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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

AMENDMENT NO. 1

(Mark One)

For the Fiscal Year Ended December 31, 2002

OR

For the Transition Period from                      to                    .

Commission File No. 000-26937

QUEST SOFTWARE, INC.

(Exact Name of Registrant as Specified in its Charter)

Registrant’s Telephone Number, Including Area Code: (949) 754-8000

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act: Common Stock

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

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes  x  No  ¨

As of March 20, 2003, 91,396,135 shares of the Registrant’s Common Stock were outstanding. The aggregate market value of the common stock held by nonaffiliates of the Registrant as of June 28, 2002 was approximately $550.9 million.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement delivered to shareholders in connection with the Registrant’s 2003 Annual Meeting of Shareholders are incorporated by reference into Part III of this Report.

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EXPLANATORY NOTE

Subsequent to the issuance of our consolidated financial statements as of and for the year ended December 31, 2002, we restated our financial statements to correct computational errors in translating property and equipment and deferred revenue balances of foreign subsidiaries into U.S. Dollars. Under Statement of Financial Accounting Standard (“SFAS”) No. 52, “Accounting for Foreign Currency Translation,” certain balance sheet and income statement accounts require translation of account balances of foreign subsidiaries from foreign currencies into the U.S. Dollar using historical rates because the functional currency of the foreign subsidiary is the U.S. Dollar. Historical rates are defined as the rates in effect in the month that the transaction was originally recorded. Because of an error in the method used to translate foreign-currency denominated property and equipment and deferred revenue accounts into U.S. Dollars at historical rates, the related balance sheet and statements of operations accounts required correction.

In June 2003, our internal accounting staff discovered the computational error, which was in the design of the system used to translate these non-dollar denominated accounts into U.S. Dollars. The error’s effect on our consolidated financial statements had been magnified by increased volatility of the exchange rates of the U.S. Dollar compared to certain other currencies, particularly to the Euro and English pound. Upon discovering the error, we immediately notified our independent auditors and began a detailed review of the affected accounts to quantify the error’s effect on prior financial statements. After quantifying this effect and reviewing it with the audit committee of our Board of Directors, we made a determination to restate our financial statements for the four quarters and year ended December 31, 2002 and the quarter ended March 31, 2003.

This report is being filed to amend and restate the following items contained in our Annual Report on Form 10-K for the year ended December 31, 2002 originally filed with the Securities and Exchange Commission on March 31, 2003:

To preserve the nature and character of the disclosures set forth in such Items as originally filed, this report continues to speak as of the date of the original filing, and we have not updated the disclosures in this report to speak as of a later date except as noted in footnotes 2 and 16 to the consolidated financial statements included in Item 15. All information contained in this Amendment No. 1 is subject to updating and supplementing as provided in our reports filed with the Securities and Exchange Commission subsequent to the date of the original filing of the Annual Report on Form 10-K.

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Item 6. Selected Financial Data

Restatement

Subsequent to the issuance of our consolidated financial statements as of and for the year ended December 31, 2002, we restated our financial statements to correct computational errors in translating property and equipment and deferred revenue balances of foreign subsidiaries into U.S. Dollars. Under Statement of Financial Accounting Standard (“SFAS”) No. 52, “Accounting for Foreign Currency Translation,” certain balance sheet and income statement accounts require translation of account balances of foreign subsidiaries from foreign currencies into the U.S. Dollar using historical rates because the functional currency of the foreign subsidiary is the U.S. Dollar. Historical rates are defined as the rates in effect in the month that the transaction was originally recorded. Because of an error in the method used to translate foreign-currency denominated property and equipment and deferred revenue accounts into U.S. Dollars at historical rates, the related balance sheet and statements of operations accounts required correction.

See Note 2 to “Notes to Consolidated Financial Statements” for a presentation of the impact of the restatement on our consolidated statement of operations for the year ended December 31, 2002 and our consolidated balance sheet as of December 31, 2002.

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The following table sets forth unaudited quarterly statements of operations data for the year ended December 31, 2002. Amounts shown are in thousands, except per share data (see Note 2—Restatement in the accompanying Notes to Consolidated Financial Statements).

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations also should be read in conjunction with the 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 on our behalf. 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 attempt to advise interested parties of 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 historical results should not be viewed as indicative of future performance.

Overview

We provide application management software solutions that maximize the availability, performance and manageability of our customer’s business critical applications and their underlying databases and other associated components. Many of our products also increase the cost effectiveness of a customer’s IT investments, including personnel, software and hardware.

Our revenues consist of software license fees and service fees. Our software-licensing model is primarily 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 software maintenance contract fees, which entitle a customer to technical support via telephone and the internet and product enhancements. These maintenance contracts all have annual terms. Customers purchase a software maintenance contract for the first year when they license a product and have the option of renewing the maintenance contract annually thereafter. Service revenues also include revenues from consulting and training services.

Acquisition of Sitraka

On November 1, 2002, we acquired all of the outstanding common stock of Sitraka, Inc. (Sitraka), a developer of application-server performance management products, in exchange for cash payments of $53.4 million and up to $3.6 million in additional contingent consideration. The acquisition was accounted for as a purchase and the purchase price was allocated primarily to goodwill totaling $35.9 million and other intangible assets totaling $25.0 million. In connection with the acquisition, we recorded a charge totaling $2.9 million for the fair value of purchased in-process research and development (IPR&D). We recorded this charge because the technological feasibility of products under development at the date of acquisition had not been established and no future alternative uses existed. The charge represented the estimated fair value of the incomplete research and development products based on discounted cash flows. Management is primarily responsible for estimating the fair value of IPR&D, which was determined with the assistance of an independent appraiser.

We identified and valued two IPR&D projects. Both projects were approximately 50% complete at the date of acquisition and the estimated cost to complete the projects was $1.3 million. One project was directed toward the development of improvements to an existing product and the other for a product that was in pre-production.

The IPR&D for the improvements to the existing product represented 55% of the total value of IPR&D acquired, while the product in pre-production represented the balance of 45%. At the date of acquisition we anticipated that both projects would be completed in the first quarter of 2003. The projects were completed as anticipated and made generally available for sale in March 2003. See Note 6 of “Notes to Consolidated Financial Statements.”

Restatement

We have restated our consolidated financial statements for the year ended December 31, 2002 to correct computational errors made in translating property and equipment and deferred revenue balances of foreign subsidiaries into U.S. Dollars. See “Note 2 — Restatement” in the accompanying Notes to Consolidated Financial Statements for additional discussion regarding cause and effect of computational errors and for a presentation of the impact of the restatement on our consolidated statements of operations for the year ended December 31, 2002 and our consolidated balance sheets as of December 31, 2002.

The following discussion has been revised to reflect the effects of the restatement.

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Results of Operations

Except as otherwise indicated, the following percentages are percentage of total revenues:

Comparison of Fiscal Years Ended December 31, 2002 and 2001

Revenues

Total revenues increased 3.7% to $255.6 million in 2002 from $246.5 million in 2001.

License Revenues—License revenues decreased 7.8% to $160.6 million in 2002 from $174.1 million in 2001. We believe customer efforts to reduce IT spending in response to general economic conditions contributed to the decrease in license revenues in 2002. In addition, we experienced increased competition related to our high availability and production support products for Oracle and our Vista output management products, which also contributed to the decline in license revenues. The decline in license revenues for these products was offset by growth in other product areas, primarily our Microsoft administration products and our monitoring products. License revenues represented 62.9% of total revenues in 2002, compared to 70.6% in 2001. License revenues in North America decreased to $113.1 million in 2002 from $136.1 million in 2001, a decline of 16.9%. The decrease in North American license revenues was offset slightly by the acquisition of Sitraka in the fourth quarter of 2002. License revenues outside of North America increased 26.8% to $47.5 million in 2002 from $38.1 million in 2001, and accounted for 29.6% of total license revenues, compared to 21.9% in 2001. The increase in license revenues outside of North America is primarily due to strengthening operations in Europe as a result of continued investment in our foreign operations. License revenues attributable to our European operations represented $42.7 million in 2002, compared to $33.1 million in 2001, representing growth of 29.0%.

Service Revenues—Service revenues increased 31.2% to $94.9 million in 2002 from $72.4 in 2001. This increase was derived primarily from higher renewal maintenance fees. Higher renewal maintenance fees derived from growth in the base of installed products and, we believe, from improved support renewal billing processes and improved maintenance renewal rates. To a much lesser extent, support revenues from the acquired base of Sitraka customers also contributed to year-over-year increase in service revenues. Professional services as a percentage of total service revenues represented 9.9% in 2002 and 15.4% in 2001.

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 decreased to $2.9 million in 2002 from $4.5 million in 2001, representing a decline of $1.6 million or 35.8%. Cost of licenses as a percentage of license revenues was 1.8% for 2002,

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compared with 2.6% in 2001. The decrease in cost of licenses for 2002 was primarily due to a decrease in third-party royalty obligations associated with our acquisition of RevealNet in the third quarter of 2001, whose products we distributed, and a decrease in amortization expense related to rights in purchased software rights. We expect that cost of licenses as a percentage of license revenues will remain relatively constant in 2003.

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 decreased to $17.8 million in 2002 from $18.5 million in 2001, representing a decline of $0.7 million. Cost of services as a percentage of service revenues declined to 18.7% for 2002, compared to 25.6% for 2001. The decrease in cost of services for 2002 is primarily attributable to a reduction in the amount of fees paid to outside consultants who provided specialized professional services.

Amortization of Purchased Intangible Assets—Amortization of purchased intangible assets includes amortization of the fair value of acquired technology associated with the acquisitions made during 2000, 2001 and 2002. Amortization of purchased intangible assets decreased to $5.7 million in 2002 from $8.0 million in 2001, representing a decrease of $2.3 million or 28.8%. The decrease is primarily due to the completion of amortization of purchased intangible assets related to certain acquisitions made in 2000, offset slightly by amortization related to acquisitions made in 2002. Intangible assets purchased as part of acquisitions were $3.2 million and $30.6 million in 2001 and 2002, respectively. The useful lives of the technology acquired range from two to seven years, and we expect the amortization of these purchased intangible assets to be approximately $7.2 million in 2003, $4.2 million in 2004 and thereafter $13.8 million. See “Critical Accounting Policies and Estimates” for additional discussion regarding accounting for intangible assets.

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 increased 4.8% to $127.8 million in 2002 from $121.9 million in 2001. As a percentage of total revenues, sales and marketing increased from 49.4% in 2001 to 50.0% in 2002. The increase in sales and marketing expenses in 2002 resulted from increased labor expenses, primarily due to additional headcount from our acquisition of Sitraka, higher sales commission expenses and increased depreciation of sales and marketing information technology assets.

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 payments made to outside software development consultants in connection with our on-going efforts to enhance our core technologies and develop additional products. Research and development expenses remained constant at $59.4 million in 2002 compared with $59.5 million in 2001, and declined as a percentage of total revenues to 23.3% in 2002 from 24.2% in 2001. In 2002, we implemented cost-control measures that resulted in decreases in travel expenses and fees paid to outside software development consultants. These savings were offset by increased labor costs primarily attributable to the additional headcount resulting from the Sitraka acquisition.

We believe significant expenditures in research and development are required to remain competitive, and expect that research and development expenses will continue to represent approximately 20-25% of total revenues for the foreseeable future.

General and Administrative—General and administrative expenses consist primarily of compensation and benefit costs for our executive, finance, legal, administrative and information services personnel, professional fees, and facilities and systems costs. General and administrative expenses increased to $25.2 million in 2002 from $24.0 million in 2001, representing an increase of $1.2 million or 4.9%. The increase in 2002 is primarily attributable to increased legal expenses and premiums for directors’ and officers’ liability insurance coverage. General and administrative expenses as a percentage of total revenues remained relatively flat from 2001 to 2002.

Intangible Asset and Goodwill Amortization—Intangible asset and goodwill amortization includes the amortization of intangible assets. These costs decreased to $2.0 million in 2002 from $56.7 million in 2001, principally resulting from our adoption of SFAS No. 142. 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. Previously recognized workforce-in-place intangible assets were reclassified to goodwill effective January 1, 2002. See Note 1 of “Notes to Consolidated Financial Statements” for a reconciliation of previously reported net income (loss) and earnings (loss) per share to the amounts adjusted for the exclusion of goodwill amortization had we adopted the non-amortization provisions of SFAS No. 142 as of January 1, 2001.

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Other Compensation Costs—Other compensation costs is comprised primarily of compensation expense associated with the issuance of stock options with exercise prices below fair market value. These costs decreased to $2.0 million in 2002 from $7.0 million in 2001.

Other Income, Net—Other income, net consists primarily of interest income and expense and gain (loss) on equity investments. Other income, net increased to $8.7 million in 2002 from $3.8 million in 2001. The increase is partially due to a $0.3 million net gain recognized in 2002 on equity investments, slightly offset by lower yields on investments as a function of the decreasing interest rate environment and a loss recognized on the disposal of an aircraft. The net gain on equity investments in 2002 was attributable to a $1.9 million gain on the sale of an equity investment, largely offset by a non-cash charge of $1.6 million reflecting an adjustment for other than temporary impairment of an equity investment. These investments are in privately held information technology companies, many of which are in the start-up or development stage. These investments are carried at cost, subject to adjustment for other than temporary impairment. The average interest rates of our investments are summarized under “Item 7a: Quantitative and Qualitative Disclosures About Market Risks—Interest Rate Risk.”

During 2001, we recognized a $4.4 million loss on equity investments. The loss in 2001 resulted from a non-cash charge to write down the carrying value of certain equity investments to reflect an adjustment for other than temporary impairment.

We have committed to make additional capital contributions to a private equity fund totaling $2.2 million. If the companies in which we have made direct or indirect investments do not complete initial public offerings or are not acquired by publicly traded companies or for cash, we may not be able to sell these investments. In addition, even if we are able to sell these investments, we cannot assure that we will be able to sell them at a gain or even recover our investment.

Income Taxes—Provision for income taxes increased to $8.1 million in 2002 from $5.9 million in 2001, representing an increase of $2.2 million or 38.6%. The effective income tax rate in 2002 was 43.9% compared to (11.7)% in 2001. The change in the effective tax rate from 2001 to 2002 results primarily from the elimination of goodwill amortization associated with the implementation of SFAS No. 142. See Note 10 of “Notes to Consolidated Financial Statements.”

Comparison of Fiscal Years Ended December 31, 2001 and 2000

Revenues

Total revenues were $246.5 million in 2001 compared to $165.6 million in 2000, representing growth of $80.9 million or 48.9%.

License Revenues—License revenues were $174.1 million in 2001, compared to $126.8 million in 2000, representing growth of $47.3 million or 37.3%. License revenues represented 70.6% of total revenues in 2001, compared to 76.6% in 2000. License revenues in North America accounted for 78.1% of total license revenues for 2001, compared to 81.0% in 2000.

License revenue growth in 2001 derived from higher unit volumes, sales force expansion and new product introductions. Our ability to close larger individual sales transactions also contributed to license revenue growth in these periods. Price increases did not contribute to license revenue growth.

The increase in license revenues from 2000 to 2001 was primarily due to continued expansion of our worldwide sales force, and to a greater extent increased market acceptance of existing products, including LiveReorg, and the successful introduction of new products, including Quest Central for DB2 and the FastLane products we acquired in September 2000 for managing Microsoft Windows 2000 environments.

Service Revenues—Service revenues were $72.4 million in 2001, compared to $38.8 million in 2000, representing growth of $33.6 million or 86.6%. Service revenues represented 29.4% of total revenues in 2001, compared to 23.4% in 2000. The growth in service revenues in 2001 reflect the increase in first year maintenance and support fees associated with the growth in product license sales. To a much lesser extent, consulting services revenue growth contributed to service revenue growth in 2001.

Cost of Revenues

Cost of Licenses—Cost of licenses was $4.5 million in 2001, compared with $3.6 million in 2000, representing an increase of $0.9 million or 25.0%. Cost of licenses as a percentage of license revenues was 2.6% in 2001, compared with 2.8% in 2000. The increase in absolute dollars in cost of licenses from 2000 to 2001 was primarily due to increased software royalties partially offset by a reduction in printing costs in 2001.

Cost of Services—Cost of services was $18.5 million in 2001, compared with $10.7 million in 2000, representing an increase of $7.8 million or 72.9%. Cost of services as a percentage of service revenues was 25.6% in 2001, compared with 27.6% for 2000. The dollar cost increase in cost of services was primarily due to the increase in the number of technical support

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personnel required to manage and support our growing customer base as well as increased product offerings. As a percentage of service revenues, costs of services decreased from 27.6% in 2000 to 25.6% in 2001. This decrease in 2001 was caused by increased tenure and productivity of technical support personnel and increased stability of enhanced products in our installed base.

Amortization of Purchased Intangible Assets—Amortization of purchased intangible assets was $8.0 million in 2001, compared with $5.0 million in 2000, representing an increase of $3.0 million or 60.0%. Intangible assets purchased as part of acquisitions were $25.4 million and $3.2 million in 2000 and 2001, respectively. The increase in amortization from 2000 to 2001 was due entirely to technology purchased as part of the acquisitions made during the third quarter of 2000. In the third quarter of 2000, we added $16.0 million of purchased intangible assets, as a result of incurring a full year of amortization in 2001 compared to approximately three months in 2000.

Operating Expenses

Sales and Marketing—Sales and marketing expenses were $121.9 million in 2001, compared to $77.6 million in 2000, representing an increase of $44.3 million or 57.1%. Sales and marketing as a percentage of total revenues increased to 49.4% in 2001, compared to 46.9% in 2000. The increase in sales and marketing expense was primarily due to an increase in salaries and related expenses of $21.6 million, a $6.0 million increase in commissions, $4.0 million increase in travel and related costs and a $2.2 million increase in office lease expenses. The increases reflect our investment in our sales and marketing organization. In particular, sales and marketing employees increased by 76 from 2000 to 2001, an increase of 12.4%. Commissions were higher year-over-year as a result of increased license revenues. Sales and marketing expenses decreased as a percentage of revenues in the first and second quarters of 2001, but then increased to 52% and 51% in the third and fourth quarters, respectively, as revenues declined more than expenses in the aftermath of the September 11, 2001 attacks on the United States.

Research and Development—Research and development expenses were $59.5 million in 2001, compared to $39.7 million in 2000, representing an increase of $19.8 million or 49.9%. The increase in research and development expenses during these periods was primarily related to increases in the number of personnel conducting research and development, including software developers and technical documentation and quality assurance personnel associated with new product initiatives and the integration of software products associated with companies acquired during the 2000 to 2001 periods. Research and development expenses as a percentage of total revenues were relatively flat from 2000 to 2001 as a result of lower than expected license revenues in the last two quarters offset by a reduction in year-over-year headcount increases.

General and Administrative—General and administrative expenses were $24.0 million in 2001, compared to $17.7 million in 2000, representing an increase of $6.3 million or 35.6%. The dollar increase in general and administrative expenses was primarily due to the increase in headcount to support our growing infrastructure and expanding operations. General and administrative expenses as a percentage of total revenues decreased from 10.7% in 2000 to 9.7% in 2001, primarily because associated headcount is growing at a slower rate than revenues.

Intangible Asset and Goodwill Amortization—Intangible asset and goodwill amortization increased to $56.7 million in 2001 from $36.0 million in 2000, primarily due to the acquisitions made during the third quarter of 2000. We added $121.3 million of goodwill, as a result of incurring a full year of amortization in 2001 compared to approximately three months in 2000. See Note 1 of “Notes to Consolidated Financial Statements” for a reconciliation of previously reported net income (loss) and earnings (loss) per share to the amounts adjusted for the exclusion of goodwill amortization had we adopted the non-amortization provisions of SFAS No. 142 as of January 1, 2000.

Other Compensation Costs—Other compensation costs increased to $7.0 million in 2001 from $5.1 million in 2000. These costs were primarily related to the grant of stock options with exercise prices at less than fair market value. The majority of the option grants with exercise prices at less than fair market value were made in 1999.

Other Income, Net—Other income, net was $3.8 million in 2001, compared to $11.6 million in 2000. The decrease from 2000 to 2001 is primarily due to a non-cash charge of $4.4 million we recognized to write down the carrying value of certain equity investments to reflect their estimated fair value, lower yields on investments as a function of the decreasing interest rate environment and reduced cash balances resulting from application of the net proceeds from public offerings in August 1999 and March 2000.

Income Taxes—Provision for income taxes was $5.9 million in 2001, compared to $6.8 million in 2000, representing a decrease of $0.9 million or 13.2%. The effective income tax rate for 2001 was (11.7)%, compared to (37.2)% in 2000. The change in the effective tax rate from 2000 to 2001 resulted primarily from an increase in non-deductible goodwill amortization associated with acquisitions completed during 2000 and 2001.

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Inflation

Inflation has not had a significant effect on our results of operations or financial position for the years ended December 31, 2000, 2001 and 2002.

Liquidity and Capital Resources

As of December 31, 2002, the fair market value of our investment portfolio included cash, cash equivalents and short-term marketable securities totaling $92.1 million and $115.4 million, respectively, in long-term investment grade corporate and government securities.

Net cash provided by operating activities declined to $53.2 million in 2002, compared with $64.5 million and $25.9 million in 2001 and 2000, respectively. The decrease in net cash provided by operating activities in 2002 resulted primarily from a slowdown in the rate of growth of deferred revenue and reduced accrued compensation.

Net cash used in investing activities was $21.9 million in 2002, consisting primarily of $35.2 million net cash received from sales and maturities of marketable securities, offset by the use of $56.8 million for acquisitions and $3.0 million in capital expenditures. Net cash used in investing activities was $72.2 million in 2001, consisting primarily of net purchases of marketable securities of $49.8 million and capital expenditures of $22.1 million to support our worldwide expansion and related infrastructure needs. Net cash used in investing activities was $241.8 million in 2000, consisting primarily of net purchases of marketable securities of $111.0 million, acquisitions of $82.1 million, and capital expenditures of $40.4 million to support our worldwide expansion and related infrastructure needs.

During the year ended December 31, 2002, we generated approximately $34.0 million in cash and cash equivalents, primarily from our operations. Because our operating results may fluctuate significantly, as a result of decreases in customer demand or decreases in the acceptance of our future products and services, our ability to generate positive cash flow from operations may be jeopardized.

In the future, we expect cash will continue to be generated from our operations. We do not expect to spend significant amounts of additional cash to acquire property and equipment in the near term and therefore the level of cash used in investing activities to acquire property and equipment should remain constant with that used in 2002. We do, however, currently plan to reinvest our cash generated from operations in new short and long term marketable securities consistent with past investment practices, and continue to evaluate a variety of strategic investment and acquisition opportunities. Therefore, net cash used in investing activities may increase.

Financing activities generated $4.0 million in 2002, primarily resulting from net proceeds of $6.2 million from issuances of our common stock under employee stock option and stock purchase plans, offset by the use of $2.3 million to repay debt. Financing activities generated $12.9 million in 2001, of which $11.5 million was generated from issuances of our common stock under employee stock option and stock purchase plans. Financing activities generated $201.1 million in 2000. In March 2000, we raised net proceeds of $253.5 million from a public offering of our common stock.

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 purchases 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 from two million shares to five million. As of December 31, 2002, we had repurchased approximately 1.7 million shares of our common stock under this program for an aggregate cost of approximately $58.0 million. Repurchases help offset dilution from stock issued under our stock option and stock purchase plans. No shares of common stock were repurchased under this plan during 2002 or 2001.

As of December 31, 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, and the remaining balance of certain indebtedness assumed in connection with our acquisition of FastLane in September 2000. These commitments will require cash payments of $14.4 million in 2003, $10.5 million in 2004, $8.1 million in 2005, $4.0 million in 2006 and $2.2 million thereafter. In addition, we have committed to make additional capital contributions to a private equity fund totaling $2.2 million as capital calls are made. We do 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.”

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

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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.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect our reported assets, liabilities, revenues and expenses. On an on-going 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 under different assumptions or conditions.

We believe the following critical accounting policies and the related judgments and estimates affect the preparation of our 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 related interpretations, 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, SOP 98-9 and SAB 101 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.

Accounts Receivable

We maintain allowances for sales returns and doubtful accounts for estimated losses resulting from the unwillingness or inability 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. Additionally, if significant product performance issues were to arise resulting in the Company accepting sales returns, additional allowances may be required which would result in a reduction of revenue in the period such determination was made. The Company’s standard licensing agreement does not permit customers to return product except in situations where the product does not perform in accordance with established product requirements and the Company is unable to remedy the outstanding issues. While such amounts 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.

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Intangible Assets

In July 2001, the Financial Accounting Standards Board (“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 $56.0 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 (licenses and services), 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. 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 two to seven years. The net carrying amount of purchased intangible assets was considered recoverable at December 31, 2002. We will continue to evaluate the value of our purchased intangible assets on a periodic basis. Recoverability of these assets is determined based upon the forecasted undiscounted future net cash flows from the operations to which the assets relate, utilizing our best estimates, appropriate assumptions and projections at the time. These projected future cash flows may significantly vary over time as a result of increased competition, changes in technology, and fluctuations in demand. 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.

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 recognized workforce-in-place intangible assets were reclassified to goodwill effective January 1, 2002. Refer to Note 1 of Notes to our consolidated financial statements for adjusted net income (loss) for the years ended December 31, 2001 and 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. Our reporting units are generally consistent with the operating segments underlying the reportable segments identified in Note 15—Geographic and Segment Information. In conjunction with the implementation of SFAS No. 142, we performed our initial impairment review as of January 1, 2002 and October 31, 2002 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 (licenses and services), the Market Approach (Guideline Company Method) was the methodology deemed the most reliable and used for impairment

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analysis. We will perform subsequent annual impairment reviews during the fourth quarter of each year, or earlier if indicators of potential impairment exist. Future impairment reviews may result in charges against earnings to write down the value of goodwill.

Effective January 1, 2002, we adopted 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 Opinion (“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. We adopted SFAS No. 144 effective January 1, 2002. The adoption of SFAS No. 144 did not have a significant impact on our financial position, results of operations, or cash flows.

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 Emerging Issues Task Force 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 apply the requirements of SFAS No. 146 to exit activities initiated after December 31, 2002, as required.

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others.” FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while the provisions of the disclosure requirements are effective for financial statements of interim or annual reports ending after December 15, 2002. We adopted the disclosure provisions of FIN 45 during the fourth quarter of fiscal 2002 and such adoption did not have a material impact on our consolidated financial statements. We are currently evaluating the recognition provisions of FIN 45 but expect that they will not have a material adverse impact on our consolidated results of operations or financial position upon adoption.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation— Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods for voluntary transition to SFAS No. 123’s fair value method of accounting for stock-based employee compensation (“the fair value method”). SFAS No. 148 also requires disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income (loss) and earnings (loss) per share in annual and interim financials statements. The provisions of SFAS No. 148 are effective in fiscal years ending after December 15, 2002. We are currently evaluating the provisions of SFAS No. 148 but expect that they will not have a material adverse impact on our consolidated results of operations and financial position upon adoption since we have not adopted the fair value method. However, should we be required to adopt the fair value method in the future, such adoption could have a material impact on our consolidated results of operations or financial position. See Note 12 of the “Notes to Consolidated Financial Statements.”

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. Since we currently have no variable interest entities, we expect that the adoption of the provisions of FIN 46 will not have a material adverse impact on our consolidated results of operations or financial position.

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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 have varied in the past and may vary significantly from quarter to quarter due to a number of factors. These factors include the following:

Fluctuations in our results of operations are likely to affect the market price of our common stock and may not be related to or indicative of 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

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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.

General economic conditions and reduced levels of 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 continued 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 further 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.

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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, including our recent acquisition of Sitraka, Inc. in November 2002. Any additional acquisitions will require us 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 use cash, incur debt or issue equity securities to pay for any future acquisitions. Use of cash or debt may affect our liquidity and use of cash would reduce our cash reserves. 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. Also, we may determine that the acquired company, product or technology does not further our business strategy or that the company, product or technology is ultimately worth less than the price we paid, either of which could generate a future impairment charge. If we are unable to fully integrate acquired businesses, products or technologies with our existing operations, we may not receive the intended benefits of acquisition.

Our 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 continue to expand our international sales activities as part of our business strategy. As a result, we face increasing risks from our international operations, including, among others:

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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 limited experience in developing localized versions of our products and marketing and distributing them internationally.

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

From time to time, we have collaborated with other companies, including Hewlett-Packard and Oracle and certain major system integrators, in areas such as product development, marketing, distribution and implementation. 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. 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, patent, 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 I, Item 3, 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

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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.

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:

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 in the past 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 and services. 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:

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 8. Financial Statements and Supplementary Data

The financial statements required by this item are included in Part IV, Item 15 of this Form 10-K/A and are presented beginning on page F-1.

The following table sets forth selected unaudited consolidated quarterly financial data for the eight quarters ended December 31, 2002 (in thousands, except per share data):