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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM 10-K

Commission File Number: 0-22823

QAD Inc.
(Exact name of Registrant as specified in its charter)

6450 Via Real
Carpinteria, California 93013
(Address of principal executive offices and zip code)

Registrant's telephone number, including area code (805) 684-6614

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value

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

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

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

        As of July 31, 2002, the last business day of the Registrant's most recently completed second fiscal quarter, there were 34,440,785 shares of the Registrant's common stock outstanding, and the aggregate market value of such shares held by non-affiliates of the Registrant (based on the closing sale price of such shares on the NASDAQ National Market on July 31, 2002) was approximately $28,400,000. Shares of the Registrant's common stock held by each executive officer and director and by each entity that owns 5% or more of the Registrant's outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

        As of April 28, 2003, there were 31,639,999 shares of the Registrant's common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Items 10, 11, 12 and 13 of Part III incorporate information by reference from the Definitive Proxy Statement for the Registrant's Annual Meeting of Stockholders to be held on June 4, 2003.

QAD INC.

FISCAL YEAR 2003 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

        In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements. These statements typically are preceded or accompanied by words like "believe," "anticipate," "expect" and words of similar meaning. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Item 7 entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in particular the subsection of Item 7 entitled "Factors That May Affect Future Results and Market Price of Stock." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. We undertake no obligation to revise or update or publicly release the results of any revision or update to these forward-looking statements. Readers should carefully review the risk factors described in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed by QAD in fiscal year 2004.

PART I

ITEM 1. BUSINESS

ABOUT QAD

        Historically, QAD has been recognized as a leading provider of enterprise resource planning (ERP) software applications for global manufacturing companies. Today, QAD enterprise applications leverage advances in Internet and enabling technologies to provide critical functionality for managing manufacturing resources and operations within and beyond the enterprise, enabling global manufacturers to collaborate with their customers, suppliers and partners to make and deliver the right product, at the right cost and at the right time.

        QAD enterprise applications are focused and optimized for select manufacturing industry segments: automotive, consumer products, electronics, food and beverage, industrial and medical industries. They address business-critical functions and processes at three levels required by today's global manufacturing companies: 1) Enterprise, providing traditional ERP functionality for intra-enterprise functions, 2) Extended Enterprise, providing Distributed Order Management capabilities for functions involving external sources such as customers and suppliers and 3) Community, providing a Portal for gaining visibility and access to information across the larger manufacturing community. Further discussion of QAD enterprise applications may be found below in "QAD SOLUTIONS" within this Item 1.

        QAD has built a solid customer base of global Fortune 1000 and mid-market manufacturers who are excellent prospects for QAD's enterprise applications. With a proven track record of more than 20 years of industry leadership, and approximately 5,200 licensed sites of our software around the world, QAD is ideally qualified to meet the business and technology requirements of global manufacturing companies worldwide. We develop our products with constant and direct input from leading global manufacturers within the industries we serve. This industry focus is a key differentiator for QAD, enabling our customers to implement QAD applications rapidly, realize a rapid return on investment, and achieve a low total cost of ownership compared with other vendors targeting the industries we serve. These benefits were recently verified by an in-depth study titled "Deriving Value From 21^st Century ERP Applications" published by the industry analyst firm META Group in April 2003. The study included QAD and five other major ERP application providers: SAP, Oracle, JD Edwards, PeopleSoft and Lawson Software.

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        Global service and support are an important component of our solutions. QAD offers service and support capabilities that are truly global in scope. We are one of a few select organizations with the capabilities and industry expertise required to implement our solutions around the globe and support them in multiple languages and currencies. Our geographic management structure ensures that our global practices meet local requirements and that our services are delivered effectively within each region around the globe. We support our customers' global operations through our network of regional support centers and online support, accessible 24 hours a day, seven days a week, all around the world.

CUSTOMERS

        As of January 31, 2003, our software was licensed at approximately 5,200 sites in over 80 countries. No single customer accounted for more than 10 percent of total revenue during any of our last three fiscal years. The following are among companies and/or subsidiaries of those companies that have each generated more than $1.0 million in software license, maintenance and services billings over the last three fiscal years:

Automotive

        ArvinMeritor, Caterpillar, Delco Remy International, Delphi, DURA Automotive Systems, Eaton, Federal Mogul, Ford Motor Company, Freudenberg & Co., GKN, Johnson Controls, Lear, Textron, Tower Automotive, TRW, Visteon, Webasto

Consumer Products

        Applica Durable Manufacturing, Avent, Avery Dennison, Black & Decker, Cussons, Firmenich, ICM International, Unilever, Villeroy & Boch AG

Electronics

        Akzo Nobel, Anritsu, Celestica, Cookson Group PLC, De La Rue, FEI Company, General Electric Company, Invensys PLC, Jabil Circuit, Lucent Technologies, Marconi Communications, Matsushita, Philips Electronics, Tyco International

Food and Beverage

        Bakkersland, Coca-Cola Enterprises, Goodman Fielder, Friesland, Hormel Foods, Kraft Foods International, Lion Nathan Ltd., Mars Inc., National Brands Ltd., National Foods, PepsiCo, Rich Products, Sara Lee

Industrial

        Actaris, Advanced Elastomers, Albany International, Alcatel, Amcor, John Crane, Metso, Mitsui & Co. Ltd., Rockwell Automation, Saint-Gobain, Schlumberger, Thales SA, Uponor Oyj

Medical

        Arrow International, C.R. Bard, Genzyme, GlaxoSmithKline, Johnson & Johnson, Maxxim Medical, Mayne Group, Medtronic, UCB Pharma SA

INDUSTRY BACKGROUND

        In recent years, businesses have been subject to increasing global competition, resulting in pressure to lower production costs, improve product performance and quality, increase

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responsiveness to customers, and shorten product development, manufacturing and delivery cycles. Globalization has greatly increased the scope and complexity of multi-national manufacturing organizations while the Internet has had a profound effect on the way these companies conduct business.

        Using the Internet as the foundation for electronic interaction and transaction, the first wave of what has commonly been referred to as e-business revolutionized traditional business processes and practices, increasing and accelerating the flow of information between employees, partners, customers, suppliers and the marketplace as a whole.

        More recently, a fusion between e-business and ERP applications has occurred. Several of the leading industry analyst firms that cover enterprise applications software have recognized this fusion. Gartner Research, refers to the result of this fusion as ERPII, AMR calls it ECM (Enterprise Commerce Management) and Forrester Research refers to it as XRM (extended Relationship Management). This trend has been recognized as a rational reaction to the irrational exuberance of the dot-com phenomenon and the rise and fall of public exchanges. Regardless of the name given to it, the goal is to fuse the use of e-business technologies with traditional enterprise application functionality to achieve significant competitive advantage. Online collaboration within the enterprise, as well as across the extended enterprise with customers, suppliers and trading partners, and the larger manufacturing community is gaining acceptance as the key to achieving this goal. Conducting business via electronic communication is commonly referred to as "collaborative commerce."

        Gartner Research defines collaborative commerce in its December 2002 research note "SMB Leaders to Focus on Collaboration and Interoperability" as follows: "Collaborative commerce is a business strategy that motivates enterprises with a common business interest to generate value through sharing information at all phases of the business cycle, from product development to distribution." Additionally, in the same research note, Gartner Research believes businesses that take advantage of solutions that support collaborative commerce will improve profitability, achieve the adaptability required to quickly develop new products and services, improve time to market and satisfy the ever-increasing needs of their customers.

        Previously, the term "collaborative commerce" could be used interchangeably to refer to either a business strategy or an enterprise software market segment. However, QAD believes that "collaborative commerce" as a software market segment or product category failed to be accepted nomenclature adopted by customers. However, as a business strategy, we believe that manufacturers remain committed to the approaches and benefits of collaborative commerce concepts. For this reason, QAD will continue to use the collaborative commerce terminology as we define our product and service capabilities, but will begin to move away from referring to it as an enterprise software market segment in which we compete. Manufacturing companies seeking to accomplish collaborative commerce as a business strategy typically require enterprise applications focused on manufacturing operations, corporate operations and supply chain management. We believe that those who adopt enterprise software solutions and best practices to accomplish collaborative commerce will realize enormous competitive advantages over those who do not.

        We believe that manufacturers focused on collaborating with their distribution channels, downstream partners, suppliers, engineering associates, and all the other members of their extended supply chain will reap major benefits.

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Today's Manufacturing Enterprise and Supply Chain Software

        To achieve collaborative commerce as a business strategy, manufacturers typically choose from three types of enterprise solutions:

        Manufacturing industry-focused ERP solutions:    These solutions are designed and built with a singular focus on the unique needs of manufacturing enterprises. These solutions provide a robust suite of capabilities that enable the integration and management of critical data within a manufacturing enterprise. They support internal and external business processes such as sales order management, procurement, inventory management, product lifecycle management, supply chain management, manufacturing planning and control, service and support, project management, distribution and finance. QAD is a provider of manufacturing industry-focused ERP solutions that are designed to handle these internal and certain external business processes specifically for manufacturing operations in the industries we serve. Some of this functionality may be provided through products provided by our partners. We believe this singular focus has resulted in software applications that are more fully integrated than point solutions (defined below) and result in faster implementations, a lower total cost of ownership and a higher net return on investment than Mega-suite solutions (defined below).

        Mega-suite ERP solutions:    (a term being used by Gartner Research) These solutions are designed and built with the goal of trying to satisfy the needs of multiple industries including not only manufacturing, but dissimilar industries such as banking, insurance, retail, state and local government, telecommunications, entertainment, education, and the like. These solutions attempt to satisfy the diverse needs of these many different industries within a single database and software application. These solutions provide a wide set of functionality similar to the focused solutions defined above. However, it is QAD's position that this lack of focus solely on manufacturing companies has caused these mega-suite applications to be characterized as having longer implementation times, a higher total cost of ownership, and a lower net return on investment than QAD's more focused approach. We feel this is because the mega-suites' extremely broad industry scope and higher solution complexity limits their effectiveness in addressing the needs of manufacturing enterprises, individual plants or divisions.

        Point solutions:    These solutions are designed and built for a fairly narrow set of functionality. Examples would be solutions that provide just procurement capabilities, just product life cycle management capabilities, or just supply chain management capabilities. While they tend to be highly specialized within a limited process scope compared to the two types of ERP suite solutions defined above, they often lack integration with processes to which they are directly related. For example, product life cycle management point solutions must be integrated to the inventory management, production planning and service and support processes within a company. QAD has developed strategic partnerships with best of breed point solutions in several key areas including demand planning, customer relationship management, and product lifecycle management. We have been able to leverage their deep functional focus in key areas, while resolving the integration challenges discussed above by providing the integration as part of our solution. Point solutions that lack integration with a company's ERP applications require the customer to carry the burden of integration and the support and upgrade of that integration over the life of their solution. This can increase the total cost of ownership for customers.

THE QAD STRATEGY

        Our objective is to be the global leader in providing manufacturing industry-focused ERP solutions. The functional scope of our objective includes enterprise functions that integrate processes within a company, as well as extended enterprise functions that integrate companies with their customers and suppliers through Distributed Order Management. In addition, our

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functional scope includes establishing manufacturing communities that allow subscribers to share visibility of planning and execution information and transact and manage exceptions.

        Our strategy of continuing to provide more robust solutions for the manufacturing sector paired with a market opportunity of over 80,000 manufacturing operations within the industries we serve, each with annual revenues over $20 million, leads us to see growth potential for many years ahead.

        We will target multi-national, large and mid-range manufacturing and distribution companies within the following industries: automotive, consumer products, electronics, food and beverage, industrial and medical. To help achieve our objectives, we have developed three supporting strategies that can be summarized with the words Connect, Collaborate and Compete. We equate these terms with our technology, product and sales and services strategy as follows:

        Connect—The primary focus of our technology strategy is to allow open, distributed, seamless connections both inside and outside of the enterprise. The ability to collaborate starts with this technology foundation. QAD products are based on industry standards and an open architecture to allow customers to run applications almost anywhere at any time, and physically connect to almost anything—factory systems, trading partners' platforms and systems, and exchanges.

        Collaborate—The primary focus of our product strategy is to create collaborative functionality both inside and outside the enterprise that helps unleash a new wave of productivity gains and eclipse what was possible just a few years ago.

        Compete—The primary focus of our sales and services strategy is to strive to ensure our clients achieve every possible business benefit from our solutions—thus enabling them to compete more effectively in their respective industries.

        The key elements of our strategy for achieving our objective include the following:

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Leverage Our Customer Base.  As of January 31, 2003, QAD software was licensed at approximately 5,200 sites in more than 80 countries. This is a substantial customer base from which we can leverage future software product and service sales. With a solid maintenance revenue base supported by a customer retention rate above 90%, we expect to continue to benefit from selling new products and services to existing customers. We plan to leverage our favorable reputation and proven track record to capitalize on this opportunity to build additional business for our QAD eQ Distributed Order Management application suite and our MFGx.net manufacturing community service offerings.



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Expand Our Customer Base.  We leverage our existing relationships to expand our customer base using two strategies. First, we target the many sister division (siblings) that reside within the same corporate structure as our existing customers. These divisions have either outgrown their legacy ERP solutions or need to extend the capabilities of those legacy ERP solutions with our QAD eQ and MFGx.net products. We have found that we can be successful generating revenue in new divisions by using our existing customers as "internal" references. Based on market data provided by Dunn & Bradstreet, we estimate this market segment of "sibling" divisions to consist of 14,000 manufacturing plants. Second, we target customers where we may have no prior relationship, but they exist in the industries we serve. We estimate these industry segments to consist of over 80,000 manufacturing plants.



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Become the Distributed Order Management Applications Leader.  We believe that Distributed Order Management outside of the enterprise represents a significant opportunity for manufacturing companies to reduce costs and enhance trading partner relationships with both customers and suppliers. As complex supply chains develop a greater need for

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collaboration, a new type of software application—Distributed Order Management (as defined by AMR Research in their March 2003 research note "Distributed Order Management Market Shows Signs of Hope")—will become an important component in every company's information architecture. Operating as an integrated, collaborative business-to-business (B2B) system, QAD eQ is a Distributed Order Management suite of applications that enables customers to lower supply chain costs, open new global markets and improve customer satisfaction through personalization of business commerce relationships. Our goal is to become the leader in delivering Distributed Order Management applications to global manufacturers in the industries we serve.

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Leverage Global Network of Alliances.  Strategic alliances with partners such as IBM, ATOS Origin and others, expand our sales reach, improve our marketing impact, and strengthen our strategic position in the industries that we serve. We leverage the expertise of distribution, software, services, and technology partners to meet the diverse needs of our customers. We augment our direct sales organization with a global network of over 40 distributors and sales agents, as well as numerous service organizations that offer consulting and implementation services to expand our reach. We plan to leverage our network of distributors, sales agents and services alliances to further penetrate the industries we target.

THE VALUE OF QAD SOLUTIONS

        In today's global economy, manufacturing and distribution companies are becoming more profit oriented and customer focused. New customer-driven business models require comprehensive end-to-end solutions that manage all areas of the enterprise including corporate, plant and distribution/operations-level and supply chain management.

        QAD's approach offers companies seeking a collaborative commerce strategy with a framework built on our established enterprise resource planning (ERP) application suite, and that is integrated with other extended enterprise and manufacturing community applications, to provide an end-to-end solution for global manufacturers. Because of our open systems architecture, QAD solutions can interoperate with legacy systems and other leading applications. The result is a powerful suite of enterprise applications for manufacturing companies that leverages a company's existing information technology (IT) investment, supports its evolving business model and enables it to quickly adapt to new market opportunities.

        QAD meets the requirements of multi-national manufacturing customers in the industries we serve by providing solutions that deliver:

        Focused Expertise and Functionality for Key Industries.    Our industry expertise and strategy of developing industry-specific solutions provide our customers with a significant competitive advantage. QAD's focus on key industries has enabled us to achieve leadership positions in the automotive, consumer products, electronics, food and beverage, industrial and medical industries. In order to stay at the forefront of the industries we serve, QAD partners with our customers through active industry Development Groups, which play a vital role in driving the next generation of enhancements.

        Low Total Cost of Ownership.    The industry-specific features and functionality of QAD solutions mean customers in the industries we serve can have feature-rich solutions for significantly less cost than larger, Mega-suite ERP solutions. These Mega-suite ERP solutions often require extensive, costly implementation to achieve the type of industry-specific functionality available "out-of-the-box" with QAD solutions. QAD solutions implement quickly and are easy to use, resulting in training times and support costs that are less than with other ERP solutions. QAD's low total cost of ownership among its competitors was

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recently verified by a study titled "Deriving Value From 21^st Century ERP Applications" published by industry analyst firm META Group in April 2003.

        Quick Time-to-Benefit.    Our proven implementation methodology, together with our expertise in the key industries we serve and impressive track record of rapid installations, provides a quick time-to-benefit for our customers compared to our larger competitors whose software often takes longer and is much more complex to implement for manufacturing customers. QAD's quick time-to-benefit relative to our competitors was recently verified by the industry analyst firm Meta Group in the aforementioned study.

        Global Functionality for Multi-national, Large and Mid-range Companies.    Our reputation for best-in-class manufacturing applications is supported by a proven track record of successful deployments worldwide. Our solutions are available in as many as 26 languages and incorporate global tax management and multi-currency capabilities tailored to local financial practices and requirements in many of our major markets.

        Increased Velocity and Efficiency of the Supply Chain.    QAD's extended enterprise solutions streamline business processes and enable diverse and sophisticated interactions between partners, suppliers and customers. By enabling global manufacturers to efficiently manage resources within and beyond the enterprise, QAD solutions can improve communication and customer delivery performance and reduce purchasing and inventory costs.

        Adaptable, High-Performance Computing.    QAD solutions have the flexibility and scalability that multi-national, large and mid-range manufacturing companies need to quickly and successfully adapt to growth, organizational change, technological advances, market shifts and other challenges. QAD solutions have a reputation for delivering robust performance that will continue as company needs and businesses change and adapt.

        Open Integration Architecture.    Our open systems architecture incorporates Open Applications Group Integration Specification (OAGIS) standards and advanced Internet technologies such as Web-Services, Java and XML in order to deliver truly open, interoperable end-to-end enterprise and supply chain solutions. The ability of our solutions to interoperate with other enterprise applications enables our customers to leverage their existing IT investments, while achieving the benefits of collaboration more quickly.

        Single Point-of-Contact for Customers, Partners and Suppliers.    QAD's extended enterprise solutions provide a single point-of-contact for customer, partner and supplier interactions. A significant part of this solution set delivers Distributed Order Management functionality that provides a central intelligent "hub" for handling customer and supplier orders and distributing them to optimal resources for processing. For example, each customer profile and the personalization of information unique to that customer can be managed in a single location and used to power all customer interactions globally. The same is true for supplier and partner communications. By presenting a single point-of-contact for all trading partner interactions, QAD solutions help unify diverse global operations and process orders intelligently from anywhere to anywhere in the world.

        Global Service and Support.    Global service and support are an important component of our solutions. QAD offers service and support capabilities that are truly global in scope, and we are one of a few select organizations with the capability to implement our solutions across the globe and support those solutions in multiple languages and currencies. Our organization is staffed with approximately 575 support and services professionals. Our service and support organizations' focus is on bringing world-class, value-added services to our customers. Our

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geographic management structure ensures that our global organization meets local requirements and that our services are delivered effectively within each region around the globe. Working in concert with a network of QAD service alliance partners, QAD Global Services ensures that our customers receive the right combination of services for their system from pre-installation, to implementation, to ongoing service and support.

        QAD Global Services utilizes a proven implementation methodology and has earned a reputation for on-time implementations and rapid time-to-benefit for our solutions. We support our customers' global operations through our network of regional support centers and online support, accessible 24 hours a day, seven days a week, almost anywhere in the world. In addition, we offer an extensive menu of training for our customers available either online or via one of our many global training centers.

QAD SOLUTIONS

        We target our solutions to address the needs of multi-national, large and mid-range manufacturing and distribution companies within the automotive, consumer products, electronics, food and beverage, industrial and medical industries. Our applications provide functionality at the three levels required by global manufacturers—the Enterprise, the Extended Enterprise, and the Manufacturing Community. Additionally, we provide Interoperability Solutions to enable seamless interaction among QAD and other enterprise applications.

        Our primary product lines are as follows:

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QAD MFG/PRO eB2, QAD's enterprise application suite, offering a Web-enabled ERP foundation for manufacturers that helps increase inventory turns, improve productivity and profitability, as well as offering a total cost of ownership that is one of the lowest in the industry.



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QAD eQ, QAD's extended enterprise application suite offering Distributed Order Management capabilities for collaborating with customers and suppliers. QAD eQ software consists of a comprehensive suite of Sell-Side, Buy-Side and Replenishment order management applications for manufacturers.



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MFGx.net, QAD's manufacturing community service offering is a hosted Portal through which we deliver Internet-based collaboration solutions to our customers. MFGx.net currently includes our Supply Visualization solution, a Web-service, which provides real-time inventory visibility to authorized suppliers via the Internet.



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QAD QXtend interoperability solutions, which enable effective interoperability across the enterprise to link financials, human resources, customer relationship management (CRM), and other enterprise and legacy applications seamlessly to QAD applications.

MFG/PRO eB2: The QAD Enterprise Application

        Our flagship product, MFG/PRO eB2, is a best-in-class manufacturing solution designed for the demands of today's business environment. MFG/PRO eB2 software includes an integrated set of manufacturing, distribution, financial and customer service applications designed to address the needs of customers in our targeted vertical markets.

        MFG/PRO eB2 was developed on more than advanced manufacturing principles. It is based on real-world requirements and represents one of the latest, most comprehensive enterprise

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application suites for global manufacturers available today. MFG/PRO eB2 represents significant investment by QAD and includes:

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New lean manufacturing functions to help accelerate lead and cycle times for efficient responsiveness to customers;



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Collaboration functions to better coordinate fulfillment and invoicing with trading partners;



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Service/support management improvements for better contract management;



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Functions to streamline multi-national financials and profitability analysis; and



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Desktop interface changes for greater ease of use and minimal user training.

        MFG/PRO eB2 software consists of a core ERP application and a number of key extensions. The core ERP application includes three primary areas of functionality—manufacturing, distribution, and financials—while the extensions provide additional business functionality. A key new extension includes QAD's Advanced Inventory Management (AIM) Warehousing solution, a solution gained when the company acquired TRW Integrated Supply Chain Solutions (TRW ISCS) in November 2002.

        QAD's deep industry experience has allowed it to develop MFG/PRO eB2 with unique, industry-specific features. Additional industry-specific functionality is developed in conjunction with our customers through our industry Development Groups. MFG/PRO eB2 software supports multiple currencies and global tax management and is tailored to financial practices and requirements in many of our major geographic markets. Because of our open systems approach, MFG/PRO eB2 software is able to interoperate with legacy systems and other leading enterprise applications to give companies best-in-class functionality.

        MFG/PRO eB2 software supports single or multiple sites, as well as multiple production and operational processes. These capabilities enable manufacturers to manage multiple hybrid production methods within a single organization or production site and provide the flexibility to adapt to additional sites and processes as an organization's business evolves. Accessible through a Web browser, MFG/PRO eB2 software includes an easily deployable Java platform interface that minimizes internal system traffic and provides low-cost system access for end users.

        MFG/PRO eB2 software delivers value to our manufacturing customers by helping to increase inventory turns and improve the productivity of manufacturing enterprise operations.

        Also available in our MFG/PRO eB2 application suite is our integrated AIM Warehousing solution. AIM has been developed to meet the requirements of organizations in a manufacturing or distributing environment where stock control facilities and warehouses are an important part of the business process.

        AIM offers a range of inventory management functionality to control the receipt, put away, storage, picking and shipping of inventory using warehouses. AIM provides a suite of programs and parameters that allows customers to model and manage the way inventory management processes operate.

QAD eQ: The QAD Extended Enterprise Solution (includes our Distributed Order Management capabilities)

        QAD eQ software extends manufacturing planning and execution capabilities beyond the four walls of a manufacturing enterprise by providing open collaboration with customers and suppliers. This is a Distributed Order Management suite for managing the buying and selling of materials across the Extended Enterprise. QAD eQ software is designed to help manufacturers increase

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sales, lower costs, open new global markets, personalize trading relationships and improve customer satisfaction by streamlining and automating the order process.

        The suite addresses three functional capabilities: Sell-Side functionality, which includes a comprehensive sales order management and fulfillment capability; Replenishment functionality, which includes a real-time, demand-based materials management capability; and Buy-Side functionality, which includes a procurement management system for centralized purchasing. These applications are built upon the QAD eQ Commerce Management Foundation, which is used to define explicit, yet flexible, representations of real-world business relationships.

        Last year, QAD completed a partnership agreement with IBM whereby QAD eQ applications would include pre-integrated IBM middleware solutions—WebSphere Application Server, WebSphere MQ and DB2 database solutions—to give customers a more efficient means to deploy a Distributed Order Management solution.

        QAD eQ software gives manufacturers the ability to take an order—unattended, at a single place, using one of many electronic conduits (such as Web Storefront, EDI)—and deliver that order intelligently to suppliers inside and outside of the enterprise by coordinating Sell-Side, Buy-Side, and Replenishment operations simultaneously. The application platform enables manufacturers to implement and monitor their trading interface with both suppliers and customers via the Internet to achieve dramatic reductions in supply chain costs, improved delivery time and greater customer satisfaction.

MFGx.net: The QAD Manufacturing Community Service (a hosted exchange)

        QAD has developed an Internet Portal, MFGx.net, through which it intends to deliver a number of service-based solutions to QAD customers and can deliver valuable information to the manufacturing community as well. We anticipate that through MFGx.net, our customers can further extend capabilities for accomplishing their collaborative commerce strategy.

        Our vision is for MFGx.net to provide a collaborative environment for the manufacturing community where trading partners can share information and can work together to achieve overall competitiveness. We plan for MFGx.net to provide a growing number of hosted, Web-based services for manufacturers.

        MFGx.net's initial offering is QAD Supply Visualization, a service that provides real-time inventory visibility to authorized suppliers via the Internet. QAD Supply Visualization was first offered in early fiscal 2002 and has since gained traction in the marketplace, now including approximately 30 customers and 300 of their trading partners using the solution.

QAD QXtend: QAD Interoperability Solutions

        In today's fast paced environment, businesses rely on optimal operations that enable fast response to customer needs. As a result, many companies deploy best-in-class applications in critical areas of their business. The challenge is getting these disparate best-in-class applications to work together seamlessly. QAD has developed a number of interoperability solutions, which are the keys to successful integration of QAD solutions within and across multi-site manufacturing enterprises.

        QAD QXtend Interoperability Solutions help link other enterprise applications, such as financials, human resources, customer relationship management (CRM), and legacy applications, seamlessly to QAD applications. In addition to linking within the enterprise, QAD Interoperability Solutions can link between enterprises for electronic data interchange (EDI).

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        QAD's QXtend family of solutions includes a robust suite of connectivity adapters and tools and QAD EDI ECommerce, an application for EDI transactions.

CUSTOMER SERVICE AND SUPPORT

        QAD offers service and support capabilities that are truly global in scope, and we are one of a few select organizations with the capability to implement our solutions across the globe and support those solutions in multiple languages and currencies. Our organization is staffed with support and service professionals whose focus is on bringing world-class, value-added services to our customers.

        In November 2002, QAD added significantly to its service and support capabilities by acquiring TRW Integrated Supply Chain Solutions (TRW ISCS). The acquisition of TRW ISCS, formerly a QAD alliance partner, significantly expands QAD's service infrastructure in the Europe, Middle East and Africa (EMEA) region, and creates a new direct presence for QAD in four countries: Belgium, Portugal, Spain and Switzerland. The acquisition brings QAD's total direct presence in EMEA to 13 countries.

        Our Global Services organization offers the following services to our customers:

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Technical Services.  Our technical services organization addresses critical areas in the life cycle of our customers' product implementation from the pre-installation audit that helps ensure a correct fit, to installation services that quickly get our customers' systems operational. To support the full application life cycle, we also provide post implementation services that offer the opportunity to continue to improve both technical and operational effectiveness and efficiency. The technical services group also provides conversion services that help customers smoothly migrate to the latest software release, integration services that address customers' complex integration needs and performance optimization services that help maximize system productivity and efficiency.



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Implementation Services.  Our implementation services organization utilizes Q-Advantage, our proven implementation framework, that enables rapid implementation, consistency in delivery and maximizes enterprise resources. Our implementation services team empowers customers through efficient knowledge transfer from our in-depth product knowledge and our business process and vertical market expertise.



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Support Services.  Our customer service organization operates attended and automated support systems around the world, including a global call tracking and escalation system based on our MFG/PRO Service/Support Management module. In addition, our solution-centered support provides customers with online access to customer service solutions 24 hours a day, seven days a week. Our Support Services offerings generate maintenance revenue from our installed base of approximately 5,200 sites, averaging 50% of QAD's total annual revenue over the past three fiscal years.



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Learning Services.  We offer comprehensive education and training services to our customers, end-users and service providers. Well equipped training centers around the globe feature experienced and certified instructors along with a broad and substantial curriculum. Learning services is currently working to enhance its educational offerings via its computer-based training curriculum.

        To broaden our customer service and support offerings, we have entered into strategic partnerships with IBM, Atos Origin, and other select organizations. Through these partnerships, we provide additional business process and program management consulting services. These strategic partners are closely aligned to our organization and participate in the selling process.

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QAD PRODUCT ALLIANCES

        We have a number of ongoing business alliances that extend the functionality of our software through the addition of integrated best-in-class applications. We have also entered into select joint development agreements with third-party software developers who provide functionality that has been embedded into or integrated with QAD software to deliver more complete solutions for our targeted vertical markets. Our alliances include Access Commerce, IBM, Progress Software Corporation and others.

TECHNOLOGY

QAD MFG/PRO eB2 Technology

        MFG/PRO was first introduced in 1986. We have subsequently released a number of product versions and enhancements. Our most recent version, MFG/PRO eB2, has been developed with a commercially available toolset marketed by Progress Software Corporation (Progress), that works with relational databases provided by Oracle Corporation and Progress. MFG/PRO eB2 software operates under UNIX, Linux and Windows NT operating systems and takes advantage of advances in Progress software that open up this fourth-generation language to access by Sun Microsystems' Java language. MFG/PRO eB2 also features an Internet-enabled Java user interface called QAD Desktop2. Using similar technology, we have exposed the functionality of MFG/PRO software for direct access by other business applications. This technology allows documents defined in XML (Extensible Markup Language) to be exchanged between MFG/PRO and other business applications without user involvement, thus automating the interaction between MFG/PRO and other applications, including but not limited to those provided by QAD. This technology is part of the QAD QXtend Interoperability Solutions.

QAD eQ Technology

        The business components of QAD eQ are built in Java, taking advantage of advanced techniques in object-oriented software design. QAD eQ is based on IBM's WebSphere development environment and Business Components framework. The solution's thin-client architecture requires only a standard Web browser to display user information. Components of QAD eQ architecture consist of Java, JSPs, DHTML, HTML, Java Scripts, Java Servlets and XML. QAD eQ leverages a Web server and Apache-Tomcat combination that has features and functionality required for the demands of secure, scalable collaborative commerce. QAD eQ is designed to run on a variety of hardware platforms, such as IBM pSeries, HP-UX Solaris, NT, MS2000 and IBM iSeries. It is designed to support major databases such as Oracle and DB2.

MFGx.net and QAD Supply Visualization Technology

        Our current MFGx.net offering, QAD Supply Visualization, is a thin-client product accessible over the Internet, requiring only a standard Web browser for customers and suppliers to share inventory and order information. Components of QAD Supply Visualization are built using Java, JSPs, DHTML, HTML and Java Servlets on the server side. Data is transported in XML format using standard HTTP protocol. The offering is hosted on the Linux operating system. These technologies allow us to leverage our legacy enterprise products while using the most advanced tools to provide our customers with true supply chain visibility.

RESEARCH AND DEVELOPMENT

        Our principal research and development staff is focused on continuing updates and improvements to QAD applications, including the continual enhancements of our application suites to better serve the needs of our customers in each of the markets we serve.

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        We maintain two separate technology development efforts within our Research and Development organization—one for our core enterprise and extended enterprise products, and one for our manufacturing community Portal and its associated solution offerings. In addition, our development staff is actively investigating the integration of certain products that were acquired as the result of the acquisition of TRW ISCS, and have begun the process of assuming responsibility for the development and maintenance of those products that are complementary to our application suites.

        We are committed to the continuing development of our products through in-house and third-party development. As of January 31, 2003, approximately 225 research and development personnel were involved in the development of QAD applications. We continue to utilize high quality, cost-effective development resources around the world, wherever possible, and have significant development operations in India, Ireland, and Australia, in addition to our primary development facilities in the United States. Our research and development expenses totaled $33.4 million, $31.7 million and $34.5 million in fiscal years 2003, 2002 and 2001, respectively.

SALES AND MARKETING

        QAD sells and supports its products and services through direct and indirect sales channels and service organizations located throughout the world.

        Our direct sales organization is composed of approximately 100 commissioned sales people. We continue to strengthen our sales organization and our sales regions in order to improve our ability to deliver localized industry-specific solutions throughout the world. Within each territory, a focus on the industries we serve is maintained through marketing, local product development and sales training.

        Our indirect sales channel consists of over 40 distributors and sales agents worldwide. We do not grant exclusive rights to any of our distributors or sales agents. Our distributors and sales agents primarily sell independently to companies within their geographic territory, but may also work in conjunction with our direct sales organization. In addition, we leverage our relationships with implementation service providers, hardware vendors and other third parties to identify sales opportunities on a global basis.

        Our marketing strategy includes developing demand for our products by consistently communicating with QAD vertical prospects and key audiences to increase awareness and mind share. QAD undertakes a variety of marketing activities such as analyst relations, press relations, investor relations, events, advertising, the development of sales tools, and the continued improvement of our Web site. The global marketing organization plans and coordinates focused campaigns as set forth in our strategic plan. The team utilizes marketing automation tools to support our field sales organization and our direct marketing efforts.

COMPETITION

        The enterprise software applications market is highly competitive, is rapidly changing and is affected by new product introductions and other market activities, including consolidations among industry participants and the entry of new participants.

        In viewing the competition, QAD separates its competition into three groups: Mega-suite vendors, focused vendors, and point solution vendors.

        Mega-suite vendors such as JD Edwards, Microsoft, Oracle, PeopleSoft, and SAP, have a strategy of serving many non-manufacturing industries in addition to their commitment to the manufacturing space. In addition, these vendors have a stated strategy that includes pursuing the

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mid-market ($250 million to $1 billion in revenues) of manufacturing—an area that has been traditionally strong for QAD.

        Our focused vendor competition comes from technology companies who have a stated strategy to focus on a niche market or a portion of the market where QAD currently does business. Brain (owned by Agilsys), Epicor, IFS, Intentia and Mapics are some of the Focused vendors currently serving the specific needs of manufacturing plants and distribution sites of multi-national manufacturing companies.

        Point solution vendors provide a narrow set of functionality often specialized in an area that overlaps with functionality within QAD solutions. Vendors in this category include Agile, Covisent, Haut Commerce, i2, Manugistics, MatrixOne, Supply Solutions, and Yantra.

        As the market for enterprise software continues to develop, companies with significantly greater resources could attempt to increase their presence in these markets by acquiring or forming strategic alliances with our competitors or with our current or potential partners. The dynamic nature of the emerging market space leads us to believe that numerous smaller, but well-capitalized vendors may emerge as strong competitors.

        Increased competition in these markets is likely to result in price reductions, reduced operating margins and changes in market share, any one of which could adversely affect us. Many of our present or future competitors may have significantly greater financial, technical, marketing and other resources, greater name recognition and a larger installed base of customers than we do. As a result, they may be able to devote greater resources to the development, promotion and sale of their products. Although we believe we offer, and will continue to offer, products that are competitive, we can make no assurance that we will be able to compete successfully with existing or new competitors or that competition will not adversely affect us.

PROPRIETARY RIGHTS AND LICENSING

        Our success is dependent upon our proprietary technology and other intellectual property.    We rely primarily on a combination of the protections provided by applicable copyright, trademark and trade secret laws, as well as on confidentiality procedures and licensing arrangements, to establish and protect our rights in our software and related materials and information. We enter into license agreements with each of our customers. Each of these license agreements provides for the non-exclusive license of QAD software. These licenses generally are perpetual and contain strict confidentiality and non-disclosure provisions, a limited warranty covering the QAD software and indemnification for the customer from infringement actions related to the QAD software.

        The pricing policy under each license is based on a standard price list and may vary based on a number of parameters including the number of end-users, number of sites, number of modules, number of languages, the country in which the license is granted and level of ongoing support, training and services to be provided by QAD.

        To facilitate our customers' ability to customize MFG/PRO, we generally license our MFG/PRO software to end-users in both object code (machine-readable) and source code (human-readable) format. While this practice facilitates customization, making software available in source code also makes it easier for third-parties to copy or modify our software for impermissable purposes. Distributors or other persons may independently develop a modified version of our software. Our license agreements generally allow the use of our software solely by the customer for internal purposes without the right to sublicense or transfer the software to third-parties. We have no patents although we have two pending patent applications.

        We believe that the measures we take to protect our proprietary technology and other intellectual property afford only limited protection. Despite our efforts, it may be possible for

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third-parties to copy portions of our products, to reverse engineer or to obtain and use information that we regard as proprietary. In addition, the laws of certain countries do not protect our proprietary rights to the same extent as the laws of the United States. Accordingly, there can be no assurance that we will be able to protect our proprietary software against unauthorized copying or use, which could adversely affect our competitive position. Furthermore, there can be no assurance that our competitors will not independently develop technology similar to ours.

        We may be faced with or need to bring infringement claims to protect our rights.    We have been in the past, and may be in the future, subject to claims of intellectual property infringement and may increasingly be subject to these types of claims as the number of products and competitors in our targeted vertical markets grows and the functionality of products in other industry segments overlaps. Although we do not believe that any of our products infringe upon the proprietary rights of third-parties, there can be no assurance that third-parties will not claim infringement by us with respect to current or future products. In addition, we periodically acquire intellectual property from third-parties. In some instances, this intellectual property is prepared on a work-for-hire or similar basis, and in other instances, we license the intellectual property. We have been in the past, and expect to be in the future, party to disputes about ownership, license scope and royalty or fee terms with respect to intellectual property. Any claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements, any of which could have an adverse effect upon us. We may also initiate claims or litigation against third-parties for infringement of our proprietary rights or to establish the validity of our proprietary rights, which could result in significant expense to us and divert the efforts of our technical and management personnel from productive tasks, whether or not such litigation were determined in our favor.

        Our intellectual property rights may be significantly affected by third-party relationships and actions.    We have in the past, and may in the future, resell certain software which we license from third-parties. In addition, we have in the past, and may in the future, jointly develop software in which we will have co-ownership or cross-licensing rights. There can be no assurance that these third-party software arrangements and licenses will continue to be available to us on terms that provide us with the third-party software we require, provide adequate functionality in our products on terms that adequately protect QAD's proprietary rights, or are commercially favorable to us. The loss of or inability to maintain or obtain any of these software licenses, including a loss as a result of a third-party infringement claim, could result in delays or reductions in product shipments until equivalent software, if any, could be identified, licensed or developed and integrated.

        We may be exposed to product liability claims.    While our license agreements with our customers typically contain provisions designed to limit our exposure to potential material product liability claims, it is possible that the limitation of liability provisions may not be effective under the laws of some jurisdictions. Although we have not experienced any product liability claims to date, we may be subject to claims in the future. We have an errors and omissions insurance policy. However, this insurance may not continue to be available to us on commercially reasonable terms, or at all. A successful product liability or errors or omissions claim brought against us could have an adverse effect on us. Moreover, defending a suit, regardless of its merits, could entail substantial expense and require the time and attention of key management personnel, either of which could have an adverse effect on us.

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EMPLOYEES

        As of January 31, 2003, we had approximately 1,325 full-time employees of which approximately 575 were in support and services, 225 were in research and development, 300 were in sales and marketing and 225 were in administration. Generally, our employees are not represented by collective bargaining agreements. However, certain employees of our Netherlands and France based subsidiaries are represented by statutory Works Councils as required under the local laws. Employees of our Brazil based subsidiary are represented by a collective bargaining agreement with the Data Processing Union. We believe that, in general, our employee relations are good.

BUSINESS SUMMARY

        We believe that QAD is well positioned to continue its success in the enterprise solutions space and leverage that success to become a market leader in the new emerging fields of enterprise, extended enterprise and manufacturing community solutions for our multi-national, large and mid-range manufacturing customers.

        We regard the combination of our applications MFG/PRO eB2 and QAD eQ, our MFGx.net service offerings, our QAD QXtend Interoperability Solutions, as well as our extensive global support and implementation capabilities, as a uniquely positioned end-to-end solution that provides manufacturers with significant competitive advantages, synchronized processes across the enterprise, increased supply chain efficiency, and the ability to open new markets via collaborative commerce.

        We believe our solutions are well positioned to succeed in the enterprise software market for the following reasons:

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We have developed and delivered an integrated application suite, MFG/PRO eB2, QAD eQ and MFGx.net based on proven technology and deep manufacturing experience.



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Our solutions can help manufacturers realize new efficiencies and achieve significant performance improvements in many areas of the manufacturing enterprise.



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Our industry-specific solutions provide our customers with significant competitive advantage and impressive return on investment (ROI).



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Our solutions implement quickly and have a low total cost of ownership compared to other solutions.



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Our solutions, service, and support are truly global in nature and are available in as many as 26 languages, incorporating global tax management and multi-currency capabilities tailored to local financial practices.



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Our solutions' open architecture allows customers to integrate with other ERP or legacy systems, protecting and extending their existing IT investments.



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We have a passion for manufacturing excellence and for helping our customers achieve competitive advantages.

        QAD's existing customer base of approximately 5,200 licensed sites, our global service and support operations, our internal and extended sales operations, our marketing organization and our strategic partnerships with select partners provide significant resources with which to build our position in the market place.

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EXECUTIVE OFFICERS OF THE REGISTRANT

        Set forth below is certain information concerning our executive officers. All ages are as of March 31, 2003.

        Pamela M. Lopker founded QAD in 1979 and has been Chairman of the Board and President since incorporation in 1981. Prior to founding QAD, Ms. Lopker served as Senior Systems Analyst for Comtek Research from 1977 to 1979. Ms. Lopker is certified in Production and Inventory Management by the American Production and Inventory Control Society. Ms. Lopker earned a Bachelor of Arts degree in Mathematics from the University of California at Santa Barbara. Ms. Lopker is married to Karl F. Lopker.

        Karl F. Lopker has served as Director and Chief Executive Officer (CEO) since joining QAD in 1981. Mr. Lopker was founder and President of Deckers Outdoor Corporation from 1973 to 1981. Mr. Lopker is certified in Production and Inventory Management at the Fellow level by the American Production and Inventory Control Society. Mr. Lopker studied Electrical Engineering and Computer Science at the University of California at Santa Barbara. Mr. Lopker is married to Pamela M. Lopker.

        Kathleen M. Fisher is Executive Vice President and Chief Financial Officer (CFO). She joined QAD in March 2000. Prior to joining QAD, Ms. Fisher served as the chief financial officer of Adept Technology, an automation software and hardware manufacturer, in San Jose, California. She has also served as CFO for Borland Software Corporation, and Softbank Content, Inc. Ms. Fisher received a Bachelor of Science degree in Business Administration from the University of Redlands and a Master of Business Administration degree from the University of Southern California in Los Angeles.

        Vincent P. Niedzielski is Executive Vice President, Research and Development. He joined QAD in April 1996. Prior to joining QAD, Mr. Niedzielski served as Vice President, Production and Development at Candle Corporation from 1984 to 1996. Mr. Niedzielski holds a Bachelor of Science degree in Mathematics and Computer Science from the University of Scranton.

        Murray W. Ray is Executive Vice President, Global Services and Human Resources. Mr. Ray joined QAD in August 1996 and was appointed Vice President of Global Services and Human Resources in October 1998 and February 2001, respectively. Prior to joining QAD, he served 11 years at Compaq Computer Corporation, formerly Digital, as an Industrial Marketing Manager and then as a Director of Professional Services. He also served as a Director of Professional Services at AT&T for the Asia Pacific region. Mr. Ray earned a Bachelor of Science Degree in Mathematics and Statistics from the University of Western Australia and he has graduated from the advanced management programs at the Australian Management College and the University of Hawaii.

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        Roland B. Desilets is Executive Vice President, General Counsel and Secretary. He rejoined QAD in April 2001, after spending one year as Vice President and General Counsel of Atlas Commerce, Inc., a Safeguard Scientifics company. Prior to this, he served as Corporate General Counsel and Regional General Counsel at QAD since 1998 and 1993, respectively. Before joining QAD in 1993, Mr. Desilets served as intellectual property counsel for Unisys Corporation. He holds a Juris Doctor degree from Widener University School of Law, a Master of Science degree in Computer Science from Villanova University, and a Bachelor of Science degree in Physics from Ursinus College.

        Valerie J. Miller is Vice President, Corporate Controller. She joined QAD as Assistant Corporate Controller in May 1999 and was appointed Vice President, Corporate Controller and Chief Accounting Officer in June 2001. Prior to joining QAD, Ms. Miller served eight years with Allergan, a specialty pharmaceutical company, in various financial positions. She began her career at the public accounting firm of Ernst & Young. Ms. Miller is a Certified Public Accountant and received her Bachelor of Arts degree in Business Economics/Accounting from the University of California at Santa Barbara.

SEGMENT REPORTING

        Segment financial information for fiscal years 2003, 2002 and 2001 is presented in note 10 within the Notes to Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K.

ITEM 2. PROPERTIES

        QAD is headquartered in Carpinteria, California, in approximately 71,000 square feet of leased space in three facilities with lease commitments ranging from 2004 to 2011. QAD owns 28 acres with approximately 45,000 square feet of existing office space in Summerland, California, a neighboring community. This property carries an entitlement for the construction of a company headquarters. QAD is currently constructing a new company headquarters in order to consolidate its corporate operations. This project is currently scheduled to be completed at the end of 2003.

        The company has over 30 additional offices located across our four geographic regions with lease commitments ranging from 2002 until 2019. This includes major offices located in the United States, the Netherlands, Australia, the United Kingdom, Mexico, Poland, Thailand, China, Spain, France and Japan. Due to the TRW ISCS acquisition, we anticipate the merging and closing of certain offices in the EMEA region.

        On March 21, 2003, QAD completed the sale of the Mark Hill property, a 34-acre undeveloped parcel of property located in Carpinteria, California.

        Although we may seek new or expanded facilities in the future, we expect that our current domestic and international facilities will be sufficient to meet our needs for at least the next 12 months.

ITEM 3. LEGAL PROCEEDINGS

        We are not party to any material legal proceedings. We are from time to time party, either as plaintiff or defendant, to various legal proceedings and claims which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on our consolidated results of operations or consolidated financial position.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        QAD common stock has been traded on the NASDAQ National Market (NASDAQ) since our initial public offering in August 1997 (under the symbol QADI). According to records of our transfer agent, we had approximately 400 stockholders of record as of April 28, 2003. The following table sets forth the high and low closing prices for QAD's common stock as reported by NASDAQ in each quarter of the last two fiscal years.

        QAD recently completed a tender offer in which QAD purchased 2.9 million shares at a price of $5.00 per share. For further discussion of the offer, see note 14 within Notes to Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K.

        Our policy has been to reinvest earnings to fund future growth. Accordingly, we have not paid dividends and we do not anticipate declaring dividends on our common stock in the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

        We have made nine acquisitions since the third quarter of fiscal year 1999. Results of operations of the acquired entities have been included in the financial statements since the respective dates of acquisition. Recent acquisitions are described in greater detail in note 2 within the Notes to Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

        In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements. These statements typically are preceded or accompanied by words like "believe," "anticipate," "expect" and words of similar meaning. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this Item 7 entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in particular the subsection of this Item 7 entitled "Factors That May Affect Future Results and Market Price of Stock." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. We undertake no obligation to revise or update or publicly release the results of any revision or update to these forward-looking statements. Readers should carefully review the risk factors described in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed by QAD in fiscal 2004.

INTRODUCTION

        The following discussion should be read in conjunction with our financial statements and notes thereto included in Item 15 of this Annual Report on Form 10-K.

OVERVIEW

        Founded in 1979, QAD has been recognized as a leading provider of enterprise resource planning (ERP) software applications for global manufacturing companies. Today, QAD enterprise applications leverage advances in Internet and enabling technologies to provide critical functionality for managing manufacturing resources and operations within and beyond the enterprise, enabling global manufacturers to collaborate with their customers, suppliers and partners to make and deliver the right product, at the right cost and at the right time.

        QAD enterprise applications are focused and optimized for select manufacturing industry segments: automotive, consumer products, electronics, food and beverage, industrial and medical industries. They address business-critical functions and processes at three levels required by today's global manufacturing companies: 1) Enterprise, providing traditional ERP functionality for intra-enterprise functions, 2) Extended Enterprise, providing Distributed Order Management capabilities for functions involving external sources such as customers and suppliers and 3) Community, providing a Portal for gaining visibility and access to information across the larger manufacturing community. Further discussion of QAD enterprise applications may be found within the section entitled "QAD SOLUTIONS" included in Item 1 of this Annual Report on Form 10-K.

        QAD has built a solid customer base of global Fortune 1000 and mid-market manufacturers who are excellent prospects for QAD's enterprise applications. With a proven track record of more than 20 years of industry leadership, and approximately 5,200 licensed sites of our software around the world, QAD is ideally qualified to meet the business and technology requirements of global manufacturing companies worldwide. We develop our products with constant and direct input from leading global manufacturers within the industries we serve. This vertical industry focus is a key differentiator for QAD, enabling our customers to implement QAD applications rapidly, realize a rapid return on investment, and achieve a low total cost of ownership compared with other vendors targeting the industries we serve.

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        Global service and support are an important component of our solutions. QAD offers service and support capabilities that are truly global in scope. We are one of a few select organizations with the capabilities and industry expertise required to implement our solutions around the globe and support them in multiple languages and currencies. Our geographic management structure ensures that our global practices meet local requirements and that our services are delivered effectively within each region around the globe. We support our customers' global operations through our network of regional support centers and online support, accessible 24 hours a day, seven days a week, all around the world.

CRITICAL ACCOUNTING POLICIES

        We consider certain accounting policies related to revenue recognition, accounts receivable allowances, impairment of long-lived assets, capitalized software development costs, and valuation of deferred tax assets to be critical policies due to the significance of these items to our operating results and the estimation processes and management's judgment involved in each.

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Revenue Recognition.  QAD licenses its software under non-cancelable license agreements including third-party software sold in conjunction with QAD software, provides customer support and provides services including technical, implementation and training. Revenue is recognized in accordance with Statement of Position (SOP) No. 97-2, "Software Revenue Recognition," as modified by SOP No. 98-9, "Modification of SOP No. 97-2, Software Revenue Recognition with Respect to Certain Transactions" and Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." Our revenue recognition policy is as follows:

        License Revenue.    We recognize revenue from license contracts when a non-cancelable, non-contingent license agreement has been signed, the software product has been delivered, no uncertainties exist surrounding product acceptance, fees from the agreement are fixed or determinable, and collection is probable. We use the residual method to recognize revenue when a license agreement includes one or more elements to be delivered at a future date if vendor-specific, objective evidence of the fair value of all undelivered elements exists. If evidence of the fair value of the undelivered elements does not exist, revenue is deferred and recognized when delivery occurs. Our standard products do not require significant production, modification or customization of software or services that are essential to the functionality of the software. Certain judgments affect the application of our license revenue recognition policy, such as the assessment of collectibility for which we review a customer's credit worthiness and our historical experience with that customer, if applicable.

        Maintenance Revenue.    Revenue for ongoing customer support and product updates is recognized ratably over the term of the maintenance period, which in most instances is one year.

        Services Revenue.    Revenue from technical and implementation services is recognized as the services are performed for the time-and-materials contracts. Revenue from training services is recognized as the services are performed.

We

believe that we are currently in compliance with SOP No. 97-2, SOP No. 98-9 and SAB No. 101. However, the accounting standard setting bodies continue to discuss various provisions of these guidelines with the objective of providing additional guidance on their future application. These discussions and the issuance of new interpretations, once finalized, could lead to unanticipated changes in recognized revenue. They could also drive significant adjustments to our business practices that could result in increased

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administrative costs, lengthened sales cycles and other changes that could affect our results of operations.

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Accounts Receivable Allowances.  We review the collectibility of our accounts receivable each period by analyzing balances based on age and record specific allowances for any balances that we determine may not be fully collectible. We also provide an additional reserve based on historical data including analysis of credit memo data and other known factors. These determinations require management's judgment. Actual collection of these balances may differ due to global or regional economic factors, challenges faced by customers within our targeted vertical markets or specific financial difficulties of individual customers.



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Impairment of Long-Lived Assets.  Our long-lived assets include goodwill, intangibles assets and other assets. At January 31, 2003, we had $12.0 million of goodwill and intangible assets, accounting for 7% of our total assets. In assessing the recoverability of our intangibles, excluding goodwill, we must make assumptions regarding estimated future cash flows to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment losses for these assets. Effective February 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142) which requires us to analyze goodwill for impairment upon adoption, and then on at least an annual basis thereafter. Upon adoption of SFAS 142, we recognized a $1.1 million impairment charge related to goodwill that is reflected as a cumulative effect of accounting change in the Consolidated Statements of Operations for the year ended January 31, 2003. For a further discussion of SFAS 142, see note 3 within the Notes to Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K.



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Capitalized Software Development Costs.  We capitalize software development costs incurred in connection with the localization and translation of our products once technological feasibility has been achieved based on a working model. A working model is defined as an operative version of the computer software product that is completed in the same software language as the product to be ultimately marketed, performs all the major functions planned for the product, and is ready for initial customer testing (usually identified as beta testing). Capitalized software development costs are amortized on a straight-line basis over three years and charged to cost of license fees. We periodically compare the unamortized capitalized software development costs to the estimated net realizable value of the associated product. The amount by which the unamortized capitalized software development costs of a particular software product exceed the estimated net realizable value of that asset is reported as a charge to the statement of operations. This review requires management's judgment regarding future cash flows. If these estimates or their related assumptions require updating in the future, we may be required to recognize losses for these assets not previously recorded.



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Valuation of Deferred Tax Assets.  Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", requires that the carrying value of our net deferred tax assets reflect an amount that is more likely than not to be realized. At January 31, 2003, we had $0.2 million of net deferred tax assets, current and non-current. In assessing the likelihood of realizing tax benefits associated with deferred tax assets and the need for a valuation allowance, we consider future taxable income and tax planning strategies that are both prudent and feasible. Should we determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to deferred tax assets would decrease tax expense in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of the net deferred tax asset in the future, an adjustment to deferred tax assets would increase tax expense in the period such determination was made.

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RESULTS OF OPERATIONS

        The following table sets forth for the periods indicated the percentage of total revenue represented by certain items reflected in our Consolidated Statements of Operations:

        Total revenue.    Total revenue for fiscal 2003 was $195.2 million, a decrease of $10.5 million, or 5%, from fiscal 2002. The TRW Integrated Supply Chain Solutions (TRW ISCS) acquisition that took place during the fourth quarter of fiscal 2003, contributed $4.2 million to total revenue.

        License revenue was $56.0 million for fiscal 2003, down $6.8 million from $62.8 million for fiscal 2002. This decline reflects the reduced IT spending levels within our customer base due to current economic conditions and the global political environment. We are finding that in some cases while our customers are willing to purchase software at comparable prices, they are purchasing smaller quantities over longer periods of time, rather than the larger, one-time license purchases experienced in the past. During fiscal 2003, there were 5 billings of QAD eQ, our Distributed Order Management suite, including $0.4 million of license billings resulting in the recognition of $0.1 million of license revenue and deferrals of $0.3 million relating mainly to discounts on maintenance fees that will be recognized as support revenue as the support services are provided in future quarters.

        Maintenance and other revenue was $106.3 million for fiscal 2003, representing an increase of $2.7 million, or 3%, over the $103.6 million for fiscal 2002. Customers acquired from TRW ISCS contributed $0.8 million in fiscal 2003 maintenance and other revenue. Excluding customers acquired from TRW ISCS, our maintenance and other revenue increased $1.9 million over last

23

year. This increase was due primarily to additional maintenance on new license sales, partially offset by cancellations within our existing customer base. Maintenance revenue growth rates are affected by the overall license revenue growth rates as well as annual maintenance contract renewal rates.

        Services revenue was $32.9 million for fiscal 2003, representing a decline of $6.4 million when compared to last year at $39.3 million. While customers acquired from TRW ISCS added $3.2 million in services revenue, this was more than offset by a $9.6 million decline in our existing business. This decline is primarily attributable to our international operations and correlates with the recent license revenue trend. Our recent license revenue has included fewer large license sales which typically lead to significant service engagements. In addition, we have experienced an increased proportion of sales to our existing customer base that generally require a lower level of services during implementation.

        Total revenue for fiscal 2002 was $205.8 million, a decrease of $10.4 million, or 5%, from fiscal 2001. License revenue decreased by $6.4 million due to the slowdown in corporate IT spending within our core customer base of manufacturers prompted by economic conditions. During fiscal 2002, there were four sales of QAD eQ. Excluding maintenance and services revenue, these sales resulted in the recognition of $0.8 million in license revenue. Overall, maintenance and other revenue increased $5.3 million to $103.6 million for fiscal 2002 from $98.3 million for fiscal 2001, due to growth in our installed base, partially offset by a decline in hardware sales. Services revenue declined $9.3 million due to a reduction in the number of large license sales that lead to large systems implementation projects.

        As a result of these factors, revenue mix has shifted toward maintenance and other revenue, growing to 54% of total revenue in fiscal 2003 from 50% and 45% in fiscal 2002 and 2001, respectively. License revenue was 29% of total revenue in fiscal 2003, declining from 31% in fiscal 2002 and 32% in fiscal 2001. Services revenue has declined to 17% of total revenue in fiscal 2003 from 19% and 23% in fiscal 2002 and 2001, respectively.

        No single customer has accounted for more than 10% of our total revenue in any of the last three fiscal years. However, it is not uncommon to obtain a multi-million dollar contract with a single customer, though this has become less common in recent years.

        Total Cost of Revenue.    Total cost of revenue (combined cost of license fees and cost of maintenance, service and other revenue) as a percentage of total revenue was 38%, 42% and 47% in fiscal 2003, 2002 and 2001, respectively. The four percentage point decrease from fiscal 2002 to fiscal 2003 was due primarily to continued improvements in our maintenance margin due to lower personnel and related costs in line with our continued cost containment measures and the shift in the mix of our revenue toward higher margin maintenance revenue.

        In addition, fiscal 2003 included non-recurring expense reductions related to royalty contract accruals totaling $1.2 million. In the first quarter, the Company terminated a third-party royalty contract, which resulted in a one-time benefit of approximately $600,000. And in the fourth quarter, we recorded an equivalent, unrelated one-time benefit from the reduction of a prior royalty accrual. Excluding these one-time royalty expense reductions, cost of revenue percentage would have increased by one percentage point to 39% for fiscal 2003.

        The five percentage point decrease from fiscal 2001 to fiscal 2002 was due primarily to our improved maintenance margin stemming mainly from lower personnel and related costs.

        Sales and Marketing.    Sales and marketing expense was $61.7 million, $59.4 million, and $66.5 million for fiscal 2003, 2002 and 2001, respectively. The increase of $2.3 million from fiscal 2002 to 2003 related mainly to higher personnel costs due to the strengthening of our sales and marketing staff, our increased focus on marketing activities in fiscal 2003, including the launch of

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MFG/PRO eB2 and higher net expense related to our annual Explore user conference, and the incremental expense due to the TRW ISCS acquisition. The decline of $7.1 million from fiscal 2001 to 2002 was due primarily to lower personnel and related costs resulting from our cost containment efforts during fiscal 2002. Fiscal 2002 also included lower partner fees, which are paid to distributors and sales agents, primarily in connection with the sale of QAD licenses and first year maintenance.

        Research and Development.    Research and development expense was $33.4 million, $31.7 million and $34.5 million in fiscal 2003, 2002 and 2001, respectively. The fiscal 2003 increase over 2002 was primarily due to increased personnel, consulting and related expenses aligned with our continued investment in the development of our new and existing products. The fiscal 2002 decline when compared to fiscal 2001 was primarily related to decreased personnel and related expenses due to our cost containment efforts, partially offset by lower capitalized expenses for translations and localizations of our products in fiscal 2002.

        General and Administrative.    General and administrative expense was $21.8 million, $22.9 million and $22.5 million for fiscal 2003, 2002 and 2001, respectively. When comparing fiscal 2003 to 2002, general and administrative expense declined $1.1 million. Excluding the impact of the TRW ISCS acquisition, expenses declined by $1.9 million, due mainly to lower personnel and related expenses and to lower bad debt expense in fiscal 2003. This decline was partially offset by $0.8 million of incremental expense due to the TRW ISCS acquisition in fiscal 2003. Fiscal 2002 was basically unchanged to fiscal 2001.

        Amortization of Intangibles from Acquisitions.    Amortization of intangibles from acquisitions totaled $1.2 million, $3.5 million and $4.6 million in fiscal 2003, 2002, and 2001, respectively. These declines were primarily related to certain intangible assets that had become fully amortized in the respective preceding fiscal year. In addition, the decline from fiscal 2002 to 2003 was partially related to the discontinued amortization of goodwill with our adoption of SFAS 142 in fiscal 2003.

        Impairment Loss.    SFAS 142 requires us to analyze goodwill for impairment at least on an annual basis or when a triggering event requires an additional analysis. We have chosen the fourth quarter of our fiscal year as our annual test period. During the fourth quarter of fiscal 2003, in connection with our annual test, all reporting units containing goodwill were valued and tested for impairment. The results of this test yielded no indication of impairment for the reporting units that had goodwill on their balance sheets as of the test date, which included Europe, Middle East and Africa (EMEA) and Latin America.

        During fiscal 2003, a prior shareholder of an acquired business in our Asia Pacific reporting unit received an earnout payment of $151,000 based on financial performance under the purchase agreement. The payment effectively serves to increase the purchase price of the acquisition, thus adding to our goodwill balance. Based on the earnout payment, under SFAS 142, the Asia Pacific reporting unit was valued and tested for impairment. In accordance with the provisions of SFAS 142, the additional $151,000 of goodwill in Asia Pacific was fully impaired and the related impairment loss is included in our Consolidated Statement of Operations for fiscal 2003.

        During fiscal 2002, we reviewed our long-lived assets for impairment in value based upon undiscounted future operating cash flows from those assets in accordance with the accounting literature in effect at that time, Statement of Financial Accounting Standards No. 121, (SFAS 121),"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Under SFAS 121, appropriate losses were recognized whenever the carrying amount of an asset might not be recovered. As of January 31, 2002, we determined that the technology related to Enterprise Engines, Inc. (EEI) was impaired, and deemed to have no fair

25

value due to our shift from the use of the EEI toolset to the IBM WebSphere toolset underlying our QAD eQ product. Accordingly, an impairment loss of $2.1 million was recorded to the fiscal year 2002 Consolidated Statement of Operations related to the remaining book value of EEI goodwill and other intangible assets.

        Restructuring Charge.    During fiscal 2003, we implemented a cost reduction program aimed at reducing annualized operating expenses by better aligning expenses with current business levels. The related actions resulted in a $3.2 million and $1.2 million charge in the third quarter and fourth quarter of fiscal 2003, respectively. These charges included a reduction of approximately 130 employees across all regions and functions (approximately $4.1 million), facility consolidations ($0.1 million), and associated asset write-downs ($0.2 million). In addition, during the fourth quarter of fiscal 2003 we recorded an adjustment of $0.9 million as an increase to operating expense, related to the fiscal 2002 restructuring accrual described below. As of January 31, 2003, of the combined $4.4 million fiscal 2003 restructuring charges, $3.6 million was utilized. We expect to pay the remaining balance of $0.8 million, consisting mainly of employee termination costs, by the end of fiscal 2004.

        During fiscal 2002, we continued our fiscal 2001 initiative to strengthen operating and financial performance by sharpening the focus of our e-business and business intelligence solutions for multi-national customers. The related actions resulted in a $0.7 million and $0.4 million charge in the second quarter and fourth quarter of fiscal 2002, respectively. These charges primarily related to the reduction of office space in three of our North American locations. In addition, during fiscal 2002, we recorded restructuring accrual adjustments of $0.7 million and $0.3 million as reductions to operating expense in our Consolidated Statement of Operations for the second quarter and third quarter, respectively. These adjustments, totaling $1.0 million, were to the fiscal 2001 restructuring accrual because employee termination costs were lower than originally estimated. As previously mentioned, during fiscal 2003, the fiscal 2002 restructuring accrual was increased $0.9 million due to the Company's inability to sublease certain office space as originally planned. As of January 31, 2003, of the combined $2.0 million fiscal 2002 restructuring charges, $1.0 million had been utilized. The remaining balance of $1.0 million related to lease obligations is expected to be paid through fiscal 2005.

        Total Other (Income) Expense.    Total other (income) expense was $2.0 million, $1.6 million and $0.7 million in fiscal 2003, 2002 and 2001, respectively. These increases in expense were due mainly to unfavorable changes in foreign currency transaction and remeasurement losses.

        Income Tax Expense.    We recorded income tax expense of $1.3 million, $2.9 million and $5.7 million in the years ended January 31, 2003, 2002 and 2001, respectively. The fiscal 2003 and 2002 income tax expense represented taxes in profitable jurisdictions. Fiscal 2001 income tax expense included $2.5 million for taxes in the jurisdictions that were profitable and a $3.2 million valuation allowance on deferred tax assets. We have not provided tax benefits for the jurisdictions in loss positions due to management's determination regarding the uncertainty of the realization of these tax benefits.

        Cumulative Effect of Accounting Change.    During the first quarter of fiscal 2003, we adopted SFAS 142 related to impairment tests for goodwill, resulting in the reporting of a cumulative effect of a change in accounting principle of $1.1 million. For further discussion, see note 3 within the Notes to Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K.

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PRO FORMA FINANCIAL RESULTS

        Pro forma information is provided below to assist in evaluating our performance on a more consistent year-to-year basis. QAD has used pro forma reporting to evaluate its operating performance and believes this presentation provides investors with additional insight into its operating results. Due to new Securities and Exchange Commission regulations applicable to our fiscal 2004 first quarter, the pro forma information below will not be reported in future periods.

        Pro forma amounts have been adjusted to exclude amortization of intangibles from acquisitions, goodwill impairment losses, restructuring charges, significant deferred tax asset valuation allowances and the cumulative effect of accounting change. Pro forma adjustments are detailed below in a reconciliation from net loss calculated in accordance with accounting principles generally accepted in the United States to pro forma net income (loss).

        On a pro forma basis, we broke even for fiscal 2003 and achieved profitability of $0.01 per share in fiscal 2002. These pro forma results represent a significant improvement over the $0.38 pro forma net loss per share in fiscal 2001.

LIQUIDITY AND CAPITAL RESOURCES

        We have historically financed our operations and met our capital expenditure requirements through cash flows from operations, sale of equity securities and borrowings. Cash and equivalents were $50.2 million and $50.8 million at January 31, 2003 and 2002, respectively. Our working capital was $6.8 million and $22.7 million as of January 31, 2003 and 2002, respectively. The TRW ISCS entities acquired in November 2002 represented a $3.7 million net decrease in working capital as of January 31, 2003, including current assets of $9.1 million and current liabilities of $12.8 million. The decrease in working capital, excluding the impact of the TRW ISCS acquisition, was $12.2 million and primarily related to a decrease in accounts receivable due to management's focus on collections and an increase in deferred revenue related to a higher level of maintenance renewal billing as of the fiscal 2003 year end when compared to fiscal 2002. These declines in working capital were partially offset by a decrease in accounts payable and other current liabilities.

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        Accounts receivable, net of the allowance for doubtful accounts and sales adjustments, decreased to $57.3 million at January 31, 2003, from $59.7 million at January 31, 2002. Accounts receivable days' sales outstanding, using the countback method, decreased to 55 days at January 31, 2003, from 75 days at January 31, 2002. This decline reflects our continued management focus on the collection process.

        Net cash provided by operating activities was $13.4 million, $21.5 million and $12.6 million in fiscal 2003, 2002 and 2001, respectively. The decrease from fiscal 2002 to 2003 relates primarily to a larger net loss in fiscal 2003, a smaller net change in accounts receivable when comparing year over year, and a larger decline in other current liabilities. These decreases to cash provided from operating activities were partially offset by the change in deferred revenue from year to year. The increase in cash provided from operations from fiscal 2001 to 2002 relates primarily to the decreased net loss and increased accounts receivable collections, offset by a decrease in deferred revenue in fiscal 2002.

        Net cash used in investing activities was $9.8 million, $4.5 million, and $7.8 million in fiscal 2003, 2002 and 2001, respectively, primarily related to our investment in property and equipment. During the second quarter of fiscal 2003, we commenced construction of a new company headquarters on property, which we refer to as Ortega Hill, owned by QAD in Summerland, California, a neighboring community to our existing headquarters in Carpinteria, California. As of January 31, 2003, the Company had incurred $5.3 million in capital expenditures related to this project. The primary motivation for this activity is to consolidate QAD Santa Barbara area operations. The current construction schedule is set to complete the effort so that it coincides with the lease termination of the existing company headquarters in nearby Carpinteria, California. Another significant motivation for this effort is that the current entitlement under the California Development Plan for the project will expire August 2003. However, we may be eligible to receive up to a one-year extension for this entitlement if substantial continuous construction is in progress.

        The board approved a $21.5 million construction budget for the new headquarters, which will be funded through a combination of cash and additional debt financing. In November 2002, QAD entered into a construction loan agreement with Santa Barbara Bank and Trust (SBB&T) to finance a maximum of $18 million, which is secured by the property and guaranteed by QAD. We anticipate entering into a permanent loan agreement upon completion of the construction project.

        Among other considerations in securing the construction loan, a commitment fee of 1%, or $180,000, was paid to SBB&T and approximately $6.8 million was transferred into a restricted cash account at SBB&T in November 2002. Of the restricted cash amount, approximately $4.3 million was used to pay off the existing first deed mortgage secured by the property with First Credit Bank. The balance of approximately $2.5 million must be used to pay costs related to the project before loan proceeds may be borrowed from SBB&T. At January 31, 2003, the remaining restricted cash balance was $1.0 million.

        In October 2002, to secure a second building permit for the construction project, we deposited $0.5 million and $0.4 million with Santa Barbara County to secure landscape installation, and maintenance of the installed landscape for up to three years, respectively. These deposits were replaced with performance bonds in the same amounts in November 2002, which secure the same obligations.

        We maintain a five-year senior credit facility with Foothill Capital Corporation (the Facility). The Facility, as amended, provides that we will maintain certain financial and operating covenants which include, among other provisions, maintaining minimum 12 month trailing earnings before interest, taxes, depreciation and amortization (EBITDA) and tangible net worth balances, as well as a minimum cash coverage ratio. At January 31, 2003, we were in compliance with the

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applicable covenants. The Facility currently provides that its term loan portion shall be repaid in quarterly principal installments ranging from $375,000 to $750,000 based on our aggregate unrestricted cash and equivalents balance at the end of each quarter.

        Effective July 31, 2002, QAD amended its credit facility with Foothill Capital Corporation to permit: 1) the construction of the new company headquarters, 2) additional indebtedness not to exceed $20 million, 3) a guarantee of debt not to exceed $20 million, and 4) the sale of the Mark Hill property, a parcel of property located in Carpinteria, California. Upon sale of the Mark Hill property, QAD agreed to use twenty-five percent (25%) of the sale proceeds or $0.5 million, whichever is less, to repay a portion of the outstanding balance on the Facility. In March 2003, the Mark Hill property was sold, and we repaid $0.5 million of the Facility.

        The net cash used in financing activities totaled $6.5 million, $2.4 million and $1.7 million in fiscal 2003, 2002 and 2001, respectively, related mainly to the proceeds and repayments of borrowings. During fiscal 2003, we paid down our debt by $6.4 million, including $4.3 million for the paydown of the mortgage on the Ortega Hill property previously mentioned. During fiscal 2002, we paid $2.0 million of principal on the term portion of our five-year senior credit facility with Foothill Capital Corporation, in accordance with the repayment terms.

        Acquisition.    On November 12, 2002, we acquired the TRW Integrated Supply Chain Solutions (TRW ISCS) business covering 10 European countries and North America from BDM International, Inc. (a wholly-owned subsidiary of TRW Inc.) and TRW Inc. Prior to the acquisition, TRW ISCS, a QAD alliance partner pursuant to an agreement with QAD, operated businesses that primarily focused on systems installation, integration and services in connection with the MFG/PRO software owned and licensed by QAD and other QAD-related goods and services.

        Under the terms of the Stock and Asset Purchase Agreement, QAD paid $1.0 million in cash and incurred transaction costs, including direct acquisition costs, involuntary termination costs and facility related costs, of approximately $5.7 million. The transaction included the purchase of the stock of BDM UK Limited (BDM UK) and its thirteen wholly-owned European subsidiaries, the acquisition of assets and assumption of certain liabilities of the businesses in Germany and North America, and TRW Systems' agreement not to compete for the next 3 years. QAD funded the purchase price received by BDM International, Inc. and TRW Inc. with cash generated from operating activities. Pursuant to the agreement, BDM UK became a wholly-owned subsidiary of QAD. The acquisition is accounted for as a business combination and, accordingly, the total purchase price is allocated to the acquired assets, including goodwill and other intangible assets and liabilities at their fair values as of November 12, 2002. Our Consolidated Statements of Operations do not include revenue or expenses related to the acquisition prior to November 12, 2002.

SUBSEQUENT EVENTS

        Effective March 18, 2003, QAD amended its credit Facility with Foothill Capital to permit the purchase of up to $15 million of QAD Inc. common stock by no later than January 31, 2004. QAD has agreed to maintain minimum cash coverage of 120% of the Facility's term loan balance on a fiscal quarterly basis and minimum cash coverage of 85% of the Facility's term loan balance on a daily basis. Minimum cash coverage is defined as the cash and cash equivalents in the QAD investment account in the United States plus the unused borrowing availability under the revolving credit facility.

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        On March 20, 2003, QAD announced a plan to purchase up to 2.6 million shares of its common stock (subject to its rights under the securities laws to purchase additional shares representing up to 2% of its outstanding common stock) through a "Modified Dutch Auction" tender offer. The tender offer commenced on March 21, 2003, and consisted of an offer to purchase shares at a price between $4.75 per share and $5.25 per share, net to the seller in cash, without interest. The offer expired on April 21, 2003. Based on a final count by the depositary for the tender offer, QAD accepted for payment 2.6 million shares and exercised its right to accept for payment an additional 0.3 million shares for a total of approximately 2.9 million shares, at a purchase price of $5.00 per share. At April 25, 2003, as a result of completing the tender offer, QAD had approximately 31.6 million shares of common stock outstanding.

        QAD anticipates the maximum aggregate cost, including fees and expenses associated with the tender offer, to be approximately $15 million. Shares acquired pursuant to the tender offer returned to the status of authorized but unissued stock, and are available for the Company to issue in the future. The Company financed the tender offer from available cash.

        On March 21, 2003, QAD sold a 34-acre undeveloped parcel of property, in Carpinteria, California (Mark Hill) for $3.3 million, net of associated fees. The book value of this property was $1.8 million as of January 31, 2003. The resulting gain of $1.5 million will be recorded as a gain on disposal of property and will be included in "Other (income) expense" in our Consolidated Statement of Operations for the three months ending April 30, 2003. In connection with the sale of this property, and in accordance with the covenants of our Facility with Foothill Capital Corporation, we paid $0.5 million towards the outstanding balance of the Facility in March 2003.

CONTRACTUAL OBLIGATIONS

        The following summarizes our significant contractual obligations at January 31, 2003 and the effect these contractual obligations are expected to have on our liquidity and cash flows in future periods.

(1)

For additional information regarding the construction loan see the Liquidity and Capital Resources section above.

(2)

For additional information regarding the tender offer, see the Subsequent Events section above.

        We believe that the cash on hand, net cash provided by operating activities and the available borrowings under our existing credit facility and construction loan will provide us with sufficient resources to meet our current and long-term working capital requirements, debt service, tender offer and other cash needs.

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RECENT ACCOUNTING STANDARDS

        On February 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). Among other things, SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with its provisions. SFAS 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS 144.

        SFAS 142 also requires an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. If an indication exists that the reporting unit's goodwill may be impaired, the implied fair value of the reporting unit's goodwill must be compared to its carrying amount. This comparison was required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss is to be recognized as the cumulative effect of a change in accounting principle in our Consolidated Statement of Operations. Upon adoption of SFAS 142, we recognized a $1.1 million impairment charge related to goodwill that is reflected as a cumulative effect of accounting change in the Consolidated Statement of Operations for the year ended January 31, 2003. For further discussion related to SFAS 142, see note 3 within the Notes to Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K.

        Effective February 1, 2002, we adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). Among other things, SFAS 144 supersedes SFAS 121. However, SFAS 144 retains the fundamental provisions of SFAS 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS 121. Unlike SFAS 121, an impairment assessment under SFAS 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under SFAS 142. The adoption of SFAS 144 did not have a material impact on our financial statements.

        Also effective February 1, 2002, we adopted Financial Accounting Standards Board Emerging Issues Task Force No. 01-14, "Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred" (EITF 01-14). EITF 01-14 requires companies to characterize reimbursements received for out-of-pocket expenses incurred as revenue in the statement of operations. Comparative financial statements for prior periods include reclassifications to comply with the guidance of this announcement. The adoption of this EITF does not affect net income or loss in any past or future period, but will increase both services revenue and cost of maintenance, service and other revenue equally. Adoption of EITF 01-14 did not have a material impact on our total gross margin percentage. In implementing EITF 01-14, we reported $1.5 million in fiscal 2003 of reimbursements received for out-of-pocket expenses incurred as revenue and recharacterized $1.8 million and $2.1 million for the fiscal years ended January 31, 2002 and 2001, respectively.

        In July 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 supercedes EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability be recognized for those costs only when the liability is incurred, that is, when it meets the definition of a liability in the FASB's conceptual framework. SFAS 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. SFAS 146 is effective for exit or

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disposal activities that are initiated after December 31, 2002. The adoption of SFAS 146 did not have a material impact on our financial statements.

        In November 2002, the FASB issued Interpretation Number 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are effective for interim and annual periods ending after December 15, 2002. The recognition and initial measurement requirements of FIN 45 are effective prospectively for guarantees issued or modified after December 31, 2002. The adoption of the recognition and initial measurement requirements of FIN 45 did not have a material impact on our financial position, cash flows or results of operations.

        In December 2002, Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123" (SFAS 148) was issued. SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure requirements apply to all companies for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. We currently do not intend to transition to the use of a fair value method of accounting for stock-based employee compensation, but will provide the required disclosures as prescribed by SFAS 148. The adoption of SFAS 148 did not have a material impact on our financial statements.

        In August, 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). The statement requires entities to record the fair value of a liability for legal obligations associated with the retirement obligations of tangible long-lived assets in the period in which it is incurred. When the liability is initially recorded, the entity increases the carrying amount of the related long-lived asset. Over time, accretion of the liability is recognized each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS 143 is effective for fiscal years beginning after June 15, 2002. We do not expect the adoption of this statement to have a material impact on our financial condition or results of operations.

        In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS 145), which among other things provides guidance in reporting gains and losses from extinguishments of debt and accounting for leases. QAD will adopt SFAS 145 in fiscal year 2004. We do not expect the adoption of this standard to have a material impact on our financial position or results of operations.

        In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). This interpretation 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

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from other parties. The recognition and measurement provisions of FIN 46 are effective for newly created variable interest entities formed after January 31, 2003, and for existing variable interest entities on the first interim or annual reporting period beginning after June 15, 2003. We do not expect the adoption of FIN 46 to have a material impact on our consolidated financial statements.

FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK

HISTORICAL FLUCTUATIONS IN QUARTERLY RESULTS AND POTENTIAL FUTURE SIGNIFICANT FLUCTUATIONS

        Our quarterly revenue, expenses and operating results have varied significantly in the past. We anticipate that such fluctuations will continue in the future as a result of a number of factors, many of which are outside our control. The factors affecting these fluctuations include demand for our products and services, the size, timing and structure of significant licenses purchased by customers, market acceptance of new or enhanced versions of our software products and products that operate with our products, the publication of opinions about us, our products and technology by industry analysts, the entry of new competitors and technological advances by competitors, delays in localizing our products for new markets, delays in sales as a result of lengthy sales cycles, changes in operating expenses, foreign currency exchange rate fluctuations, changes in pricing policies by us or our competitors, customer order deferrals in anticipation of product enhancements or new product offerings by us or our competitors, the timing of the release of new or enhanced versions of our software products and products that operate with our products, changes in the method of product distribution and licensing (including the mix of direct and indirect channels), product life cycles, changes in the mix of products and services licensed or sold by us, customer cancellation of major planned software development programs and general, regional or market economic factors.

        We have also historically recognized a substantial portion of our revenue from sales booked and shipped in the last month of a quarter. As a result, the magnitude of quarterly fluctuations in license fees may not become evident until late in, or at the end of, a particular quarter. If sales forecasted from a specific customer for a particular quarter are not realized in that quarter, we are unlikely to be able to generate revenue from alternate sources in time to compensate for the shortfall. As a result, a lost or delayed sale could have an adverse effect on our quarterly operating results. To the extent that significant sales occur earlier than expected, operating results for subsequent quarters may be adversely affected. We have also historically operated with little backlog for licenses because our products are generally shipped as orders are received. As a result, revenue from license fees in any quarter is substantially dependent on orders booked and shipped in that quarter and on sales by our distributors and other resellers. Sales derived through indirect channels are more difficult to predict and may have lower profit margins than direct sales.

        A significant portion of our revenue in any quarter may be derived from a limited number of large, non-recurring license sales.    We expect to continue to experience from time to time large, individual license sales, which may cause significant variations in quarterly license fees. We also believe that the purchase of our products is relatively discretionary and generally involves a significant commitment of a customer's capital resources. Therefore, a downturn in any potential customer's business could result in order cancellations that could have a significant adverse impact on our revenue and quarterly results. Moreover, declines in general economic conditions, worsening of the global political environment or failure of the current economic situation to improve, may continue to precipitate significant reductions in corporate spending for information technology, which could result in delays, cancellations or reductions of orders for our products.

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        Our service-related revenue may contribute to the quarterly fluctuations in our revenue. Additionally, the services business reduces our gross margins and services staffing increases our overhead.    During fiscal years 2002 and 2003, customer demand for QAD services declined primarily due to reduced license sales with which such services are associated. However, services revenue remains a substantial part of our business. While the expenses associated with services operations are relatively predictable, the revenues are dependent upon the timing and size of customer orders to provide the services. To the extent that we are not successful in securing orders from customers to provide services on a regular basis, our results may be negatively affected.

        Our expense level is relatively fixed and is based, in significant part, on expectations of future revenue.    Because our expense level is relatively fixed, if revenue levels are below expectations, expense could be disproportionately high as a percentage of total revenue. If this were to occur, operating results would be immediately and adversely affected and losses could occur.

        Because of the significant fluctuations in our revenue, period-to-period comparisons may not be meaningful.    Based upon the factors described above, we believe that our quarterly revenue, expenses and operating results are likely to vary significantly in the future, that period-to-period comparisons of our results of operations are not necessarily meaningful and that, as a result, these comparisons should not be relied upon as indications of future performance. Moreover, there can be no assurance that our revenue will grow in future periods or that we will be profitable on a quarterly or annual basis. We have in the past and may in the future experience quarterly losses.

RISKS ASSOCIATED WITH SALES CYCLE

        Our products involve a long sales cycle and the timing of sales is difficult to predict.    Because the licensing of our primary products generally involves a significant commitment of capital (which ranges from approximately $50,000 to several million dollars), the sales cycle associated with a customer's purchase of our products is generally lengthy (with a typical duration of 4 to 15 months), varies from customer to customer and is subject to a number of significant risks over which we have little or no control. These risks include customers' budgetary constraints, timing of budget cycles, concerns about the introduction of new products by us or our competitors and general economic downturns that can result in delays or cancellations of information systems investments. Due in part to the strategic nature of our products, potential customers are typically cautious in making product acquisition decisions. We have seen the results of this in the recent economic downturn in the global economy. The decision to license our products generally requires us to provide a significant level of education to prospective customers regarding the uses and benefits of our products, and we must frequently commit substantial presales support resources. While we believe we have established a robust global support and services organization over the past several years, we continue to rely on third-parties for a substantial portion of our implementation and systems support services, which in the past caused sales cycles to be lengthened and may have resulted in the loss of sales. Further, the uncertainty of the outcome of our sales efforts and the length of our sales cycles could still result in substantial fluctuations in operating results. If sales forecasted from a specific customer for a particular quarter are not realized in that quarter, then we are unlikely to be able to generate revenue from alternative sources in time to compensate for the shortfall. As a result, and due to the relatively large size of some orders, a lost or delayed sale could have an adverse effect on our quarterly operating results.

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DEPENDENCE ON THIRD-PARTY PRODUCTS

        We are dependent on third-party products, particularly Progress software.    Our MFG/PRO software is written in a programming language that is proprietary to Progress Software Corporation (Progress). We have entered into a license agreement with Progress that provides us and each of our subsidiaries, among other things, with the perpetual, worldwide, royalty-free right to use the Progress programming language to develop and market our software products. We recently signed a three year extension of the agreement with Progress under which Progress provides support to us at no charge. The extension was effective July 2002.

        Our success is dependent upon Progress continuing to develop, support and enhance its programming language, its toolset and database, as well as the continued market acceptance of Progress as a standard database program. We have in the past and may in the future experience product release delays because of delays in the release of Progress products or product enhancements. Any of these delays could have an adverse effect on our business, operating results and financial condition. MFG/PRO software employs Progress programming interfaces that allow MFG/PRO software to operate with Oracle Corporation database software. However, our MFG/PRO software does not run within programming environments other than Progress and our customers must acquire rights to Progress software in order to use MFG/PRO software.

        We also are reliant on the Java programming language (Java) in developing and supporting our products. For instance, the user interface for MFG/PRO software products employs Java. The QAD eQ software is also written in Java and is implemented using the IBM WebSphere components. The success of QAD eQ is dependent upon the continued acceptance of Java as well as on the continued support of the WebSphere components product by IBM and its acceptance in the market. The failure to successfully incorporate Java in new products, to convert MFG/PRO software to Java-interfaced Progress software components, to extend the MFG/PRO Java user interfaces, or of Java or Enterprise Java Beans technology to achieve market acceptance, could have an adverse effect on us.

        We also maintain a number of development and product alliances with other third-parties. These alliances include software developed to be sold in conjunction with QAD software products, technology developed to be included in or encapsulated within QAD software products and numerous third-party software programs that generally are not sold with QAD software but interoperate directly with QAD software through application program interfaces. We generally enter into joint development agreements with our third-party software development partners that govern ownership of the technology collectively developed. Each of our partner agreements and third-party development or reseller agreements contain strict confidentiality and non-disclosure provisions for the service provider, end-user and third-party developer. Our third-party development agreements contain restrictions on the use of QAD technology outside of the development process. Any failure to establish or maintain successful relationships with these third-party software providers or third-party installation, implementation and development partners or failure of these third-party software providers to develop and support their software could have an adverse effect on us.

RAPID TECHNOLOGICAL CHANGE

        The market for our software products is characterized by rapid technological advances, evolving industry standards in computer hardware and software technology, changes in customer requirements and frequent new product introductions and enhancements.    Customer requirements for products can change rapidly as a result of innovations or changes within the computer hardware and software industries, the introduction of new products and technologies (including new hardware platforms and programming languages) and the emergence, evolution or widespread adoption of

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industry standards. For example, increasing commercial use of the Internet is giving rise to new customer requirements and new industry standards. Our future success will depend upon our ability to continue to enhance our current product line and to develop and introduce new products that keep pace with technological developments, satisfy increasingly sophisticated customer requirements and achieve market acceptance. In particular, we believe our future success will depend on our ability to convert our products to component objects, as well as our ability to develop products that will operate and interoperate across the Internet and assist customers to operate with the Extended Enterprise and the Manufacturing Community. We cannot ensure that we will be successful in developing and marketing, on a timely and cost-effective basis, product enhancements or new products that respond to technological advances by others. Our products may also not achieve market acceptance. Our failure to successfully develop and market product enhancements or new products could have an adverse effect on us.

        New software releases and enhancements may adversely affect our software sales.    While we generally take steps to avoid interruptions of sales due to the pending availability of new products, customers may delay their purchasing decisions in anticipation of the general availability of new or enhanced QAD software or other software, which could have an adverse effect on us. The actual or anticipated introduction of new products, technologies and industry standards can also render existing products obsolete or unmarketable or result in delays in the purchase of those products. As a result, the life cycles of our products are difficult to estimate. We must respond to developments rapidly and incur substantial product development expenses. Any failure by QAD to anticipate or respond adequately to developments in technology or customer requirements, or any significant delays in introduction of new products, could result in a loss of revenue. Moreover, significant delays in the general availability of new releases, significant problems in the installation or implementation of new releases, or customer dissatisfaction with new releases could adversely affect us.

QAD eQ AND OTHER COLLABORATIVE COMMERCE STRATEGY SOLUTIONS

        The market for QAD eQ and other collaborative commerce strategy solutions is uncertain.    A significant element of our strategy is the acceptance of our QAD eQ product and the development of other Distributed Order Management software, a series of new solutions targeted at the extended enterprise and manufacturing community needs. We have devoted substantial resources to developing QAD eQ and MFGx.net, and working with third-parties to develop software components that may be included as part of or encapsulated within QAD eQ and MFGx.net solutions. However, we cannot ensure our other planned releases for QAD eQ or other Distributed Order Management software solutions, whether developed by us or third-parties, will achieve the performance standards required for commercialization. In addition, our QAD eQ software or other Distributed Order Management software solutions may not achieve market acceptance or be profitable. If QAD eQ software or our other planned Distributed Order Management software solutions do not achieve such performance standards or do not achieve market acceptance, we would be adversely affected.

        The underlying technology for our new applications is new and dependent on specific technologies.    QAD eQ software is being designed and built using the object-oriented technology of Sun Microsystems—Java 2 Enterprise Edition (J2EE). QAD eQ software depends on the commercial success of platforms that support Enterprise Java Beans in Application Server environments such as the IBM WebSphere development environment and the WebSphere Business Components framework supplied by IBM. Similar to the way our MFG/PRO software is dependent upon Progress language and database technology, our QAD eQ software is dependent on Java, Enterprise Java Beans, and technology supplied by IBM.

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        Object-oriented applications, such as QAD eQ software, are characterized by technology development styles and programming languages that differ from those used in traditional software applications. We believe that the flexibility inherent in object-based functionality will play a key role in the competitive manufacturing, distribution, financial, planning and service/support management information technology strategies of customers in our targeted industry segments. We cannot ensure that we will be successful in developing our other planned Distributed Order Management software on a timely basis or that this software or our QAD eQ software will achieve market acceptance.

MARKET CONCENTRATION

        Our target markets are concentrated and, as a result, we are dependent upon achieving success in those markets.    We have made a strategic decision to concentrate our product development and sales and marketing in certain primary vertical industry segments—automotive, consumer products, electronics, food and beverage, industrial and medical. An important element of our strategy is to achieve technological and market leadership recognition for our software products in these segments. The failure of our products to achieve or maintain substantial market acceptance in one or more of these segments could have an adverse effect on us. If any of these targeted industry segments experience a material slowdown in expansion or in prospects for future growth, that downturn would adversely affect the demand for our products. A discussion of concentration of our credit risk is contained in note 1 of our Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K.

DEPENDENCE UPON KEY PERSONNEL

        We are dependent upon key personnel.    Our future operating results depend in significant part upon the continued service of a relatively small number of key technical and senior management personnel, including Founder, Chairman of the Board and President, Pamela M. Lopker, and Chief Executive Officer, Karl F. Lopker, neither of whom is bound by an employment agreement. Pamela and Karl Lopker are married to each other and, as of April 28, 2003, jointly own approximately 58% of QAD's outstanding common stock. The loss of one or more of these or other key individuals could have an adverse effect on QAD. We do not currently have key-person insurance covering any of our employees.

        Our future success also depends on our continuing ability to attract and retain other highly qualified technical and managerial personnel. Competition for these personnel can be intense, and we have at times experienced difficulty in recruiting and retaining qualified personnel. We may be unable to retain our key technical and managerial employees and we may not be successful in attracting, assimilating and retaining other highly qualified technical and managerial personnel in the future. The loss of any member of our key technical and senior management personnel or the inability to attract and retain additional qualified personnel could have an adverse effect on us.

DEPENDENCE UPON DEVELOPMENT AND MAINTENANCE OF SALES AND MARKETING CHANNELS

        We are dependent upon the development and maintenance of sales and marketing channels.    We sell and support our products through direct and indirect sales organizations throughout the world. In the past, we have made significant expenditures in the expansion of our sales and marketing force, primarily outside the United States. More recently, we have tailored our sales and marketing expenditures to align more closely with our targeted vertical markets. Our future success will depend in part upon the productivity of our sales and marketing force and our ability to continue to attract, integrate, train, motivate and retain new sales and marketing personnel. Competition for sales and marketing personnel in the software industry can be intense. We cannot

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ensure that we will be successful in hiring these personnel in accordance with our plans. Neither can there be assurance that our recent and planned expenses in sales and marketing will ultimately prove to be successful or that the incremental revenue generated will exceed the significant incremental costs associated with these efforts. In addition, our sales and marketing organization may not be able to compete successfully against the significantly more extensive and better funded sales and marketing operations of many of our current and potential competitors. If we are unable to develop and manage our sales and marketing force effectively, we could be adversely affected.

        Our indirect sales channel consists of over 40 distributors and sales agents worldwide (sales channels). We do not grant exclusive distribution rights to our sales channels. Our sales channels primarily sell independently to companies within their geographic territory but may also work in conjunction with our direct sales organization. We will need to maintain and expand our relationships with our existing sales channels to expand the distribution of our products. Current or future distributors and sales agents may not provide the level and quality of expertise and service required to successfully license QAD software products. We also may not be able to maintain effective, long-term relationships with them. In addition, our selected sales channels may not continue to meet our sales needs. Further, they may market software products in competition with us in the future or otherwise reduce or discontinue their relationships with or support of us and our products. Any failure to successfully maintain our existing indirect sales channel relationships or to establish new relationships in the future could have an adverse effect on us. In addition, if any of our distributors and sales agents exclusively adopts a product other than QAD software products, or if any distributor or sales agent reduces its sales efforts relating to QAD software products or increases support for competitive products, we could be adversely affected.

RELIANCE ON RELATIONSHIPS WITH THIRD-PARTIES

        We are reliant on relationships with third-parties.    We have established strategic relationships with a number of consulting and systems integration organizations that we believe are important to our worldwide sales, marketing, service and support activities and the implementation of our products. We are aware that these third-party providers do not provide system integration services exclusively for our products and in many instances these firms have similar, and often more established, relationships with our principal competitors. We expect to continue to utilize third-party system integrators.

        QAD global services is a significant part of our business that offers technical, implementation and learning services to our customers. We have designed our service organization so that we can subcontract our services to partners for specific technical needs and also subcontract services from our partners to meet our capacity requirements. We believe this method allows for additional flexibility in ensuring our customers' needs for services are met. These relationships also assist us in keeping pace with the technological and marketing developments of major software vendors, and, in certain instances, provide us with technical assistance for our product development efforts.

        Numerous organizations provide services in connection with QAD software. These third-parties may not provide the level and quality of service required to meet the needs of our customers and we may not be able to maintain an effective, long-term relationship with these third-parties. Further, we cannot ensure that these third-party implementation providers, many of which have significantly greater financial, technical, personnel and marketing resources than QAD, will not market software products in competition with us in the future or will not otherwise reduce or discontinue their relationships with or support of us and our products. Any failure to maintain our existing relationships or to establish new relationships in the future, or the failure of these third-parties to meet the needs of our customers, could have an adverse effect on us. In addition, if these third-parties exclusively adopt a product or technology other than QAD software

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products or technology, or if these third-parties reduce their support of QAD software products and technology or increase such support for competitive products or technology, we could be adversely affected.

        We typically enter into separate agreements with each of our service partners.    These agreements provide our partners with the non-exclusive right to promote and market QAD software products and to provide training, installation, implementation and other services for QAD software products within a defined territory for a specified period of time (generally two years). Our installation and implementation partners generally do not receive fees for the sale of QAD software products unless they participate actively in a sale as a sales agent. However, they generally are permitted to set their own rates for their installation and implementation services, and we typically do not collect a royalty or percentage fee from these partners on services performed. We also enter into similar agreements with our distribution partners that grant these partners the non-exclusive right, within a specified territory, to market, license, deliver and support QAD software products. In exchange for these distributors' services, we grant a discount to the distributor for the license of our software products.

        We also rely on third-parties for the development or interoperation of key components of our software so that users of QAD software products will obtain the functionality demanded. These research and product alliances develop software to be sold in conjunction with QAD software products, technology to be included in or encapsulated within QAD software products and numerous third-party software programs that generally are not sold with QAD software products, but interoperate directly with QAD software through application program interfaces. We generally enter into reseller or joint development agreements with our third-party software development partners that govern ownership of the technology collectively developed. Each of our partner agreements and third-party development agreements contains strict confidentiality and non-disclosure provisions for the service provider, end-user and third-party developer. Our third-party development agreements contain restrictions on the use of our technology outside of the development process. Any failure to establish or maintain successful relationships with these third-party software providers or these third-party implementation and development partners or the failure of these third-party software providers to develop and support their software could have an adverse effect on us.

INTEGRATION OF ACQUIRED BUSINESS

        On November 12, 2002, we acquired the TRW Integrated Supply Chain Solutions (TRW ISCS) business covering ten European countries and North America from BDM International, Inc. and TRW Inc. Prior to the acquisition, TRW ISCS, a QAD alliance partner, operated businesses that primarily focused on systems installation, integration and services in connection with MFG/PRO software. As a result of the acquisition, we expanded our existing presence in Europe and obtained a new direct presence in four additional European countries: Belgium, Portugal, Spain and Switzerland.

        As of January 31, 2003, we have incurred transaction costs estimated at approximately $5.7 million associated with this acquisition, related mainly to involuntary employee termination and facility related costs. There is no assurance that there will not be substantially greater transaction costs recognized than originally estimated.

        Given the difficulty in combining operations of over 13 entities in 10 countries, substantial effort is required to assimilate the operations, financial and accounting methods and IT systems, and to integrate key personnel from the acquired business. This acquisition may cause disruptions in our operations and divert management's attention from day-to-day operations. We may not realize the anticipated benefits of this acquisition, our profitability may suffer due to integration related costs, and we may incur unanticipated liabilities or losses generated by the acquired business.

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RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS

        Our operations are international in scope, which exposes us to additional risk, including currency-related risk.    For the last three fiscal years, we derived approximately 55% of our total revenue from sales outside the United States. Of our approximately 5,200 licensed sites in more than 80 countries, as of January 31, 2003, over 70% are outside the United States. Our foreign exchange risk is discussed in Item 7A of this Annual Report on Form 10-K.

        Continued terrorism threats and war in the Middle East have had a negative impact on the global economy.    The adverse consequences of war and the effects of terrorism have had a negative affect on the global economy. Prolonged conflict could negatively impact our ability to raise additional funds if needed and our revenues will be adversely affected if consumers and businesses continue to cut back spending due to conflicts or such threats.

        Recent fears of contagious infectious disease have affected travel to and from certain regions of the world.    In light of Severe Acute Respiratory Syndrome (SARS), some companies have restricted or banned nonessential travel to and from Asia and cancelled or postponed major tradeshows. Limited face-to-face contact with suppliers, customers and potential customers may result in lost or delayed sales and/or services that could have an adverse effect on our operating results.

PRINCIPAL STOCKHOLDERS

        Our principal stockholders are also directors.    As of April 28, 2003, Pamela and Karl Lopker jointly and beneficially owned approximately 58% of our outstanding common stock. Recovery Equity Investors II, L.P. (REI) owned approximately 9% of our outstanding common stock. On a combined basis, current directors and executive officers beneficially owned approximately 67% of the common stock. Pamela and Karl Lopker currently constitute two of the seven members of the board of directors and are also officers of QAD in their capacity as President and CEO, respectively. A general partner of the general partner of REI is also on the QAD board of directors.

IMPACT OF RECENT LEGISLATION

        Recent corporate bankruptcies, accounting irregularities, and alleged insider wrong doings have negatively affected general confidence in the stock markets and economy, further depressing the stock market and causing the U.S. Congress to enact sweeping legislation.    In an effort to address these growing investor concerns, the U.S. Congress passed, and on July 30, 2002, President Bush signed into law, the Sarbanes-Oxley Act of 2002. This sweeping legislation primarily impacts investors, the public accounting profession, public companies, including corporate duties and responsibilities, and securities analysts. Some highlights include establishment of a new independent oversight board for public accounting firms, enhanced disclosure requirements for public companies and their insiders, required certification by CEO's and CFO's of SEC financial filings, prohibitions on certain loans to officers and directors, efforts to curb potential securities analysts' conflicts of interest, possible forfeiture of profits by certain insiders in the event financial statements are restated, enhanced board audit committee requirements, protections provided under a formal system to handle complaints to the audit committee, and enhanced civil and criminal penalties for violations of securities laws. It is difficult to predict the impact of such legislation, however it will increase the costs of securities law compliance for publicly traded companies such as us.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Foreign Exchange.    In fiscal year 2003, approximately 30% of our revenue was denominated in foreign currencies compared to 35% and 40% in fiscal 2002 and 2001, respectively. We also incur a significant portion of our expenses in currencies other than the United States dollar. As a result, fluctuations in the values of the respective currencies relative to the currencies in which we generate revenue could adversely affect us.

        Fluctuations in currencies relative to the United States dollar have affected and will continue to affect period-to-period comparisons of our reported results of operations. In fiscal 2003, 2002 and 2001, foreign currency transaction and remeasurement (gains) and losses totaled $0.8 million, $0.5 million and $(1.5) million, respectively, and are included in other (income) expense in our Consolidated Statements of Operations. Due to constantly changing currency exposures and the volatility of currency exchange rates, we may experience currency losses in the future, and we cannot predict the effect of exchange rate fluctuations upon future operating results. Although we do not currently undertake hedging transactions, we may choose to hedge a portion of our currency exposure in the future, as we deem appropriate.

        Interest Rates.    We invest our surplus cash in a variety of financial instruments, consisting principally of bank time deposits and short-term marketable securities with maturities of less than one year. QAD's investment securities are held for purposes other than trading. Cash balances held by subsidiaries are invested in short-term time deposits with the local operating banks. Additionally, our short-term and long-term debt bears interest at variable rates.

        We prepared sensitivity analyses of our interest rate exposure and our exposure from anticipated investment and borrowing levels for fiscal 2004 to assess the impact of hypothetical changes in interest rates. Based upon the results of these analyses, a 10% adverse change in interest rates from the 2003 fiscal year-end rates would not have a material adverse effect on the fair value of investments and would not materially impact our results of operations or financial condition for the next fiscal year.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The response to this item is included in Item 15 of this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        Information regarding the directors is incorporated by reference to the section entitled "Election of Directors" appearing in our Definitive Proxy Statement for the Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission (Commission) within 120 days after the end of our fiscal year 2003. Certain information with respect to persons who are or may be deemed to be executive officers of the Registrant is set forth under the caption "Executive Officers of the Registrant" in Part I of this Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

        Information regarding executive compensation is incorporated by reference to the information set forth under the caption "Executive Compensation" in our Definitive Proxy Statement for the Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of our fiscal year 2003.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

        Information regarding security ownership of certain beneficial owners and management is incorporated by reference to the information set forth under the caption "Stock Ownership of Directors, Executive Officers and Certain Beneficial Owners" in our Definitive Proxy Statement for the Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of our fiscal year 2003.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        Information regarding certain relationships and related transactions is incorporated by reference to the information set forth under the caption "Certain Transactions" in our Definitive Proxy Statement for the Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of our fiscal year 2003.

ITEM 14. CONTROLS AND PROCEDURES

        Evaluation of disclosure controls and procedures.    Under the supervision and with the participation of QAD management, including the Chief Executive Officer and Chief Financial Officer, QAD has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-14(c) within 90 days of the filing date of this annual report (the "Evaluation Date"). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

        Changes in internal controls.    Subsequent to the Evaluation Date, there were no significant changes in our internal controls or in other factors that could significantly affect our internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A) 1. FINANCIAL STATEMENTS

        The following financial statements are filed as a part of this Annual Report on Form 10-K:

QAD INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

(A) 2. FINANCIAL STATEMENT SCHEDULES

The following financial statement schedule is filed as a part of this Annual Report on Form 10-K:

All other schedules are omitted because they are not required or the required information is presented in the financial statements or notes thereto.

(A) 3. EXHIBITS

        See the Index of Exhibits at page 80.

(B) REPORTS ON FORM 8-K

        On November 27, 2002 (as amended by Amendment No. 1 to Form 8-K filed on January 27, 2003, and as amended by Amendment No. 2 to Form 8-K filed on February 14, 2003), QAD Inc. filed a Current Report on Form 8-K reporting under Item 2 and 7 related to the Registrant's acquisition of the TRW ISCS business.

        On November 27, 2002, QAD Inc. filed a Current Report on Form 8-K reporting under Item 7 and 9 related to the Registrant's press release announcing 2003 fiscal third quarter results and guidance for the 2003 fiscal fourth quarter and full year, respectively.

        On November 20, 2002, QAD Inc. filed a Current Report on Form 8-K reporting under Item 7 and 9 related to the Registrant's press release announcing anticipated 2003 fiscal third quarter results in comparison to previously reported financial guidance.

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INDEPENDENT AUDITORS' REPORT

The Board of Directors of
QAD Inc.:

        We have audited the accompanying consolidated balance sheets of QAD Inc. and subsidiaries as of January 31, 2003 and 2002 and the related consolidated statements of operations, stockholders' equity and comprehensive loss, and cash flows for each of the years in the three-year period ended January 31, 2003. These consolidated financial statements are the responsibility of QAD's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

        We conducted our audits 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 audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of QAD Inc. and subsidiaries at January 31, 2003 and 2002 and the results of their operations and their cash flows for each of the years in the three-year period ended January 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

        As discussed in note 3 to the consolidated financial statements, the company implemented Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," on February 1, 2002.

KPMG LLP

Los Angeles, California
March 3, 2003

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QAD INC.

CONSOLIDATED BALANCE SHEETS

AS OF JANUARY 31, 2003 AND 2002

(IN THOUSANDS, EXCEPT SHARE DATA)

See accompanying notes to consolidated financial statements.

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QAD INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED JANUARY 31, 2003, 2002 AND 2001

(IN THOUSANDS, EXCEPT PER SHARE DATA)

See accompanying notes to consolidated financial statements.

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QAD INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS

FOR THE YEARS ENDED JANUARY 31, 2003, 2002 AND 2001

(IN THOUSANDS)