The following discussion of our financial condition and results of operations ("MD&A") should be read in conjunction with the condensed consolidated financial statements and notes to those statements included elsewhere in this Report. Certain statements in this Report, including statements regarding our business strategies, operations, financial condition 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 described under Item 1A - "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2008, 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 historic results should not be viewed as indicative of future performance.

Overview

Our Company and Business Model

Quest Software, Inc., together with our subsidiaries ScriptLogic and Vizioncore, delivers innovative products that help IT organizations derive enhanced performance from their computing environment. Our product areas are Application Management, Database Management, Windows Management and Virtualization Management. Our products improve the performance, manageability and productivity of our customers' IT infrastructure.

Quarterly Update

As discussed in more detail throughout our MD&A, for the three months ended June 30, 2009 compared to the three months ended June 30, 2008, we delivered the following financial performance:

• Total revenues decreased by $9.2 million, or 5.3%, to $164.3 million.

• Total expenses decreased by $26.1 million, or 15.4%, to $142.9 million.

• Income from operations increased by $16.9 million, or 384.8%, to $21.3 million.

• Diluted earnings per share increased by $0.13, or 162.5%, to $0.21.

• Weighted average diluted shares outstanding decreased by 10.5 million shares, or 9.9%, to 96.1 million shares as a result of our previous share repurchases.

Our second quarter 2009 revenue performance was affected by the generally weak macro-economic conditions. Of particular note, we experienced weakness within our EMEA sales region when compared to the comparable period of the prior year.

Along product lines, sales of our Windows Management and Virtualization Management products and related services grew worldwide. This however was offset by declines within our Database Management products on a worldwide basis and Application Management products in the rest of world region. Our second quarter 2009 total revenues were also negatively impacted by the strengthening U.S. Dollar relative to certain non-U.S. Dollar currencies in the second quarter of 2009. This resulted in a lesser U.S. Dollar equivalent for several currencies including the Euro and British Pound. Since certain of our international sales are denominated in these non-U.S. Dollar currencies, the impact from foreign currency comprised approximately 61%, or $5.6 million, of the overall decrease in total revenues.

Although total revenues declined, we decreased our discretionary and headcount related expenses. This focus, combined with beneficial foreign currency exchange rates resulted in an increase in our operating margin.

The decrease in total expenses was primarily due to decreased personnel related costs, which include compensation, benefits and payroll related taxes. We estimate that these personnel related costs represented approximately 66% of total expenses in the three months ended June 30, 2009 and 2008. Our full-time employee headcount at the end of the second quarter of 2009 was 3,465, which included 98 employees remaining from our acquisition of NetPro in the third quarter of 2008, as compared to 3,336 at the end of the second quarter of 2008. Our full-time employee headcount in locations outside of the United States was 1,626 at the end of the second quarter of 2009 compared to 1,668 at the end of the second quarter of 2008. Our second quarter 2009 total expenses were also impacted by the strengthening U.S. Dollar relative to certain non-U.S. Dollar currencies in the second quarter of 2009, which resulted in a lesser U.S. Dollar equivalent for several currencies as noted above. Since certain of our international expenses are denominated in these non-U.S. Dollar currencies, approximately 46%, or $12.1 million, of the overall decrease in total expenses resulted from the impact of foreign currency exchange rates.

The increase in income from operations is due to several factors. First, we continue to realize benefit from certain cost management initiatives we have undertaken since mid-2008 which include reduced headcount, travel costs, and other measures. Also, the change in foreign currency exchange rates had a much greater positive impact on our operating expenses than it did a negative impact on our total revenues. Finally, a larger proportion of total revenues in the quarter was derived from maintenance renewals, which generally have a higher contribution margin.

Foreign Currency

While we are a U.S. Dollar functional company on a world-wide basis, we transact business and operate using multiple foreign currencies. As such, the value of our revenues, expenses, certain account balances and cash flows are exposed to fluctuations in foreign currencies against the value of the U.S. Dollar. For example, when the U.S. Dollar strengthens against several non-U.S. Dollar currencies as has recently occurred, our foreign revenues and thus our total revenues can be negatively impacted. Similarly, a stronger U.S. Dollar translates into lower expenses in those entities where we have operations and our personnel and occupancy expenses are denominated in non-U.S. Dollars. Thus our total expenses would be lower. Conversely, a weaker U.S. Dollar would have the opposite effect on total revenues and expenses all other things being equal. In certain geographic regions and within specific currencies, there are partial offsets between revenues and expenses or balance sheet positions that may reduce this exposure. In other instances, we can manage our operations to reduce foreign currency exposure or utilize derivative instruments to manage this exposure.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. On an on-going basis, we make and evaluate estimates and judgments, including those related to revenue recognition, asset valuations (including accounts receivable, goodwill and intangible assets), share-based compensation, income taxes and functional currencies for purpose of consolidation. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. Our estimates form the basis for making judgments about amounts and timing of revenue and expenses, the carrying values of assets, and the recorded amounts of liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. We have discussed the development and selection of the critical accounting policies with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed our related disclosures. The critical accounting policies related to the estimates and judgments listed above are discussed further in our Annual Report on Form 10-K for fiscal 2008 under Management's Discussion and Analysis of Financial Condition and Results of Operations. There have been no material changes to our critical accounting policies or estimates during the six months ended June 30, 2009.

Recently Adopted Accounting Pronouncement

See Note 1 of our Notes to Condensed Consolidated Financial Statements for information regarding recent accounting pronouncements.

Results of Operations

The following table sets forth selected condensed consolidated income statement
data for each of the periods indicated as a percentage of total revenues:



                                                      Three Months Ended         Six Months Ended
                                                           June 30,                  June 30,
                                                     2009           2008         2009         2008
Revenues:
Licenses                                               37.5 %         43.4 %       37.6 %      44.6 %
Services                                               62.5           56.6         62.4        55.4

Total revenues                                        100.0          100.0        100.0       100.0
Cost of revenues:
Licenses                                                1.1            1.0          1.1         1.2
Services                                                8.8            9.4          8.6         9.1
Amortization of purchased technology                    2.8            2.7          3.0         2.8

Total cost of revenues                                 12.7           13.1         12.7        13.1

Gross profit                                           87.3           86.9         87.3        86.9
Operating expenses:
Sales and marketing                                    39.9           46.9         40.0        45.5
Research and development                               21.6           22.7         22.2        22.4
General and administrative                             10.8           12.8         11.0        13.2
Amortization of other purchased intangible assets       2.0            1.4          2.0         1.5
In-process research and development                      -             0.6           -          0.3

Total operating expenses                               74.3           84.4         75.2        82.9

Income from operations                                 13.0            2.5         12.1         4.0
Other income, net                                       2.9            1.7          0.2         3.2

Income before income tax provision (benefit)           15.9            4.2         12.3         7.2
Income tax provision (benefit)                          3.4           (0.5 )        3.1         0.9

Net income                                             12.5 %          4.7 %        9.2 %       6.3 %

Comparison of Three Months Ended June 30, 2009 and 2008

Revenues

Total revenues and year-over-year changes are as follows (in thousands, except
for percentages):



                             Three Months Ended June 30,          Increase/(Decrease)
                               2009               2008          Dollars       Percentage
 Revenues:
 Licenses
 Americas                 $        38,576    $        38,708   $    (132 )          (0.3 )%
 Rest of World                     23,063             36,578     (13,515 )         (36.9 )%

 Total license revenues            61,639             75,286     (13,647 )         (18.1 )%

 Services
 Americas                          68,722             62,455       6,267            10.0 %
 Rest of World                     33,896             35,692      (1,796 )          (5.0 )%

 Total service revenues           102,618             98,147       4,471             4.6 %

 Total revenues           $       164,257    $       173,433   $  (9,176 )          (5.3 )%

Licenses Revenues - The main driver of the decrease in license revenues was decreased sales of our Database Management products across all geographic regions and Windows Management products in our Europe, the Middle East and Africa ("EMEA") region. This decrease was partially offset by increases in the sales of our Virtualization and Application Management products. Our second quarter license revenues were also negatively impacted by the strengthening U.S. Dollar relative to certain non-U.S. Dollar currencies in the second quarter of 2009. This resulted in a lesser U.S. Dollar equivalent for several currencies including the Euro and British Pound. Since certain of our international sales are denominated in these non-U.S. Dollar currencies, the impact from foreign currency comprised approximately 36% of the overall decrease in license revenues.

Services Revenues - Services revenues are derived from post-contract technical support services ("maintenance") and consulting and training services. The largest component of our services revenues is maintenance revenue. The main driver of our growth in services revenues was maintenance renewals on our Windows Management products in the Americas. Approximately 80% of the overall increase in maintenance renewals on our Windows Management products during the period came from the contributions of NetPro. Also contributing to the growth in services revenues were maintenance renewals on our Virtualization Management products across all geographic regions. Revenue from consulting and training services as a percentage of total service revenues was approximately 8.9% and 10.9% in the three months ended June 30, 2009 and 2008, respectively.

Maintenance revenues continue to contribute a larger percentage of our total revenues for three primary reasons: growth of our installed base of customers; acquisitions and their related maintenance contracts; and, multi-year pre-paid support programs. As our maintenance customer base grows, maintenance renewals have a larger influence on the maintenance revenue growth rate and the amount of new software license revenues has a diminishing effect. Therefore, the growth rate of total revenues does not necessarily correlate directly to the growth rate of new software license revenues in a given period. The primary determinant of changes in our maintenance revenue profile is the extent to which our customers renew their annual maintenance agreements, taking into account the number of products and licenses for which each customer renews, and the timing of the renewals by each such customer. If our maintenance renewals were to decline materially, our maintenance revenues, total revenues and cash flows would likely decline materially as well.

Cost of Revenues

Total cost of revenues and year-over-year changes are as follows (in thousands,
except for percentages):



                                             Three Months Ended June 30,        Increase/(Decrease)
                                                2009              2008        Dollars       Percentage
Cost of revenues:
Licenses                                   $        1,873    $        1,775   $     98             5.5 %
Services                                           14,499            16,333     (1,834 )         (11.2 )%
Amortization of purchased technology                4,626             4,669        (43 )          (0.9 )%

Total cost of revenues                     $       20,998    $       22,777   $ (1,779 )          (7.8 )%

Cost of Licenses - Cost of licenses primarily consists of third-party software royalties, product packaging, documentation, duplication, delivery and personnel costs. Cost of licenses as a percentage of license revenues was 3.0% and 2.4% for the three months ended June 30, 2009 and 2008, respectively. The increase in cost of licenses, both in terms of absolute dollars and as a percentage of license revenues, was primarily due to an increase in royalty expense related to sales of licenses to royalty-bearing products, partially offset by reduced hardware and inventory purchases that are sold with certain of our software products and reduced delivery costs.

Cost of Services - Cost of services primarily consists of personnel, outside consultants, facilities and systems costs used in providing maintenance, consulting and training services. Cost of services does not include development costs related to bug fixes and upgrades which are classified in research and development and which are not separately determinable. Personnel related costs and travel costs decreased by $1.2 million and $0.3 million, respectively. An additional $0.3 million of the overall decrease was due to reduced consulting and other professional fees. The impact from foreign currency comprised approximately 68% of the overall decrease in cost of services. Cost of services as a percentage of service revenues was 14.1% and 16.6% in the three months ended June 30, 2009 and 2008, respectively.

Amortization of Purchased Technology - Amortization of purchased technology includes amortization of the fair value of purchased technology associated with acquisitions. The decrease in amortization of purchased technology during the quarter ended June 30, 2009 over the comparable period in 2008 was due to certain purchased technologies being fully amortized prior to the quarter ended June 30, 2009, partially offset by technology acquired in the third and fourth quarters of 2008. We expect amortization of purchased technology within the cost of revenues arising from acquisitions completed prior to June 30, 2009 to be approximately $9.0 million over the remaining two quarters of 2009.

Operating Expenses

Total operating expenses and year-over-year changes are as follows (in
thousands, except for percentages):



                                               Three Months Ended June 30,          Increase/(Decrease)
                                                 2009               2008          Dollars       Percentage
Operating expenses:
Sales and marketing                         $        65,490    $        81,275   $ (15,785 )         (19.4 )%
Research and development                             35,510             39,297      (3,787 )          (9.6 )%
General and administrative                           17,678             22,220      (4,542 )         (20.4 )%
Amortization of other purchased
intangible assets                                     3,261              2,511         750            29.9 %
In-process research and development                      -                 955        (955 )        (100.0 )%

Total operating expenses                    $       121,939    $       146,258   $ (24,319 )         (16.6 )%

Sales and Marketing - Sales and marketing expenses consist primarily of compensation and benefit costs for sales and marketing personnel, sales commissions, and costs of trade shows, travel and entertainment and various discretionary marketing programs. The decrease in sales and marketing expense during the three months ended June 30, 2009 over the comparable period in 2008 was primarily due to a $9.1 million decrease in personnel related costs and a $2.4 million decrease in travel costs and also lower commissions paid. We also had a $1.2 million decrease in conferences and trade show costs and a $0.6 million decrease in advertising costs. The impact from foreign currency comprised approximately 38% of the overall decrease in sales and marketing expense.

Research and Development - Research and development expenses consist primarily of compensation and benefit costs for software developers who develop new products, bug fixes and upgrades to existing products and at times provide engineering support for maintenance services, software product managers, quality assurance and technical documentation personnel, and payments made to outside software development consultants in connection with our ongoing efforts to enhance our core technologies and develop additional products. The decrease in research and development expense during the second quarter of 2009 as compared to the second quarter of 2008 was primarily due to a $2.7 million decrease in personnel related costs and a $1.0 million decrease in travel costs. The impact from foreign currency comprised approximately 89% of the overall decrease in research and development expense.

General and Administrative - General and administrative expenses consist primarily of compensation and benefit costs for our executive, finance, legal, human resources, administrative and IS personnel, and professional fees for audit, tax and legal services. The decrease in general and administrative expense during the second quarter of 2009 as compared to the same period in 2008 was primarily due to a decrease of $3.4 million in personnel related costs and a $0.2 million decrease in travel costs. Lower professional accounting, tax and legal fees and recruiting costs contributed $1.0 million to the overall decrease in general and administrative costs. The impact from foreign currency comprised approximately 24% of the overall decrease in general and administrative expenses.

Amortization of Other Purchased Intangible Assets - Amortization of other purchased intangible assets includes the amortization of customer lists, trademarks, non-compete agreements and maintenance contracts associated with acquisitions. The increase in amortization of other purchased intangible assets from the quarter ended June 30, 2009 over the comparable period in 2008 was primarily due to other purchased intangible assets from acquisitions in the third and fourth quarters of 2008, partially offset by certain other purchased intangible assets that were fully amortized prior to the quarter ended June 30, 2009. We expect amortization of other purchased intangible assets within operating expenses arising from acquisitions completed prior to June 30, 2009 to be approximately $6.5 million over the remaining two quarters of 2009.

In-Process Research and Development - In-process research and development expenses related to in-process technology acquired in May 2008. These costs were charged to operations as the technologies had not reached technological feasibility and did not have alternative future uses at the date of acquisition.

Other Income, Net

Other income, net primarily includes interest income generated by our investment portfolio, gains and losses from foreign exchange fluctuations and gains or losses on other financial assets as well as a variety of other non-operating expenses. Other income, net increased to $4.8 million in the second quarter of 2009 from $3.0 million in the second quarter of 2008. The largest impact to other income, net this quarter was attributed to a foreign currency gain of $4.6 million compared to a loss of $0.1 million in the comparable period of 2008. Our foreign currency gains or losses are predominantly

attributable to translation gains or losses relative to the U.S. Dollar on the re-measurement of net monetary assets, including accounts receivable and cash, which were primarily denominated in the Euro, and to a lesser extent, the British Pound and Canadian Dollar. Interest income was $0.5 million and $2.7 million in the three months ended June 30, 2009 and 2008, respectively. The decrease in interest income was due primarily to lower average cash and investment balances and lower average investment yields.

Income Tax Provision

During the three months ended June 30, 2009, the provision for income taxes increased to $5.6 million from $(0.8) million in the comparable period of 2008, representing an increase of $6.4 million. The increase is primarily related to a result of the mix of pre-tax income between high and low tax jurisdictions, resolution of the US-France Mutual Agreement Procedure, and the impact of net operating losses and associated valuation allowances in certain foreign jurisdictions. The closure of the Internal Revenue Service's examination of income tax returns through December 31, 2004 resulted in a tax benefit for the reversal of income tax and related interest accrued for period ended June 30, 2008. The effective income tax rate for the three months ended June 30, 2009 was 21.6% compared to (11.3)% in the comparable period of 2008.

Comparison of Six Months Ended June 30, 2009 and 2008

Revenues

Total revenues and year-over-year changes are as follows (in thousands, except
for percentages):



                              Six Months Ended June 30,          Increase/(Decrease)
                                2009              2008         Dollars       Percentage
  Revenues:
  Licenses
  Americas                 $       77,012    $       84,615   $  (7,603 )          (9.0 )%
  Rest of World                    46,997            69,813     (22,816 )         (32.7 )%

  Total license revenues          124,009           154,428     (30,419 )         (19.7 )%

  Services
  Americas                        141,327           124,289      17,038            13.7 %
  Rest of World                    64,518            67,496      (2,978 )          (4.4 )%

  Total service revenues          205,845           191,785      14,060             7.3 %

  Total revenues           $      329,854    $      346,213   $ (16,359 )          (4.7 )%

Licenses Revenues - The decrease in license revenues was primarily the result of decreased sales of our Windows Management products in our EMEA region and Database Management products across all regions. Our license revenues during the six months ended June 30, 2009 were also negatively impacted by the strengthening U.S. Dollar relative to certain non-U.S. Dollar currencies in the six months ended June 30, 2009. This resulted in a lesser U.S. Dollar equivalent for several currencies including the Euro and British Pound. Since certain of our international sales are denominated in these non-U.S. Dollar currencies, the impact from foreign currency comprised approximately 32% of the overall decrease in license revenues.

Services Revenues - The primary driver of our growth in services revenues was the maintenance renewals generated by a larger customer installed base created by license revenue growth from previous periods. Maintenance revenues from our Windows and Virtualization Management products in the Americas were the main drivers of services revenues growth during the period. Approximately half of the overall increase in services revenues during the period came from the contributions of NetPro. Revenue from consulting and training services as a percentage of total service revenues was approximately 8.6% and 10.7% in the six months ended June 30, 2009 and 2008, respectively.

Cost of Revenues

Total cost of revenues and year-over-year changes are as follows (in thousands,
except for percentages):



                                              Six Months Ended June 30,        Increase/(Decrease)
                                                2009             2008        Dollars       Percentage
. . .