8-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

(Amendment No. 1)

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported) March 17, 2004

QUEST SOFTWARE, INC.

(Exact name of registrant as specified in its charter)

California	000-26937	33-0231678
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

8001 Irvine Center Drive, Irvine, California	92618
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (949) 754-8000

Not Applicable

(Former name or former address, if changed since last report.)

AMENDMENT NO. 1 TO FORM 8-K DATED APRIL 1, 2004

On April 1, 2004, Quest Software, Inc. (“Quest”) filed a Current Report on Form 8-K to report its acquisition of Aelita Software Corporation (“Aelita”) on March 17, 2004. This amended Current Report on Form 8-K amends Item 7 of the previously filed report to provide the financial statements and pro forma financial information required under Items 7(a) and 7(b) of Form 8-K.

Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.

(a) Financial Statements of Business Acquired

The following audited consolidated financial statements of Aelita are included as Exhibit 99.1 in this amended Current Report:

Independent Auditors’ Report

Consolidated Balance Sheet as of December 31, 2003

Consolidated Statement of Operations for the Year Ended December 31, 2003

Consolidated Statement of Shareholders’ Deficiency for the Year Ended December 31, 2003

Consolidated Statement of Cash Flows for the Year Ended December 31, 2003

Notes to Consolidated Financial Statements

(b) Pro Forma Financial Information

The following unaudited combined pro forma financial statements of Quest, giving effect to the acquisition of Aelita, are included as Exhibit 99.2 in this amended Current Report:

Unaudited Pro Forma Combined Balance Sheet as of December 31, 2003

Unaudited Pro Forma Combined Statement of Operations for the Year Ended December 31, 2003

Notes to Unaudited Pro Forma Combined Financial Statements

(c) Exhibits

2.1 Agreement and Plan of Merger, dated as of January 28, 2004, by and among Quest Software, Inc., Answer Acquisition Corp., Aelita Software Corporation, certain stockholders of Aelita and Insight Venture Partners, LLC, as Stockholders’ Representative (1)

23.1 Independent Auditors’ Consent (2)

99.1 Audited consolidated financial statements of Aelita as of and for the year ended December 31, 2003 and Independent Auditors’ Report (2)

99.2 Unaudited pro forma combined financial statements giving effect to Quest’s acquisition of Aelita (2)

(1) Previously filed

(2) Filed herewith

2

SIGNATURES

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

	QUEST SOFTWARE, INC.
Date: May 28, 2004	By:	/s/ M. BRINKLEY MORSE
		M. Brinkley Morse,
		Vice President, Finance and Operations
		and Chief Financial Officer

3

EXHIBIT INDEX

Exhibit Number	Description of Document
2.1	Agreement and Plan of Merger, dated as of January 28, 2004, by and among Quest Software, Inc., Answer Acquisition Corp., Aelita Software Corporation, certain stockholders of Aelita and Insight Venture Partners, LLC, as Stockholders’ Representative (1)
23.1	Independent Auditors’ Consent (2)
99.1	Audited consolidated financial statements of Aelita as of and for the year ended December 31, 2003 and Independent Auditors’ Report (2)
99.2	Unaudited pro forma combined financial statements giving effect to Quest’s acquisition of Aelita (2)

(1) Previously filed

(2) Filed herewith

4

EX-23.1

Exhibit 23.1

Independent Auditors Consent

We consent to the incorporation by reference in Registration Statement Nos. 333-82784, 333-38002, 333-49668, 333-91429, 333-96183, 333-103010, 333-107045 and 333-113927 on Form S-8; Registration Statement No. 333-46648 on Form S-3; and Registration Statement No. 333-63596 on Form S-4 of Quest Software, Inc., of our report dated May 12, 2004, relating to the consolidated financial statements of Aelita Software Corporation, which appears in this Current Report on Form 8-K/A of Quest Software, Inc.

/s/ Deloitte & Touche LLP

Columbus, Ohio

May 28, 2004

EX-99.1

Exhibit 99.1

Audited Consolidated Financial Statements of

Aelita Software Corporation as of and for

the Year Ended December 31, 2003

and Independent Auditors’ Report

INDEPENDENT AUDITORS’ REPORT

Shareholders

Aelita Software Corporation

We have audited the accompanying consolidated balance sheet of Aelita Software Corporation and subsidiaries as of December 31, 2003, and the related consolidated statements of operations, shareholders’ deficiency and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Aelita Software Corporation and subsidiaries as of December 31, 2003, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 8 in the financial statements, effective March 17, 2004 the Company was sold to Quest Software, Inc.

/s/ Deloitte & Touche LLP

Columbus, Ohio

May 12, 2004

2

AELITA SOFTWARE CORPORATION

CONSOLIDATED BALANCE SHEET

DECEMBER 31, 2003

(In thousands, except share and par value amounts)

ASSETS
Current assets:
Cash and cash equivalents	$	10,413
Accounts receivable, net of reserve – $44		7,599
Prepaid expenses		414
Deferred commissions		1,638
Deferred income taxes		4,835
Other		365
Total current assets		25,264
Property and equipment:
Office furniture, equipment and leasehold improvements		2,246
Less accumulated depreciation and amortization		(770	)
Property and equipment – net		1,476
Total assets	$	26,740
LIABILITIES AND SHAREHOLDERS’ DEFICIENCY
Current liabilities:
Accounts payable	$	587
Income taxes payable		475
Accrued expenses:
Sales commissions		1,670
Payroll		1,858
Marketing and other		1,160
Deferred revenues		16,759
Deferred rent		17
Total current liabilities		22,526
Long-term obligations – less current portion:
Deferred revenues		1,444
Deferred income taxes		134
Deferred rent		95
Total long-term obligations		1,673
Mandatory redeemable convertible preferred stock		9,887
Shareholders’ deficiency
Common stock, $.01 par value, authorized – 18,500,000 shares; issued – 10,081,693 shares; outstanding – 6,748,360 shares		101
Additional paid-in capital		143
Treasury stock (3,333,333 shares), at cost		(2,696	)
Accumulated deficit		(4,894	)
Total shareholders’ deficiency		(7,346	)
Total liabilities and shareholders’ deficiency	$	26,740

See notes to consolidated financial statements.

3

AELITA SOFTWARE CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 2003

(In thousands)

Revenues:
License and maintenance	$	19,037
Professional services		1,486
Total revenues		20,523
Cost of revenues:
License and maintenance		897
Professional services		416
Total cost of revenues		1,313
Gross profit		19,210
Operating expenses:
Sales and marketing		17,731
Research and development		5,182
General and administrative		5,892
Total operating expenses		28,805
Loss from operations		(9,595	)
Other income (expenses):
Interest expense		(60	)
Interest income		80
Other – net		(29	)
Loss before income tax benefit		(9,604	)
Income tax benefit		(3,742	)
Net loss	$	(5,862	)

See notes to consolidated financial statements.

4

AELITA SOFTWARE CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ DEFICIENCY

YEAR ENDED DECEMBER 31, 2003

(In thousands)

	Issued Common Stock			Additional Paid-in Capital		Treasury Stock			(Accumulated Deficit) Retained Earnings			Total
	Shares	Amount
BALANCE, December 31, 2002	10,048	$	101	$	107	$	(2,696	)	$	968		$	(1,520	)
Sale of common stock	20		—		22		—			—			22
Stock options exercised	14		—		14		—			—			14
Net loss	—		—		—		—			(5,862	)		(5,862	)
BALANCE, December 31, 2003	10,082	$	101	$	143	$	(2,696	)	$	(4,894	)	$	(7,346	)

See notes to consolidated financial statements

5

AELITA SOFTWARE CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

YEAR ENDED DECEMBER 31, 2003

(In thousands)

Cash flows from operating activities:
Net loss	$	(5,862	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		445
Deferred income tax benefit		(4,608	)
Loss on disposal of fixed asset		28
Changes in operating assets and liabilities:
Accounts receivable		(4,708	)
Prepaid expenses		(206	)
Deferred commissions		(1,133	)
Other assets		(305	)
Accounts payable		137
Income taxes		709
Accrued expenses		2,995
Deferred rent		(7	)
Deferred revenues		13,260
Net cash provided by operating activities		745
Cash flows from investing activities:
Proceeds from sale of fixed assets		4
Purchases of property and equipment		(1,015	)
Net cash used in investing activities		(1,011	)
Cash flows from financing activities:
Proceeds from sale of common stock		36
Payments on debt		(259	)
Payments on capital leases		(7	)
Net cash used in financing activities		(230	)
Net decrease in cash and cash equivalents		(496	)
Cash and cash equivalents, beginning of year		10,909
Cash and cash equivalents, end of year	$	10,413
Supplemental disclosures:
Cash paid for:
Interest	$	5
Income taxes	$	140

See notes to consolidated financial statements

6

AELITA SOFTWARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEAR ENDED DECEMBER 31, 2003

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation—The consolidated financial statements include the accounts of Aelita Software Corporation, a Delaware corporation, and its wholly owned subsidiaries in which it exercises significant control (collectively, the “Company”). All significant intercompany accounts and transactions have been eliminated. Effective March 17, 2004 the Company was sold to Quest Software, Inc., See Note 8. In 2002, the Company established product development offices in Russia and has a branch office located in the United Kingdom, as well as various locations within the United States.

Description of Business—Aelita Software Corporation (the “Company”) began operations on March 1, 1999. The Company is a provider of systems management solutions for Microsoft Active Directory and Microsoft Exchange environments. In addition, the Company provides post-contract customer support services to the licensees of its software. The market for the Company’s products is principally comprised of United States of America (“U.S.”) national and multinational organizations.

Cash and Cash Equivalents—The Company considers all checking accounts and cash funds with a maturity of less than three months at the date of purchase to be cash equivalents.

Property and Equipment—Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the following estimated useful lives: office furniture and equipment, 5 years; computer software and hardware, 3 years.

Long-Lived Assets—If events or circumstances indicate that the carrying amount of the asset or related group of assets may not be recoverable, a determination is made by management to ascertain whether property and equipment and other intangibles have been impaired based on the sum of expected future undiscounted cash flows from operating activities. If the estimated net cash flows are less than the carrying amount of such assets, the Company will recognize an impairment loss in an amount necessary to write down the assets to a fair value.

Revenue Recognition—The Company follows the standards in Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended by SOP 98-4. The company’s revenues derive from perpetual license fees, annual product support fees and professional services fees. As explained below, perpetual license fees from sales in fiscal 2003 were recognized at the time of sale for transactions under $50,000, provided revenue recognition criteria were met, while transactions over $50,000 were recorded in deferred revenue and amortized to license and maintenance revenue on a straight line basis over the contracted support period (generally one-year) beginning on the date of sale. Product support revenue is recorded in deferred revenue and amortized to maintenance revenue over the annual term of the contract on a straight-line basis. Revenues from professional services are typically recognized as the services are performed for time and material contracts, or on a percentage-of-completion basis.

Beginning in January 2003, the Company began to bundle software license fees and first year product support fees into one price charged to the customers. For these multi-element agreements, vendor specific objective evidence (“VSOE”) is used to allocate a portion of the total fee to the undelivered elements of the agreement. For contracts under $50,000, the Company determined, based on the fair value charged on renewals for annual product support, that there was appropriate VSOE to establish fair value of the first year support component of the bundled transactions. The Company thus recognized the licensed component of its sub-$50,000 transactions at the time of sale and amortized the support component over the support term. For all other contracts, VSOE did not support a consistent fair value of the undelivered support component of the transactions. For these contracts, the Company is amortizing the full bundled license and support contract values over the support terms of the contracts, typically one year. Deferred commissions related to such revenues are amortized to expense over the term of the contracts. Approximately $11.1 million of contracts valued over $50,000 were deferred on this basis as of December 31, 2003. In connection with the Company’s acquisition by Quest Software, Inc. on March 17, 2004, the balance of deferred revenues as of that date was reduced to its fair value when added to Quest’s financial statements. See Note 8.

Cost of Revenues—Cost of license and maintenance revenue primarily consists of material and shipping costs related to developed software and costs to provide technical support to existing maintenance contracts. Cost of professional services revenue consists primarily of consulting and training services to the Company’s customers.

Research and Development—Research and development expenditures are charged to operations as incurred. SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company’s product development process, technological feasibility is established upon completion of a working model. Development costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have been insignificant. Through December 31, 2003 all research and development costs have been expensed as incurred.

7

Mandatory Redeemable Convertible Preferred Stock—In October 2002, the Company authorized 5,000,000 shares and issued 4,655,863 shares of $.01 par value per share Mandatory Redeemable Convertible Preferred Stock to an institutional investor as further discussed in Note 6.

Advertising Costs—The Company expenses advertising costs as they are incurred. Advertising expense was approximately $899,000 in 2003 and is included in marketing expenses.

Management Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Concentration of Credit Risk—Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash investments and trade receivables. The Company invests its excess cash in deposits with major banks. The Company performs periodic evaluations of the relative credit standing of all the financial institutions dealt with by the Company, and considers the related credit risk to be minimal. The principal market for the Company’s products is comprised of major U.S. national and multi-national organizations. Approximately 10% of the Company’s revenues in 2003 were derived from sales to one customer.

Accounting for Income Taxes—The Company accounts for income taxes pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes, which uses the liability method to calculate deferred income taxes. The Company will establish a valuation allowance against deferred tax assets if it deems the realization of such assets to be uncertain.

Stock-Based Compensation—The Company accounts for its stock based employee compensation plan, which is described more fully in Note 7 under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based cost is reflected in net loss, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant, if applicable, or as determined by the Board of Directors. The following table illustrates the effect on net loss if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation for the year ended December 31, 2003 (in thousands):

Net loss—as reported	$	(5,862	)
Deduct total stock-based employee compensation expense determined under fair value based method for all awards—net of tax		(276	)
Net loss—proforma	$	(6,138	)

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing method with the following weighted-average assumptions: volatility and dividend yield of 0%, risk-free interest rate of 4.00% for 2003 and an expected life of 7 years for 2003. The weighted average fair value of options granted in 2003 under the Black-Scholes method was approximately $0.46 per share.

Recent Accounting Pronouncements—In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances), many of which were previously classified as equity. In its October 2003 meeting, the FASB decided to defer the effective date of certain provisions of SFAS No. 150 for financial instruments entered into or modified after May 31, 2003 and otherwise shall be effective for the Company’s 2004 financial statements. Management has determined that the adoption of SFAS No. 150 will not have a significant impact on its consolidated financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity 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. FIN 46 requires a variable interest entity to be consolidated by a company, if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. In

8

December 2003, the FASB issued FIN 46R. It is effective in 2004 for interests in newly formed entities created after December 31, 2003, and for all other entities for periods beginning after December 15, 2004. Management has determined that it does not have any variable interest entities that would be subject to consolidation under FIN 46R.

2. NOTES PAYABLE AND BANK LOANS

During 2001, the Company entered into a bank line of credit, due on demand, totaling $750,000, all of which is secured by substantially all the assets of the Company, bears interest at the prime rate plus 1% and is personally guaranteed by the two of the Company’s principal shareholders. Additionally the line of credit contains subordination agreements with the two principal shareholders that prohibit payments on the shareholders’ notes if any amounts are outstanding on the line of credit. There was no outstanding balance on this line at December 31, 2003.

3. LEASES

The Company leases office space and certain equipment under various operating lease agreements. The future minimum rental payments required under all operating leases that have initial or remaining lease terms in excess of one year are as follows as of December 31, 2003 (in thousands):

	Operating Leases
2004	$	1,033
2005		627
2006		292
2007		304
2008		51
Total minimum lease payments	$	2,307

Total rent expense incurred by the Company under operating leases for 2003 totaled approximately $697,000.

4. INCOME TAXES

The benefit for income taxes for the year ended December 31, 2003 consists of the following (in thousands):

Current	$	866
Deferred		(4,608	)
Total benefit	$	(3,742	)

The total income tax benefit for the period differs from the amount computed using the federal statutory rate primarily due to certain nondeductible expenses and state and local income taxes.

Deferred tax assets and liabilities at December 31, 2003 are comprised of the following (in thousands):

Total deferred tax assets	$	6,113
Total deferred tax liabilities		(1,412	)
Net deferred tax asset	$	4,701

Significant temporary differences giving rise to deferred tax assets and liabilities include deferred revenues, accrued rent and other expenses, prepaid expenses and depreciation methods.

9

5. DEFINED CONTRIBUTION PLAN UNDER SECTION 401(k)

The Company adopted a defined contribution plan effective May 1, 2000 covering all eligible employees. Eligible employees may defer a percentage of their compensation which is not less than 1% and not greater than 15%. The total deferral may not exceed the maximum dollar limit set by law. The Company matches the elected deferrals by making a discretionary contribution. In 2003, the Company matched 20% of each participant’s contribution. Total matching contribution charged to expense for 2003 was approximately $93,000.

6. PREFERRED STOCK

The amount of total authorized capital which the Company has the right to issue is 15,900,000 shares of voting common stock, 2,600,000 shares of non-voting common stock and 5,000,000 shares of Series A Redeemable Convertible Preferred Stock (the “Series A Preferred Stock”). All common and preferred shares have a par value of $0.01 per share. As of December 31, 2003, 5,000,000 shares of voting common stock are reserved for future issuance for the conversion of the Series A Preferred Stock and 2,600,000 shares of non-voting common stock are reserved for future issuance pursuant to the exercise of employee stock options.

Series A Redeemable Convertible Preferred Stock—On June 28, 2002 the Company entered into a Securities Purchase Agreement with an institutional investor, pursuant to which the investor acquired 4,655,863 shares of Series A Preferred Stock at $2.15 per share for an aggregate gross purchase price of approximately $10.0 million ($9.9 million net of transaction costs). Such transaction closed on October 4, 2002. Each share of Series A Preferred Stock is convertible into common stock at the option of the holder at the conversion rate, which was one-to-one on December 31, 2003. Such conversion rate is subject to adjustment should the Company, at any time after October 4, 2002, issue shares of common stock for consideration per share, which is less than the conversion price of the Series A Preferred Stock.

In addition, each share of Series A Preferred Stock shall automatically be converted into shares of common stock at the then effective conversion rate (i) upon the vote of the holders of at least 75% of the shares of Series A Preferred Stock then outstanding or (ii) once at least 75% of the shares of Series A Preferred Stock issued on October 4, 2002 shall have been converted into common stock. In the event of a qualified public offering, each share of Series A Preferred Stock shall automatically be converted into the right to receive (i) $2.15 plus (ii) a number of shares of common stock at the then applicable conversion rate.

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company resulting in any distribution of assets to its shareholders, the holders of shares of Series A Preferred Stock then outstanding shall be entitled to receive an amount per share equal to (i) $2.15 plus (ii) the pro-rata amount of any additional proceeds from such liquidation attributable to the Series A Preferred Stock as though it were then converted into common stock.

At any time after October 4, 2007, the holders of a majority of the outstanding shares of Series A Preferred Stock may require the Company to redeem any or all shares of Series A Preferred Stock held by such holders at the redemption price specified in the certificate of incorporation.

Dividends are payable when and as declared by the Board of Directors. In addition, holders of Series A Preferred Stock shall be entitled to share pro-rata, on an as-if-converted basis, in any dividends declared on common stock. As of December 31, 2003, no dividends have been declared, and no dividend shall be paid on common stock without the consent of the holders of a majority of the outstanding shares of Series A Preferred Stock.

Generally, the holders of Series A Preferred Stock shall vote equally with the common stock on an as-if-converted basis, except that the holders of Series A Preferred Stock shall have the exclusive right, voting separately as a class, to elect two directors. Certain actions related to changes in the corporate governance of the Company, payment of a dividend, sale or liquidation of the Company and other major actions, as defined, shall require the consent of the holders of a majority of the outstanding shares of Series A Preferred Stock.

7. STOCK OPTIONS

The Company has adopted the Omnibus Stock Option Plan, as amended. The plan allows for the issuance of options to key employees, outside directors, consultants and advisors of the Company, or affiliates of the Company, for the purchase of up to an aggregate of 2,600,000 shares of non-voting common stock of the Company. Options vest over a period as specified by the Board of Directors, typically three to four years.

10

The following summarizes the stock option transactions (in thousands):

	Number of Options		Weighted Average Exercise Price
Balance—December 31, 2002	1,954		$	1.32
Granted	942			1.90
Exercised	(14	)		(1.01	)
Cancelled	(479	)		(1.68	)
Balance—December 31, 2003	2,403		$	1.49

At December 31, 2003 options exercisable under the Company’s stock option plan totaled 1.1 million and had a weighted average option price per share of $1.15. Exercise prices for 1.1 million options outstanding at December 31, 2003 ranging from $1.00 to $1.20 have a contractual life of 8.48 years and a weighted average price of $1.06. Exercise prices for 1.3 million options outstanding at December 31, 2003 ranging from $1.50 to $1.90 have a contractual life of 8.35 years and a weighted average price of $1.83. At December 31, 2003, there were 158,033 options available for grant.

8. SUBSEQUENT EVENT

In March 2004, the Company was acquired by Quest Software, Inc. (“Quest”), a leading provider of application management solutions, for a purchase price of $117.3 million. In addition, the Company’s outstanding stock options were assumed by Quest and represent the right to purchase a number of shares of Quest common stock. The purchase price consisted of cash of $102.0 million, the assumption of Aelita stock options valued at $13.4 million and direct acquisition costs of $1.9 million. The accompanying consolidated financial statements reflect no adjustments resulting from the sale.

11

EX-99.2

Exhibit 99.2

QUEST AND AELITA

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

On March 17, 2004, Quest Software, Inc., through a wholly owned subsidiary, acquired Aelita Software Corporation. The acquisition was completed pursuant to the terms of the Agreement and Plan of Merger dated as of January 28, 2004. The purchase price for Aelita was $117.3 million, consisting of $102.0 million in cash, the assumption of Aelita stock options valued at $13.4 million and direct acquisition costs of $1.9 million. The acquisition was accounted for as a purchase and the results of Aelita’s operations were included in Quest’s statement of operations from the date of acquisition.

The following unaudited pro forma combined financial statements have been prepared to give effect to the acquisition of Aelita, using the purchase method of accounting, and the assumptions and adjustments to reflect the allocation of purchase price to the acquired assets and assumed liabilities of Aelita described in the accompanying notes to the unaudited pro forma combined financial statements. The unaudited pro forma combined balance sheet as of December 31, 2003 includes the historical balance sheets of Quest and Aelita as of December 31, 2003 as if the merger transaction had been consummated on that date. The unaudited pro forma combined statement of operations of Quest and Aelita for the year ended December 31, 2003 includes the historical statements of operations of Quest and Aelita for the year ended December 31, 2003 as if the merger transaction had been consummated on January 1, 2003.

The unaudited pro forma combined financial statements are based on the respective historical financial statements of Quest and Aelita, and should be read in conjunction with: (i) Quest’s Annual Report on Form 10-K for the year ended December 31, 2003 filed on March 15, 2004; (ii) Aelita’s audited financial statements for the year ended December 31, 2003, included in this amended Current Report as Exhibit 99.1; and (iii) the accompanying notes to the unaudited pro forma combined financial statements.

The unaudited pro forma combined financial statements include adjustments, which are based on preliminary estimates, to reflect the allocation of the purchase price to the acquired assets and assumed liabilities of Aelita. The purchase price allocation presented herein is preliminary, and final purchase accounting adjustments may differ from the pro forma adjustments presented herein.

These unaudited pro forma combined financial statements are intended for informational purposes only and are not necessarily indicative of the financial position or results of operations that would have actually been reported had the merger occurred on January 1, 2003 for statements of operations purposes and as of December 31, 2003 for balance sheet purposes, nor are they necessarily indicative of the future financial position or results of operations.

These unaudited pro forma combined financial statements do not include potential cost savings from operating efficiencies or synergies that may result from the acquisition.

QUEST SOFTWARE, INC.

UNAUDITED PRO FORMA COMBINED BALANCE SHEET

DECEMBER 31, 2003

(In thousands)

	Historical						Pro Forma
	Quest			Aelita			Adjustments			Combined
ASSETS
Current assets:
Cash and cash equivalents	$	67,470		$	10,413		$	(42,039	)(a)	$	35,844
Short-term marketable securities		26,736			—			—			26,736
Accounts receivable, net		58,535			7,599			—			66,134
Prepaid expenses and other current assets		6,846			2,417			(1,638	)(b)		7,625
Deferred income taxes		15,074			4,835			(2,335	)(c)		17,574
Total current assets		174,661			25,264			(46,012	)		153,913
Property and equipment, net		31,950			1,476			—			33,426
Long-term marketable securities		184,160			—			—			184,160
Goodwill		239,840			—			82,691	(d)		322,531
Amortizing intangible assets, net		25,159			—			27,800	(e)		52,959
Deferred income taxes		10,126			—			(10,126	)(f)		—
Other assets		1,915			—			—			1,915
Total assets	$	667,811		$	26,740		$	54,353		$	748,904
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable	$	4,180		$	587		$	—		$	4,767
Obligation under repurchase agreement		—			—			60,000	(g)		60,000
Accrued compensation		17,384			3,528			—			20,912
Other accrued expenses		27,939			1,177			1,040	(h)		32,034
								1,895	(i)
								(17	)(j)
Income taxes payable		9,082			475			—			9,557
Current portion of deferred revenue		73,957			16,759			(8,672	)(k)		82,044
Total current liabilities		132,542			22,526			54,246			209,314
Long-term liabilities:
Long-term portion of deferred revenue		9,416			1,444			(905	)(k)		9,955
Other long-term liabilities		1,677			229			(95	)(j)		2,805
								994	(f)
Total long-term liabilities		11,093			1,673			(6	)		12,760
Mandatory redeemable convertible preferred stock		—			9,887			(9,887	)(l)		—
Shareholders’ equity (deficiency):
Preferred stock		—			—			—			—
Common stock		588,203			101			(101	)(l)		601,565
								9,354	(m)
								4,008	(m)
Additional paid-in capital		—			143			(143	)(l)		—
Treasury stock		—			(2,696	)		2,696	(l)		—
Accumulated deficit		(47,073	)		(4,894	)		4,894	(l)		(53,773	)
								(6,700	)(n)
Accumulated other comprehensive income		260			—			—			260
Unearned compensation		—			—			(4,008	)(m)		(4,008	)
Notes receivable from sale of common stock		(17,214	)		—			—			(17,214	)
Net shareholders’ equity (deficiency)		524,176			(7,346	)		10,000			526,830
Total liabilities and shareholders’ equity (deficiency)	$	667,811		$	26,740		$	54,353		$	748,904

The accompanying notes are an integral part of these unaudited pro forma combined financial statements.

2

QUEST SOFTWARE, INC.

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 2003

(In thousands, except per share amounts)

	Historical						Pro Forma
	Quest			Aelita			Adjustments			Combined
Total revenues	$	304,288		$	20,523		$	—		$	324,811
Cost of revenues:
Licenses		4,312			49			—			4,361
Services		21,365			1,264			222	(a)		22,851
Amortization of purchased intangible assets		7,675			—			3,732	(b)		11,407
Total cost of revenues		33,352			1,313			3,954			38,619
Gross profit		270,936			19,210			(3,954	)		286,192
Operating expenses:
Sales and marketing		144,460			17,731			1,605	(a)		163,796
Research and development		67,448			5,182			58	(a)		72,688
General and administrative		29,656			5,892			31	(a)		35,579
In-process research and development		—			—			6,700	(c)		6,700
Intangible asset amortization		3,390			—			4,120	(b)		7,510
Total operating expenses		244,954			28,805			12,514			286,273
Income (loss) from operations		25,982			(9,595	)		(16,468	)		(81	)
Other income, net		11,132			(9	)		(1,233	)(d)		9,890
Loss on impairment of aircraft		(3,495	)		—			—			(3,495	)
Income (loss) before income tax provision (benefit)		33,619			(9,604	)		(17,701	)		6,314
Income tax provision (benefit)		12,103			(3,742	)		(4,400	)(e)		3,961
Net income (loss)	$	21,516		$	(5,862	)	$	(22,101	)	$	2,353
Net income (loss) per share:
Basic	$	0.23								$	0.03
Diluted	$	0.23								$	0.02
Weighted-average shares:
Basic		92,081									92,081
Diluted		94,231									94,231

The accompanying notes are an integral part of these unaudited pro forma combined financial statements.

3

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The unaudited pro forma combined financial statements included herein have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations; however, management believes that the disclosures are adequate to make the information presented not misleading.

On March 17, 2004, by way of a merger of a wholly-owned subsidiary with and into Aelita, Quest acquired all of the issued and outstanding shares of Aelita, a leading provider of systems management solutions for Microsoft Active Directory and Microsoft Exchange environments, for cash consideration of $102.0 million, the assumption of Aelita stock options valued at $13.4 million and direct acquisition costs of $1.9 million. Intrinsic value of unvested stock options of $4.0 million has been allocated to unearned compensation and will be recognized as non-cash compensation expense over the remaining future vesting period of three to four years.

Quest entered into a repurchase agreement utilizing $67.5 million of its investment securities as collateral. Of the cash proceeds from this transaction, $60.0 million was used to provide funding for this acquisition. The repurchase agreement both entitles and obligates Quest to repurchase the securities from the transferee (“buyer-lender”) and the buyer-lender does not have a right to pledge or sell the collateralized securities to a third party. Accordingly, Quest’s obligations under the repurchase agreement are accounted for as short-term borrowings and recorded as a liability on the balance sheet. Obligations under the repurchase agreement bear interest at 1.07% and will mature in June 2004, and require maintenance of a customary market collateral margin.

Quest expects the acquisition of Aelita to add breadth and depth to its Microsoft expertise and product portfolio, with a combined product offering will deliver the robust solutions customers require to better administer, migrate, consolidate, recover and audit their Microsoft Active Directory and Exchange environments.

The unaudited pro forma combined balance sheet as of December 31, 2003 includes the historical balance sheets of Quest and Aelita as of December 31, 2003 as if the merger transaction had been consummated on that date. The unaudited pro forma combined statement of operations of Quest and Aelita for the year ended December 31, 2003 includes the historical statements of operations of Quest and Aelita for the year ended December 31, 2003 as if the merger transaction had been consummated on January 1, 2003.

1. Purchase Price Allocation

The following represents the preliminary allocation of the purchase price paid for Aelita based on the estimated fair values of the acquired assets and assumed liabilities of Aelita as of December 31, 2003. Actual fair values will be determined as more detailed analysis is completed and additional information on the fair values of Aelita’s assets and liabilities becomes available.

The unaudited pro forma combined financial statements reflect a total purchase price of approximately $117.3 million, consisting of the following (in thousands):

Cash	$	102,039
Fair value of Quest options to be issued		13,362
Direct acquisition costs incurred by Quest		1,895
Total purchase price	$	117,296

The fair value of Quest options issued was determined using the Black-Scholes model and the number of Aelita stock options outstanding as of March 17, 2004. The merger agreement requires us to make certain payments to the former shareholders of Aelita in the event assumed Aelita options are prematurely forfeited within eighteen months of the acquisition date. The amount of these payments are equal to 50% of the aggregate value of the spread between the exercise price per share of each forfeited option as of the date of forfeiture and the lower of the price of our common stock as reported on the Nasdaq National Market on either (a) the acquisition closing date, or (b) the trading day immediately preceding the date which the option was forfeited. This represents contingent consideration and in accordance with the provisions of SFAS No. 141, “Business Combinations,” will result in a reduction to common stock when paid.

The preliminary purchase price allocation as of December 31, 2003 is as follows (in thousands):

Tangible assets	$	20,267
Liabilities assumed		(15,550	)
Deferred tax asset		2,500
Deferred tax liability		(11,120	)
Goodwill		82,691
Acquired technology		16,500
Customer list		5,100
Maintenance contracts		2,600
Non-compete agreements		3,000
Trademark		600
In-process research and development		6,700
Unearned stock-based compensation		4,008
Total purchase price	$	117,296

4

The allocation of the purchase price was based on a preliminary evaluation of assets acquired and liabilities assumed. The valuation of intangible assets was based in part on the assistance from an independent valuation firm. The valuation method used to determine the intangible asset values was the income approach. The income approach presumes that the value of an asset can be estimated by the net economic benefit (i.e., cash flows) to be received over the life of the asset, discounted to present value. The discounting process uses a rate of return that accounts for both the time value of money and investment risk factors.

In accordance with accounting principles generally accepted in the United States of America, Quest recorded a deferred tax asset of $2.5 million for the acquired deferred tax assets relating to net operating loss and tax credit carry-forwards for tax purposes acquired in the acquisition. In addition, a deferred tax liability of $11.1 million has been recorded for the difference between the assigned values and the tax bases of the intellectual property assets acquired in the acquisition.

Amortizing intangible assets of $27.8 million consist of acquired technology, customer list, existing maintenance contracts, non-compete agreements and trademark. The weighted average amortization period of acquired technology is 58 months. The amortization period for customer list is 24 months, existing maintenance contracts is 60 months, non-compete agreements is 48 months and trademark is 24 months. The total weighted average amortization period of all intangible assets is 45 months. All intangible assets will be amortized on a straight-line basis over their useful lives, which best represents the distribution of the economic value of the intangible assets.

The acquired in-process research and development of $6.7 million was charged to the consolidated statement of operations on the acquisition date because technological feasibility had not been established and no future alternative uses existed. In-process research and development is related to the next generation of Aelita’s products including changes to existing applications and the addition of new applications. The value of in-process research and development was determined using the income approach.

In conjunction with the acquisition of Aelita, Quest also recorded unearned stock-based compensation totaling $4.0 million, which represents the intrinsic value of Aelita’s unvested stock options. The weighted average remaining vesting period of unvested employee stock options approximates four years. This amount is included as part of the total fair value of Quest options to be issued of $13.4 million.

A preliminary estimate of $82.7 million has been allocated to goodwill, representing the excess of the purchase price over the fair market value of the net tangible assets, amortizable intangible assets and assumed liabilities acquired. Goodwill will not be amortized but will be tested for impairment at least annually in accordance with Quest’s policy on impairment analysis. Any change in the fair value of the net assets of Aelita from the estimates used in the preliminary allocation of purchase price will change the amount of the purchase price allocated to goodwill.

2. Pro Forma Adjustments

The following are adjustments reflected in the unaudited pro forma combined balance sheet as of December 31, 2003:

(a) To adjust cash and cash equivalents for the cash consideration paid by Quest as part of the acquisition.

(b) To adjust deferred commissions to estimated fair value.

(c) To record deferred tax asset associated with net operating losses from Aelita.

(d) To record goodwill related to the acquisition.

(e) To record intangible assets related to the acquisition.

(f) To record deferred tax liability associated with the identified intangible assets acquired.

(g) To record obligation under repurchase agreement utilized to fund additional cash consideration paid by Quest.

5

(h) To adjust accrued expenses for estimated severance to be paid by Quest as part of the acquisition.

(i) To record estimated direct acquisition costs incurred by Quest, consisting primarily of professional fees incurred related to attorneys, accountants and valuation advisors.

(j) To eliminate Aelita deferred rent.

(k) To adjust Aelita deferred revenue to estimated fair value. Of the $9.6 million reduction, we estimate that approximately $7.9 million is allocable to deferred license revenues that had zero fair value because the Company had performed all of its obligations under the associated license agreements.

(l) To eliminate the historical preferred stock balance, treasury stock balance and stockholders’ deficit of Aelita.

(m) To record the fair value of 1.1 million Quest stock options issued in exchange for Aelita stock options as part of the acquisition. Of the $13.4 million ascribed to stock options, approximately $4.0 million represents the intrinsic value related to Quest unvested stock options issued as part of the acquisition.

(n) To record the write-off of in-process research and development.

The following are adjustments reflected in the unaudited pro forma combined statements of operations for the year ended December 31, 2003:

(a) To record the amortization of the unearned stock-based compensation calculated using straight-line method.

(b) To reflect the amortization of intangible assets on a straight-line basis resulting from the acquisition.

(c) To record the write-off of in-process research and development.

(d) To reflect the decrease in interest income using a yield of 1.41% for the use of cash and increase in interest expense using a borrowing rate of 1.07% for funds borrowed under the repurchase agreement.

(e) To adjust provision (benefit) for taxes to reflect the impact of the pro forma adjustments using the Federal and State statutory tax rates.

6