8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 OR 15(d) of

The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported) August 5, 2008

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.)

5 Polaris Way, Aliso Viejo, California	92656
(Address of principal executive offices)	(Zip Code)

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

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

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02 Results of Operations and Financial Condition.

On August 5, 2008, Quest Software, Inc. issued a press release announcing operating results for the quarter ended June 30, 2008. This press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference.

The information in this Form 8-K and the Exhibit attached hereto shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, unless Quest specifically incorporates the foregoing information into those documents by reference.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits.

99.1 Press release issued by Quest Software, Inc. on August 5, 2008.

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: August 5, 2008	By:	/s/ Scott J. Davidson
		Scott J. Davidson Senior Vice President, Chief Financial Officer

EXHIBIT INDEX

Exhibit Number	Exhibit Title or Description
99.1	Press release issued by Quest Software, Inc. on August 5, 2008.

EX-99.1

Exhibit 99.1

NEWS For Immediate Release

Editorial Contact: Daphne Kent

614-726-4787

daphne.kent@quest.com

Investor Contacts: Thomas Patterson

949-754-8336

thomas.patterson@quest.com

Stephen Wideman

949-754-8142

stephen.wideman@quest.com

QUEST SOFTWARE REPORTS SECOND QUARTER 2008 RESULTS

Achieves Record Second Quarter Revenues of $173.4 Million

ALISO VIEJO, Calif., August 5, 2008 – Quest Software, Inc. (Nasdaq: QSFT) today reported financial results for the quarter ended June 30, 2008. Total revenues increased 21.9% to $173.4 million compared to the prior year’s second quarter revenue of $142.3 million. Total revenues for the first six months of 2008 increased 18.5% to $346.2 million compared to $292.1 million for the same period in 2007.

The Company’s cash and investments at June 30, 2008, totaled $419.7 million, an increase of $36.2 million over the comparable balance at March 31, 2008. Quest generated cash flow from operations of $24.0 million in the second quarter of 2008.

“We are pleased with our financial performance through what has been a tough macroeconomic environment in the first half of 2008,” said Vinny Smith, Quest CEO. “We are continuing to drive our business to support our customers’ requirements across the breadth of their IT infrastructure with innovative products and services.”

GAAP Results

Quest Software’s net income for the second quarter of 2008 was $8.3 million, or $0.08 per fully diluted share. This compares to net income of $7.9 million, or $0.08 per share on a fully diluted basis, for the second quarter of 2007. Operating margins decreased year-over-year from 5.5% to 2.5% in the second quarter, resulting in operating income of $4.4 million which compares to $7.9 million for the corresponding period in 2007. Net income for the first six months of 2008 was $21.6 million, or $0.20 per fully diluted

-more-

Quest Software Reports Second Quarter 2008 Results – page 2 of 11

share, versus net income of $22.8 million, or $0.22 per fully diluted share, for the comparable period in 2007.

Non-GAAP Results

On a non-GAAP basis, net income for the second quarter of 2008 was $17.7 million, or $0.17 per fully diluted share. This compares to non-GAAP net income of $17.4 million, or $0.17 per share on a fully diluted basis, for the second quarter of 2007. The non-GAAP operating margin was 10.8% in the second quarter of 2008, resulting in non-GAAP operating income of $18.7 million, compared to non-GAAP operating margin and operating income of 13.8% and $19.6 million, respectively, for the corresponding period in 2007. For the six months ended June 30, 2008 non-GAAP net income was $39.9 million, or $0.38 per fully diluted share. This compares to non-GAAP net income of $43.6 million, or $0.41 per fully diluted share, for the six months ended June 30, 2007. The non-GAAP operating margin was 12.1% in the first six months of 2008, resulting in non-GAAP operating income of $42.0 million, compared to non-GAAP operating margin of 18.2% and non-GAAP operating income of $53.1 million in the comparable period of 2007.

Non-GAAP results exclude the after-tax effects of amortization of intangible assets acquired with business combinations, share-based compensation expenses, expenses associated with our stock option investigation and write off of in-process research and development. A reconciliation of GAAP to non-GAAP financial results is included with this press release.

Quest Software’s management prepares and uses non-GAAP financial measures in the presentation of the Company’s results to provide a consistent understanding of its historical operating performance and comparisons with peer companies. Management believes that non-GAAP reporting provides a more meaningful representation of the Company’s on-going economic performance and therefore uses non-GAAP reporting internally to evaluate and manage the Company’s operations. By excluding charges such as those described above from its GAAP-based results, we believe these non-GAAP financial measures are more likely to facilitate investors’ understanding of the Company’s ongoing business operating results. These non-GAAP financial measures also facilitate comparisons to the operating results of the Company’s competitors and provide investors with greater transparency with respect to the supplemental information used by management in its operational and financial decision making.

Financial Outlook

Quest Software management offers the following updated guidance for the twelve months ending December 31, 2008:

• Annual revenue is expected to be in the range of $705 million to $720 million;

Quest Software Reports Second Quarter 2008 Results – page 3 of 11

• GAAP operating margin is expected to be in the range of 11.0% to 12.0%. Our GAAP guidance is based on information available as of the date of this release;

• Non-GAAP operating margin is expected to be in the range of 17.5% to 18.5%. The non-GAAP guidance excludes approximately $28.5 million in amortization of acquisition-related intangible assets, $1.0 million charge for in-process research and development acquired in May 2008, $13.0 million related to share-based compensation expense recognized in the six months ended June 30, 2008, and $2.2 million in expenses associated with the stock option investigation.

Second Quarter 2008 Conference Call Information

Quest Software will host a conference call today, Tuesday, August 5, 2008, at 2:00 p.m. Pacific Time, to discuss its results. A simultaneous Web cast of the conference call will be available on Quest Software’s Web site in the Investors – IR Events section at www.quest.com. A Web cast replay will be available on the same Web site through August 5, 2009. An audio replay of the conference call will also be available through August 12, 2008, by dialing (888) 203-1112 (from the U.S. or Canada) or (719) 457-0820 (outside the U.S. and Canada), using confirmation code: 1815438.

About Quest Software, Inc.

Quest Software, Inc., a leading enterprise systems management vendor, delivers innovative products that help organizations get more performance and productivity from their applications, databases, Windows infrastructure and virtual environments. Through a deep expertise in IT operations and a continued focus on what works best, Quest helps more than 90,000 customers worldwide meet higher expectations for enterprise IT. Quest provides customers with client management as well as server and desktop virtualization solutions through its subsidiaries, ScriptLogic and Vizioncore. Quest Software can be found in offices around the globe and at www.quest.com.

Quest, Quest Software and the Quest logo are trademarks or registered trademarks of Quest Software in the United States and certain other countries. Other trademarks and registered trademarks are property of their respective owners.

Forward-Looking Statements

This release and the matters to be discussed on the conference call may include predictions, estimates and other information that might be considered forward-looking statements, including statements relating to expectations of future revenue and operating margin performance and other

Quest Software Reports Second Quarter 2008 Results – page 4 of 11

operating prospects. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ from those anticipated as a result of various factors, including: the impact of adverse changes in general economic conditions on our relationships with customers, strategic partners and vendors; reductions or delays in information technology spending; variations in demand or the size and timing of customer orders; competitive conditions in our various product areas; uncertainties relating to ongoing litigation and government investigations arising from our stock option investigation; rapid technological change; risks associated with the development and market acceptance of new products and product strategies; disruptions caused by acquisitions of companies and/or technologies; fluctuating currency exchange rates and risks associated with international operations; the need to attract and retain qualified employees; and other risks inherent in software businesses. For a discussion of these and other related risks, please refer to our recent SEC filings, including our Annual Report on Form 10-K for the year ended December 31, 2007, which are available on the SEC's website at www.sec.gov. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date thereof. We undertake no obligation to update forward-looking statements to reflect events or circumstances after the date thereof.

Quest Software Reports Second Quarter 2008 Results – page 5 of 11

QUEST SOFTWARE, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2008			2007		2008		2007
Revenues:
Licenses	$	75,286		$	65,803	$	154,428	$	140,072
Services		98,147			76,514		191,785		152,014
Total revenues		173,433			142,317		346,213		292,086
Cost of revenues:
Licenses		1,775			659		4,189		2,662
Services		16,333			13,536		31,404		26,517
Amortization of purchased technology		4,669			3,220		9,593		6,277
Total cost of revenues		22,777			17,415		45,186		35,456
Gross profit		150,656			124,902		301,027		256,630
Operating expenses:
Sales and marketing		81,275			65,822		157,647		129,058
Research and development		39,297			29,849		77,518		58,114
General and administrative		22,220			19,779		45,691		36,344
Amortization of other purchased intangible assets		2,511			1,587		5,312		3,129
In-process research and development		955			—		955		—
Total operating expenses		146,258			117,037		287,123		226,645
Income from operations		4,398			7,865		13,904		29,985
Other income, net		3,026			6,140		10,911		11,192
Income before income tax (benefit) provision		7,424			14,005		24,815		41,177
Income tax (benefit) provision		(842	)		6,070		3,261		18,336
Net income	$	8,266		$	7,935	$	21,554	$	22,841
Net income per share:
Basic	$	0.08		$	0.08	$	0.21	$	0.22
Diluted	$	0.08		$	0.08	$	0.20	$	0.22
Weighted average shares:
Basic		104,247			101,819		103,774		101,819
Diluted		106,643			105,462		106,277		105,150

Quest Software Reports Second Quarter 2008 Results – page 6 of 11

Reconciliation of Non-GAAP Financial Measures to Comparable U.S. GAAP Measures (Unaudited)

The Company has provided a reconciliation of each non-GAAP financial measure used in this earnings release and related conference call and Web cast to the most directly comparable GAAP financial measure. These measures differ from GAAP in that they exclude amortization of intangible assets acquired with business combinations, share-based compensation expenses, expenses, including indemnification advances, associated with ongoing legal matters arising from our stock option investigation, write off of in-process research and development and the estimated tax effect related to each of these items. The Company’s basis for these adjustments is described below.

Quest Software’s management prepares and uses non-GAAP financial measures in the presentation of the Company’s results to provide a consistent understanding of its historical operating performance and comparisons with peer companies. Management believes that non-GAAP reporting provides a more meaningful representation of the Company’s on-going economic performance and therefore uses non-GAAP reporting internally to evaluate and manage the Company’s operations. The Company’s management believes that by excluding charges such as those described above from its GAAP-based results, these non-GAAP financial measures are more likely to facilitate investors’ understanding of the Company’s ongoing business operating results. These non-GAAP financial measures also facilitate comparisons to the operating results of the Company’s competitors and provide investors with greater transparency with respect to the supplemental information used by management in its operational and financial decision making.

Management excludes the expenses described above when evaluating the Company’s operating performance and believes that the resulting non-GAAP measures are useful to investors and financial analysts in assessing the Company’s operating performance due to the following factors:

• The Company does not acquire businesses on a predictable cycle. The Company, therefore, believes that the presentation of non-GAAP measures that adjust for the impact of amortization and charges for acquired in-process research and development that are related to business combinations, provide investors and financial analysts with a consistent basis for comparison across accounting periods and, therefore, are useful to investors and financial analysts in helping them to better understand the Company's operating results and underlying operational trends.

• Amortization costs are fixed at the time of an acquisition, are then amortized over a period of several years after the acquisition and generally cannot be changed or influenced by management after the acquisition.

Quest Software Reports Second Quarter 2008 Results – page 7 of 11

• Although share-based compensation is an important aspect of the compensation of the Company’s employees and executives, share-based compensation expense and its related tax impact because such charges are generally fixed at the time of grant, are then amortized over a period of several years after the grant of the share-based instrument and generally cannot be changed or influenced by management after the grant.

• Share-based compensation is not an expense that typically requires or will require cash settlement by the Company.

• Ongoing expenses associated with our stock option investigation include expenses incurred for outside legal fees and costs, consulting services and other professional fees, and indemnification expenses for current and former directors and officers. Because these expenses are non-recurring and unique to the stock option investigation, we believe they are not indicative of future operating results and that investors benefit from an understanding of our operating results without giving effect to them.

• The estimated income tax effects on the above items adjust the provision for income taxes to reflect the effect of the non-GAAP adjustments on non-GAAP operating income.

These non-GAAP financial measures are not prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and may differ from the non-GAAP information used by other companies. There are significant limitations associated with the use of non-GAAP financial measures. The additional non-GAAP financial information presented here should be considered in conjunction with, and not as a substitute for or superior to, the financial information presented in accordance with GAAP (such as net income and earnings per share) and should not be considered measures of the Company’s liquidity. Furthermore, the Company in the future may exclude amortization related to new business combinations from financial measures that it releases, and the Company expects to continue to incur share-based compensation expenses.

Quest Software Reports Second Quarter 2008 Results – page 8 of 11

QUEST SOFTWARE, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended June 30, 2008							Six Months Ended June 30, 2008
	GAAP			Adjustments		Non-GAAP		GAAP		Adjustments		Non-GAAP
Revenues:
Licenses	$	75,286				$	75,286	$	154,428			$	154,428
Services		98,147					98,147		191,785				191,785
Total revenues		173,433					173,433		346,213				346,213
Cost of revenues:
Licenses		1,775		(1	) (1)		1,774		4,189	(2	) (1)		4,187
Services		16,333		(276	) (1)		16,057		31,404	(535	) (1)		30,869
Amortization of purchased technology		4,669		(4,669)			—		9,593	(9,593	)		—
Total cost of revenues		22,777					17,831		45,186				35,056
Gross profit		150,656					155,602		301,027				311,157
Operating expenses:
Sales and marketing		81,275		(2,222	) (1)		79,053		157,647	(3,949	) (1)		153,698
Research and development		39,297		(1,586	) (1)		37,711		77,518	(3,222	) (1)		74,296
General and administrative		22,220		(2,083	) (2)		20,137		45,691	(4,482	) (2)		41,209
Amortization of other purchased intangible assets		2,511		(2,511	)		—		5,312	(5,312	)		—
In-process research and development		955		(955	) (3)		—		955	(955	) (3)		—
Total operating expenses		146,258					136,901		287,123				269,203
Income from operations		4,398					18,701		13,904				41,954
Other income, net		3,026					3,026		10,911				10,911
Income before income tax (benefit) provision		7,424					21,727		24,815				52,865
Income tax (benefit) provision		(842	)	4,905	(4)		4,063		3,261	9,739	(4)		13,000
Net income	$	8,266				$	17,664	$	21,554			$	39,865
Net income per share:
Basic	$	0.08				$	0.17	$	0.21			$	0.38
Diluted	$	0.08				$	0.17	$	0.20			$	0.38
Weighted average shares:
Basic		104,247					104,247		103,774				103,774
Diluted		106,643					106,643		106,277				106,277

(1) Represents share-based compensation expense.

(2) Represents $0.6 million and $2.2 million in expenses related to our stock option investigation for the three and six months ended June 30, 2008, respectively, and $1.5 million and $2.3 million in share-based compensation expense for the three and six months ended June 30, 2008, respectively.

(3) Represents a one-time charge to write off in-process research and development acquired in May 2008.

(4) Represents the tax effect of adjustments.

Quest Software Reports Second Quarter 2008 Results – page 9 of 11

QUEST SOFTWARE, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended June 30, 2007						Six Months Ended June 30, 2007
	GAAP		Adjustments		Non-GAAP		GAAP		Adjustments		Non-GAAP
Revenues:
Licenses	$	65,803			$	65,803	$	140,072			$	140,072
Services		76,514				76,514		152,014				152,014
Total revenues		142,317				142,317		292,086				292,086
Cost of revenues:
Licenses		659	(1	) (1)		658		2,662	(3	) (1)		2,659
Services		13,536	(243	) (1)		13,293		26,517	(507	) (1)		26,010
Amortization of purchased technology		3,220	(3,220	)		—		6,277	(6,277	)		—
Total cost of revenues		17,415				13,951		35,456				28,669
Gross profit		124,902				128,366		256,630				263,417
Operating expenses:
Sales and marketing		65,822	(1,813	) (1)		64,009		129,058	(3,903	) (1)		125,155
Research and development		29,849	(1,667	) (1)		28,182		58,114	(3,578	) (1)		54,536
General and administrative		19,779	(3,189	) (2)		16,590		36,344	(5,705	) (2)		30,639
Amortization of other purchased intangible assets		1,587	(1,587	)		—		3,129	(3,129	)		—
Total operating expenses		117,037				108,781		226,645				210,330
Income from operations		7,865				19,585		29,985				53,087
Other income, net		6,140				6,140		11,192				11,192
Income before income tax provision		14,005				25,725		41,177				64,279
Income tax provision		6,070	2,213	(3)		8,283		18,336	2,361	(3)		20,697
Net income	$	7,935			$	17,442	$	22,841			$	43,582
Net income per share:
Basic	$	0.08			$	0.17	$	0.22			$	0.43
Diluted	$	0.08			$	0.17	$	0.22			$	0.41
Weighted average shares:
Basic		101,819				101,819		101,819				101,819
Diluted		105,462				105,462		105,150				105,150

(1) Represents share-based compensation expense.

(2) Represents $2.3 million and $3.9 million in expenses related to our stock option investigation for the three and six months ended June 30, 2007, respectively, and $0.9 million and $1.8 million in share-based compensation expense for the three and six months ended June 30, 2007, respectively.

(3) Represents the tax effect of adjustments.

Quest Software Reports Second Quarter 2008 Results – page 10 of 11

QUEST SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

ASSETS

	June 30, 2008		December 31, 2007
Current assets:
Cash and cash equivalents	$	327,508	$	235,568
Restricted cash for an acquisition		—		48,924
Short-term marketable securities		212		10,287
Accounts receivable, net		110,957		152,438
Prepaid expenses and other current assets		26,491		19,022
Deferred income taxes		10,775		11,014
Total current assets		475,943		477,253
Property and equipment, net		77,502		75,848
Long-term marketable securities		91,935		70,936
Intangible assets, net		80,129		76,641
Goodwill		606,341		563,766
Deferred income taxes		29,636		36,661
Other assets		22,654		18,025
Total assets	$	1,384,140	$	1,319,130

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	6,148	$	4,590
Accrued compensation		44,913		46,437
Other accrued expenses		41,872		43,313
Current portion of income taxes payable		—		1,962
Current portion of deferred revenue		232,784		211,840
Total current liabilities		325,717		308,142
Long-term liabilities:
Long-term portion of deferred revenue		61,988		73,820
Long-term portion of income taxes payable		31,592		37,130
Other long-term liabilities		2,964		2,712
Total long-term liabilities		96,544		113,662
Shareholders’ equity		961,879		897,326
Total liabilities and shareholders’ equity	$	1,384,140	$	1,319,130

Quest Software Reports Second Quarter 2008 Results – page 11 of 11

QUEST SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Cash flows from operating activities:
Net income		8,266		$	7,935		$	21,554		$	22,841
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		11,206			8,483			23,209			16,788
Compensation expense associated with stock option grants		5,289			4,595			9,167			9,710
Deferred income taxes		1,546			169			2,118			(4,519	)
Excess tax benefit related to share-based compensation		(1,808	)		—			(3,138	)		—
Provision for bad debts		280			177			414			42
In-process research and development		955			—			955			—
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		(1,166	)		(14,294	)		47,955			31,641
Prepaid expenses and other current assets		3,674			1,214			(29	)		1,951
Other assets		12			(11	)		(892	)		352
Accounts payable		(78	)		(1,798	)		1,083			(884	)
Accrued compensation		1,378			4,706			(5,092	)		(815	)
Other accrued expenses		500			1,902			(5,682	)		(4,378	)
Income taxes payable		(5,895	)		(9,486	)		(14,488	)		(7,574	)
Deferred revenue		(125	)		3,316			2,132			(746	)
Other liabilities		(77	)		(21	)		20			(92	)
Net cash provided by operating activities		23,957			6,887			79,286			64,317
Cash flows from investing activities:
Purchases of property and equipment		(2,368	)		(5,510	)		(5,530	)		(7,633	)
Cash paid for acquisitions, net of cash acquired		(4,520	)		(22,688	)		(52,672	)		(23,815	)
Cash restricted for an acquisition		—			—			48,924			—
Purchases of cost-method investments		—			(2	)		(3,160	)		(2	)
Purchases of marketable securities		—			—			(51,999	)		(20,167	)
Sales and maturities of marketable securities		4,194			26,818			39,064			33,398
Net cash used in investing activities		(2,694	)		(1,382	)		(25,373	)		(18,219	)
Cash flows from financing activities:
Repayment of capital lease obligations		(51	)		(23	)		(107	)		(92	)
Proceeds from the exercise of stock options		18,178			—			36,824			—
Excess tax benefit related to share-based compensation		1,808			—			3,138			—
Other		—			99			—			99
Net cash provided by financing activities		19,935			76			39,855			7
Effect of exchange rate changes on cash and cash equivalents		(224	)		527			(1,828	)		631
Net increase in cash and cash equivalents		40,974			6,108			91,940			46,736
Cash and cash equivalents, beginning of period		286,534			326,792			235,568			286,164
Cash and cash equivalents, end of period	$	327,508		$	332,900		$	327,508		$	332,900