.

Operating results for the three and nine months ended September 30, 2002 are not necessarily indicative of the
results that may be expected for any future period.

2. New Accounting Pronouncements

In July 2001, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and other intangible assets. Quest adopted SFAS No. 142 at the beginning of the first quarter of 2002. As required by SFAS No. 142, Quest discontinued amortizing the remaining
balances of goodwill as of the beginning of fiscal 2002. All remaining and future acquired goodwill will be subject to impairment tests annually, or earlier if indicators of potential impairment exist, using a fair-value-based approach. All other
intangible assets will continue to be amortized over their estimated useful lives and assessed for impairment under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Previously recognized workforce-in-place
intangible assets were reclassified to goodwill effective January 1, 2002.

Under SFAS No. 142, goodwill impairment is deemed to exist if
the net book value of a reporting unit exceeds its estimated fair value. The Companys reporting units are generally consistent with the operating segments underlying the segments identified in Note 8Operating Segment Data. In conjunction
with the implementation of SFAS No. 142, the Company performed its initial impairment review and as a result determined that the carrying value of its reporting units was less than the estimated fair value. In calculating the fair value of the
reporting units, the Market Approach (Guideline Company Method) was the methodology deemed the most reliable and used for impairment analysis. Quest will perform subsequent annual impairment reviews during the fourth quarter of each year, or earlier
if indicators of potential impairment exist, commencing in the fourth quarter of 2002. Future impairment reviews may result in charges against earnings to write down the value of goodwill.

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A reconciliation of previously reported net income (loss) and earnings (loss) per share to the amounts adjusted for
the exclusion of goodwill and workforce-in-place amortization, net of the related income tax effect, is as follows (in thousands, except per share amounts):

|                                                           |         | Three Months Ended  September 30, |         | Nine Months Ended  September 30, |  
|---------------------------------------------------------- | ------- | --------------------------------- | ------- | -------------------------------- | -
|                                                           |         |                                   |         |                                  |  
|                                                           |         | 2001                              |         | 2002                             |  
|                                                           |         |                                   |         |                                  |  
|Reported net income (loss)                                 |         | $                                 | (10,841 | )                                | $
|Goodwill and workforce amortization (net of tax)           |         |                                   | 13,941  |                                  |  
|                                                           |         |                                   |         |                                  |  
|Adjusted net income                                        |         | $                                 | 3,100   |                                  | $
|                                                           |         |                                   |         |                                  |  
|Reported basic net income (loss) per share                 |         | $                                 | (0.12   | )                                | $
|Goodwill and workforce amortization per share (net of tax) |         |                                   | 0.16    |                                  |  
|                                                           |         |                                   |         |                                  |  
|Adjusted basic net income per share                        |         | $                                 | 0.04    |                                  | $
|                                                           |         |                                   |         |                                  |  
|Reported diluted net income (loss) per share               |         | $                                 | (0.12   | )                                | $
|Goodwill and workforce amortization per share (net of tax) |         |                                   | 0.15    |                                  |  
|                                                           |         |                                   |         |                                  |  
|Adjusted diluted net income per share                      |         | $                                 | 0.03    |                                  | $
|                                                           |         |                                   |         |                                  |  
|Weighted average shares:                                   |         |                                   |         |                                  |  
|                                                           | Basic   |                                   |         | 88,299                           |  
|                                                           | Diluted |                                   |         | 92,158                           |  

Amortized intangible
assets as of December 31, 2001 and September 30, 2002, respectively, are comprised of the following (in thousands):

|                      |  | December 31, 2001      |        | September 30, 2002        |  
|--------------------- |  | ---------------------- | ------ | ------------------------- | -
|                      |  |                        |        |                           |  
|                      |  | Gross Carrying  Amount |        | Accumulated  Amortization |  
|                      |  |                        |        |                           |  
|Acquired technology   |  | $                      | 22,694 |                           | $
|Customer list         |  |                        | 2,381  |                           |  
|Non-compete agreement |  |                        |       |                           |  
|Other                 |  |                        | 2,264  |                           |  
|                      |  |                        |        |                           |  
|                      |  | $                      | 27,339 |                           | $
|                      |  |                        |        |                           |  

Amortization expense for amortizing
intangible assets was $1.8 million and $5.5 million for the three and nine months ended September 30, 2002, respectively. Estimated annual amortization expense by fiscal year is as follows: 2002$7.4 million; 2003$5.8 million;
2004$0.9 million; thereafter$0.2 million. All intangible assets currently recorded will be fully amortized by the end of 2007.

The changes in the carrying amount of goodwill by reportable operating segment for the nine months ended September 30, 2002 are as follows (in thousands):

|                                                                                 | Licenses |   | Services |   | Total   |    
|-------------------------------------------------------------------------------- | -------- | - | -------- | - | ------- | ---
|                                                                                 |          |   |          |   |         |    
|Balance as of December 31, 2001                                                  | 145,337  |   | 45,896   |   | 191,233 | (1)
|Goodwill acquired during the nine months ended September 30, 2002                | 3,683    |   | 1,163    |   | 4,846   |    
|Goodwill adjustment for income tax refunds related to pre-acquisition tax period | (230     | ) | (72      | ) | (302    | )  
|                                                                                 |          |   |          |   |         |    
|Balance as of September 30, 2002                                                 | 148,790  |   | 46,987   |   | 195,777 |    
|                                                                                 |          |   |          |   |         |    

|   
|---
|(1)

Also in August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. This new statement also supersedes certain aspects of Accounting Principles Board
(APB) 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, with regard to reporting the effects of a disposal
of a segment of a business and will require expected future operating losses from discontinued operations to be reported in discontinued operations in the period incurred (rather than as of the measurement date as presently required by APB 30). In
addition, more dispositions may qualify for discontinued operations treatment. The provisions of this statement are required to be applied for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company
adopted SFAS No. 144 effective January 1, 2002. The adoption of SFAS No. 144 did not have a significant impact on the financial position, results of operations, or cash flows of the Company.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs incurred in a Restructuring). SFAS No. 146 requires that costs associated with exit or disposal activities be recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS
No. 146 also establishes that the liability should initially be measured and recorded at fair value. The Company will adopt the provisions of SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002.

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3. Acquisition

On February 1, 2002, the Company
acquired the outstanding shares of BB4 Technologies, Inc., a provider of systems availability monitoring solutions. The purchase price for BB4 Technologies, Inc. was $6.6 million, consisting of $4.2 million cash, direct acquisition costs of
$0.2 million, and future payments of $2.2 million related to non-compete agreements with certain key employees who are former shareholders. The acquisition was accounted for as a purchase with the purchase price allocated as follows (in
thousands):

|Current assets      |                      | $ | 123    |      
|------------------- | -------------------- | - | ------ | -----
|Goodwill            |                      |   | 4,846  |      
|Other intangibles   |                      |   | 2,743  |      
|Deferred taxes      |                      |   | (1,097 | )    
|Liabilities assumed |                      |   | (60    | )    
|                    |                      |   |        |      
|                    | Total purchase price |   | $      | 6,555
|                    |                      |   |        |      
|                    |                      |   |        |      

Operating results include operations of BB4 from the date of acquisition. The acquisition, if it had been made in
the beginning of 2001, would not have had a significant impact on revenues, net loss or net loss per sharebasic and diluted. The goodwill associated with this acquisition is not deductible for tax purposes.

The Company believes that the acquisition resulted in the recognition of goodwill primarily as a result of the expected benefits that are anticipated to be realized
from a more comprehensive suite of monitoring software products.

4. Other Compensation Costs

The Company records compensation expense for options to purchase the Companys common stock granted with an exercise price 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, currently four to five
years. The following table shows the allocation to Cost of Services Revenues, Sales and Marketing, Research and Development and General and Administrative expenses of such costs based on the related headcount (in thousands):

|                                      |                            | As Reported |   | Allocation |  | Pro Forma |      
|------------------------------------- | -------------------------- | ----------- | - | ---------- |  | --------- | -----
|                                      |                            |             |   |            |  |           |      
|Three months ended September 30, 2001 |                            |             |   |            |  |           |      
|                                      | Cost of services revenues  |             | $ | 4,920      |  | $         | 59   
|                                      | Sales and marketing        |             |   | 29,593     |  |           | 439  
|                                      | Research and development   |             |   | 15,262     |  |           | 381  
|                                      | General and administrative |             |   | 5,809      |  |           | 98   
|Three months ended September 30, 2002 |                            |             |   |            |  |           |      
|                                      | Cost of services revenues  |             | $ | 4,290      |  | $         | 31   
|                                      | Sales and marketing        |             |   | 30,934     |  |           | 177  
|                                      | Research and development   |             |   | 14,508     |  |           | 203  
|                                      | General and administrative |             |   | 6,287      |  |           | 51   
|Nine months ended September 30, 2001  |                            |             |   |            |  |           |      
|                                      | Cost of services revenues  |             | $ | 14,034     |  | $         | 161  
|                                      | Sales and marketing        |             |   | 91,675     |  |           | 1,249
|                                      | Research and development   |             |   | 44,649     |  |           | 1,209
|                                      | General and administrative |             |   | 18,248     |  |           | 1,410
|Nine months ended September 30, 2002  |                            |             |   |            |  |           |      
|                                      | Cost of services revenues  |             | $ | 13,195     |  | $         | 92   
|                                      | Sales and marketing        |             |   | 92,324     |  |           | 487  
|                                      | Research and development   |             |   | 44,473     |  |           | 614  
|                                      | General and administrative |             |   | 18,415     |  |           | 135  

Amortization expense
for other compensation costs was $0.5 million and $1.3 million for the three and nine months ended September 30, 2002, respectively. Estimated annual amortization expense by fiscal year is as follows: 2002$1.9 million;
2003$1.4 million; 2004$0.9 million; thereafter$0.8 million per year.

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5. Net Income (Loss) Per Share

The Company computes net
income (loss) per share in accordance with SFAS No. 128, Earnings per Share. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted
net income (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 the effect of such inclusion
would be dilutive.

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

|                                                             |                                                                                                                                                                                                                                                                                       | Three Months Ended  September 30, |        | Nine Months Ended  September 30, | 
|------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ------ | -------------------------------- | 
|                                                             |                                                                                                                                                                                                                                                                                       |                                   |        |                                  | 
|                                                             |                                                                                                                                                                                                                                                                                       | 2001                              |        | 2002                             | 
|                                                             |                                                                                                                                                                                                                                                                                       |                                   |        |                                  | 
|Shares used in computing basic net income (loss) per share   |                                                                                                                                                                                                                                                                                       |                                   | 88,299 |                                  | 
|Dilutive effect of stock options                             |                                                                                                                                                                                                                                                                                       |                                   |       | (1)                              | 
|                                                             |                                                                                                                                                                                                                                                                                       |                                   |        |                                  | 
|Shares used in computing diluted net income (loss) per share |                                                                                                                                                                                                                                                                                       |                                   | 88,299 |                                  | 
|                                                             |                                                                                                                                                                                                                                                                                       |                                   |        |                                  | 
|                                                             |                                                                                                                                                                                                                                                                                       |                                   |        |                                  | 
|                                                            
|(1)                                                          | Effect would have been anti-dilutive, accordingly, the amount is excluded from shares used in computing diluted net loss per share. The dilutive effect of stock
options would have been 3,859 and 4,211 shares for the three and nine months ended September 30, 2001, respectively.

6. Shareholders Equity

In January and July 2002, 124,095 and 237,891 shares of common stock were purchased under the Companys Employee Stock Purchase Plan at a price of $20.26
and $8.23 per share, respectively.

7. Stock Option Plans

The following
table summarizes information about stock options outstanding as of September 30, 2002 (in thousands, except for per share data):

|                                                                                               |           | Number  of Shares |        | Weighted Average  Exercise Price |   | Number of Options  Exercisable as of  September 30, 2002 |      
|---------------------------------------------------------------------------------------------- | --------- | ----------------- | ------ | -------------------------------- | - | -------------------------------------------------------- | -----
|                                                                                               |           |                   |        |                                  |   |                                                          |      
|Balance at December 31, 2001                                                                   |           |                   | 15,926 |                                  | $ | 14.27                                                    |      
|                                                                                               | Granted   |                   |        | 4,803                            |   |                                                          | 9.09 
|                                                                                               | Exercised |                   |        | (1,146                           | ) |                                                          | 1.21 
|                                                                                               | Canceled  |                   |        | (1,075                           | ) |                                                          | 21.35
|                                                                                               |           |                   |        |                                  |   |                                                          |      
|Balance at September 30, 2002                                                                  |           |                   | 18,508 |                                  | $ | 13.37                                                    |      
|                                                                                               |           |                   |        |                                  |   |                                                          |      
|Weighted-average fair value of options granted during the nine-months ended September 30, 2002 |           |                   |        |                                  | $ | 9.09                                                     |      
|                                                                                               |           |                   |        |                                  |   |                                                          |      
|                                                                                               |           |                   |        |                                  |   |                                                          |      

8. Segment Data

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 Licenses 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, operating segment
information reported includes only revenues, cost of revenues and gross profit, as this information and the geographic information described below are the only information provided to the chief operating decision maker on a segment basis.

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Reportable segment data for the three and nine months ended September 30, 2001 and 2002 were as follows (in
thousands):

|                                      |                  | Licenses |   | Services |  | Total |       
|------------------------------------- | ---------------- | -------- | - | -------- |  | ----- | ------
|                                      |                  |          |   |          |  |       |       
|Three months ended September 30, 2001 |                  |          |   |          |  |       |       
|                                      | Revenues         |          | $ | 37,584   |  | $     | 19,059
|                                      | Cost of Revenues |          |   | 2,842    |  |       | 4,920 
|                                      |                  |          |   |          |  |       |       
|                                      | Gross profit     |          | $ | 34,742   |  | $     | 14,139
|                                      |                  |          |   |          |  |       |       
|Three months ended September 30, 2002 |                  |          |   |          |  |       |       
|                                      | Revenues         |          | $ | 39,880   |  | $     | 23,203
|                                      | Cost of Revenues |          |   | 2,062    |  |       | 4,290 
|                                      |                  |          |   |          |  |       |       
|                                      | Gross profit     |          | $ | 37,818   |  | $     | 18,913
|                                      |                  |          |   |          |  |       |       
|Nine months ended September 30, 2001  |                  |          |   |          |  |       |       
|                                      | Revenues         |          | $ | 135,171  |  | $     | 52,071
|                                      | Cost of Revenues |          |   | 8,795    |  |       | 14,034
|                                      |                  |          |   |          |  |       |       
|                                      | Gross profit     |          | $ | 126,376  |  | $     | 38,037
|                                      |                  |          |   |          |  |       |       
|Nine months ended September 30, 2002  |                  |          |   |          |  |       |       
|                                      | Revenues         |          | $ | 117,059  |  | $     | 68,954
|                                      | Cost of Revenues |          |   | 6,291    |  |       | 13,195
|                                      |                  |          |   |          |  |       |       
|                                      | Gross profit     |          | $ | 110,768  |  | $     | 55,759
|                                      |                  |          |   |          |  |       |       
|                                      |                  |          |   |          |  |       |       

Revenues are attributed to geographic areas primarily based on the location of the entity to which the products or
services were delivered.  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):

|                                      |                                                         | North America(1) |   | Europe  |   | Other International |        | Total |  
|------------------------------------- | ------------------------------------------------------- | ---------------- | - | ------- | - | ------------------- | ------ | ----- | -
|                                      |                                                         |                  |   |         |   |                     |        |       |  
|Three months ended September 30, 2001 |                                                         |                  |   |         |   |                     |        |       |  
|                                      | Revenues                                                |                  | $ | 44,346  |   | $                   | 10,869 |       | $
|                                      | Gross profit                                            |                  |   | 39,627  |   |                     | 8,330  |       |  
|                                      | Loss from operations                                    |                  |   | (14,949 | ) |                     | (159   | )     |  
|                                      | Long-lived assets                                       |                  |   | 402,715 |   |                     | 2,259  |       |  
|Three months ended September 30, 2002 |                                                         |                  |   |         |   |                     |        |       |  
|                                      | Revenues                                                |                  | $ | 47,446  |   | $                   | 14,418 |       | $
|                                      | Gross profit                                            |                  |   | 46,899  |   |                     | 9,281  |       |  
|                                      | Income (loss) from operations                           |                  |   | 5,425   |   |                     | (1,154 | )     |  
|                                      | Long-lived assets                                       |                  |   | 430,319 |   |                     | 1,836  |       |  
|Nine months ended September 30, 2001  |                                                         |                  |   |         |   |                     |        |       |  
|                                      | Revenues                                                |                  | $ | 151,369 |   | $                   | 31,775 |       | $
|                                      | Gross profit                                            |                  |   | 142,148 |   |                     | 20,085 |       |  
|                                      | Loss from operations                                    |                  |   | (24,240 | ) |                     | (4,033 | )     |  
|                                      | Long-lived assets                                       |                  |   | 402,715 |   |                     | 2,259  |       |  
|Nine months ended September 30, 2002  |                                                         |                  |   |         |   |                     |        |       |  
|                                      | Revenues                                                |                  | $ | 139,015 |   | $                   | 40,913 |       | $
|                                      | Gross profit                                            |                  |   | 136,119 |   |                     | 26,262 |       |  
|                                      | Income (loss) from operations                           |                  |   | 9,330   |   |                     | (2,808 | )     |  
|                                      | Long-lived assets                                       |                  |   | 430,319 |   |                     | 1,836  |       |  
|                                      |                                                         |                  |   |         |   |                     |        |       |  
|                                     
|(1)                                   | Principally represents operations in the United States.

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9. 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.

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 September 30, 2002 and are carried at the lower of cost or fair value, subject to adjustment for other than temporary impairment. These investments are privately held information technology companies, many of which are
in the start-up or development stage. The Company monitors these investments for impairment and as a result recorded a write down of $1.1 million during the nine months ended September 30, 2002.

10. Sale of Aircraft

In August 2002, the Company sold its interest in an aircraft and received proceeds
of approximately $2.1 million.  The sale resulted in a net loss of $0.8 million.

11. Commitments and Contingencies

On July 2, 2002, Computer Associates International, Inc. filed a complaint against the Company and four of its employees in the U.S. District Court for the Northern
District of Illinois alleging copyright infringement and trade secret misappropriation in connection with our development of the database administration component of our Quest Central for DB2 product and seeking injunctive relief and unspecified
money damages. We will vigorously defend CAs claims and do not believe that this matter will have a material adverse effect on our results of operations or financial condition.

We are a party to other litigation, which we consider to be routine and incidental to our business. Management does not expect the results of any of these actions to
have a material adverse effect on our results of operations or financial condition.

12. Related-Party Transactions

During 1998, the Company received a note receivable from an 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 interest accruing at the rate of 5.7% per annum, was due April 2003.  In September 2002, the officer repaid the note receivable, plus accrued interest, in full.

In April 1999, the Company repurchased and canceled 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 April 2002 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.

In August 2000, the Company received a note receivable from a
former officer of the Company for the purchase of 339,000 shares of the Companys common stock at $46.50 per share. The former officer remains employed by the Company. The note receivable, plus accrued interest, is due August 2007, bears
interest at 6.33% per annum, and is secured by the common stock. The note receivable is deemed to be a non-recourse obligation of the former officer for financial reporting purposes.

13. Subsequent Event

On November 1, 2002, the Company, through its wholly owned subsidiary, acquired
all of the outstanding common stock of Sitraka, Inc. in exchange for cash payments of $53.4 million and up to $1.3 million in additional contingent consideration. Of the cash amount paid at closing, $1.7 million of the total purchase price is
subject to adjustment in certain circumstances and $5.2 million was deposited to an escrow account to secure certain indemnification obligations of the selling shareholders.  The acquisition will be accounted for as a purchase and the purchase
price is expected to be allocated primarily to goodwill and other intangible assets.

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Item 2: 
Managements Discussion and Analysis of Financial Condition and Results of Operations

The following
discussion of our financial condition and results of operations also should be read in conjunction with the condensed consolidated financial statements and notes to those statements included elsewhere in this report. Certain statements in this
report, including statements regarding our business strategies, operations, financial conditions and prospects, are forward-looking statements. Use of the words believe, expect, anticipate, will,
contemplate, would and similar expressions that contemplate future events may identify forward-looking statements.

Numerous important factors, risks and uncertainties affect our operations and could cause actual results to differ materially from those expressed or implied by these
or any other forward-looking statements made by us or others. Readers are urged to carefully review and consider the various disclosures made in this report, including those described under Risk Factors, and in other filings with the
SEC, that describe certain risks and factors that may affect our business. Readers are cautioned not to place undue reliance on these forward-looking statements, which are based on current expectations and reflect managements opinions only as
of the date thereof. We do not assume any obligation to revise or update forward-looking statements. Finally, our historic results should not be viewed as indicative of future performance.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and
results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires
us to make estimates and judgments that affect our reported assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable, intangible assets and
deferred income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. This forms the basis of judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates.

We believe the following critical
accounting policies and the related judgments and estimates affect the preparation of our condensed consolidated financial statements.

Revenue Recognition

We derive revenues from two primary sources: (1) software licenses and (2) services, which include customer support, consulting and
education. We license our products through our direct sales force and indirectly through resellers. We recognize revenue in accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2,
Software Revenue Recognition, and SOP 98-9 Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. Based on our reading and interpretation of SOP 97-2 and SOP 98-9, we believe that our
current sales contract terms and business arrangements have been properly reported. The AICPA and its Software Revenue Recognition Task Force continue to issue interpretations and guidance for applying the relevant standards to a wide range of sales
contract terms and business arrangements that are prevalent in the software industry. Also, the Securities and Exchange Commission (SEC) has issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, which
provides guidance related to revenue recognition based on interpretations and practices followed by the SEC. Future interpretations of existing accounting standards or changes in our business practices could result in future changes in our revenue
accounting policies that could have a material adverse effect on our business, financial condition and results of operations.

Revenues from
sales of software licenses, which generally do not contain multiple elements, are recognized when: (1) we enter into a legally binding arrangement with a customer; (2) we deliver the products; (3) customer payment is deemed fixed or determinable and
free of contingencies or significant uncertainties; and (4) collection is probable. If all the requirements of SOP 97-2 and 98-9 have not been met, revenue recognition is deferred until such items are known or resolved. Revenue from post-sale
customer support is deferred and recognized ratably over the term of the support contract. Revenues from consulting and training services are recognized as the services are performed.

For arrangements with multiple elements, we allocate revenue to each element of a transaction based upon its fair value as determined in reliance on
vendor-specific objective evidence. Vendor-specific objective evidence of fair value for all elements of an arrangement is based upon the normal pricing and discounting practices for those products and services when sold separately. If
we cannot objectively determine the fair value of any undelivered element included in bundled software and service arrangements, we defer revenue until all elements are delivered, services have been performed or until fair value can objectively be
determined.

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Accounts Receivable

We maintain allowances for doubtful accounts for estimated losses resulting from the inability or failure of our customers to make required payments. The
amount of our reserves is based on historical experience and our analysis of the accounts receivable. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional
allowances may be required which would result in an additional general and administrative expense in the period such determination was made. While such credit losses have historically been within our expectations and the provisions established, we
cannot guarantee that we will continue to experience the same credit loss rates that we have in the past.

Intangible Assets

In July 2001, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. SFAS No. 142 addresses financial accounting and reporting
for acquired goodwill and other intangible assets. We adopted SFAS No. 141 at the beginning of the third quarter of 2001 and adopted SFAS No. 142 at the beginning of the first quarter of 2002. As required by SFAS No. 142, we discontinued amortizing
the remaining balances of goodwill as of the beginning of fiscal 2002. As a result, our annual amortization expense decreased approximately $57.0 million. All remaining and future acquired goodwill will be subject to impairment tests annually, or
earlier if indicators of potential impairment exist, using a fair-value-based approach. All other intangible assets will continue to be amortized over their estimated useful lives and assessed for impairment under SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets.

Under SFAS No. 142, goodwill impairment is deemed to exist if the net
book value of a reporting unit exceeds its estimated fair value. In conjunction with the implementation of SFAS No. 142, we performed our initial impairment review and as a result determined that the carrying value of goodwill was less than the
estimated fair value. In calculating the fair value of the reporting units, the Market Approach (Guideline Company Method) was the methodology deemed the most reliable and used for impairment analysis. We will perform subsequent annual impairment
reviews during the fourth quarter of each year, or earlier if indicators of potential impairment exist, commencing in the fourth quarter of 2002. Future impairment reviews may result in charges against earnings to write down the value of goodwill.

Purchased intangible assets are recorded at the appraised value and amortized using the straight-line method over estimated
useful lives of three years to six years. The net carrying amount of purchased intangible assets was considered recoverable at September 30, 2002. We will continue to evaluate the value of our purchased intangible assets on a periodic basis. In the
event that in the future it is determined that the purchased intangible assets value has been impaired, an adjustment will be made resulting in a charge for the write-down in the period in which the determination is made.

Deferred Taxes

We recognize deferred income tax assets and
liabilities based upon the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Such deferred income taxes primarily relate to the timing of the recognition of certain revenue items and the timing
of the deductibility of certain reserves and accruals for income tax purposes. We regularly review the deferred tax assets for recoverability and establish a valuation allowance when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. If we are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time periods within which the underlying timing differences become taxable
or deductible, we could be required to establish an additional valuation allowance against the deferred tax assets which could result in a substantial increase in our effective tax rate and have a materially adverse impact on our operating results.

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Overview

Our revenues comprise software license fees and service fees.  Our software licensing model is based on perpetual license fees, and our licenses are
either server-based or, for our SQL development, report management and Microsoft administration tools, user-based.  Service revenues primarily represent the ratable recognition of annual software maintenance contract fees for technical support
and product enhancements. Services revenues also include consulting services and training revenues.

Results of Operations

The following table sets forth certain condensed consolidated statements of operations data as a percentage of total revenues, except as indicated:

|                                          |                                                       | Three Months Ended September 30, |       | Nine Months Ended September 30, |  
|----------------------------------------- | ----------------------------------------------------- | -------------------------------- | ----- | ------------------------------- | -
|                                          |                                                       |                                  |       |                                 |  
|                                          |                                                       | 2001                             |       | 2002                            |  
|                                          |                                                       |                                  |       |                                 |  
|Revenues:                                 |                                                       |                                  |       |                                 |  
|                                          | Licenses                                              |                                  |       | 66.4                            | %
|                                          | Services                                              |                                  |       | 33.6                            |  
|                                          |                                                       |                                  |       |                                 |  
|                                          | Total revenues                                        |                                  |       | 100.0                           |  
|Cost of revenues:                         |                                                       |                                  |       |                                 |  
|                                          | Licenses                                              |                                  |       | 1.7                             |  
|                                          | Services                                              |                                  |       | 8.7                             |  
|                                          | Amortization of purchased intangible assets           |                                  |       | 3.3                             |  
|                                          |                                                       |                                  |       |                                 |  
|                                          | Total cost of revenues                                |                                  |       | 13.7                            |  
|                                          |                                                       |                                  |       |                                 |  
|Gross profit                              |                                                       |                                  | 86.3  |                                 |  
|Operating expenses:                       |                                                       |                                  |       |                                 |  
|                                          | Sales and marketing                                   |                                  |       | 52.2                            |  
|                                          | Research and development                              |                                  |       | 26.9                            |  
|                                          | General and administrative                            |                                  |       | 10.3                            |  
|                                          | Other compensation costs and intangibles amortization |                                  |       | 29.0                            |  
|                                          |                                                       |                                  |       |                                 |  
|                                          | Total operating expenses                              |                                  |       | 118.4                           |  
|                                          |                                                       |                                  |       |                                 |  
|Income (loss) from operations             |                                                       |                                  | (32.1 | )                               |  
|Other income, net                         |                                                       |                                  | 4.7   |                                 |  
|Loss on sale of aircraft                  |                                                       |                                  |      |                                 |  
|Write-down of investments                 |                                                       |                                  |      |                                 |  
|                                          |                                                       |                                  |       |                                 |  
|Income (loss) before income tax provision |                                                       |                                  | (27.4 | )                               |  
|Income tax provision (benefit)            |                                                       |                                  | (8.3  | )                               |  
|                                          |                                                       |                                  |       |                                 |  
|Net income (loss)                         |                                                       |                                  | (19.1 | )%                              |  
|                                          |                                                       |                                  |       |                                 |  
|                                          | As a percentage of related revenues:                  |                                  |       |                                 |  
|                                          | Cost of licenses                                      |                                  |       | 2.5                             | %
|                                          | Cost of services                                      |                                  |       | 25.8                            |  
|                                          |                                                       |                                  |       |                                 |  

Three Months Ended September 30, 2001 and 2002

Revenues

Total revenues for the three months ended September 30, 2002
were $63.1 million, an increase of 11.4% from the comparable period of 2001, with both license and services revenues increasing year over year.

License Revenues License revenues for the three months ended September 30, 2002 were $39.9 million, an increase of 6.1% from the comparable
period of 2001. License revenues outside of North America accounted for 28.1% of total license revenues for the three months ended September 30, 2002, compared to 25.3% for the same period in 2001. The increase in total license revenues from the
prior year is primarily due to increased sales in Europe, with this increase being partially attributable to foreign currency appreciation against the U.S. dollar.  License revenues attributable to our European operations represent $10.4
million in 2002 versus $8.4 million in 2001, an increase of 23.8%.  In both the three and nine month periods ended September 30, 2002, we have experienced a shift in the overall mix of license transactions from larger to smaller individual
transactions. At the end of each quarter there is typically a balance of product sales that have not met all of our revenue recognition criteria or are otherwise incomplete. This balance decreased sequentially from June 30, 2002 to September 30,
2002.

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Service Revenues Service revenues for the three months ended September 30, 2002 was $23.2
million, an increase of 21.7% from the comparable period of 2001. Service revenues represented 36.8% of total revenues for the three months ended September 30, 2002, compared to 33.6% for the same period of 2001. Service revenues outside
of North America accounted for 19.1% of total services for the three months ended September 30, 2002, compared to 14.6% for the same period in 2001.  The growth in service revenues in 2002 reflects higher support renewal fees as our installed
base of customers grew and we improved support renewal billing processes.

Cost of Revenues

Cost of LicensesCost of licenses primarily consists of third-party software royalties, product packaging, documentation, duplication and
amortization of purchased software rights. Cost of licenses was $0.8 million for the three months ended September 30, 2002, versus $0.9 million in the comparable period of 2001, representing a decrease of 18.4%. Cost of licenses as a
percentage of license revenues was 1.9% for the three months ended September 30, 2002, compared to 2.5% for the same period in 2001. The decrease in cost of licenses was primarily due to a decrease in third-party royalty obligations associated with
the Companys acquisition of RevealNet in the third quarter of 2001, whose products the Company distributed, offset slightly by new royalty agreements.

Cost of ServicesCost of services primarily consists of personnel, facilities and systems costs used in providing support, consulting and
training services. Cost of services for the three months ended September 30, 2002 was $4.3 million, versus $4.9 million for the comparable period of 2001, representing a decrease of 12.8%. The decrease in absolute dollars is primarily due to lower
fees paid to outside consultants who provided specialized professional services in the 2002 quarter compared to the same period in 2001 and lower labor-related costs resulting from a reduction in headcount.

Cost of services as a percentage of services revenues was 18.5% for the three months ended September 30, 2002, compared to 25.8% for the same
period in 2001. This margin improvement is primarily due to our continued increase in customer maintenance and support revenues while holding headcount relatively flat and from the shift in service revenues mix toward a greater contribution from
higher margin support services.

Amortization of Purchased Intangible AssetsAmortization of purchased intangible
assets includes amortization of the fair value of acquired technology associated with acquisitions made during 2000, 2001 and 2002. Amortization of purchased intangible assets was $1.3 million during the three months ended September 30, 2002 versus
$1.9 million in the same period of 2001, representing a decrease of 32.0%. The decrease is primarily due to the completion of amortization of purchased intangible assets related to acquisitions made in 2000.

Operating Expenses

Sales and MarketingSales and marketing expenses consist
primarily of compensation and benefit costs, sales commissions, facilities and systems costs, recruiting costs, trade shows, travel and entertainment and marketing communications costs such as advertising and promotion. Sales and marketing expenses
were $30.9 million for the three months ended September 30, 2002, versus $29.6 million for the comparable period of 2001, representing an increase of 4.5%. Sales and marketing expenses as a percentage of total revenues were 49.0% for the
three months ended September 30, 2002, compared to 52.2% in the same period of 2001. The increase from the three months ended September 30, 2001 to the comparable period in 2002 is primarily due to increased infrastructure expenses and an idle
facility charge of $0.4 million, offset slightly by reductions in labor costs.

Research and DevelopmentResearch
and development expenses consist primarily of compensation and benefit costs for software developers, software product managers, quality assurance and technical documentation personnel, facilities and systems costs and of payments made to outside
software development contractors. Research and development expenses were $14.5 million for the three months ended September 30, 2002, versus $15.3 million in the same period of 2001, representing a decrease of 4.9%. These expenses as a
percentage of total revenues were 23.0% for the three months ended September 30, 2002, compared to 26.9% in the same period of 2001.The decrease in absolute dollars is due primarily to lower
personnel costs from reduced headcount and fewer outside consultants. We incurred an idle facility charge of approximately $0.4 million in the third quarter of 2002.

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General and AdministrativeGeneral and administrative expenses consist primarily of
compensation and benefit costs for our executive, finance, legal, administrative and information services personnel and related facilities and systems costs. General and administrative expenses were $6.3 million for the three months ended September
30, 2002, versus $5.8 million in the same period of 2001, representing an increase of 8.2%. While headcount reductions in prior quarters have provided payroll costs savings, these savings have been offset by various items, including higher legal
expenses and increased premiums for health and directors and officers liability insurance coverage.

Other
Compensation Costs and Intangible AmortizationOther compensation costs and intangible amortization includes compensation expense associated with the issuance (primarily in 1999) of stock options with exercise prices below fair market value
and the amortization of other intangible assets. These costs also included amortization of goodwill in 2001. These costs totaled $0.9 million for the three months ended September 30, 2002, compared to $16.4 million in the same period of 2001,
representing a decrease of 94.3%. As a result of implementing SFAS No. 142, goodwill is no longer amortized. In the third quarter of 2001, the Company recorded amortization charges (net of tax) of $13.9 million related to goodwill and workforce
intangible assets.

Other Income, NetOther income, net consists primarily of interest income and expense. Other
income, net was $0.7 million for the three months ended September 30, 2002, compared to $2.7 million for the same period of 2001, representing a decrease of 75.1%. The decrease is due primarily to unfavorable foreign exchange movement during the
quarter coupled with the loss of $0.8 million incurred from the disposal of an aircraft.

Income TaxesProvision
for income taxes was $2.2 million for the three months ended September 30, 2002, compared with a benefit of $4.7 million for the comparable period of 2001, representing an effective rate for these periods of 47.3% and (30.3%), respectively. The
increase in the effective rate results primarily from the elimination of goodwill amortization due to the implementation of SFAS No. 142.

Nine Months Ended September 30, 2001 and 2002

Revenues

Total revenues for the nine months ended September 30, 2002 were $186.0 million, a decrease of 0.7% from the comparable period of 2001, with
declining license revenues in the first two quarters of 2002 being offset by increasing customer support revenues.

License
Revenues License revenues for the nine months ended September 30, 2002 were $117.1 million, a decrease of 13.4% from the comparable period of 2001. License revenues outside of North America accounted for 29.2% of total licenses for the
nine months ended September 30, 2002, compared to 21.1% for the same period in 2001. We believe the decrease in total license revenues from the prior year is primarily the result of reduced IT spending levels and associated difficulties of closing
larger sales transactions relative to the first half of 2001. In addition, declines in 2002 license revenues from High Availability products for Oracle and our Vista information availability product lines have contributed to the decline.

Service Revenues Service revenues for the nine months ended September 30, 2002 were $69.0 million, an increase of 32.4% from
the comparable period of 2001. Service revenues represented 37.1% of total revenues for the nine months ended September 30, 2002, compared to 27.8% for the same period of 2001. Service revenues outside of North America accounted for 18.6%
of total services revenues for the nine months ended September 30, 2002, compared to 14.1% for the same period in 2001. The growth in service revenues in 2002 reflects higher support renewal fees as the installed base of customers grew and improved
support renewal billing processes.

Cost of Revenues

Cost of
LicensesCost of licenses was $2.3 million for the nine months ended September 30, 2002 versus $3.0 million in the comparable period of 2001, representing a decrease of 21.9%. Cost of licenses as a percentage of license revenues was 2.0%
for the nine months ended September 30, 2002, compared to 2.2% for the same period in 2001. The decrease in cost of licenses was primarily due to a decrease in third-party royalty obligations associated with the Companys acquisition of
RevealNet in the third quarter of 2001, whose products the Company distributed, offset slightly by new royalty agreements.

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Cost of ServicesCost of services for the nine months ended September 30, 2002 was $13.2
million, versus $14.0 million for the comparable period of 2001, representing a decrease of 6.0%. The decrease in absolute dollars is primarily due to a $0.4 million reduction in the amount of fees paid to outside consultants who provided
specialized professional services.  Also contributing to the decrease was lower employee related travel costs. Cost of services as a percentage of services revenues was 19.1% for the nine months ended September 30, 2002, compared to 27.0% for
the same period in 2001. The margin improvement is primarily due to a decrease in services headcount compared to the increase in support service revenues and from the shift in service revenues mix towards a greater contribution from higher margin
support services.

Amortization of Purchased Intangible AssetsAmortization of purchased intangible assets was $4.0
million during the nine months ended September 30, 2002, versus $5.8 million in the same period of 2001, representing a decrease of 31.8%. The decrease is primarily due to the completion of amortization of purchased intangible assets related to
acquisitions made in 2000.

Operating Expenses

Sales and
MarketingSales and marketing expenses were $92.3 million for the nine months ended September 30, 2002, versus $91.7 million for the comparable period of 2001, representing an increase of 0.7%. Sales and marketing expenses as a percentage
of total revenues were 49.6% for the nine months ended September 30, 2002, compared to 49.0% in the same period of 2001. The increase from the nine months ended September 30, 2001 to the comparable period in 2002 is primarily due to increased
infrastructure expenses, which were partially offset by lower sales personnel costs.

Research and
DevelopmentResearch and development expenses were $44.5 million for the nine months ended September 30, 2002, versus $44.6 million in the same period of 2001, representing a nominal decrease in the current quarter, and were
constant as a percentage of total revenues.

General and AdministrativeGeneral and administrative expenses
were $18.4 million for the nine months ended September 30, 2002, versus $18.2 million in the same period of 2001, representing an increase of 0.9%. As in the September 2002 quarter, cost savings from reduced headcount was offset by higher
legal fees, increased telephone charges, and rising costs for health and directors and officers liability insurance coverage. The increase was partially offset by lower employee related costs as a result of reduced headcount.

Other Compensation Costs and Intangible AmortizationOther compensation costs and intangible amortization totaled $2.7 million
for the nine months ended September 30, 2002, compared to $47.9 million in the same period of 2001, representing a decrease of 94.4%. These expenses as a percentage of total revenues were 1.4% for the nine months ended September 30, 2002, compared
to 25.6% in the same period of 2001.  In the nine months ended September 30, 2001, the Company recorded amortization charges (net of tax) of $41.1 million related to goodwill and workforce intangible assets.

Other Income, NetOther income, net was $3.5 million for the nine months ended September 30, 2002, a decrease of 26.1% from $4.7 million for
the same period of 2001. The decrease is due primarily to unfavorable foreign exchange movement during 2002 along with the loss of $0.8 million incurred from the disposal of an aircraft.  Also included in other income, net for the nine month
period ended September 30, 2002 is a write down of $1.1 million recorded in the second quarter of 2002 related to our minority equity investments in non-publicly traded companies.

Income TaxesProvision for income taxes was $5.2 million for the nine months ended September 30, 2002, compared with $5.2 million for the
comparable period of 2001, representing an effective rate for these periods of 43.1% and 15.7%, respectively. The increase in the effective rate results primarily from the elimination of goodwill amortization due to the implementation of SFAS No.
142.

Liquidity and Capital Resources

We have funded our
business to date primarily from cash generated by our operations and net proceeds of from two public offerings of our securities.  Our sources of liquidity as of September 30, 2002 consisted principally of cash and cash equivalents of $49.7
million and $192.1 million in short- and long-term high grade corporate and government marketable securities.

Net cash
provided by operating activities was $33.4 million for the nine months ended September 30, 2002, compared with $51.7 million for the comparable period in 2001. The decline in cash provided by operating activities in the nine months of 2002 was
primarily attributable to a slowdown in the rate of growth in deferred revenue and reduced accrued compensation.

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Investing activities used $19.4 million for the nine months ended September 30, 2002, compared with
$26.5 million for the comparable period in 2001.  Capital expenditures for purchases of property and equipment were $3.2 million and $20.6 million in the first nine months of 2002 and 2001. Net purchases of marketable securities were $14.0
million and $6.0 million in the first nine months of 2002 and 2001, respectively. In August 2002, the Company received cash proceeds of $2.1 million from the sale of its interest in aircraft.

Financing activities provided $4.5 million and $9.7 million for the nine months ended September 30, 2002 and 2001, respectively. During the 2002
period, we generated approximately $5.2 million less in proceeds from exercise of stock options and other equity incentive programs than the comparable 2001 period.

In December 2000, our Board of Directors authorized a stock repurchase program under which Quest may purchase up to two million shares of its
common stock. Under the repurchase program, we may purchase shares from time to time at varying prices in open market or private transactions.In October 2001, our Board of Directors increased
the total number of shares authorized for repurchase under the stock repurchase program to five million.  No shares have been repurchased during 2002.

As of September 30, 2002, other than current operating liabilities recorded within the balance sheet at September 30, 2002, our only significant
contractual obligations or commercial commitments consisted of our facility lease commitments and operating leases for office facilities and certain items of equipment. These commitments will require cash payments of $11.5 million in 2002, $9.8
million in 2003, $7.6 million in 2004, $6.2 million in 2005 and $3.6 million thereafter. As of September 30, 2002, we did not have any off-balance sheet arrangements that could significantly reduce our liquidity. We would be required to use existing
cash, cash equivalents and investment balances to support our working capital balances if we are not able to generate or sustain positive cash flow from operations. Our ability to generate cash from operations is subject to substantial risks
described below under the caption Risk Factors.

On November 1, 2002, the Company acquired all of the
outstanding common stock of Sitraka, Inc. in exchange for cash payments of $53.4 million and up to $1.3 million in additional contingent consideration.

Based on our current operating 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. However, if events occur or circumstances change such that we fail to meet our operating plan as expected, 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 can not assure
you that such financing will be available to us on commercially reasonable terms or at all.

Recently Issued Accounting Pronouncements

In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets. We adopted SFAS No. 142 at the beginning of the first quarter of 2002. As required by SFAS No. 142, we discontinued amortizing the remaining balances of goodwill as of the beginning of
fiscal 2002. All remaining and future acquired goodwill will be subject to impairment tests annually, or earlier if indicators of potential impairment exist, using a fair-value-based approach. All other intangible assets will continue to be
amortized over their estimated useful lives and assessed for impairment under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Previously issued workforce-in-place intangible assets were reclassified to
goodwill effective January 1, 2002. Refer to Note 2 of the condensed consolidated financial statements for adjusted net income (loss) for the three and nine months ended September 30, 2001.

Under SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. The
Companys reporting units are generally consistent with the operating segments underlying the segments identified in Note 8  Operating Segment Data. In conjunction with the implementation of SFAS No. 142, we performed our initial
impairment review and as a result determined that the carrying value of goodwill was less than the estimated fair value. In calculating the fair value of the reporting units, the Market Approach (Guideline Company Method) was the methodology deemed
the most reliable and used for impairment analysis. Quest will perform subsequent annual impairment reviews during the fourth quarter of each year, or earlier if indicators of potential impairment exist, commencing in the fourth quarter of 2002.
Future impairment reviews may result in charges against earnings to write down the value of goodwill.

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Also in August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. This new statement also supersedes certain aspects of APB 30, Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, with regard to reporting the effects of a disposal of a segment of a business and will
require expected future operating losses from discontinued operations to be reported in discontinued operations in the period incurred (rather than as of the measurement date as presently required by APB 30). In addition, more dispositions may
qualify for discontinued operations treatment. The provisions of this statement are required to be applied for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company adopted SFAS No. 144 effective
January 1, 2002. The adoption of SFAS No. 144 did not have a significant impact on the financial position, results of operations, or cash flows of the Company.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial
accounting and reporting for costs associated with exit or disposal activities and EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs incurred in a
Restructuring). SFAS No. 146 requires that costs associated with exit or disposal activities be recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 also establishes that the
liability should initially be measured and recorded at fair value. We will adopt the provisions of SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002.

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RISK FACTORS

An investment in
our shares involves risks and uncertainties. You should carefully consider the factors described below before making an investment decision in our securities. The risks described below are the risks that we currently believe are material risks of
business 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;                                                                                                             
| |   |                                                                                                                                                                                          
| |  | exposure to general economic conditions and reductions in corporate IT spending;                                                                                                         
| |   |                                                                                                                                                                                          
| |  | changes in our level of operating expenses and our ability to control costs;                                                                                                             
| |   |                                                                                                                                                                                          
| |  | our ability to attain market acceptance of new products and services and enhancements to our existing products;                                                                          
| |   |                                                                                                                                                                                          
| |  | changes in our pricing policies or the pricing policies of our competitors;                                                                                                              
| |   |                                                                                                                                                                                          
| |  | the relative growth rates of competing operating system, database and application platforms;                                                                                             
| |   |                                                                                                                                                                                          
| |  | costs related to acquisitions of technologies or businesses, including amortization costs for intangible assets with indefinite lives; and                                               
| |   |                                                                                                                                                                                          
| |  | the timing of releases of new versions of third-party software products that our products support.                                                                                       

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 and operating results

Our license revenues in any quarter are substantially dependent on orders booked and shipped in that quarter. Our revenues in a
given quarter could be adversely affected if we are unable to complete one or more large license agreements, or if the contract terms were to prevent us from recognizing revenue during that quarter. 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. Also, we have often booked a large amount of our sales in the last month, weeks or days 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. These factors may cause significant periodic variation in our license revenues. In addition, we incur or commit to operating expenses
based on anticipated revenue levels, and generally do not know whether revenues in any quarter will meet expectations until the end of that quarter. Accordingly, if our revenue growth rates slow or our revenues decline, our operating results could
be seriously impaired because many of our expenses are relatively fixed in nature and cannot be easily or quickly changed.

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General economic conditions and reductions in corporate IT spending may continue to affect revenue growth rates and impact our business

Our business and operating results are subject to the effects of changes in general economic conditions. Recent unfavorable economic conditions
have resulted in reduced corporate IT spending in the industries that we serve and a softening of demand for computer software, not only in the database and application market segments we support but also in the product segment in which we compete.
If these economic conditions do not improve, or we experience continued deterioration in general economic conditions or reduced corporate IT spending, our business and operating results could continue to be adversely impacted.

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 and SQLab Vision, 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 is 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 compete with Oracle in the market for database management solutions
and the competitive pressure continues to increase. 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 market does not continue to develop as anticipated, or demand for our products in this market does not materialize or occurs more
slowly than we expect, or if our development efforts are delayed or unsuccessful, we will have expended substantial resources and capital without realizing sufficient revenues, 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 intangible assets with indefinite useful
lives. 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.

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

Our international operations and our planned expansion of our international operations expose us to certain risks

We intend to expand our international sales activities as part of our business strategy. 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;                                                                                                  
| |   |                                                                                                                                     
| |  | political unrest or terrorism, particularly in areas in which we have facilities;                                                   
| |   |                                                                                                                                     
| |  | compliance with a wide variety of complex foreign laws and treaties; and                                                            
| |   |                                                                                                                                     
| |  | licenses, tariffs and other trade barriers.                                                                                         

In addition, because our international subsidiaries generally conduct business in the currency of the country in which they operate, our exposure
to exchange rate fluctuations, which are outside of our control, will increase as our international operations expand. We have not yet entered into any hedging transactions to mitigate exposure to foreign currency fluctuations.

Operating in international markets also requires 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.

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Failure to develop strategic relationships could harm our business by denying us selling opportunities and other benefits

Our current collaborative relationships may not prove to be beneficial to us, and they may not be sustained. We also may not be able to enter into
successful new strategic relationships in the future, which could have a material adverse effect on our business, operating results and financial condition. From time to time, we have collaborated with other companies, including Hewlett-Packard and
Oracle and certain 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.

Failure to adequately protect our intellectual property rights 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 generally
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, whether successful or unsuccessful, could result in substantial costs and diversion of management and financial resources, which could harm our business.

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.

Third parties may claim that our software products or services infringe on their
intellectual property rights, exposing us to litigation that, regardless of merit, may be costly to defend

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 that our current or future products infringe their intellectual property rights. Any such
claim, with our without merit, could have a significant effect on our business and financial results. See Legal Proceedings in Part II, Item 1, of this report, for information concerning copyright infringement and trade secret
misappropriation claims recently initiated against Quest by Computer Associates International, Inc. This and any future third party claim could be time consuming, divert managements attention from our business operations and result in
substantial litigation costs, including any monetary damages and customer indemnification obligations, which may result from such claims. In addition, parties making these claims may be able to obtain injunctive or other equitable relief affecting
our ability to license the products that incorporate the challenged intellectual property. As a result of such claims, we may be required to obtain licenses from third parties, develop alternative technology or redesign our products. We cannot be
sure that such licenses would be available on terms acceptable to us, if at all. If a successful claim is made against us and we are unable to develop or license alternative technology, our business and financial results and position could be
materially adversely affected.

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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.

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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 other executive
officers. 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 3:Quantitative and Qualitative Disclosures About Market Risks

We transact business in a
number of different foreign countries around the world. In most instances, revenues are collected and operating expenses are paid in the local currency of the country in which we are transacting. Accordingly, we are exposed to incremental volatility
in sales and earnings within these countries due to fluctuations in foreign exchange rates.

Our exposure to foreign
exchange risk is directly proportional to the magnitude of foreign net profits and losses denominated in currencies other than the U.S. dollar, as well as our net foreign investment in non-U.S. dollar assets. These exposures have the potential to
produce either gains or losses. Our cumulative currency gains or losses in any given period are typically lessened by the economic benefits of diversification and low correlation between different currencies, but there can be no assurance that this
pattern will continue to be true in future periods.

The foreign currencies to which we currently have the most
significant exposure are the Canadian dollar, the British pound, the Euro and the Australian dollar.

To date, we have
not used derivative financial instruments to hedge our foreign exchange exposures, nor do we use such instruments for speculative trading purposes. We regularly monitor the potential cost benefit of hedging foreign exchange exposures with
derivatives and there remains the possibility that our foreign exchange hedging practices could change accordingly in time.

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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 to hedge the market risks of our investments. We place our investments with high-quality issuers and, by policy,
limit the amount of credit exposure to any one asset class or issuer other than the United States government and its agencies. Our investments in marketable securities consist primarily of investment-grade bonds and government securities.
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.

Information about our investment
portfolio is presented in the table below, which states the amortized book value and related weighted-average interest rates by year of maturity (in thousands):

|Investments maturing by September 30, |  |  | Amortized Book Value |  |  | WeightedAverage  Rate | 
|------------------------------------- |  |  | -------------------- |  |  | --------------------- | 
|                                      |  |  |                      |  |  |                      
|2003                                  |  |  | 74,578               |  |  | 2.41%                 | 
|2004                                  |  |  | 18,985               |  |  | 3.73%                 | 
|2005                                  |  |  | 17,950               |  |  | 3.54%                 | 
|2006                                  |  |  | 16,243               |  |  | 4.81%                 | 
|Thereafter                            |  |  | 112,294              |  |  | 5.24%                 | 
|                                      |  |  |                      |  |  |                       | 
|Total portfolio                       |  |  | 240,050              |  |  | 4.09%                 | 
|                                      |  |  |                      |  |  |                       | 

We also maintain a
level of cash and cash equivalents such that we have generally been able to hold our investments to maturity. Accordingly, changes in the market interest rate would not have a material effect on the fair value of such investments.

Item 4:Controls and Procedures

a) Evaluation of disclosure controls and procedures:

Within the ninety days prior to
the date of this quarterly report and with the participation of the Companys management, including the Companys chief executive officer and principal financial officer, the Company performed an evaluation of its disclosure controls and
procedures.  Based on such evaluation, the Companys chief executive officer and principal financial officer concluded that the Companys disclosure controls and procedures were effective and sufficient to ensure that information
required to be disclosed by the Company in the reports that it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and that such
information is accumulated and communicated to the Companys management as appropriate to allow timely decisions regarding required disclosure.

b) Changes in internal controls:

There have been no significant changes in the Companys internal controls, or in other factors that could significantly affect these internal controls, subsequent to the date the Company completed its
evaluation.

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PART II
OTHER INFORMATION

Item 1:Legal Proceedings

On July 2, 2002, Computer Associates International, Inc. filed a
complaint against the Company and four of its employees in the U.S. District Court for the Northern District of Illinois alleging copyright infringement and trade secret misappropriation in connection with our development of the database
administration component of our Quest Central for DB2 product and seeking injunctive relief and unspecified money damages. We will vigorously defend CAs claims and do not believe that this matter will have a material adverse effect on our
results of operations or financial condition.

We are a party to other litigation, which we consider to be routine and
incidental to our business. Management does not expect the results of any of these actions to have a material adverse effect on our results of operations or financial condition.

Item 5:Other Information

On November 1, 2002, the Company acquired all of the outstanding common
stock of Sitraka Inc., a developer of application-server performance management products, in exchange for cash payments of $53.4 million and up to $1.3 million in additional contingent consideration.  Sitraka generated $16.4 million in total
revenue and a net loss of $3.1 million in its year ended March 31, 2002.  For the six-month period ended September 30, 2002, Sitraka generated $8.8 million of total revenue and net income of $251,000.

A copy of the Stock Purchase Agreement is attached hereto as Exhibit 2.1 and incorporated herein by reference.

Item 6:Exhibits and Reports on Form 8-K

(a)  EXHIBITS

| | Exhibit Number |  | Description                                                                                                                                                      
| | -------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                |  |                                                                                                                                                                  
| | 2.1            |  | Share Purchase Agreement dated as of October 21, 2002 among Quest Software, Inc., 881229 Alberta Ltd., Sitraka Inc. and Certain Shareholders of Sitraka          
| |                |  |                                                                                                                                                                  
| | 99.1           |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.               
| |                |  |                                                                                                                                                                  
| | 99.2           |  | Certification of Vice President, Finance and Operations pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)  REPORTS ON FORM 8-K

We did not
file any current report on Form 8-K during the quarter ended September 30, 2002.

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SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

|                  | QUEST SOFTWARE, INC.                                     
|----------------- | ---------------------------------------------------------
|                  |                                                          
|November 14, 2002 | /s/  M. BRINKLEY MORSE                                   
|                  |                                                          
|                  | M. Brinkley Morse  Vice President, Finance and Operations
|                  |                                                          
|                  | /s/  KEVIN E. BROOKS                                     
|                  |                                                          
|                  | Kevin E. Brooks  Principal Accounting Officer            

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CERTIFICATIONS

I, Vincent C. Smith, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Quest Software, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and procedures as of a date
within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;

5. The registrants other certifying officers and
I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely
affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrants internal controls; and

6. The registrants other certifying officers and I have
indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material weaknesses.

|Date: November 14, 2002 | /s/  VINCENT C. SMITH                     | 
|----------------------- | ----------------------------------------- | 
|                        |                                           | 
|                        | Vincent C. Smith, Chief Executive Officer | 



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##### Table of Contents

I, M. Brinkley Morse, certify that:

1. I have
reviewed this quarterly report on Form 10-Q of Quest Software, Inc.;

2. Based on my knowledge, this quarterly report
does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included
in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and procedures as of a date
within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;

5. The registrants other certifying officers and
I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely
affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrants internal controls; and

6. The registrants other certifying officers and I have
indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material weaknesses.

|Date: November 14, 2002 | /s/    M. BRINKLEY MORSE                                   | 
|----------------------- | ---------------------------------------------------------- | 
|                        |                                                            | 
|                        | M. Brinkley Morse,  Vice President, Finance and Operations | 

2