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 Item 1A entitled “Risk Factors.” 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 and other information described in this Annual Report on Form 10-K and 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 2009.

INTRODUCTION

The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K.

OVERVIEW

QAD Inc. was founded in 1979 and is a provider of enterprise software applications, professional services and application support that address the requirements of manufacturing companies primarily in six target industries. With a goal of delivering software applications that enable its customers to operate their businesses more efficiently, embrace emerging business practices and comply with legislative requirements, QAD has built a customer base of more than 6,100 licensed sites that support their businesses using QAD software and services. QAD employs over 1,500 people around the world who develop products and work with customers to implement and support QAD Enterprise Applications. QAD’s vision for the future of manufacturing is a market where all suppliers, manufacturers and customers collaborate seamlessly to eliminate inefficiencies and automate processes at all stages of the supply chain. This vision for what QAD terms the Perfect Lean Market is key to QAD’s product direction and is unique in the enterprise software industry.

QAD Enterprise Applications, which includes modules formerly marketed as MFG/PRO, is QAD’s core product suite. QAD Enterprise Applications has been developed to address the needs of manufacturers in six principal industry segments: automotive, consumer products, high technology, food and beverage, industrial products and life sciences. We develop our products and services through consultation with customers and partners, ensuring that we are knowledgeable of requirements in the markets we serve. A key focus for QAD is addressing the needs of global manufacturers, enabling them to implement software applications to run their businesses almost anywhere in the world and meet local requirements while maintaining control of their business as a whole.

QAD has a design philosophy of developing software applications that are easy to implement as well as easy to use. Combined with focused implementation tools and methodology, we believe this design philosophy allows customers to implement QAD solutions faster than other competing solutions at lower operating costs over time.

In addition to the delivery of QAD Enterprise Applications, QAD has developed a global services and application support capability with over 600 skilled personnel located throughout the world. QAD’s services and support capabilities are critical in delivering the value of its solutions to customers.

QAD has been at the leading edge of a number of technologies aimed at supporting its vision for the Perfect Lean Market. For example, QAD provides collaborative supply chain capabilities delivered on demand through its Supply Visualization service. QAD has built on this method of delivering its software applications and in 2007 announced the capability to deliver QAD Enterprise Applications in an on demand deployment environment. With QAD On Demand, customers can connect to their application over a network or via the Internet and do not have to provide or support their own computer systems. We see the on demand deployment option gaining acceptance in the market. QAD has considered this trend in delivering our software applications to address customers’ requirements.

CRITICAL ACCOUNTING POLICIES

We consider certain accounting policies related to revenue recognition, accounts receivable allowances, goodwill and intangible assets, capitalized software development costs, valuation of deferred tax assets and tax contingency reserves and stock-based compensation expense to be critical policies due to the significance of these items to our operating results and the estimation processes and management judgment involved in each. Historically, estimates described in our critical accounting policies that have required significant judgment and estimation on the part of management have been reasonably accurate.

	•		Revenue Recognition. We recognize revenue in accordance with the American Institute of Certified Public Accountant’s Statement of Position (SOP) No. 97-2, “Software Revenue Recognition,” (SOP No. 97-2) 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. 104, “Revenue Recognition.”
			We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service or product has been delivered to the customer and no uncertainties exist surrounding product acceptance; (3) the collection of our fees is probable; and (4) the amount of fees to be paid by the customer is fixed or determinable.
			Our typical payment terms vary by region. Occasionally, payment terms of up to one year may be granted for software license fees to customers with an established history of collections without concessions.
			License Revenue. Provided all other revenue recognition criteria have been met, we recognize license revenue on delivery using the residual method. When a license agreement includes one or more elements to be delivered at a future date, we recognize revenue in one of two ways. If vendor-specific objective evidence (VSOE) of the fair value of all undelivered elements exists, the revenue for the undelivered elements is deferred and the residual amount is allocated to the license revenue and recognized when the above criteria have been met. If VSOE for the fair value of the undelivered elements does not exist, revenue is deferred and recognized when VSOE of fair value for undelivered elements has been established or when delivery of all elements occurs. VSOE of the fair value is determined based on historical evidence of stand-alone sales of these elements to customers.
			Revenue from our subscription product offerings, including our On Demand product, is recognized ratably over the contract period when the customer does not have the right to take possession of the software. For subscription arrangements where the customer has the right and ability to take possession of the software, revenue is recognized in accordance with SOP No. 97-2 using the residual method.
			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, as applicable.
			Maintenance Revenue. Revenue from ongoing customer support and product updates is recognized ratably over the term of the maintenance period, which in most instances is one year. Software license updates provide customers with rights to unspecified software product upgrades, maintenance releases and patches released during the term of the support period on a when-and-if available basis. Product support includes Internet access to technical content, as well as Internet and telephone access to technical support personnel.

			Services Revenue. Revenue from technical and implementation services is recognized as services are performed for time-and-materials contracts. At times our license and support arrangements include consulting implementation services sold separately under consulting engagement contracts. Consulting revenues from these arrangements are generally accounted for separately from software license revenues, because the arrangements qualify as service transactions as defined in SOP 97-2 and we have VSOE of the fair value for services. When the services are determined to not have been sold separately from our license and support arrangements, we allocate revenue to services based on the VSOE determined value of the services. Revenues for consulting services are generally recognized as the services are performed based on time and materials incurred during each reporting period. If there is a significant uncertainty about the project completion or receipt of payment for the consulting services, revenue is deferred until the uncertainty is resolved.
			On occasion, we enter into fixed-price services arrangements. We estimate the proportional performance on contracts with fixed or “not to exceed” fees on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project.
			When an arrangement does not qualify for separate accounting of the software license and consulting transactions, the software license revenue is recognized together with the consulting services based on contract accounting using either the percentage-of-completion or completed-contract method.
	•		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 due to the inability of the customer to pay. We also provide an additional reserve based on historical data including analysis of write-offs and other known factors. The allowance for sales adjustments primarily relates to reserves required to adjust revenue to the amount that will actually be realized. Provisions to the allowance for doubtful accounts are included in bad debt expense in general and administrative expenses and provisions for sales adjustments are recorded against revenue. Actual results may differ from our estimates for a variety of reasons.
	•		Goodwill and Intangible Assets. Goodwill and other intangible assets at January 31, 2008 were $22.6 million and $1.1 million, respectively, and accounted for 10% of our total assets. All of our goodwill and intangible assets have been accounted for under the provisions of Statement of Financial Accounting Standards (SFAS) 142, “Goodwill and Other Intangible Assets” (SFAS 142). The excess cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. SFAS 142 requires that goodwill and intangible assets deemed to have indefinite lives not be amortized, but rather be tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate potential impairment. Finite-lived intangible assets are required to be amortized over their useful lives and are subject to impairment evaluation under the provisions of SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144).
			Goodwill is tested for impairment at least annually utilizing an “income approach” methodology, which utilizes a discounted cash flow method to determine the fair value of the reporting unit based on the present value of future benefits the reporting unit is expected to generate, and the “publicly-traded guideline company method” or the “market approach,” which utilizes financial and valuation ratios of publicly traded companies that are considered comparable to QAD to determine if our valuation ratios are a fair measure of QAD’s enterprise value. In assessing the recoverability of goodwill and intangible assets, we estimate future revenue and cash flow attributable to our reporting units and other factors in determining the fair value of our reporting units. These estimates contain management’s best estimates, using appropriate and customary assumptions available at the time. For further discussion of goodwill, see note 4 within the Notes to Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K.
			Other intangible assets are tested for impairment when, in our judgment, events or changes in circumstances suggest that the carrying value of an asset may not be fully recoverable in accordance with SFAS 144. Other intangible assets arise from business combinations and consist of customer relationships, restrictive covenants related to employment agreements and trade names that are amortized, on a straight-line basis, over periods of up to five years. For further discussion of other intangible assets, see note 4 within the Notes to Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K.

	•		Capitalized Software Development Costs. We capitalize software development costs incurred once technological feasibility has been achieved in the form of a working model. These costs are primarily related to the localization and translation of our products. 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. We also capitalize software purchased from third parties or through business combinations as acquired software technology if such software has reached technological feasibility. Capitalized software costs are amortized on a product-by-product basis and charged to “Cost of license fees”. The amortization is the greater of straight-line basis over three years, the expected useful life, or computed using a ratio of current revenue for a product compared to the estimated total of current and future revenues for that product. 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 costs of a particular software product exceed the estimated net realizable value of that asset is reported as a charge to the statement of income. This review requires management judgment regarding future cash flows. If these estimates or their related assumptions require updating in the future, we may be required to recognize write-offs for these assets.
	•		Valuation of Deferred Tax Assets and Tax Contingency Reserves. SFAS 109, “Accounting for Income Taxes” (SFAS 109), requires that the carrying value of our deferred tax assets reflects an amount that is more likely than not to be realized. At January 31, 2008, we had $22.7 million of deferred tax assets, net of valuation allowances, consisting of $36.4 million of gross deferred tax assets offset by valuation allowances of $13.7 million. In assessing the likelihood of realizing tax benefits associated with deferred tax assets and the need for a valuation allowance, we consider the weight of all available evidence, both positive and negative, including expected future taxable income and tax planning strategies that are both prudent and feasible. There was a net decrease of valuation allowances recorded in fiscal 2008 of $0.2 million. 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.
			Effective February 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (FIN 48). Under FIN 48, we recognize a tax position when we determine that it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions that are more likely than not to be sustained, we measure the tax position at the largest amount of benefit that has a greater than 50 percent likelihood of being realized when it is ultimately settled. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition with respect to tax positions. We reflect interest and penalties related to income tax liabilities as income tax expense.
			We have reserves for taxes to address potential exposures involving tax positions that could be challenged by taxing authorities, even though we believe that the positions taken on previously filed tax returns are appropriate. The tax reserves are reviewed as circumstances warrant and adjusted as events occur that affect our potential liability for additional taxes. We are subject to income taxes in the U.S. and in numerous foreign jurisdictions, and in the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain.
	•		Stock-based Compensation Expense. SFAS 123 (revised 2004), “Share-Based Payment” (SFAS 123R) requires that share-based payment transactions with employees be accounted for using a fair-value-based method and expensed ratably over the vesting period of the stock instrument.
			Stock-based compensation expense is based on the fair values of all stock-based awards as of the grant date. Determining the expense of stock-based awards at the grant date requires judgment, including estimating volatility, the expected life of the award, the percentage of awards that will be forfeited and other inputs. If actual forfeitures differ significantly from the estimates, stock-based compensation expense and our results of operations could be materially impacted.
			Equity instruments issued to non-employees in exchange for services are recorded in accordance with the provisions of Emerging Issues Task Force Issue No. 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” (EITF 96-18). Under this guidance, the fair value of the equity instruments is re-measured each period until the instruments vest. The incremental change is recorded as an expense in the period in which the change occurred.

RECENT ACCOUNTING STANDARDS

Fair Value Measurements

The FASB has released two statements which address fair value accounting. SFAS 157, “Fair Value Measurements” (SFAS 157), defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115” (SFAS 159), allows an entity to elect to measure many financial instruments and certain other items at fair value. Both statements are effective for fiscal 2009. The FASB has deferred the effective date of SFAS 157 as it relates to fair value measurement requirements for nonfinancial assets and liabilities that are not measured at fair value on a recurring basis to fiscal years beginning after December 15, 2008. We do not expect the adoption of these statements to have a material effect on our consolidated financial statements.

Business Combinations

In December 2007, the FASB issued SFAS 141 (revised 2007), “Business Combinations” (SFAS 141R). The objective of the Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141R requires that all business combinations be accounted for by applying the acquisition method (previously referred to as the purchase method), and most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in business combinations to be recorded at “full fair value”. SFAS 141R also broadens the definition of a business and changes the treatment of direct acquisition-related costs from being included in the purchase price to instead being generally expensed if they are not costs associated with issuing debt or equity securities. SFAS 141R is effective beginning February 1, 2009, and will be applied prospectively to any new business combination.

Minority Interests

In December 2007, the FASB issued SFAS 160, “Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements, amendment of ARB 51” (SFAS 160). The objective of the Statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 specifies that noncontrolling interests (previously referred to as minority interests) be reported as a separate component of equity, not as a liability or other item outside of equity, which changes the accounting for transactions with noncontrolling interest holders. SFAS 160 is effective beginning February 1, 2009, and will be applied prospectively to all noncontrolling interests, including any that arose before that date.

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 Income:

		Years Ended January 31,
		2008				2007				2006
Revenue:
License fees			23	%			23	%			26	%
Maintenance and other			49				52				52
Services			28				25				22
Total revenue			100				100				100
Costs and expenses:
Cost of license fees			4				4				3
Cost of maintenance, service and other revenue			38				36				36
Sales and marketing			27				27				27
Research and development			16				17				15
General and administrative			13				13				12
Amortization of intangibles from acquisitions			—				—				—
Total costs and expenses			98				97				93
Operating income			2				3				7
Other income			—				(2	)			—
Income before income taxes			2				5				7
Income tax expense (benefit)			—				2				(2	)
Net income			2	%			3	%			9	%

Comparison of fiscal 2008 revenue to fiscal 2007

Total revenue for fiscal 2008 was $262.7 million, an increase of $27.1 million, or 12%, from $235.6 million in fiscal 2007. This increase in total revenue was attributable to increases in all revenue categories. Our customers are widely dispersed and no single customer accounted for more than 10% of total revenue in any of the last three fiscal years. Holding foreign currency exchange rates constant to fiscal 2007, fiscal 2008 revenue would have been approximately $255.1 million, representing an increase of $19.5 million, or 8%. All revenue categories were positively impacted by currency fluctuations in fiscal 2008, reflecting the impact of the weakening U.S. dollar when compared to other currencies. These fluctuations were primarily due to favorable fluctuations in the euro, Australian dollar, Brazilian real and Thai baht. Revenue outside the North America region as a percentage of total revenue was 56% during fiscal 2008, compared to 57% during fiscal 2007. While revenue increased year over year in all geographic regions, North America and Asia Pacific experienced the largest increases in revenue. In fiscal 2008, revenue from sales of our acquired products from our fiscal 2007 acquisitions of Precision and FBO Systems, Inc. (FBOS), contributed approximately $13.9 million to total revenue. In fiscal 2007, revenue from sales of these products was included from the acquisition date and contributed $3.2 million to total revenue.

License revenue was $61.5 million for fiscal 2008, an increase of $7.1 million, or 13%, from $54.4 million in fiscal 2007. Sales from Precision and FBOS acquired products contributed $4.3 million in license revenue in fiscal 2008 compared to $0.4 million in fiscal 2007. Holding foreign currency exchange rates constant to fiscal 2007, fiscal 2008 license revenue would have been approximately $59.9 million, representing a $5.5 million, or 10%, increase from last year. All of our geographic regions experienced increased license revenue, with the largest increase in the Asia Pacific region. One of the metrics that management uses to measure license revenue performance is the number of customers which have placed sizable license orders in the period. In fiscal 2008, 46 customers placed license orders totaling more than $0.3 million, of which nine exceeded $1.0 million. This compared to 36 customers who placed license orders totaling more than $0.3 million in fiscal 2007, four of which exceeded $1.0 million. Discounts granted to customers for software licenses remained consistent during fiscal 2008 when compared to fiscal 2007.

Products are generally shipped as orders are received or within a short period thereafter and, accordingly, we have historically operated with little or no license backlog. Because of the generally short cycle between order and shipment, we believe that our backlog as of any particular date is not significant or meaningful.

Maintenance and other revenue was $128.2 million for fiscal 2008, representing an increase of $5.5 million, or 4%, in comparison to $122.7 million for fiscal 2007. Sales from Precision and FBOS acquired products contributed $2.8 million in maintenance and other revenue in fiscal 2008 compared to $0.3 million in fiscal 2007. Holding exchange rates constant to those prevailing in fiscal 2007, fiscal 2008 maintenance and other revenue would have been approximately $125.4 million, representing a $2.7 million, or 2%, increase over last year, due in part to increases related to additional license sales during the current year partially offset by cancellations. Year over year, maintenance and other revenue increased in the North America and Asia Pacific geographic regions and were relatively unchanged in the Latin America and Europe, Middle East and Africa (EMEA) geographic regions. One of the ways management measures our success in securing contract renewals is by measuring the number of customer sites with active contracts as of the end of the previous reporting period and comparing this to the number of those same customers that have renewed, or are in the process of renewing, as of the current period end. Our maintenance contract renewal rate has remained consistent, in excess of 90%, for fiscal years 2008, 2007 and 2006.

Services revenue was $73.1 million for fiscal 2008, representing an increase of $14.7 million, or 25%, when compared to last year at $58.4 million. Sales from Precision and FBOS acquired products contributed $6.8 million in services revenue in fiscal 2008 compared to $2.5 million in fiscal 2007. Holding exchange rates constant to those prevailing during fiscal 2007, fiscal 2008 services revenue would have been approximately $69.8 million, reflecting an $11.4 million, or 20%, increase from last year. Services revenue increased across all geographic regions year over year except for the EMEA region which remained relatively unchanged.

Comparison of fiscal 2007 revenue to fiscal 2006

Total revenue for fiscal 2007 was $235.6 million, an increase of $10.1 million, or 4%, from $225.5 million in fiscal 2006. This increase was primarily due to higher services and maintenance and other revenue, offset by lower license revenue. Holding foreign currency exchange rates constant to fiscal 2006, fiscal 2007 revenue would have been approximately $234.1 million, representing an increase of $8.6 million, or 4%. All revenue categories were positively impacted by currency fluctuations in fiscal 2007, primarily due to favorable fluctuations in the Brazilian real, Thai baht and euro, partially offset by unfavorable fluctuations in the Japanese yen. Revenue outside the North America region as a percentage of total revenue was 57% during fiscal 2007, compared to 58% during fiscal 2006. Revenue increased year over year in all geographic regions except Asia Pacific. Revenue was favorably impacted by the acquisitions of Precision and FBOS. Revenue from sales of their acquired products were included from the acquisition date and contributed approximately $3.2 million to total revenue, including approximately $0.4 million in license revenue, $0.3 million in maintenance and other revenue and $2.5 million in services during fiscal 2007.

License revenue was $54.4 million for fiscal 2007, a decrease of $3.5 million, or 6%, from $57.9 million in fiscal 2006. Holding foreign currency exchange rates constant to fiscal 2006, fiscal 2007 license revenue would have been approximately $54.2 million, representing a $3.7 million, or 6%, decrease from fiscal 2006. We experienced decreases in our North America, Asia Pacific and Latin America geographic regions, partially offset by an increase in our EMEA region. One of the metrics that management uses to measure license revenue performance is the number of customers that have placed sizable license orders in the period. During fiscal 2007, 36 customers each placed aggregate license orders totaling more than $0.3 million, compared to 35 customers in fiscal 2006. Not including orders greater than $2 million (of which there was one in fiscal 2007 and three in fiscal 2006), our software license discounts in fiscal 2007 were comparable to fiscal 2006.

Maintenance and other revenue was $122.7 million for fiscal 2007, representing an increase of $5.6 million, or 5%, in comparison to $117.1 million for fiscal 2006. Holding exchange rates constant to those prevailing in fiscal 2006, fiscal 2007 maintenance and other revenue would have been approximately $122.2 million, representing a $5.1 million, or 4%, increase over fiscal 2006, due in part to increases related to additional license sales during fiscal 2007 partially offset by cancellations. Maintenance and other revenue increased across all geographic regions year over year.

Services revenue was $58.4 million for fiscal 2007, representing an increase of $8.0 million, or 16%, when compared to fiscal 2006 at $50.4 million. Holding exchange rates constant to those prevailing during fiscal 2006, fiscal 2007 services revenue would have been approximately $57.8 million, reflecting a $7.4 million, or 15%, increase from the previous year. Services revenue increased across all geographic regions year over year. Contributing to the increase in services revenue was revenue earned by companies we acquired during fiscal 2007. Two of those acquisitions, Precision and FBOS, generated a total of $2.5 million in services revenue during fiscal 2007 in periods subsequent to the acquisition.

Comparison of costs and expenses—fiscal 2008, 2007 and 2006

We adopted SFAS 123R on February 1, 2006, the beginning of our fiscal 2007. We elected the modified prospective transition method as permitted by SFAS 123R and accordingly prior periods’ results have not been restated to reflect the impact of SFAS 123R. Under this method, we recognize stock-based compensation for all new awards and modifications to existing awards that are granted on or subsequent to February 1, 2006 and all previously granted awards that vest on or subsequent to February 1, 2006. Stock-based compensation is measured based on the fair values of all stock-based awards on the dates of grant. For the year ended January 31, 2006, we accounted for stock-based compensation in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), and related interpretations including FIN 44, “Accounting for Certain Transactions Involving Stock Compensation.” Accordingly, compensation expense was recorded on the date of grant only if the then current market price of the underlying stock exceeded the exercise price or in connection with the modification to outstanding awards and/or changes in grantee status.

The following table sets forth, for the periods indicated, reported stock compensation expense for the years ended January 31, 2008, 2007 and 2006.

		Years Ended January 31,
(in thousands)		2008				2007				2006
Stock-based compensation expense:
Cost of maintenance, service and other revenue		$	1,104			$	990			$	110
Sales and marketing			1,458				1,290				—
Research and development			861				918				—
General and administrative			2,783				2,263				98
Total stock-based compensation expense		$	6,206			$	5,461			$	208

Total Cost of Revenue. Total cost of revenue (combined cost of license fees and cost of maintenance, services and other revenue) was $110.9 million for fiscal 2008, $93.5 million for fiscal 2007 and $88.7 million for fiscal 2006, and as a percentage of total revenue was 42% for fiscal 2008, 40% for fiscal 2007 and 39% for fiscal 2006. Holding exchange rates constant to the most recent preceding fiscal year, total cost of revenue would have been approximately $106.8 million and $92.7 million for fiscal 2008 and 2007, respectively, reflecting the impact of the weakening U.S. dollar in comparison to other currencies. At constant exchange rates, the total cost of revenue percentage for fiscal 2008 and 2007 would have been unchanged at 42% and 40%, respectively. Changes in the cost of revenue as a percentage of total revenue was primarily due to changes in revenue mix as services revenue, which has lower margins, grew at a higher rate than license and maintenance and other revenue.

The non-currency related increase in total cost of revenue of $13.3 million from fiscal 2007 to fiscal 2008 was primarily due to increased services costs incurred to generate additional services revenue. Services related costs consisted of higher personnel costs of $7.0 million, primarily due to increased headcount and higher bonus expense. In addition, third party contractor expenses and travel expenses increased $2.2 million and $2.0 million, respectively.

Total cost of revenue increased $4.8 million from fiscal 2006 to fiscal 2007. Holding foreign currency exchange rates constant to those in fiscal 2006, total cost of revenue would have increased approximately $4.0 million. At constant exchange rates, the total cost of revenue percentage for fiscal 2007 and 2006 would have been 40% and 39%, respectively. Changes in the cost of revenue as a percentage of total revenue were primarily due to changes in revenue mix as license revenues carry higher margins in comparison to support and services revenues.

Cost of revenue included employee separation costs of $0.4 million, $0.2 million and $1.2 million in fiscal 2008, 2007 and 2006, respectively. These costs related predominantly to EMEA services employees in fiscal 2008, North America support employees in fiscal 2007 and EMEA services employees in fiscal 2006.

Sales and Marketing. Sales and marketing expense was $71.0 million, $63.8 million and $61.4 million for fiscal 2008, 2007 and 2006, respectively. Holding foreign currency exchange rates constant to fiscal 2007, fiscal 2008 sales and marketing expense would have been approximately $68.5 million, representing a non-currency related increase of $4.7 million, or 7%. The increase of $4.7 million from fiscal 2007 to fiscal 2008 primarily related to higher commissions and bonuses of $3.4 million due to accelerators associated with our higher revenue levels and higher sales agent commissions of $0.8 million. Fiscal 2008 also included increased salary expense of $1.4 million associated with an increase in the number of sales and marketing employees, higher travel expenses of $0.5 million and increased recruiting expenses of $0.4 million. Higher travel and recruiting expenses were primarily due to the increased hiring and training of our sales and marketing team. These increases were partially offset by lower marketing expense of $1.6 million, due in part to not holding a European Explore Conference in fiscal 2008, and lower severance of $0.5 million.

Sales and marketing expense increased $2.4 million from fiscal 2006 to fiscal 2007. Holding foreign currency exchange rates constant to those in fiscal 2006, total sales and marketing expense would have increased approximately $1.8 million from $61.4 million. The $1.8 million increase from fiscal 2006 to fiscal 2007 primarily related to higher commissions and bonuses of $1.4 million. Fiscal 2007 also included stock compensation expense of $1.3 million. Sales and marketing expenses had increases in travel of $0.6 million, systems of $0.3 million and marketing of $0.2 million. These increases in expenses were partially offset by decreases of $0.8 million in recruiting, $0.6 million in severance and $0.6 million in sales agent fees.

Research and Development. Research and development expense, which is managed on a global basis, was $41.1 million, $40.1 million and $32.7 million in fiscal 2008, 2007 and 2006, respectively. Holding foreign currency exchange rates constant to fiscal 2007, fiscal 2008 R&D expense would have been approximately $39.7 million, representing a decrease of $0.4 million, or 1%. The decrease of $0.4 million from fiscal 2007 to fiscal 2008 was primarily related to lower travel costs of $0.5 million.

Research and development expense increased $7.4 million from fiscal 2006 to fiscal 2007. Holding foreign currency exchange rates constant to those in fiscal 2006, total research and development expense would have increased approximately $7.2 million. The increase of $7.2 million from fiscal 2006 to fiscal 2007 was mainly related to an increase in personnel expenses of $6.3 million due to increased headcount. During fiscal 2007, we expanded the headcount at our R&D centers in China and India. We also acquired R&D headcount, primarily from the Soft Cell N.V. (Soft Cell) and Precision acquisitions. In addition, fiscal 2007 included stock compensation expense of $0.9 million.

General and Administrative. General and administrative expense was $33.5 million, $29.7 million, and $26.8 million for fiscal 2008, 2007 and 2006, respectively. Holding foreign currency exchange rates constant to fiscal 2007, fiscal 2008 general and administrative expense would have been approximately $32.6 million, representing an increase of $2.9 million, or 10%. The $2.9 million increase from fiscal 2007 to 2008 was primarily due to higher personnel expenses of $1.9 million, primarily related to salary and bonus expense, and $1.4 million in higher professional fees related to tax consulting. These amounts were partially offset by lower bad debt expense of $0.4 million.

General and administrative expenses increased $2.9 million from fiscal 2006 to fiscal 2007. Holding foreign currency exchange rates constant to those in fiscal 2006, general and administrative expenses would have increased approximately $2.7 million. The $2.7 million increase from fiscal 2006 to 2007 was primarily related to higher stock compensation expense in fiscal 2007 of $2.1 million. In addition, personnel expenses increased $1.3 million primarily related to increased headcount throughout all regions.

Amortization of Intangibles from Acquisitions. Amortization of intangibles from acquisitions totaled $0.7 million, $0.4 million and $0.3 million in fiscal years 2008, 2007 and 2006, respectively. The year over year changes were due to the intangible assets acquired during fiscal 2007 from our acquisitions of Precision, FBOS and Bisgen Ltd. (Bisgen). Amortization increased slightly from fiscal 2006 to fiscal 2007 due to a partial year of amortization from the acquisitions in fiscal 2007 and the increase from fiscal 2007 to fiscal 2008 was due to fiscal 2008 being the first full year of amortization. We expect amortization expense for intangibles in fiscal 2009 to be similar to amortization expense in fiscal 2008.

Total Other Income. Total other income was $0.2 million, $3.3 million and $0.3 million in fiscal 2008, 2007 and 2006, respectively. The $3.1 million unfavorable change from fiscal 2007 to fiscal 2008 was primarily related to a $2.6 million unfavorable foreign exchange change caused by the weakening of the U.S. dollar against foreign currencies. Lower interest income of $0.3 million also contributed to the decrease. Lower interest income was primarily due to lower average balances in our investment accounts.

The $3.0 million favorable change from fiscal 2006 to fiscal 2007 was due to higher interest income of $1.1 million related to both higher interest rates and higher balances in our investment accounts, lower interest expense of $0.5 million primarily due to lower debt balances as we repaid our line of credit in the second quarter of fiscal 2006 and foreign currency exchange gains of $1.6 million, primarily related to favorable changes in the euro, Mexican peso and Japanese yen, partially offset by the unfavorable change in the Brazilian real.

Income Tax Expense. We recorded income tax expense of $0.3 million and $4.1 million in fiscal 2008 and fiscal 2007, respectively, and an income tax benefit of $4.6 million in fiscal 2006. Our income tax expense decreased from fiscal 2007 to fiscal 2008 primarily due to a decrease in the effective rate associated with changes in the jurisdictional mix of income and research and development credits that were applied in the fourth quarter of fiscal 2008.

Amounts in fiscal 2006 reflect the reversal of tax valuation allowances of $10.5 million. We have not provided tax benefits for certain jurisdictions in loss positions due to management’s determination that it was more likely than not that tax benefits associated with previously reserved net deferred tax assets in such jurisdictions would not be realized.

For further information regarding income taxes, see note 7 within the Notes to Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K.

LIQUIDITY AND CAPITAL RESOURCES

We have historically financed our operations and met our capital expenditure requirements through cash flows from operations, the sale of equity securities and borrowings.

Our principal sources of liquidity are cash flows generated from operations and our cash and equivalents balances. Cash and cash equivalents, including restricted cash, were $45.6 million and $56.8 million at January 31, 2008 and 2007, respectively. At January 31, 2008 and 2007, our cash equivalents consisted of registered money market funds and time delineated deposits. We had no investments in securities with an underlying exposure to sub-prime mortgages nor did we hold auction rate notes or similar securities. Approximately 60% of our cash, cash equivalents and restricted cash were held in U.S. dollar denominated accounts as of January 31, 2008 and 2007.

Our working capital decreased to $8.8 million as of January 31, 2008 from $14.8 million as of January 31, 2007. The decrease in working capital of $6.0 million resulted from a $15.3 million increase in current liabilities partially offset by a $9.4 million increase in current assets. The $15.3 million increase in current liabilities was primarily due to a $12.3 million increase in deferred revenue, a result of our increased sales in fiscal 2008 including higher annual maintenance billings. In addition, other current liabilities increased $2.5 million due to higher compensation related accruals.

The $9.4 million increase in current assets was primarily due to a $14.2 million increase in accounts receivable, a result of higher billings in fiscal 2008 compared to fiscal 2007, and a $6.4 million increase in other current assets primarily related to an increase in our current deferred tax assets. These increases were partially offset by an $11.2 million decrease in cash, cash equivalents and restricted cash. The changes in cash, cash equivalents and restricted cash included stock repurchases of $18.7 million, capital expenditures of $5.2 million, the first Precision anniversary payment of $3.7 million and dividends paid of $3.2 million. These cash outflows were partially offset by cashflow from operations of $15.9 million and cash received from the exercise of stock awards of $2.9 million.

As of January 31, 2007, we had restricted cash of $2.6 million held in an escrow account related to the Precision acquisition. During fiscal 2008, $1.5 million of restricted cash was returned to QAD and $1.1 million was released to Precision. For additional information, see note 2 within the Notes to Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K.

We have historically calculated accounts receivable days’ sales outstanding (DSO), using the countback, or last-in first-out, method. This method calculates the number of days of billed revenue that the accounts receivable balance as of period end represents. When reviewing the performance of our business units, DSO under the countback method is used by management. It is management’s belief that the countback method best reflects the relative health of our accounts receivable as of a given quarter-end or year-end because of the cyclical nature of our billings. Our billing cycle includes high annual maintenance renewal billings at year-end that will not be recognized as earned revenue until future periods.

DSO under the countback method was 58 days at January 31, 2008, compared to 56 days at January 31, 2007. DSO using the average method, which utilizes the accounts receivable balance and earned revenue in the calculation, was 99 days and 93 days at January 31, 2008 and 2007, respectively.

Cash Flows

The following is a summary of cash flows for fiscal 2008, 2007 and 2006:

Operating Activities

Cash provided by operating activities was $15.9 million, $18.9 million and $28.6 million in fiscal 2008, 2007 and 2006, respectively. The decrease in operating cash flow from fiscal 2007 to 2008 primarily resulted from lower net income of $1.9 million, an increase in accounts receivable of $9.7 million due to higher billings and a decrease in accounts payable of $2.6 million. These decreases in operating cash flow were partially offset by increases in operating cash flow resulting from an increase in deferred revenue of $9.1 million due to higher maintenance billings in fiscal 2008 and depreciation and amortization expenses of $1.2 million.

The decrease in operating cash flow from fiscal 2006 to 2007 primarily resulted from lower net income of $13.3 million, which was partially offset by non-cash expenses for stock compensation of $5.3 million. Accounts receivable increased $4.5 million primarily related to increased billings. Other changes to net cash provided by operating activities included a decrease in cash flow from changes in other assets primarily related to deferred tax assets and an increase in our deferred revenue balance year over year. Fiscal 2006 cash flow from operations included a non-cash tax benefit of $11.5 million related to the reversal of valuation allowances and contingency reserves.

In the first quarter of fiscal 2006, we moved our data center from Carpinteria, California, to our corporate headquarters in Santa Barbara, California. The move resulted in $1.1 million in exit costs incurred during fiscal 2006. Throughout fiscal 2007, the fair market value of the estimated sublease income continued to decline and as a result we incurred additional charges of $0.7 million. We secured a sublease agreement with a tenant in fiscal 2008.

Investing Activities

Cash used in investing activities for fiscal 2008 and 2007 was $9.7 million and $16.2 million, respectively. These amounts primarily related to costs associated with acquisitions and purchases of property and equipment. In fiscal 2006, investing activities provided $1.8 million of cash, primarily due to sales of marketable securities.

During fiscal 2007, in order to expand our product offering, we acquired the rights to certain assets of Soft Cell and three businesses: Bisgen, Precision and FBOS. In fiscal 2007 we paid $8.5 million in net cash related to these acquisitions and had an increase in restricted cash of $2.6 million resulting from the acquisition of Precision. In fiscal 2008 we paid $4.7 million in net cash related to these acquisitions and $1.5 million of restricted cash was returned to us. For additional information regarding our acquisitions, see note 2 within the Notes to Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K.

Purchases of property and equipment for fiscal 2008, 2007 and 2006 were $5.2 million, $4.6 million and $7.2 million, respectively. Purchases of property and equipment in both fiscal 2008 and 2007 primarily relate to computer equipment and software. Fiscal 2006 included capital investments of $2.1 million for the construction of and building improvements for our company headquarters on property owned by QAD in Santa Barbara, California.

We spent $1.4 million, $1.5 million and $4.1 million, in fiscal 2008, 2007 and 2006, respectively, related to capitalized software costs. Fiscal 2008 and 2007 capitalized software expenditures primarily related to internal costs incurred to integrate and localize purchased technology and internally developed products. Fiscal 2006 cash outflows primarily related to technology purchased from Soft Cell and related internal costs incurred to integrate and localize internally developed products.

Historically, we invested funds in short term marketable securities on which we earned interest income. In fiscal 2006 we sold $13.0 million in marketable securities and deposited the proceeds into our cash account.

Financing Activities

Cash used in financing activities was $18.4 million, $7.3 million and $24.3 million for fiscal 2008, 2007 and 2006, respectively. The fiscal 2008 activity included repurchases of 2.2 million shares of QAD common stock for $18.7 million and dividend payments of $3.2 million to holders of QAD common stock. Of the 2.2 million shares repurchased in fiscal 2008, one million shares were repurchased in a single privately negotiated transaction. Additionally, we repaid $0.3 million of debt related to our mortgage. These cash payments were partially offset by $2.9 million received from stock exercises and $0.6 million from changes in cash overdraft.

The fiscal 2007 activity included outflows for the repurchase of 0.8 million shares of QAD common stock for $6.0 million and $3.2 million of dividend payments to owners of QAD common stock. Additionally, we made total cash payments of $0.4 million to the minority shareholders of our Thailand subsidiary, which consisted of $0.2 million in dividends and $0.2 million in reduction of our minority interest liability. These cash payments were partially offset by $1.7 million received from stock option exercises and $1.0 million from changes in cash overdraft. We also repaid $0.3 million of debt related to our mortgage.

The fiscal 2006 activity included the purchase of 2 million shares of QAD common stock from Recovery Equity Investors II, L.P. for $7.40 per share for total cash consideration of $14.8 million. During fiscal 2006, we repaid the outstanding balance of $7.6 million on our Comerica Bank credit facility. In addition, we made $0.2 million in principal payments related to other debt during the year. Proceeds from the issuance of stock were $2.8 million, primarily related to the exercise of stock options. We implemented a dividend program during fiscal 2005 and paid $3.3 million in dividends during fiscal 2006.

We believe that the cash on hand, net cash provided by operating activities and the available borrowings under our existing credit facility will provide us with sufficient resources to meet our current and long-term working capital requirements, debt service, dividend payments and other cash needs for at least the next twelve months.

CONTRACTUAL OBLIGATIONS

The following summarizes our significant contractual obligations at January 31, 2008 and the effect these contractual obligations are expected to have on our liquidity and cash flows in future periods.

		Year Ended January 31,
		2009				2010				2011				2012				2013				Thereafter				Total
		(In millions)
Notes payable		$	0.2			$	0.3			$	0.3			$	0.3			$	0.3			$	15.8			$	17.2
Notes payable interest payments			1.1				1.1				1.1				1.1				1.1				1.5				7.0
Lease obligations			8.6				5.6				3.4				2.4				1.5				3.5				25.0
Obligations associated with acquisitions			5.3				—				—				—				—				—				5.3
Total		$	15.2			$	7.0			$	4.8			$	3.8			$	2.9			$	20.8			$	54.5

Credit Facility

Effective April 7, 2005, we entered into an unsecured loan agreement with Comerica Bank. The agreement provides a three-year commitment for a $20 million line of credit (the Facility). The maximum amount that can be borrowed under the Facility is subject to a borrowing base calculation of 1.5 times the four-quarter trailing earnings before interest, taxes, depreciation and amortization (EBITDA), less the total amount of letters of credit and other similar obligations. At January 31, 2008, the maximum that could have been borrowed under the Facility was $20 million. We pay an annual commitment fee of between 0.25% and 0.50% calculated on the average unused portion of the $20 million Facility. The rate is determined by our ratio of funded debt to our 12-month trailing EBITDA.

The Facility provides that we will maintain certain financial and operating covenants which include, among other provisions, maintaining a minimum liquidity ratio of 1.3 to 1.0, a minimum 12-month trailing EBITDA of $10 million and a minimum cash balance in the United States of $10 million. Borrowings under the Facility bear interest at a floating rate based on LIBOR or prime plus the corresponding applicable margins, ranging from 0.75% to 1.75% for the LIBOR option or -0.25% to 0.25% for the prime option, depending on our funded debt to 12-month trailing EBITDA ratio. At January 31, 2008, a prime rate borrowing would have had an effective rate of 5.75% and a 30-day LIBOR borrowing would have had an effective rate of approximately 3.89%.

As of January 31, 2008, there were no borrowings under the Facility and we were in compliance with the financial covenants of the Facility, as amended.

Effective April 10, 2008, we entered into an unsecured loan agreement with Bank of America, N.A. The agreement provides a three-year commitment for a $20 million line of credit (the New Facility). We will pay an annual commitment fee of between 0.25% and 0.50% calculated on the average unused portion of the $20 million New Facility. The rate is determined by our ratio of funded debt to our 12-month trailing EBITDA.

The New Facility provides that we will maintain certain financial and operating covenants which include, among other provisions, a minimum total leverage ratio of 1.5 to 1.0, a minimum liquidity ratio of 1.3 to 1.0, a minimum 12-month trailing EBITDA of $10 million and a maximum fixed charge coverage ratio of 2.00 to 1.00. Borrowings under the New Facility bear interest at a floating rate based on LIBOR or prime plus the corresponding applicable margins, ranging from 0.75% to 1.75% for the LIBOR option or -0.25% to 0.25% for the prime option, depending on our funded debt to 12-month trailing EBITDA ratio.

Notes Payable

In July 2004, we entered into a loan agreement with Mid-State Bank & Trust. The loan had an original principal amount of $18.0 million and bears interest at a fixed rate of 6.5%. This loan is a non-recourse loan, which is secured by real property located in Santa Barbara, California. The terms of the loan provide that we will make 119 monthly payments consisting of principal and interest totaling $115,000 and one final principal payment of $15.4 million. The loan matures in July 2014. A portion of these proceeds were used to repay our then-existing construction loan with Santa Barbara Bank and Trust. The balance of the note payable at January 31, 2008 was $17.2 million.

Lease Obligations

We lease certain office facilities, office equipment and automobiles under operating lease agreements. Future minimum rental payments under non-cancelable operating lease commitments with terms of more than one year are included in the above table of contractual obligations. For further discussion of our leased office facilities, see Item 2 entitled “Properties” included elsewhere in this Annual Report on Form 10-K.

Obligations Associated with Acquisitions

In connection with the acquisitions of Precision and Bisgen in fiscal 2007, part of the purchase price consideration for each of these companies included deferred payments. Consideration for Precision included total deferred payments of $7.2 million. In September 2007, we made the first anniversary payment of $3.7 million and the second anniversary payment of $3.5 million is due to be paid in September 2008. Consideration for Bisgen included deferred payments of $0.7 million. In fiscal 2008, we paid $0.1 million and an additional $0.6 million is due to be paid in fiscal 2009.

We made a final payment of $1.2 million to buy out a minority interest shareholder in our Thailand subsidiary. The $1.2 million payment was made in the first quarter of fiscal 2009.

ITEM 7A.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Exchange Rates. In fiscal years 2008 and 2007 approximately 30% of our revenue was denominated in foreign currencies compared to 35% in fiscal 2006. We also incurred approximately 45% of our expenses in currencies other than the U.S. dollar in each of the last three fiscal years. 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 U.S. dollar have affected, and will continue to affect, period-to-period comparisons of our reported results of operations. In fiscal 2008, 2007 and 2006, foreign currency transaction and remeasurement (gains) losses totaled $0.9 million, $(1.7) million and $(0.1) million, respectively, and are included in “Other (income) expense, net” in our Consolidated Statements of Income. 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. Our investment securities are held for purposes other than trading. When invested, cash balances held by subsidiaries are invested in short-term time deposits with 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 2008 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 2008 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.

ITEM 9A.		CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

QAD maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by QAD in reports that it files or submits under the Securities Exchange Act of 1934 (the Exchange Act) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. QAD’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of QAD’s disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, QAD’s principal executive officer and principal financial officer have concluded that QAD’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective at the reasonable assurance level.

(b) Management’s Report on Internal Control Over Financial Reporting

QAD’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. QAD’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. QAD’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of QAD’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that QAD’s receipts and expenditures are being made only in accordance with authorizations of QAD’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of QAD’s assets that could have a material effect on the financial statements.

Management has assessed the effectiveness of QAD’s internal control over financial reporting as of January 31, 2008 based on the criteria described in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on management’s assessment, management has concluded that QAD’s internal control over financial reporting was effective as of January 31, 2008.

Our independent registered public accounting firm, KPMG, LLP, has audited our internal control over financial reporting as of January 31, 2008, as stated in its report included in this Annual Report on Form 10-K.

(c) Changes in Internal Control over Financial Reporting

Our annual report on Form 10-K for the fiscal year ended January 31, 2007, disclosed a material weakness relating to accounting for income taxes. In order to remediate this material weakness, during fiscal 2008, we: (1) completed a reorganization and increased staffing in the Corporate Tax department, (2) implemented additional review procedures, (3) engaged external tax advisors to assist in the review of our SFAS 109 calculations and (4) increased coordination between members of the Corporate Tax Department and Corporate Controller’s Office and other senior finance management. As a result of these actions, management has concluded that the Company has remediated the material weakness. Other than the changes described above, there were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

(d) Limitations on the Effectiveness of Controls

QAD’s management does not expect that its disclosure controls and procedures or its internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within QAD have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of QAD Inc.:

We have audited QAD Inc.’s internal control over financial reporting as of January 31, 2008 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). QAD Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying report entitled Management’s Report on Internal Control Over Financial Reporting included in Item 9A.(b). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, QAD Inc. maintained, in all material respects, effective internal control over financial reporting as of January 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of QAD Inc. and subsidiaries as of January 31, 2008 and 2007, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended January 31, 2008, and our report dated April 15, 2008 expressed an unqualified opinion on those consolidated financial statements.

		/s/ KPMG LLP

Los Angeles, California
April 15, 2008

ITEM 9B.		OTHER INFORMATION

None.

PART III

ITEM 10.		DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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 Item 1 of Part I of this Annual Report on Form 10-K.

Information regarding QAD directors is set forth in the section entitled “Election of Directors” appearing in our Definitive Proxy Statement for the Annual Meeting of Stockholders (Proxy Statement) to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended January 31, 2008, which information is incorporated herein by reference.

In addition, the other information required by Item 10 is incorporated by reference from the Proxy Statement.

ITEM 11.		EXECUTIVE COMPENSATION

Information regarding executive compensation is set forth under the caption “Executive Compensation” in the Proxy Statement, which information is incorporated herein by reference.

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 set forth under the caption “Stock Ownership of Directors, Executive Officers and Certain Beneficial Owners” in the Proxy Statement, which information is incorporated herein by reference.