9. STOCK-BASED COMPENSATION

Stock Plans Summary

On June 7, 2006, the shareholders approved the QAD Inc. 2006 Stock Incentive Program (“2006 Program”). The 2006 Program replaced the QAD 1997 Stock Incentive Program (“1997 Program”). The 2006 Program allows for equity awards in the form of incentive stock options, non-statutory stock options, restricted shares, rights to purchase stock, stock appreciation rights (“SARs”) and other stock rights. In connection with the Recapitalization and pursuant to the terms of the 2006 Program, the maximum number of authorized shares of stock to be issued or granted as equity awards under the 2006 Program was proportionately reduced by 50% to account for the effective reverse stock split ratio, of which 80% consisted of Class A Common Stock and 20% consisted of Class B Common Stock. All references to the number of shares, stock options, restricted shares, stock appreciation rights and related per-share amounts of the Company's common stock have been restated to reflect the effect of the Recapitalization for all periods presented. The shareholders authorized a maximum of 4,150,000 shares to be issued under the 2006 Program, of which 3,320,000 are reserved for issuance as Class A Common Stock and 830,000 are reserved for issuance as Class B Common Stock. As of January 31, 2012, 598,000 Class A Common Shares and 305,000 Class B Common Shares were available for issuance.

After the 2006 Program was adopted, the Company began issuing the majority of equity awards in the form of stock-settled SARs. A SAR is a contractual right to receive value tied to the post-grant appreciation of the underlying stock. Although the Company has the ability to grant stock-settled or cash-settled SARs, the Company has only granted stock-settled SARs. Upon vesting, a holder of a stock-settled SAR receives shares in the Company's common stock equal to the intrinsic value of the SAR at time of exercise. Economically, a stock-settled SAR provides the same compensation value as a stock option, but the employee is not required to pay an exercise price upon exercise of the SAR. Stock compensation expense, as required under ASC 718, is the same for stock-settled SARs and stock options. The Company also issues restricted stock units (“RSUs”) beginning in fiscal 2008.

Under the 1997 Program and the 2006 Program, non-statutory stock options and SARs have generally been granted for a term of eight years, they generally vest 25% after each year of service for four years and are contingent upon employment with the Company on the vesting date. Since February 1, 2006, there have been no grants of non-statutory stock options. RSUs granted to employees under the 2006 Program are generally released 25% after each year of service for four years and are contingent upon employment with the Company on the release date. Under the 2006 Program and 1997 Program, non-statutory stock options, SARs and RSUs granted to non-employee directors generally vest over one to four years and are contingent upon providing services to the Company. Stock based compensation is typically issued out of treasury shares.

Under both programs, officers, directors, employees, consultants and other independent contractors or agents of the Company or subsidiaries of the Company who are responsible for or contribute to the management, growth or profitability of its business are eligible for selection by the program administrators to participate. However, incentive stock options granted under the programs may only be granted to a person who is an employee of the Company or one of its subsidiaries.

Impact of Recapitalization

In connection with the Recapitalization, the Company's outstanding stock options, RSUs and SARs were adjusted to conform their terms to the Company's capital structure following implementation of the Recapitalization as follows: (i) each ten shares of stock covered by an outstanding option agreement, RSU or SAR agreement was converted, as nearly as possible, into equivalent rights to receive one share of Class B Common Stock and four shares of Class A Common Stock; and (ii) the exercise price per share of stock covered by an outstanding option agreement, RSU and SAR agreement shall be proportionately increased by 100% to account for the effective reverse stock split ratio of the Recapitalization. At January 31, 2012, outstanding under the 1997 Program, there were 340,000 non-statutory stock options to purchase Class A Common Stock and 85,000 non-statutory stock options to purchase Class B Common Stock. Effective with the adoption of the 2006 Program, no further awards were granted using the 1997 Program. At January 31, 2012, outstanding under the 2006 Program, there were 2,049,000 SARs to purchase Class A Common Stock and 397,000 SARs to purchase Class B Common Stock. In addition, at January 31, 2012, outstanding under the 2006 Program, there were 364,000 RSUs of Class A Common Stock and 50,000 RSUs of Class B Common Stock.

Exchange Program

On August 12, 2009, the Company completed a one-time Stock Option and Stock Appreciation Right Exchange Program (the “Program”). Pursuant to the terms of the Program, eligible participants were able to exchange outstanding stock options and SARs granted under QAD's 1997 and 2006 Stock Incentive Programs for a reduced number of new SARs. The stock options and SARs that were eligible for the Program had a per share exercise price above the fair market value of QAD common stock as of the first business day following the close of the exchange offer period. The eligible stock options and SARs were exchanged for a reduced number of SARs based on predefined exchange ratios. The new SARs were issued at a per share exercise price equal to the fair market value of the Company's common stock on August 13, 2009, the date of issuance.

Stock options and SARs to purchase 1,689,000 shares of the Company's common stock were tendered and accepted in the exchange offer, which expired August 12, 2009. These surrendered equity awards represent 79% of the total shares subject to equity awards eligible for exchange in the exchange offer at the beginning of the offer period or 85% of the total shares subject to equity awards eligible for exchange in the exchange offer at the close of the offer period. The surrendered equity awards were cancelled as of August 13, 2009. In exchange for these surrendered equity awards, the Company issued 770,000 new SARs at an exercise price of $7.82 (“New SARs”). A total of 343,000 shares were returned to the pool of shares available for issuance. The Company did not incur any incremental stock-based compensation expense nor will it incur any incremental stock-based compensation expense in the future as a result of the Program.

The exchange ratios (the “Exchange Ratios”) under the Program were determined at the commencement of the exchange period. The Exchange Ratios were intended to result in the issuance of New SARs with a fair value approximately equal to the fair value of the eligible stock options and SARs surrendered. The Black-Scholes-Merton valuation model was used to determine the fair value of the eligible stock options and SARs and the New SARs for purposes of determining the Exchange Ratios. Because the closing price of the Company's common stock increased over the course of the exchange period, the Exchange Ratios resulted in the issuance of New SARs with a fair value less than the fair value of the surrendered stock options and SARs. For purposes of the Black-Scholes-Merton valuation model, the expected life of the surrendered stock options and SARs was estimated to be the full remaining contractual term. The risk-free interest rate was based on the U.S. Treasury yield for a term consistent with the expected life. The volatility was based on the historical volatility of the Company's common stock for a period equal to the expected life. The dividend rate was based on the assumption of paying quarterly dividends at the same historical rate.

Stock- Based Compensation

The following table sets forth reported stock compensation expense included in the Company's Consolidated Statements of Income for the fiscal years ended January 31, 2012, 2011 and 2010.

	Years Ended January 31,
	2012		2011		2010
	(in thousands)
Stock-based compensation expense:
Cost of maintenance, subscription and other revenue	$	221	$	276	$	217
Cost of professional services		526		664		589
Sales and marketing		813		1,076		829
Research and development		667		846		622
General and administrative		2,280		2,441		2,335
Total stock-based compensation expense	$	4,507	$	5,303	$	4,592

The Company presents any benefits of realized tax deductions in excess of recognized compensation expense as cash flow from financing activities in the accompanying Consolidated Statement of Cash Flows. There were $33,000, $384,000 and zero excess tax benefits recorded for equity awards exercised in the fiscal years ended January 31, 2012, 2011 and 2010, respectively.

Option/SAR Information

The weighted average assumptions used to value SARs are shown in the following table.

	Years Ended January 31,
	2012			2011			2010 (5)
Expected life in years (1)		4.52			5.79			5.17
Risk free interest rate (2)		0.98	%		2.27	%		2.06	%
Volatility (3)		67	%		61	%		66	%
Dividend rate (4)		2.59	%		2.23	%		2.40	%

__________________________

(1)	The expected life of the New SARs was estimated to be the full remaining contractual term. Excluding the effect of the New SARs granted as a result of the Program, the weighted average expected life in years in fiscal 2010 was 4.78.

(2)	Excluding the effect of the New SARs granted as a result of the Program, the weighted average risk free rate in fiscal 2010 was 1.17%.

(3)	Excluding the effect of the New SARs granted as a result of the Program, the weighted average volatility in fiscal 2010 was 69%.

(4)	Excluding the effect of the New SARs granted as a result of the Program, the weighted average dividend rate in fiscal 2010 was 2.16%.

(5)	The valuation of the New SARs granted as a result of the Program is included in the calculations above.

The following table summarizes the activity for outstanding options and SARs for the fiscal years ended January 31, 2012, 2011 and 2010:

	Options/ SARs (in thousands)			Weighted Average Exercise Price per Share		WeightedAverageRemainingContractualTerm (years)		AggregateIntrinsic Value(in thousands)
Outstanding at January 31, 2009		2,984		$	15.98
Granted (1)		1,293			8.52
Exercised		(45	)		5.96
Expired		(172	)		15.60
Forfeited		(157	)		13.88
Cancelled (2)		(1,689	)		16.30
Outstanding at January 31, 2010		2,214		$	11.76
Granted		683			8.95
Exercised		(88	)		6.44
Expired		(58	)		10.42
Forfeited		(98	)		8.93
Outstanding at January 31, 2011		2,653		$	11.33
Granted		502			10.28
Exercised		(164	)		8.08
Expired		(46	)		14.28
Forfeited		(74	)		9.26
Outstanding at January 31, 2012		2,871		$	11.34		4.6	$	854
Vested and expected to vest at January 31, 2012 (3)		2,794		$	11.39		4.6	$	7,780
Vested and exercisable at January 31, 2012		1,519		$	12.97		3.0	$	3,360

____________

(1)	As a result of the Program a total of 770,000 SARs were granted during the third quarter of fiscal 2010 with an exercise price of $7.82.

(2)	Options and SARs cancelled during the third quarter of fiscal 2010 as a part of the Program.

(3)	The expected-to-vest options and SARs are the result of applying the pre-vesting forfeiture rate assumptions to total outstanding options and SARs.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the aggregate difference between the closing stock price of the Company's common stock based on the last trading day as of January 31, 2012 and the exercise price for in-the-money stock options and SARs) that would have been received by the holders if all stock options and SARs had been exercised on January 31, 2012. The total intrinsic value of stock options or SARs exercised in the years ended January 31, 2012, 2011 and 2010 was $0.5 million, $0.3 million and $0.2 million, respectively. The weighted average grant date fair value per share of SARs granted in the years ended January 31, 2012, 2011 and 2010 was $4.51, $4.10 and $5.42, respectively. Excluding the effect of the New SARs granted as a result of the Exchange Program, the weighted average grant date fair value per share of SARs granted in the year ended January 31, 2010 was $4.62.

The number of SARs exercised includes shares withheld on behalf of employees to satisfy minimum statutory tax withholding requirements. During the fiscal years ended January 31, 2012, 2011 and 2010, the Company withheld 13,000 shares, 1,000 shares and zero shares for payment of these taxes. The value of the withheld shares for the fiscal years ended January 31, 2012, 2011 and 2010 were $144,000, $10,000 and zero, respectively.

At January 31, 2012, there was approximately $5.0 million of total unrecognized compensation cost related to unvested SARs. This cost is expected to be recognized over a weighted average period of approximately 2.6 years.

RSU Information

The following table summarizes the activity for RSUs for the fiscal years ended January 31, 2012, 2011 and 2010:

	RSUs			Weighted Average Grant Date Fair Value
	(in thousands)
Restricted stock at January 31, 2009		374		$	12.78
Granted		208			8.40
Released (1)		(102	)		13.30
Forfeited		(5	)		13.48
Restricted stock at January 31, 2010		475		$	10.74
Granted		128			8.81
Released (1)		(165	)		11.37
Forfeited		(3	)		8.75
Restricted stock at January 31, 2011		435		$	10.02
Granted		174			9.32
Released (1)		(178	)		11.02
Forfeited		(17	)		9.35
Restricted stock at January 31, 2012		414		$	9.32

____________

(1)

The number of RSUs released includes shares withheld on behalf of employees to satisfy minimum statutory tax withholding requirements. During the fiscal years ended January 31, 2012, 2011 and 2010, the Company withheld 58,000 shares, 53,000 shares and 15,000 shares, respectively, for payment of these taxes. The value of the withheld shares for the fiscal years ended January 31, 2012, 2011 and 2010 were $0.6 million, $0.5 million and $0.1 million, respectively.

Total unrecognized compensation cost related to RSUs was approximately $2.6 million as of January 31, 2012. This cost is expected to be recognized over a period of approximately 2.3 years.