Quality Systems Inc · 10-K · For 3/31/00

Filed On 6/27/00 9:30pm ET   ·   SEC File 1-12537   ·   Accession Number 708818-0-3

Annual Report   ·   Form 10-K
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 2: EX-27       Financial Data Schedule                                1      4K 

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION    
WASHINGTON, D.C. 20549    

FORM 10-K     

[ X ]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE                
SECURITIES EXCHANGE ACT OF 1934     

For the fiscal year ended March 31, 2000      

OR        

[   ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE              
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]   

For the transition period from ______________ to                  

Commission file number 0-13801    

QUALITY SYSTEMS, INC.   
(Exact name of registrant as specified in its charter)  

California                                95-2888568        
(State or Other Jurisdiction of       (I.R.S. Employer Identification No.)    
Incorporation or Organization)                                              

17822 East 17th Street, Tustin, California    92780         
(Address of Principal Executive Offices)   (Zip Code)       

Registrant's telephone number, including area code: (714) 731-7171              

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

Securities registered pursuant to Section 12(g) of the Act:                     

                                  Name of each exchange on
Title of each class                which registered:  
---------------------------------------   ---------------------------       
Common Stock, par value $.01 per share               NA                   

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 [ X ] No [  ]                                                               

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 any       
amendment to this Form 10-K. [   ]                                              

State the aggregate market value of the voting stock held by non-affiliates     
of the registrant as of May 31, 2000: $19,749,660. (*)                          

Indicate the number of shares outstanding of each of the registrant's           
classes of common stock as of May 31, 2000:  6,212,966.                         

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DOCUMENTS INCORPORATED BY REFERENCE   

The information required by Part III of the Form 10-K is incorporated by        
reference from Registrant's Definitive Proxy Statement for its 2000 annual      
meeting which is to be filed with the Commission on or before July 29,          
2000.                                                                           

-----------------------------------------------------------------------         

(*) For purposes of this report, in addition to those shareholders which        
fall within the definition of "affiliates" under Rule 405 of the Securities     
Act of 1933, as amended, holders of ten percent or more of the Registrant's     
Common Stock are deemed to be affiliates.                                       

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PART I.       
Item 1. BUSINESS.                                                               
---------                                                       

Except for the historical information contained herein, the matters             
discussed in this Annual Report on Form 10-K, including discussions of the      
Registrant's product development plans, business strategies and market          
factors influencing the Registrant's results, are forward-looking               
statements that involve certain risks and uncertainties. Actual results may     
differ from those anticipated by the Registrant as a result of various          
factors, both foreseen and unforeseen, including, but not limited to, the       
Registrant's ability to continue to develop new products and increase           
systems sales in markets characterized by rapid technological evolution;        
consolidation within the Registrant's target marketplace and among the          
Registrant's competitors; and, competition from larger, better capitalized      
competitors. Many other economic, competitive, governmental and                 
technological factors could impact the Registrant's ability to achieve its      
goals and interested persons are urged to review the risks described under      
"Item 1. Business. Risk Factors." and in "Item 7. Management's Discussion       
and Analysis of Financial Condition and Results of Operations." as well as      
in the Registrant's other public disclosures and filings with the               
Securities and Exchange Commission.                                             

COMPANY OVERVIEW.     

Quality Systems, Inc. ("QSI") and its wholly-owned subsidiaries, Clinitec       
International, Inc. ("Clinitec") and MicroMed Healthcare Information            
Systems, Inc. ("MicroMed"), (collectively, the "Company") develop and           
market healthcare information systems that automate medical and dental          
group practices, physician hospital organizations ("PHOs"), management          
service organizations ("MSOs"), community health centers and dental             
schools. In response to the growing need for more comprehensive, cost-          
effective information solutions for physician and dental practices, the         
Company's systems provide its clients with the ability to redesign patient      
care and other workflow processes, improve productivity, reduce information     
processing and administrative costs, and provide multi-site access to           
patient information. The Company's proprietary software systems include         
general patient information, electronic medical records, appointment            
scheduling, billing, insurance claims submission and processing, managed        
care plan implementation and referral management, treatment outcome             
studies, treatment planning, drug formularies, dental charting, and letter      
generation. Several of the Company's proprietary software systems may be        
operated remotely using thin client connectivity or a standard web browser.     
In addition to providing fully integrated software information solutions to     
its clients, the Company offers comprehensive hardware and software             
installation services, maintenance and support services, system training        
services, and electronic insurance claims submission services.                  

The Company currently has an installed base of more than 600 healthcare         
information systems serving PHOs, MSOs, group practices, specialty              
practices, dental schools and other healthcare organizations, each of which     
consists of from one to 250 physicians or dentists. The Company believes        
that as healthcare providers are increasingly required to reduce costs          
while maintaining the quality of healthcare, the Company will be able to        
capitalize on its strategy of providing fully integrated information            
systems and superior client service.                                            

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QSI is a California Corporation formed in 1974 and was founded with an          
early focus on providing information systems and services primarily for         
dental group practices. QSI's initial "turnkey" systems were designed to        
improve productivity while reducing information processing costs and            
personnel requirements. In the mid-1980's, QSI capitalized on the               
opportunity presented by the increasing pressure of cost containment on         
physicians and healthcare organizations and further expanded its                
information processing systems into the broader medical market. Today, QSI      
primarily develops and provides integrated character-based healthcare           
information systems utilizing a UNIX* operating system for both the medical     
and dental markets ("Legacy Product"). These expandable systems operate on      
a stand-alone basis or in a networked environment.                              

During fiscal 1998, QSI released a new product, the Clinical Product Suite      
("CPS"), a comprehensive dental solution designed specifically for the          
large dental group practice environment. CPS integrates the dental Legacy       
Product with a computer-based clinical information system that incorporates     
a wide range of clinical tools, including electronic charting of dental         
procedures, treatment plans and existing conditions; periodontal charting,      
via light-pen, voice-activation, or keyboard entry, for full periodontal        
examinations and PSR scoring; digital imaging of x-ray and intra-oral           
camera images; computer-based patient education modules; full access to         
patient information, treatment plans, and insurance plans; and document and     
image scanning for digital storage and linkage to the electronic patient        
record. CPS incorporates a Windows-based client/server technology               
consisting of one or more file servers together with any combination of         
desktops or laptops. The file server(s) used in connection with CPS             
utilize(s) a Windows NT** operating system. Based on the server                 
configuration chosen, CPS is scalable from one to hundreds of workstations.     

QSI's wholly owned subsidiaries, Clinitec and Micromed, develop and sell        
both proprietary electronic medical records software and practice               
management systems under the product name of NextGen***.  Major product         
categories of the NextGen suite of applications include Electronic Medical      
Records (NextGen-emr), Enterprise Practice Management (NextGen-epm), Enterprise 
Appointment Scheduling (NextGen-eas), Enterprise Master Patient Index           
(NextGen-epi), Managed Care, Electronic Data Interchange, System Interfaces,    
Internet Operability (NextGen web), and a Patient-centric and Provider-         
centric Web Portal Solution (NextMD).                                           

NextGen-emr allows healthcare providers to create and maintain medical          
records using a series of user-definable clinical "templates." Data is          
generally captured using a light pen or a mouse, and entries are then           
turned into sentences and/or paragraphs to create documentation. NextGen-emr    
also supports the scanning and annotation of paper documents, photographs       
and X-rays, and contains many other advanced features. NextGen-emr is           
marketed both in conjunction with the Company's practice management             
software offerings as well as on a stand-alone basis where NextGen-emr may      
interface with other practice management systems. The Company believes that     
it currently provides a comprehensive information management solution for       
the medical marketplace.                                                        

*    UNIX is a registered trademark of AT&T Corporation.                        
**   Microsoft Windows, Windows NT, Windows 95 and Windows 98 are               
registered Trademarks of Microsoft Corporation.                       
***  NextGen is a registered trademark of Clinitec International, Inc.          

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NextGen-epm has been developed with a client/server architecture; a GUI         
design utilizing either Windows 95, Windows 98, Windows 2000, or Windows NT     
operating system platforms; and, a platform independent relational database     
that is ANSI SQL-compliant. NextGen-epm is designed to provide a flexible,      
enterprise-wide solution employing a master patient index.                      

Recognizing the need and benefits to be obtained by using its software in       
conjunction with the capabilities of the Internet, the Company enhanced its     
enterprise practice management and electronic medical software packages in      
Fiscal 2000 to enable them to be run via Private Intranet or the Internet       
in an Application Services Provider (ASP) environment.                          

Additionally, in April 2000, the Company announced the launch of an             
Internet-based consumer health portal, NextMD.com.  NextMD.com will be a        
vertical portal for the healthcare industry, linking patients with their        
physicians, insurers, laboratories, and online pharmacies, while providing      
a centralized source of health-oriented information for both consumers and      
medical professionals.  Patients whose physicians are linked to the portal      
will be able to request appointments, send appointment changes or               
cancellations, receive test results online, request prescription refills,       
view and/or pay their statements, and communicate with their physicians,        
all in a secure, online environment.  The Company's NextGen suite of            
information systems will be linked to NextMD.com, integrating a number of       
these features with physicians' existing systems.                               

INDUSTRY BACKGROUND.    

To compete in the changing healthcare environment, physicians and other         
outpatient care providers are increasingly joining and affiliating with         
other physicians, managed care organizations, hospitals and other               
enterprises to form larger healthcare organizations such as PHOs, MSOs and      
health maintenance organizations ("HMOs"). These organizations are designed     
to take advantage of anticipated economies of scale associated with             
managing healthcare services for large patient populations across inpatient     
and outpatient settings while achieving improved quality, reduced costs and     
strengthened negotiating positions with managed care entities. Similarly,       
the dental profession has recently seen consolidation of dental practices       
driven by many of the same factors as in the medical profession. The            
consolidation occurring among medical and dental providers, respectively,       
has created business organizations which require more sophisticated             
computer information systems.                                                   

As the managed care environment continues to expand as many experts expect,     
more healthcare provider organizations enter into contracts, and often          
multiple contracts, which define the terms under which care is                  
administered. The expansion in the number of managed care and third-party       
payor organizations, as well as additional government regulation and            
changes in reimbursement models, has greatly increased the complexity of        
pricing policies, billing procedures and reimbursement policies impacting       
medical and dental practices. To operate effectively, healthcare provider       
organizations must efficiently manage patient care and other workflow           
processes which increasingly extend across multiple care locations and          
business entities.                                                              

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To compete under the constraints of managed care while maintaining quality      
of services, healthcare provider organizations have placed increasing           
demands on their information systems. Initially, these information systems      
automated financial and administrative functions. As it became necessary to     
manage patient flow processes, the need arose to integrate "back-office"        
data with such clinical information as patient test results and office          
visits. Particularly for larger organizations and group practices, the          
Company believes information systems must allow enterprise-wide exchange of     
patient information incorporating administrative, financial and clinical        
information from multiple entities, while focusing on the primary care          
provider. In addition, large healthcare organizations increasingly require      
information systems that can deliver high performance in environments with      
multiple concurrent computer users.                                             

Many existing healthcare information systems, including numerous systems        
currently utilized by the solo practitioner and small group practices, were     
designed for limited administrative tasks such as billing and scheduling        
and can neither accommodate multiple computing environments nor operate         
effectively across multiple locations and entities. As the healthcare           
industry continues to evolve, physician and dental groups and other             
healthcare organizations will increasingly require systems that compile         
structured clinical information from multiple sources and enable                
measurement of treatment outcomes and management of clinical processes. The     
Company believes that systems which integrate this patient clinical data        
with administrative, financial and other practice management data to            
maintain patient flow while continuing to reduce costs and improve quality      
of care are best positioned to succeed in the evolving managed care             
environment.                                                                    

As healthcare organizations transition to new computer platforms and newer      
technologies, experts believe such organizations will be migrating toward       
the implementation of enterprise-wide, patient-centered computing systems       
embedded with automated patient medical records. These organizations cannot     
afford significant downtime or reeducation, nor can they prudently risk         
choosing a system that has not proven its ability to handle high volume         
processing with continuous dependability. The Company believes, therefore,      
that successful systems vendors in the market most likely will have a           
sufficient installed base and adequate resources to offer high quality,         
fully integrated products together with the value-added services needed to      
expand and support growing clients throughout this evolutionary process.        

PRODUCTS.     

In response to the growing need for more comprehensive, cost-effective          
healthcare information solutions for physician and dental practices, the        
Company's systems provide its clients with the ability to redesign patient      
care and other workflow processes while improving productivity through          
multi-site and multi-user access to patient information. Utilizing proven       
third-party hardware solutions combined with the Company's proprietary          
software configured to maximize the efficiency of a healthcare                  
organization's information processing requirements, the Company's solutions     
enable an integration of a variety of administrative and clinical               
information operations. Leveraging over 20 years of experience in the           
healthcare information services industry, the Company believes that it          
continues to distinguish its solutions by providing its clients with            
sophisticated, full-featured software systems along with comprehensive          
systems implementation, maintenance and support.                                

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PRACTICE MANAGEMENT SYSTEMS.    

The Legacy Product consists primarily of proprietary healthcare software        
applications together with third party hardware and other non-industry          
specific software. The systems range in capacity from one to hundreds of        
users, allowing the Company to address the needs of both small and large        
organizations. The systems are modular in design and may be expanded to         
grow with changing client requirements.                                         

The software configuration for a typical Legacy Product system includes a       
basic medical or dental application and additional software to meet             
identified needs of each client. The basic Legacy Product software              
automates many aspects of group practice management, including general          
patient registration, appointment scheduling, billing, insurance claims         
submission and processing, and treatment planning. Add-on applications          
include such modules as outside referral management for managed care,           
patient eligibility, electronic insurance claims and electronic patient         
statements processing, and various proprietary and third party accounting       
and word-processing packages.                                                   

A typical Legacy Product system also consists of third party hardware           
components, including one or more central processing units, disk drives,        
magnetic tape units, video display terminals, PCs, and printers together        
with telecommunications equipment, which the client often purchases as a        
turnkey system from the Company.                                                

The Legacy Product system primarily uses the IBM RS6000* central processing     
unit and IBM'S AIX** version of the UNIX operating system as a platform for     
its application software enabling a wide range of flexible and functional       
systems.  The hardware components, as well as the requisite operating           
system licenses, are purchased from manufacturers or distributors of those      
components. QSI assembles and tests the hardware components and                 
incorporates the Legacy Product software and other third party packages         
into completed systems tailored to accommodate particular client                
requirements. The Company continually evaluates the hardware components of      
its systems with a view toward utilizing hardware that is functional,           
reliable and cost-effective.                                                    

NextGen-epm expands the Company's practice management system product line       
that historically has been primarily character-based software solutions.        
NextGen-epm has been developed using a GUI client/server platform for           
compatibility with Windows 95, Windows 98, Windows 2000,  and Windows NT        
operating systems and a relational database that is ANSI SQL-compliant.         
NextGen-epm, which has been designed initially for healthcare provider          
networks, is scalable and includes a master patient index, enterprise-wide      
appointment scheduling with referral tracking, clinical support, and            
centralized or decentralized patient financial management based on either a     
managed care or fee-for-service model.                                          

NextGen-epm is designed to be used on any computer that supports                
Windows 95, Windows 98, Windows 2000, or Windows NT operating systems. The      
system's three-tiered architecture allows work to be performed on the           
database server, the application server and the client workstation.             

*   RS6000 is a registered trademark of International Business Machines         
Corporation.                                                            
**  AIX is a registered trademark of International Business Machines            
Corporation.                                                            

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To date, the Company generally has made hardware recommendations for            
NextGen-epm to its clients based upon information provided by each client.      
However, the client is responsible for the ultimate selection,                  
installation, and integration of the hardware that each client purchases        
directly from third party suppliers other than the Company.                     

Recognizing the need and benefits to be obtained by using its software in       
conjunction with the capabilities of the Internet, the Company enhanced its     
NextGen-epm in Fiscal 2000 to enable NextGen-epm to be run via private Intranet 
or the Internet in an Application Services Provider (ASP) environment.          

The Company has previously released an Internet dental practice management      
product, QSINET that includes such features as patient registration,            
scheduling, collections and receivables tracking, treatment planning, and       
management reporting. QSINET connects dental groups to the extensive and        
growing electronic commerce network enabling users to process insurance         
claims and patient statements more rapidly and also allows the practice to      
communicate with its patients via e-mail for appointment reminders,             
treatment recalls, and other patient notifications. The system can be           
accessed using a personal computer with Internet access. In addition, the       
Company has also provided an Intranet solution to several of its clients        
based on the QSINET product. The Company does not generally provide any         
hardware in connection with its Internet/intranet products.                     

CLINICAL SYSTEMS.   

Clinitec provides software applications that are complementary to, and          
interface with, the Company's medical practice management offerings. The        
applications incorporated into the Company's practice management solutions      
(such as scheduling, eligibility, billing and claims processing) are            
augmented by clinical information captured by NextGen-emr, including            
services rendered and diagnoses used for billing purposes.                      

NextGen-emr was developed with a client/server architecture and a graphical     
user interface ("GUI") utilizing Microsoft Windows 95, Windows 98, Windows      
2000,  or Windows NT on each workstation and either Windows NT, UNIX or         
Novell* on the server. NextGen-emr maintains data using an industry standard    
relational database engine such as Microsoft SQL Server**, INFORMIX*** or       
Oracle****. The system is scalable from one to hundreds of workstations.        

NextGen-emr stores and maintains clinical data including:                       

-    Data captured using user-customized input "templates";                     
-    Scanned or electronically acquired images, including x-rays                
and photographs;                                                      
-    Data electronically acquired through interfaces with clinical              
instruments;                                                          
-    Other records, documents or notes, including electronically                
captured handwriting and annotations; and                             
-    Digital voice recordings.                                                  

*       Novell is a registered trademark of Novell, Inc.                        
**   Microsoft is a registered trademark and SQL Server is                      
a registered trademark of Microsoft Corporation.                
***  INFORMIX is a registered trademark of Informix Corporation.                
**** Oracle is a registered trademark of Oracle Corporation.                    

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NextGen-emr also offers a workflow module, prescription management, automatic   
document and letter generation, patient education, referral tracking,           
interfaces to billing and lab systems, physician alerts and reminders, and      
powerful reporting and data analysis tools.                                     

NextGen-emr is sold either as a combination of software and services, or as a   
turnkey system including computer hardware, which can include network           
servers, PC workstations, tape back-up units, printers, scanners and            
requisite operating system software. Computer hardware for turnkey systems      
is purchased for resale by the Company from third party manufacturers or        
distributors.                                                                   

Recognizing the need and benefits to be obtained by using its software in       
conjunction with the capabilities of the Internet, the Company enhanced the     
NextGen-emr application in Fiscal 2000 to enable NextGen-emr to be run via      
private Intranet or the Internet in an Application Services Provider (ASP)      
environment.                                                                    

Additionally, in April 2000, the Company announced the launching of an          
Internet-based consumer health portal, NextMD.com.  NextMD.com will be a        
vertical portal for the healthcare industry, linking patients with their        
physicians, insurers, laboratories, and online pharmacies, while providing      
a centralized source of health-oriented information for both consumers and      
medical professionals.  Patients whose physicians are linked to the portal      
will be able to request appointments, send appointment changes or               
cancellations, receive test results on-line, request prescription refills,      
view and/or pay their statements, and communicate with their physicians,        
all in a secure, on-line environment.  The Company's NextGen suite of           
information systems will be linked to NextMD.com, integrating a number of       
these features with physicians' existing systems.                               

The Company's dental charting software system, the Clinical Product Suite,      
(CPS) is a comprehensive dental solution designed specifically for the          
large dental group practice environment. CPS integrates the dental Legacy       
Product with a computer-based clinical information system that incorporates     
a wide range of clinical tools, including:                                      

-   Electronic charting of dental procedures, treatment plans and existing      
conditions;                                                             
-   Periodontal charting, via light-pen, voice-activation, or keyboard          
entry, for full periodontal examinations and PSR scoring;               
-   Digital imaging of x-ray and intra-oral camera images;                      
-   Computer-based patient education modules, viewable chairside to             
enhance case presentation;                                              
-   Full access to patient information, treatment plans, and insurance          
plans via a fully integrated interface with the dental Legacy Product;  
and                                                                     
-   Document and image scanning for digital storage and linkage to the          
electronic patient record.                                              

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The result is a comprehensive clinical information management system that       
saves time, reduces costs, improves case presentation, and enhances the         
delivery of dental services and quality of care.  Clinical information is       
managed and maintained electronically thus forming an electronic patient        
record that allows for the implementation of the "chartless" office.            

CPS incorporates a Windows-based client/server technology consisting of one     
or more file servers together with any combination of one or more desktop,      
laptop, or pen-based PC workstations. The file server(s) used in connection     
with CPS utilize(s) a Windows NT operating system and the hardware is           
typically a Pentium* based single or multi-processor platform.  Based on        
the server configuration chosen, CPS is scalable from one to hundreds of        
workstations.  A typical configuration may also include redundant disk          
storage, magnetic tape units, intra and extra oral cameras, digital x-ray       
components, digital scanners, conventional and flat screen displays, and        
printers.  The hardware components, including the requisite operating           
system licenses, are purchased from third party manufacturers or                
distributors either directly by the customer or by the Company for resale       
to the customer.                                                                

ELECTRONIC DATA INTERCHANGE.                                                    

The Company makes available electronic data interchange (EDI)capabilities       
and services to its customers which increase the utility of the system          
for these customers.  These EDI capabilities and services facilitate            
the sharing of information across multiple business entities to increase        
office efficiency; reduce processing time and shorten accounts receivable       
days; and reduce the possibilities of errors.  The EDI capabilities             
encompass direct interfaces between the Company's products and external         
third-party systems, as well as transaction-based services.  Services           
include:                                                                        

-  Electronic claims submission through the Company's relationships with a      
number of national claims clearinghouses;                                 
-  Electronic patient statements, appointment reminder cards, recall cards,     
patient letters, and other correspondence;                                
-  Electronic insurance eligibility verification;                               
-  Electronic posting of remittances from insurance carriers into the           
accounts receivable application.                                          

SALES AND MARKETING.    

The Company sells and markets its products nationwide through a direct          
sales force. The Company's sales and marketing employees identify and           
contact prospective clients by a variety of means, including referrals from     
existing clients and contacts at professional society meetings and seminars     
with persons involved in group practices as well as trade journal               
advertising, direct mail advertising, and telemarketing.                        

These sales employees are knowledgeable about medical and dental group          
healthcare entities, as well as computer applications. Typically, sales         
employees make presentations to potential clients by demonstrating the          
system and its capabilities on the prospective client's premises.               

*   Pentium is a registered trademark of Intel Corporation                      

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The Company's sales cycle can vary significantly and typically ranges from      
three to 12 months from initial contact to contract execution. Systems are      
normally delivered to a customer within 30 to 60 days of receipt of a           
system order, and therefore, the Company does not believe data pertaining       
to backlog is meaningful. As part of the fees paid by its clients, the          
Company receives up-front licensing fees and a monthly or quarterly service     
fee based on system configuration.                                              

Several clients have purchased the Company's practice management system         
and, in turn, are providing either time-share or billing services to local      
single and group practice practitioners. Under the time-share or billing        
service agreements, the client provides the use of its system for a fee to      
one or more practitioners. Although the Company does not receive a fee          
directly from the client's customers, implementation of such arrangements       
has resulted in the purchase of additional system capacity by the client        
offering the services, as well as new system purchases made by the client's     
customers should such customers decide to perform the practice management       
functions in-house.                                                             

The Company continues to concentrate its sales and marketing efforts on         
medical and dental practices, dental schools, physician clinics, MSOs, PHOs     
and community health centers.                                                   

MSOs and PHOs to which the Company has sold systems provide use of the          
Company's software to those group and single physician practices associated     
with the organization or hospital on either a service basis or by directing     
the Company to contract with those practices for the sale of stand-alone        
systems.                                                                        

The Company has also entered into marketing assistance agreements with          
certain of its clients pursuant to which the clients allow the Company to       
demonstrate to potential clients the use of systems on the existing             
clients' premises. In addition, the Company has established certain of its      
clients as dealers for its systems. Through this arrangement to date, the       
dealer markets and sells the Legacy Product to prospects in a local             
territory. These prospects are generally smaller healthcare facilities than     
those actively pursued by the Company. The Company's PC-based Legacy            
Products are well suited to this dealer marketing. In addition, the dealer      
typically provides a variety of ongoing services for its clients. Dealers       
are compensated based on system size and profitability, and the services        
which they perform in place of the Company.                                     

The Company often assists prospective clients in identifying third party        
sources for financing the purchase of the Company's systems. The financing      
usually is obtained by the client directly from institutional lenders and       
typically takes the form of a loan from the institution secured by the          
system to be purchased or a leasing arrangement.                                

The Company has numerous clients and does not believe that the loss of any      
single client would have a material adverse effect on the Company. No           
client accounted for ten percent or more of net revenues during fiscal          
years ended March 31, 2000, 1999 or 1998.                                       

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CUSTOMER SERVICE AND SUPPORT.     

The Company believes its success is attributable in part to its exceptional     
customer service and support. The Company offers support to its clients         
seven days a week, 24 hours a day. All of the Legacy Product systems have a     
dedicated computer port for dial-up remote access facilitating rapid            
response by technicians to system inquiries. Most inquiries can be resolved     
without the need to dispatch technicians to the client location. These          
support services also provide the Company with the opportunity to monitor       
changes in each client's information processing requirements and to             
recommend the purchase of system hardware or software enhancements designed     
to satisfy these additional requirements. The Company believes that its         
commitment to provide extensive support has contributed significantly to        
the development of its business.                                                

The Company's continuing system support staff is comprised of specialists       
who are knowledgeable in the area of hardware and software technology as        
well as in the day-to-day operations of a group practice. This system           
support ranges from correcting minor procedural problems in the client's        
system to performing complex database reconstructions or software updates.      
The Company also utilizes an automated online support system for the            
Legacy Product which assists clients in resolving minor problems and            
facilitates automated electronic retrieval of problems and symptoms             
following a client's call to the automated support system. Additionally,        
this online support system maintains a complete call record at both the         
client's facility and the Company.                                              

The Company offers its clients support services for most system components,     
including hardware and software maintenance, for a fixed monthly or             
quarterly fee. The Company also subcontracts, in certain instances, with        
IBM to perform specific hardware maintenance tasks under the Company's          
direction. This arrangement has provided the Company with economies of          
scale associated with IBM's service infrastructure while still maintaining      
service standards.                                                              

IMPLEMENTATION AND TRAINING.      

The Company offers implementation and training services and believes that       
its system delivery, implementation and support services are key elements       
of successful client relationships. When a client signs a contract for the      
purchase of a system, a client manager/implementation specialist, trained       
in medical and/or dental group practice procedures, is assigned to assure       
that the client is fully informed of system options and that the proper         
software system configuration is installed. This information is determined      
through discussions with the client and observation of the client's             
practice. Once the set of software features is established, the software        
configuration unique to a given client can be created in an automated           
fashion.                                                                        

Before activation of the client's practice management system, Company           
personnel typically convert, or assist in conversion of, the relevant           
client data onto the system. Usually, the data is converted electronically      
from another computer system enabling a quick, cost-effective and accurate      
conversion. The system is then subjected to extensive testing which             
includes processing representative data using the client's system               
configuration.  One or more Company trainers experienced in group practice      
procedures are assigned to conduct an intensive training program for the        
client's employees.                                                             

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The program may include a combination of computer assisted instruction          
("CAI") for certain of the Company's products, remote training techniques       
and training classes conducted by Company staff at the client's office(s).      
CAI consists of workbooks, computer interaction and self-paced instruction.     
CAI is also offered to clients, for an additional charge, after the initial     
training program is completed for the purpose of training new and               
additional employees. Remote training allows a trainer at the Company           
office to train one or more people at a client site via telephone and           
computer connection, thus allowing an interactive and office-specific mode      
of training without the expense and time required for travel. In addition,      
the Company's on-line "help" documentation feature facilitates client           
training as well as ongoing support.                                            

COMPETITION.    

The market for medical group practice management systems is intensely           
competitive and the Company faces significant competition from a number of      
different sources. The industry is highly fragmented and includes numerous      
competitors, none of which the Company believes dominates the overall           
market for medical group practice management systems. In addition, several      
of the Company's competitors have significantly greater financial,              
technical, product development and marketing resources than the Company.        
The Company believes its principal competitive advantages are the features      
and capabilities of its products and services, its high level of customer       
support and its extensive experience in the industry.                           

There can be no assurance that the NextGen suite of applications will           
achieve broad market acceptance or will successfully compete with other         
Windows-based practice management software products.                            

To date, the Company has not encountered substantial competition for its        
dental practice management and clinical products in the Company's primary       
niche market of dental group practices consisting of six or more dentists.      
The Company is anticipating that market competition in this dental group        
practice niche market will increase as new competitors enter the                
marketplace. The Company believes that numerous firms sell computerized         
data processing systems to group dental practices consisting of five or         
fewer dentists.                                                                 

The market for electronic medical records systems is highly competitive and     
subject to rapid changes in technology. The Company expects that market         
competition will increase as new competitors enter the marketplace. The         
industry is highly fragmented and includes numerous competitors, none of        
which the Company believes dominates the electronic medical records market.     
Many of the Company's competitors have substantially greater name               
recognition and technical, marketing and financial resources. The Company       
believes its principal competitive advantages are the features and              
flexibility of its NextGen products. There can be no assurance that future      
competition or new product introductions in the electronic medical records      
market will not have a material adverse effect on the Company's business,       
financial condition and results of operations. There can be no assurance        
that the NextGen suite of applications will achieve broad market                
acceptance.                                                                     

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Competitive pressures and other factors, such as new product introductions      
by the Company or its competitors, may result in price erosion that could       
have a material adverse effect on the Company's business, financial             
condition and results of operations.  Furthermore, the Company also             
competes in all of its markets indirectly and to varying degrees with other     
major healthcare related companies, information management companies and        
systems integrators generally, and other software developers which may more     
directly enter the markets in which the Company competes. There can be no       
assurance that future competition will not have a material adverse effect       
on the Company's business, financial condition and results of operations.       

PRODUCT ENHANCEMENT AND DEVELOPMENT.    

The healthcare information management and computer software and hardware        
industries are characterized by rapid technological change requiring the        
Company to engage in continuing efforts to improve its systems. During          
fiscal years 2000, 1999 and 1998 the Company expended approximately $4.9        
million, $4.8 million and $4.9 million, respectively, on research and           
development activities including capitalized software amounts of $1.1           
million, $1.2 million and $1.9 million, respectively. In addition, many of      
the Company's product enhancements have resulted from software development      
work performed under contracts with its clients. To the extent that the         
Company fails to achieve technological advances comparable to those made by     
others in the computer and healthcare information management industries,        
its products and services may become obsolete.                                  

GOVERNMENTAL REGULATION.    

The healthcare industry is subject to changing political, economic and          
regulatory influences that may affect the procurement processes and             
operation of healthcare facilities. During the past several years, the          
healthcare industry has been subject to an increase in governmental             
regulation of, among other things, reimbursement rates and certain capital      
expenditures. In the past, various legislators have announced that they         
intend to examine proposals to reform certain aspects of the U.S.               
healthcare system including proposals which may increase governmental           
involvement in healthcare, lower reimbursement rates and otherwise change       
the operating environment for the Company's clients. Healthcare providers       
may react to these proposals, and the uncertainty surrounding such              
proposals, by curtailing or deferring investments, including those for the      
Company's systems and related services. On the other hand, changes in the       
regulatory environment have increased and may continue to increase the          
needs of healthcare organizations for cost-effective data management and        
thereby enhance the overall market for healthcare management information        
systems. The Company cannot predict what impact, if any, such proposals or      
healthcare reforms might have on the Company's business, financial              
condition and results of operations.                                            

The Health Insurance Portability and Accountability Act of 1996 (HIPAA)         
mandates the use of national standards for transmissions of certain patient     
healthcare information, prescribed security measures to protect the             
confidentiality of such information, and other provisions within two years      
after the adoption of final regulations by the Department of Health and         
Human Services ("HHS").  The Company is following the progress of the HHS       
implementation of HIPAA, but at this time, it is uncertain what regulations     
will be ratified by HHS and the impact of those regulations on the              
Company's products and services and on the products and services offered by     
our business partners.                                                          

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Our intention is to modify our products and services as necessary to become     
compliant with the final regulations but there can be no assurance that the     
Company will be able to do so in a timely manner.                               

In addition, the Company's software may be subject to regulation by the         
U.S. Food and Drug Administration (the "FDA") as a medical device. Such         
regulation could require the registration of the applicable manufacturing       
facility and software and hardware products; application of detailed            
record-keeping and manufacturing standards; and, FDA approval or clearance      
prior to marketing. An approval or clearance could create delays in             
marketing, and the FDA could require supplemental filings or object to          
certain of these applications, the result of which could have a material        
adverse effect on the Company's business, financial condition and results       
of operations.                                                                  

EMPLOYEES.    

As of May 31, 2000, the Company employed 232 persons of which 228 were          
full-time employees. Systems analysts, programmers and qualified sales and      
marketing personnel are in short supply and, consequently, competition for      
such individuals is intense. The Company believes that its future success       
depends in part upon recruiting and retaining qualified marketing and           
technical personnel as well as other employees. The Company considers its       
employee relations to be good.                                                  

RISK FACTORS.     

COMPETITION.                                                                    

The market for healthcare information systems is intensely competitive and      
the Company faces significant competition from a number of different            
sources. The electronic medical records market, in particular, is subject       
to rapid changes in technology and the Company expects that competition in      
this portion of the market will increase as new competitors enter the           
marketplace. In addition, several of the Company's competitors have             
significantly greater name recognition as well as substantially greater         
financial, technical, product development and marketing resources than the      
Company.                                                                        

The industry is highly fragmented and includes numerous competitors, none       
of which the Company believes dominates the overall market for either group     
practice management or clinical systems.                                        

Furthermore, the Company also competes indirectly and to varying degrees        
with other major healthcare related companies, information management           
companies generally, and other software developers which may more directly      
enter the markets in which the Company competes.                                

There can be no assurance that future competition or new product                
introductions will not have a material adverse effect on the Company's          
business, results of operations and financial condition. Competitive            
pressures and other factors, such as new product introductions by the           
Company or its competitors, may result in price or market share erosion         
that could have a material adverse effect on the Company's business,            
results of operations and financial condition.                                  

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In addition, the Company believes that once a healthcare provider has           
chosen a particular healthcare information system vendor, the provider          
will, for a period of time, be more likely to rely on that vendor for its       
future information system requirements. Furthermore, if the healthcare          
industry continues to undergo further consolidation as it has recently          
experienced, each sale of the Company's systems will assume even greater        
importance to the Company's business, results of operations and financial       
condition. The Company's inability to make initial sales of its systems to      
either newly formed groups and/or healthcare providers that are replacing       
or substantially modifying their healthcare information systems could have      
a material adverse effect on the Company's business, results of operations      
and financial condition. If new systems sales do not materialize,               
maintenance service revenues can be expected to decrease over time due to       
the effect of failure to capture new maintenance revenues therefrom in          
combination with attrition of existing maintenance revenues associated with     
the Company's current clients whose systems become obsolete or are replaced     
by competitors' products.                                                       

FLUCTUATION IN QUARTERLY OPERATING RESULTS.                                     

The Company's revenues and operating results have in the past fluctuated,       
and may in the future fluctuate, from quarter to quarter and period to          
period, as a result of a number of factors including, without limitation:       
the size and timing of orders from clients; the length of sales cycles and      
installation processes; the ability of the Company's clients to obtain          
financing for the purchase of the Company's products; changes in pricing        
policies or price reductions by the Company or its competitors; the timing      
of new product announcements and product introductions by the Company or        
its competitors; the availability and cost of system components; the            
financial stability of major clients; market acceptance of new products,        
applications and product enhancements; the Company's ability to develop,        
introduce and market new products, applications and product enhancements        
and to control costs; the Company's success in expanding its sales and          
marketing programs; deferrals of client orders in anticipation of new           
products, applications or product enhancements; changes in Company              
strategy; personnel changes; and general economic factors.                      

The Company's products are generally shipped as orders are received and         
accordingly, the Company has historically operated with minimal backlog. As     
a result, sales in any quarter are dependent on orders booked and shipped       
in that quarter and are not predictable with any degree of certainty.           
Furthermore, the Company's systems can be relatively large and expensive        
and individual systems sales can represent a significant portion of the         
Company's revenues for a quarter such that the loss of even one such sale       
can have a significant adverse impact on the Company's quarterly                
profitability.                                                                  

Clients often defer systems purchases until the Company's quarter end, so       
quarterly results generally cannot be predicted and frequently are not          
known until the quarter has concluded. The Company's initial contact with a     
potential customer depends in significant part on the customer's decision       
to replace, or substantially modify, its existing information system. How       
and when to implement, replace or substantially modify an information           
system are major decisions for healthcare providers.  Accordingly, the          
sales cycle for the Company's systems can vary significantly and typically      
ranges from three to 12 months from initial contact to contract                 
execution/shipment.                                                             

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Because a significant percentage of the Company's expenses are relatively       
fixed, a variation in the timing of systems sales and installations can         
cause significant variations in operating results from quarter to quarter.      
As a result, the Company believes that interim period-to-period comparisons     
of its results of operations are not necessarily meaningful and should not      
be relied upon as indications of future performance. Further, the Company's     
historical operating results are not necessarily indicative of future           
performance for any particular period.                                          

Through March 31, 1998, the Company recognized revenue in accordance with       
the provisions of the American Institute of Certified Public Accountants        
("AICPA") Statement of Position No. 91-1, "Software Revenue Recognition"        
("SOP 91-1"). The AICPA has adopted Statement of Position No. 97-2,             
"Software Revenue Recognition" ("SOP 97-2"), that supersedes SOP 91-1           
and became effective for the Company on April 1, 1998. There can be no          
assurance that application and subsequent interpretations of this               
pronouncement by the Company, its independent auditors or the Securities        
and Exchange Commission will not further modify the Company's revenue           
recognition policies, or that such modifications would not have a material      
adverse effect on the operating results reported in any particular quarter.     

There can be no assurance that the Company will not be required to adopt        
changes in its licensing or services practices to conform to SOP 97-2, or       
that such changes, if adopted, would not result in delays or cancellations      
of potential sales of the Company's products.                                   

Due to all of the foregoing factors, it is possible that in some future         
quarter the Company's operating results may be below the expectations of        
public market analysts and investors. In such event, the price of the           
Company's Common Stock would likely be materially adversely affected.           

DEPENDENCE ON PRINCIPAL PRODUCT AND NEW PRODUCT DEVELOPMENT.                    

The Company currently derives substantially all of its net revenues from        
sales of its healthcare information systems and related services. The           
Company believes that a primary factor in the market acceptance of its          
systems has been its ability to meet the needs of users of healthcare           
information systems. The Company's future financial performance will depend     
in large part on the Company's ability to continue to meet the increasingly     
sophisticated needs of its clients through the timely development,              
successful introduction and implementation of new and enhanced versions of      
its systems and other complementary products. The Company has historically      
expended a significant amount of its net revenues on product development        
and believes that significant continuing product development efforts will       
be required to sustain the Company's growth.                                    

There can be no assurance that the Company will be successful in its            
product development efforts, that the market will continue to accept the        
Company's existing or new products, or that products or product                 
enhancements will be developed and implemented in a timely manner, meet the     
requirements of healthcare providers, or achieve market acceptance. If new      
products or product enhancements do not achieve market acceptance, the          
Company's business, results of operations and financial condition could be      
materially adversely affected. At certain times in the past, the Company        
has also experienced delays in purchases of its products by clients             
anticipating the launch of new products by the Company. There can be no         
assurance that material order deferrals in anticipation of new product          
introductions will not occur.                                                   

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TECHNOLOGICAL CHANGE.                                                           

The software market generally is characterized by rapid technological           
change, changing customer needs, frequent new product introductions and         
evolving industry standards. The introduction of products incorporating new     
technologies and the emergence of new industry standards could render the       
Company's existing products obsolete and unmarketable. There can be no          
assurance that the Company will be successful in developing and marketing       
new products that respond to technological changes or evolving industry         
standards. New product development depends upon significant research and        
development expenditures which depend ultimately upon sales growth. Any         
material weakness in revenues or research funding could impair the              
Company's ability to respond to technological advances in the marketplace       
and to remain competitive. If the Company is unable, for technological or       
other reasons, to develop and introduce new products in a timely manner in      
response to changing market conditions or customer requirements, the            
Company's business, results of operations and financial condition will be       
materially adversely affected.                                                  

In response to increasing market demand, the Company is currently               
developing new generations of certain of its software products designed for     
the client-server and Internet/intranet environments. There can be no           
assurance that the Company will successfully develop these new software         
products or that these products will operate successfully on the principal      
client-server operating systems, which include UNIX, Microsoft Windows,         
Windows NT, Windows 95 and Windows 98, or that any such development, even       
if successful, will be completed concurrently with or prior to introduction     
by competitors of products designed for the client-server and                   
Internet/intranet environments. Any such failure or delay could adversely       
affect the Company's competitive position or could make the Company's           
current products obsolete.                                                      

LITIGATION.                                                                     

The Company faces several Federal and State securities actions (see "Item       
3. Legal Proceedings.").  At this time it is not reasonably possible to         
estimate the damage, or the range of damages, if any, that the Company          
might incur in connection with such actions. However, the uncertainty           
associated with substantial unresolved litigation may be expected to have       
an adverse impact on the Company's business. In particular, such litigation     
could impair the Company's relationships with existing customers and its        
ability to obtain new customers. Defending such litigation will likely          
result in a diversion of management's time and attention away from business     
operations, which could have a material adverse effect on the Company's         
business, results of operations and financial condition. Such litigation        
may also have the effect of discouraging potential acquirors from bidding       
for the Company or reducing the consideration such acquirors would              
otherwise be willing to pay in connection with an acquisition.                  

PROPRIETARY TECHNOLOGY.                                                         

The Company is heavily dependent on the maintenance and protection of its       
intellectual property and relies largely on license agreements,                 
confidentiality procedures, and employee nondisclosure agreements to            
protect its intellectual property. The Company's software is not patented       
and existing copyright laws offer only limited practical protection.            

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There can be no assurance that the legal protections and precautions taken      
by the Company will be adequate to prevent misappropriation of the              
Company's technology or that competitors will not independently develop         
technologies equivalent or superior to the Company's. Further, the laws of      
some foreign countries do not protect the Company's proprietary rights to       
as great an extent as do the laws of the United States and are often not        
enforced as vigorously as those in the United States.                           

The Company does not believe that its operations or products infringe on        
the intellectual property rights of others. However, there can be no            
assurance that others will not assert infringement or trade secret claims       
against the Company with respect to its current or future products or that      
any such assertion will not require the Company to enter into a license         
agreement or royalty arrangement with the party asserting the claim. As         
competing healthcare information systems increase in complexity and overall     
capabilities and the functionality of these systems further overlaps,           
providers of such systems may become increasingly subject to infringement       
claims. Responding to and defending any such claims may distract the            
attention of Company management and have a material adverse effect on the       
Company's business, results of operations and financial condition. In           
addition, claims may be brought against third parties from which the            
Company purchases software, and such claims could adversely affect the          
Company's ability to access third party software for its systems.               

ABILITY TO MANAGE GROWTH.                                                       

The Company has experienced periods of growth has increased personnel,          
which has placed, and may continue to place, a significant strain on the        
Company's resources. The Company also anticipates expanding its overall         
software development, marketing, sales, client management and training          
capacity. In the event the Company is unable to identify, hire, train and       
retain qualified individuals in such capacities within a reasonable             
timeframe, such failure could have a material adverse effect on the             
Company. In addition, the Company's ability to manage future increases, if      
any, in the scope of its operations or personnel will depend on significant     
expansion of its research and development, marketing and sales, management,     
and administrative and financial capabilities. The failure of the Company's     
management to effectively manage expansion in its business could have a         
material adverse effect on the Company's business, results of operations        
and financial condition.                                                        

DEPENDENCE UPON KEY PERSONNEL.                                                  

The Company's future performance also depends in significant part upon the      
continued service of its key technical and senior management personnel,         
many of whom have been with the Company for a significant period of time.       
The Company does not maintain key man life insurance on any of its              
employees. Because the Company has a relatively small number of employees       
when compared to other leading companies in the same industry, its              
dependence on maintaining its employees is particularly significant. The        
Company is also dependent on its ability to attract and retain high quality     
personnel, particularly highly skilled software engineers for applications      
development.                                                                    

The industry is characterized by a high level of employee mobility and          
aggressive recruiting of skilled personnel. There can be no assurance that      
the Company's current employees will continue to work for the Company.          

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Loss of services of key employees could have a material adverse effect on       
the Company's business, results of operations and financial condition.          
Furthermore, the Company may need to grant additional stock options to key      
employees and provide other forms of incentive compensation to attract and      
retain such key personnel.                                                      

PRODUCT LIABILITY.                                                              

Certain of the Company's products provide applications that relate to           
patient clinical information. Any failure by the Company's products to          
provide accurate and timely information could result in claims against the      
Company. In addition, a court or government agency may take the position        
that our delivery of health information directly, including through             
licensed physicians, or delivery of information by a third party-site that      
a consumer accesses through the Company's web sites, exposes the Company to     
malpractice or other personal injury liability for wrongful delivery of         
healthcare services or erroneous health information. The Company maintains      
insurance to protect against claims associated with the use of its              
products, but there can be no assurance that its insurance coverage would       
adequately cover any claim asserted against the Company. A successful claim     
brought against the Company in excess of its insurance coverage could have      
a material adverse effect on the Company's business, results of operations      
and financial condition. Even unsuccessful claims could result in the           
Company's expenditure of funds in litigation and management time and            
resources.                                                                      

Certain physicians or other healthcare professionals who use the Company's      
Internet based products will directly enter health information about their      
patients including information that constitutes a record under applicable       
law, that the Company will store on the Company's computer systems.             
Numerous federal and state laws and regulations, the common law, and            
contractual obligations govern collection, dissemination, use and               
confidentiality of patient-identifiable health information, including:          

-          State privacy and confidentiality laws;                              
-          The Company's contracts with customers and partners;                 
-          State laws regulating healthcare professionals, such as physicians,  
pharmacists and nurse practitioners;                                  
-          Medicaid laws;                                                       
-          The Heath Insurance Portability and Accountability Act of 1996 and   
related rules proposed by the Heath Care Financing Administration; and
Health Care Financing Administration standards for Internet           
transmission of health data.                                          

The U.S. Congress has been considering proposed legislation that would          
establish a new federal standard for protection and use of health               
information.  Any failure by us or by our personnel or partners to comply       
with any of these legal and other requirements would result in material         
liability.                                                                      

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Although the company has systems in place for safeguarding patient health       
information from unauthorized disclosure, these systems may not preclude        
successful claims against the Company for violation of applicable law or        
other requirements.  Other third-party sites or links that consumers access     
through the Company's web sites also may not maintain systems to safeguard      
this health information, or may circumvent systems the Company put in place     
to protect the information from disclosure.  In addition, future laws or        
changes in current laws may necessitate costly adaptations to the Company's     
systems.                                                                        

There can be no assurance that the Company will not be subject to product       
liability claims, that such claims will not result in liability in excess       
of its insurance coverage, that the Company's insurance will cover such         
claims or that appropriate insurance will continue to be available to the       
Company in the future at commercially reasonable rates. Such claims could       
have a material adverse affect on the Company's business, results of            
operations and financial condition.                                             

UNCERTAINTY IN HEALTHCARE INDUSTRY; GOVERNMENT REGULATION.                      

The healthcare industry is subject to changing political, economic and          
regulatory influences that may affect the procurement processes and             
operation of healthcare facilities. During the past several years, the          
healthcare industry has been subject to an increase in governmental             
regulation of, among other things, reimbursement rates and certain capital      
expenditures. In the past, various legislators have announced that they         
intend to examine proposals to reform certain aspects of the U.S.               
healthcare system including proposals which may increase governmental           
involvement in healthcare, lower reimbursement rates and otherwise change       
the operating environment for the Company's clients. Healthcare providers       
may react to these proposals and the uncertainty surrounding such proposals     
by curtailing or deferring investments, including those for the Company's       
systems and related services. Cost-containment measures instituted by           
healthcare providers as a result of regulatory reform or otherwise could        
result in greater selectivity in the allocation of capital funds. Such          
selectivity could have an adverse effect on the Company's ability to sell       
its systems and related services. The Company cannot predict what impact,       
if any, such proposals or healthcare reforms might have on its business,        
results of operations and financial condition.                                  

In the year 2001, the Department of Health and Human Services expects to        
finalize proposed regulations at the federal level authorized under the         
Health Insurance Portability and Accountability Act of 1996.  These             
proposed regulations will establish new federal standards for privacy of        
health information.  The Company anticipates that these regulations will        
directly affect the Company's products and services, but the Company cannot     
accurately predict the impact at this time. Achieving compliance with these     
regulations could be costly and distract management's attention and other       
resources from the Company's historical business, and any noncompliance by      
the Company could result in civil and criminal penalties. In addition,          
development of related federal and state regulations and policies on            
confidentiality of health information could negatively affect the Company's     
business.                                                                       

The Company's software may be subject to regulation by the FDA as a medical     
device. Such regulation could require the registration of the applicable        
manufacturing facility and software/hardware products, application of           

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detailed record-keeping and manufacturing standards, and FDA approval or        
clearance prior to marketing.  An approval or clearance could create delays     
in marketing, and the FDA could require supplemental filings or object to       
certain of these applications, the result of which could have a material        
adverse effect on the Company's business, results of operations and             
financial condition.                                                            

YEAR 2000                                                                       

The Company is aware of issues associated with the programming code in          
existing computer systems related to the millennium. In particular,             
software applications that use only two digits to identify a year in the        
date field may fail or create errors in the year 2000 ("Year 2000 Issues").     
Year 2000 Issues create risk for the Company from unforeseen problems in        
computer systems that the Company sells to customers on a nationwide basis      
which are used, among other things, to process their financial transactions     
and schedule patients ("Company Products"), as well as systems that the         
Company uses internally to provide certain services to its customers and to     
process its own financial transactions ("Internal Use Systems").  The           
potential costs and uncertainties associated with Year 2000 Issues will         
depend upon a number of factors, including the Company's proprietary and        
third party developed software, hardware (hardware and third party              
developed software will hereinafter be referred to collectively as "Third       
Party Products") and the nature of the industry in which the Company            
operates.                                                                       

The nature of the Company's business and its relationships with its             
customers make it difficult to assess the magnitude of the Company's            
potential exposure as a result of Year 2000 issues. Company Products and        
Third Party Products sold by the Company may fail to operate properly or as     
expected due to Year 2000 Issues. Such failures could result in system          
failures or miscalculations causing disruptions of customers' operations,       
including among other things, an inability to process transactions, send        
invoices, conduct communications, treat patients or engage in similar           
normal business activities. In addition, Company Products and Third Party       
Products are often used in conjunction with other vendors' products and         
services and the Company must rely on these other vendors to complete the       
material remediation efforts necessary with regards to Year 2000 Issues in      
connection with such products and services. Should such vendors be unable       
to complete such remediation efforts in a timely manner, the use of such        
products and services on the same system as Company Products and Third          
Party Products may result in system failures. As a result of one or more of     
the above potential system failures, certain of the Company's customers may     
assert breach of warranty or other claims against the Company relating to       
Year 2000 functionality. The assertion of such claims may have a material       
adverse impact upon the Company's business, results of operations and           
financial condition. Furthermore, the efforts and resources devoted to Year     
2000 Issues of current and potential customers of the Company could result      
in the deferral, delay or cancellation by customers of current                  
installations of and plans to purchase systems from the Company.                

Internal Use Systems, including both information systems and non-               
information systems, may not operate properly or as expected due to Year        
2000 Issues. Year 2000 Issues could result in system failures or                
miscalculations causing disruption of the Company's operations, including       
among other things, an inability to process its own and certain of its          
customers' financial transactions, send invoices, conduct communications,       
or engage in similar normal business activities.                                

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The failure of one or more Internal Use Systems as a result of Year 2000        
Issues may have a material adverse impact upon the Company's business,          
results of operations and financial condition.  The Company cannot be sure      
that Year 2000 Issues will not affect its business.  Thus far, the Company      
has incurred no materially adverse problems related to Year 2000 Issues         
associated with the computer systems, software, other property and              
equipment it uses.  However, the Company cannot guarantee that Year 2000        
Issues will not adversely affect its business, operating results or             
financial condition at some point in the future.  See "Management's             
Discussion and Analysis of Financial Condition and Results of Operations -      
Year 2000 Implications.".                                                       

Item 2. Properties.                                                             
-----------                                                     
The Company's principal administrative, data processing, marketing and          
development operations are located in approximately 19,000 square feet of       
leased space in Tustin, California under a lease which expires in March         
2001. In addition, the Company leases approximately 13,000 square feet of       
space in Santa Ana, California to house its assembly and warehouse              
operations, approximately 15,000 square feet of space in Horsham,               
Pennsylvania, the principal office for Clinitec, approximately 12,000           
square feet of space in Atlanta, Georgia, the principal office for              
MicroMed, and an aggregate of 4,000 square feet of space in Florida,            
Kansas, Minnesota, Texas, Wisconsin and Washington to house additional          
sales, training and service operations. These leases, including options,        
have expiration dates ranging from month-to-month to August 2001. The           
Company believes that its facilities are adequate for its current needs and     
that suitable additional or substitute space is available, if needed, at        
commercially reasonable rates.                                                  

Item 3. LEGAL PROCEEDINGS.                                                      
------------------                                              
On April 22, 1997, a purported class action entitled JOHN P. CAVENY v.          
QUALITY SYSTEMS, INC., ET AL. was filed in the Superior Court of the State      
of California for the County of Orange, in which Mr. Caveny, on behalf of       
himself and all others who purchased the Company's Common Stock between         
June 26, 1995 and July 3, 1996, alleges that the Company, and Sheldon           
Razin, Robert J. Beck, Gregory S. Flynn, Abe C. LaLande, Donn Neufeld, Irma     
G. Carmona, John A. Bowers, Graeme H. Frehner, and Gordon L. Setran (all of     
the foregoing individuals were either officers, directors or both during        
the period from June 26, 1995 through July 3, 1996), as well as other           
defendants not affiliated with the Company, violated California                 
Corporations Code Sections 25400 and 25500, California Civil Code Sections      
1709 and 1710, and California Business and Professions Code Sections 17200      
et. seq., by issuing positive statements about the Company that allegedly       
were knowingly false, in part, in order to assist the Company and the           
individual defendants in selling Common Stock at an inflated price in the       
Company's March 5, 1996 public offering and at other points during the          
class period. The complaint seeks compensatory and punitive damages in          
unspecified amounts, disgorgement, declaratory and injunctive relief, and       
attorneys' fees.                                                                

On January 25, 1999, the court denied plaintiffs' motion to certify the         
class representative and class legal counsel. Plaintiffs have appealed that     
decision. On February 25, 2000, the Fourth District Court of Appeals            
affirmed the order disqualifying the class legal counsel.  On May 9, 2000,      
the Court of Appeals issued its Remittur certifying its decision as final.      
Plaintiff will seek new class counsel, however, the named defendants will       
again have the opportunity to oppose class certification.                       

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The Company and its named officers and directors deny all remaining             
allegations of wrongdoing made against them in these suits, consider the        
allegations groundless and without merit, and intend to vigorously defend       
against these actions.                                                          

On May 14, 1997, a second purported class action entitled WENDY WOO v.          
QUALITY SYSTEMS, INC., ET AL. was filed in the same court. This complaint,      
which has been consolidated with the Caveny lawsuit, essentially repeats        
the allegations in the Caveny lawsuit and seeks identical relief.  The          
Company and the other named defendants successfully demurred to the             
plaintiffs' claim under California Civil Code Sections 1709 and 1710, and       
that claim, which served as the only basis for plaintiffs' request for          
punitive damages, has been dismissed from both actions.                         

On July 1, 1997, a third purported class action entitled WADE CHENEY v.         
QUALITY SYSTEMS, INC., ET AL. was filed in the United States District Court     
of the Central District of California, Southern Division. The complaint         
makes essentially the same factual allegations as in the Caveny and Woo         
complaints, and purports to state claims under Section 10(b) of the             
Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and under            
Section 20(a) of said Act. By Court order dated August 13, 1997, this           
action was stayed temporarily and the Court reserved jurisdiction to lift       
the stay after all matters are final in the Caveny and Woo actions or if        
otherwise appropriate, and on August 15, 1997 the case was removed from the     
Court's active caseload. The Company denies all allegations of wrongdoing       
made in this suit, considers the allegations groundless and without merit,      
and if the stay is ever lifted, the Company intends to vigorously defend        
against this action.                                                            

On March 23, 1999, a purported class action and derivative complaint            
entitled IRVING ROSENZWEIG v. SHELDON RAZIN, ET AL. was filed in the            
Superior Court of the State of California for the County of Orange, in          
which Mr. Rosenzweig, on behalf of himself and all non-director                 
shareholders, and derivatively on behalf of the Company, alleges that           
Sheldon Razin, John Bowers, William Bowers, Patrick Cline, Janet Razin and      
Gordon Setran (all of the foregoing individuals are directors of the            
Company) breached their fiduciary duties by allegedly entrenching               
themselves in their positions of control, failing to ensure that third-         
party offers involving the Company were fully and fairly considered, and/or     
failing to conduct a reasonable inquiry to assure the maximization of           
shareholder value. The complaint seeks declaratory and injunctive relief,       
an accounting of monetary damages allegedly suffered by plaintiff and the       
purported class, and attorneys' fees.  Defendants demurred to each of the       
causes of action alleged in the complaint and the court sustained those         
demurrers with leave to amend in December 1999.  Rather than file an            
amended complaint, plaintiff filed a motion for attorney's fees.                
Defendants, in turn, filed a motion to dismiss the action for failure to        
file an amended pleading within the time limit specified by the court.          
Those motions are currently pending.                                            

The parties agreed to a settlement of action and stipulated to a final          
judgement and order which was entered by the court on May 15, 2000 at which     
time the action was dismissed.  The final judgement and order provided for      
a dismissal of the action with prejudice, releases given to each of the         
defendants, and payment of the nominal sum of $100,000 (paid by the             
Company's Directors and Officers Liability Insurance Company) in full           
settlement of plaintiff's motion for attorney's fees.  The settlement           
further expressly provided that it did not constitute an admission of any       
liability of defendants, which defendants continue to vigorously deny.          

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The Company is a party to various other legal proceedings incidental to its     
business, none of which are considered by the Company to be material.           

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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.                    
----------------------------------------------------            

No matter was submitted to a vote of security holders during the fourth         
quarter of fiscal year 2000.                                                    

Executive Officers of the Registrant.                                           
-------------------------------------                                           

The executive officers of the Company as of May 31, 2000 were as follows:       

                                                                [Download Table]

       Name           Age                 Position                                
------------------  ------  -------------------------------------                 
                                                                                  
Patrick B. Cline      39     Interim Chief Executive Officer                      

Greg Flynn            42     General Manager,                                     
                                    Executive Vice President                      

Don L. Jackson        39     Vice President Marketing                             

Donn Neufeld          43     Vice President Software                              
                                    and Operations                                

David Razin           36     Vice President Business Development                  

Paul Holt                              34         Interim Chief Financial Officer,
                                    Secretary                                     

Executive officers of the Company are elected by, and serve at the              
discretion of, the Board of Directors. Additional information regarding the     
Company's executive officers is set forth below.                                

Patrick B. Cline has served as Interim Chief Executive Officer since April      
2000.  Mr. Cline has served as Executive Vice President of the Company          
since May 1996. Mr. Cline is a co-founder of Clinitec and has served as its     
President since its inception in January 1994 and as its Chief Operating        
Officer since May 1996 when it was acquired by QSI. Mr. Cline served as         
Clinitec's Chairman of the Board of Directors and Chief Executive Officer       
from January 1994 until May 1996. Prior to co-founding Clinitec, Mr. Cline      
served, from July 1987 to January 1994, as Vice President of Sales and          
Marketing with Script Systems, a subsidiary of InfoMed, a healthcare            
information systems company. From January 1994 to May 1994, after the           
founding of Clinitec, Mr. Cline continued to serve, on a part time basis,       
as Script Systems' Vice President of Sales and Marketing. Mr. Cline has         
held senior positions in the healthcare information systems industry since      
1981.  Mr. Cline has been appointed interim Chief Executive Officer             
following the resignation of Sheldon Razin on April 3, 2000.                    

Greg Flynn has served as the Company's General Manager since April 2000 and     
as Executive Vice President since August 1998 after serving as Vice             
President of Sales and Marketing from January 1996 to August 1998. Prior to     
January 1996, Mr. Flynn served as Vice President Administration since June      
1992. In these capacities, Mr. Flynn has been responsible for numerous          
functions related to the ongoing management of the Company and sales.           
Previously, Mr. Flynn served as the Company's Vice President Corporate          
Communications.  Since joining the Company in January 1982, Mr. Flynn has       
held a variety of increasingly responsible management positions within the      
organization. He holds a B.A. degree in English from the University of          
California, Santa Barbara.                                                      

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Don L. Jackson joined the Company in June 1998 as its Vice President of         
Marketing. Prior to joining the Company, Mr. Jackson was the Vice President     
of Sales and Marketing of Wyndgate Technologies, a developer of information     
systems for blood banks and transfusion management. From February 1992 to       
May 1997, Mr. Jackson held several senior management positions with Henry       
Schein, Inc., Practice Management Technologies Division, a leading provider     
of computer-based solutions to the dental, medical, and veterinary markets.     
From 1985 to 1992, Mr. Jackson was Executive Vice President of FoxMeyer's       
Retail Services Business unit, a developer and distributor of retail            
pharmacy point of sale computer systems. Mr. Jackson holds an M.B.A. from       
Southern Methodist University and a B.A. in Computer Science from the           
University of Texas at Austin.                                                  

Donn Neufeld has served as the Company's Vice President Software and            
Operations since January 1996 and as Vice President Operations from June        
1986 until January 1996. From April 1981 until June 1986, Mr. Neufeld held      
the position of Manager of Customer Support. He joined the Company in           
December 1980 as part of the System Generation Department. Prior to joining     
the Company, Mr. Neufeld was a System Analyst/Programmer at Loma Linda          
University Medical Center.                                                      

David Razin has served as Vice President Business Development of the            
Company since August 1997. Before being named to this position, Mr. Razin       
served from 1995 to 1997 as Director of Product Development. In that            
position, Mr. Razin oversaw the development of the Company's Legacy             
Products, EDI services network and Internet/intranet applications. From         
1988 to 1995, Mr. Razin held the position of Manager of Client Managing and     
Training. Prior to that, Mr. Razin held various positions in software           
development from 1985 to 1988. David Razin is the son of Sheldon Razin.         

Paul Holt was appointed Interim Chief Financial Officer in May 2000. Mr.        
Holt has served as the Company's Controller since January, 2000.  Prior to      
joining the Company, Mr. Holt was the Controller of Sierra Alloys Co.,          
Inc., a titanium metal manufacturing company from August 1999 to December       
1999.  From May 1997 to July 1999, he was Controller of Refrigeration           
Supplies Distributor, a wholesale distributor and manufacturer of               
refrigeration supplies and heating controls.  From March 1995 to April          
1997, he was Assistant Controller of Refrigeration Supplies Distributor.        
Mr. Holt is a Certified Public Accountant and holds an M.B.A. from the          
University of Southern California and a B.A. in Economics from the              
University of California, Irvine.                                               

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PART II.

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

The Company's Common Stock is traded on the Nasdaq National Market under        
the symbol "QSII". The following table sets forth for the quarters              
indicated the high and low sales prices as reported by NASDAQ. The              
quotations reflect inter-dealer prices, without retail markup, markdown, or     
commissions, and may not necessarily represent actual transactions.             

Quarter Ended                    High            Low                        
------------------              --------        --------                        
June 30, 1998                     11.25            7.25                         
September 30, 1998                 9.28            3.50                         
December 31, 1998                  5.00            3.00                         
March 31, 1999                     4.94            3.50                         

June 30, 1999                      6.56            3.75                         
September 30, 1999                 8.38            5.63                         
December 31, 1999                  7.75            5.88                         
March 31, 2000                    18.75            6.75                         

At May 31, 2000, there were approximately 153 holders of record of the          
Company's Common Stock. The Company estimates the number of beneficial          
holders of its Common Stock to be in excess of 1,200.                           

Through May 31, 2000, the Company has not paid cash dividends on shares of      
its Common Stock. The Company anticipates that for the foreseeable future,      
all earnings, if any, will be retained for use in the Company's business        
and it does not anticipate paying any cash dividends in the future. Payment     
of future dividends, if any, will be at the discretion of the Company's         
Board of Directors after taking into account various factors, including the     
Company's financial condition, operating results, current and anticipated       
cash needs and plans for expansion.                                             

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Item 6. SELECTED FINANCIAL DATA.                                                
------------------------                                        

The following selected financial data with respect to the Company's             
Consolidated Statements of Operations Data for each of the five years in        
the period ended March 31, 2000 and the Consolidated Balance Sheet Data as      
of the end of each such fiscal year are derived from the audited financial      
statements of the Company. The following information should be read in          
conjunction with the Consolidated Financial Statements of the Company and       
the related notes thereto and "Item 7. Management's Discussion and Analysis     
of Financial Condition and Results of Operations." included elsewhere           
herein.                                                                         

Consolidated Statements of Operations Data            
(In thousands, except for per share data)           

                                                                [Download Table]

                                          Year Ended March 31,           
                              -------------------------------------------
                                2000     1999     1998     1997     1996 
                              -------  -------  -------  -------  -------
                                                                         
Net Revenues                  $36,373  $33,816  $31,216  $20,127  $16,732
Cost of Products                                                         
  and Services                 16,395   15,834   13,509   10,089    7,929
                              -------  -------  -------  -------  -------
Gross Profit                   19,978   17,982   17,707   10,038    8,803
Selling, General                                                         
  and Administrative           12,645   13,495   12,485    7,736    3,897
Research and Development        3,726    3,603    3,072    1,978    1,567
Purchased In-Process                                                     
  Research and Development(1)    -        -      10,200    8,300      -  
                              -------  -------  -------  -------  -------

Income (Loss)                                                            
  from Operations (3)           3,607      884   (8,050)  (7,976)   3,339
Investment Income                 759      413      971    1,285      482
                              -------  -------  -------  -------  -------
Income (Loss) before                                                     
  Provision for (Benefit                                                 
  from) Income Taxes (3)        4,366    1,297   (7,079)  (6,691)   3,821
Provision for (Benefit                                                   
  from) Income Taxes (2)        1,862      713   (2,463)     784    1,528
                              -------  -------  -------  -------  -------
Net Income (Loss) (3)         $ 2,504  $   584  $(4,616) $(7,475) $ 2,293
                              =======  =======  =======  =======  =======
Net Income (Loss) per Share:                                             
  Basic (3)                   $  0.40  $  0.09  $ (0.77) $(1.26)  $  0.49
                              =======  =======  =======  =======  =======
  Diluted (3)                 $  0.40  $  0.09  $ (0.77) $(1.26)  $  0.49
                              =======  =======  =======  =======  =======
Weighted Average                                                         
  Shares Outstanding:                                                    
  Basic                         6,208    6,176    5,981    5,937    4,640
                              =======  =======  =======  =======  =======
  Diluted                       6,261    6,185    5,981    5,937    4,776
                              =======  =======  =======  =======  =======

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Consolidated Balance Sheet Data     
(in thousands)      

                                                                [Download Table]

                                                  March 31,               
                               -------------------------------------------
                                 2000     1999     1998     1997     1996 
                               -------  -------  -------  -------  -------
                                                                          
Cash and Cash Equivalents and                                             
  Short-Term Investments       $16,169  $14,441  $17,080  $22,735  $28,944
Working Capital                 21,332   18,166   15,543   25,613   30,196
Total Assets                    44,136   40,218   40,916   37,866   37,272
Total Liabilities               12,053   10,554   13,475    5,596    4,571
Shareholders' Equity           $32,083  $29,664  $27,441  $32,270  $32,701
                               =======  =======  =======  =======  =======

(1) In May 1996, the Company acquired Clinitec (see "Item 1. Business.          
Acquisitions.") which was treated as a purchase transaction for         
accounting purposes. In connection with this treatment, the Company     
incurred an $8.3 million charge for purchased in-process research and   
development during the year ended March 31, 1997.                       

In May 1997, the Company acquired MicroMed (see "Item 1. Business.      
Acquisitions.") which was treated as a purchase transaction for         
accounting purposes. In connection with this treatment, the Company     
incurred a $10.2 million charge for purchased in-process research and   
development during the year ended March 31, 1998.                       

(2) The provision for income taxes for the year ended March 31, 1997            
differs from the Company's combined Federal and State statutory rates   
primarily due to the non-deductible charge for purchased in-process     
research and development incurred in connection with the acquisition of 
Clinitec in May 1996.                                                   

(3) Includes a charge of $10.2 million and $8.3 million for purchased in-       
process research and development for the years ended March 31, 1998 and 
1997, respectively. Excluding the charge, on a pro forma basis, income  
from operations and income before provision for (benefit from) income   
taxes would have been $2.2 million and $3.1 million, respectively, for  
fiscal 1998 and $324,000 and $1.6 million, respectively for fiscal      
1997. The income tax benefit related to the charge for purchased in-    
process research and development for the years ended March 31, 1998 and 
1997 was $3.9 million and $0, respectively. Excluding the charge and    
related income tax benefit, on a pro forma basis, net income and basic  
and diluted income per share would have been $1.7 million, $0.29 and    
$0.28, respectively, for fiscal 1998 and $825,000, $0.14 and $0.14,     
respectively, for fiscal 1997.                                          

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

Except for the historical information contained herein, the matters             
discussed in this Annual Report on Form 10-K, including discussions of the      
Company's product development plans, business strategies and market factors     
influencing the Company's results, are forward-looking statements that          
involve certain risks and uncertainties. Actual results may differ from         
those anticipated by the Company as a result of various factors, both           
foreseen and unforeseen, including, but not limited to, the Company's           
ability to continue to develop new products and increase systems sales in       
markets characterized by rapid technological evolution, consolidation, and      
competition from larger, better capitalized competitors. Many other             
economic, competitive, governmental and technological factors could impact      
the Company's ability to achieve its goals, and interested persons are          
urged to review the risks described in "Item 1. Business. Risk Factors."        
and in "Management's Discussion and Analysis of Financial Condition and         
Results of Operations." set forth below, as well as in the Company's other      
public disclosures and filings with the Securities and Exchange Commission.     

The following discussion should be read in conjunction with, and is             
qualified in its entirety by, the Consolidated Financial Statements and         
related notes thereto included elsewhere herein. Historical results of          
operations, percentage margin fluctuations and any trends that may be           
inferred from the discussion below are not necessarily indicative of the        
operating results for any future period.                                        

RESULTS OF OPERATIONS.        

The following table sets forth for the periods indicated the percentage of      
net revenues represented by each item in the Company's Consolidated             
Statements of Operations.                                                       

                                                                [Download Table]

                                                  Year Ended March 31,     
                                              ---------------------------  
                                                2000      1999      1998   
                                              -------   -------   -------  
                                                                           
Net Revenues:                                                              
  Sales of computer systems,                                               
    upgrades and supplies                        52.9%     55.8%     64.9% 
  Maintenance and other services                 47.1      44.2      35.1  
                                              -------   -------   -------  
                                                100.0     100.0     100.0  
Cost of Products and Services                    45.1      46.8      43.3  
                                              -------   -------   -------  
Gross Profit                                     54.9      53.2      56.7  
Selling, General and Administrative Expenses     34.8      39.9      40.0  
Research and Development Costs                   10.2      10.7       9.8  
Purchased In-Process Research and Development     -         -        32.7  
                                              -------   -------   -------  
Income (Loss) from Operations                     9.9       2.6     (25.8) 
Investment Income                                 2.1       1.2       3.1  
                                              -------   -------   -------  
Income (Loss) before Provision                                             
  for (Benefit from) Income Taxes                12.0       3.8     (22.7) 
Provision for (Benefit from) Income Taxes         5.1       2.1      (7.9) 
                                              -------   -------   -------  
Net Income (Loss)                                 6.9%      1.7%    (14.8)%
                                              =======   =======   =======  

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FOR THE YEARS ENDED MARCH 31, 2000 AND 1999.                                    

For the year ended March 31, 2000, the Company's net income was $2,504,000      
or $0.40 per share on a basic and diluted basis.  In comparison, the            
company earned $584,000 or $0.09 per share on a basic and diluted basis in      
the year ended March 31, 1999.  The increase in net income was achieved         
through a combination of an increase in revenue from software systems           
sales, maintenance, and other services along with a reduction in selling,       
general and administrative expenses.  Selling, general and administrative       
expenses declined due to the integration of the Company's two subsidiaries,     
Clinitec and Micromed.  For the year ended March 31, 2000, revenue              
increased 7.6% to $36.4 million compared to $33.8 million in the year ended     
March 31, 1999.  Selling, general and administrative expenses declined 6.3%     
to $12.6 million in the year ended March 31, 2000 compared to $13.5 million     
in the year ended March 31, 1999.                                               

Net Revenues.  Net revenues for the year ended March 31, 2000 increased         
7.6% to $36.4 million from $33.8 million for the year ended March 31, 1999.     
Sales of computer systems, upgrades and supplies increased 2.0% to $19.2        
million from $18.9 million while net revenues from maintenance and other        
service grew 14.6% to $17.1 from $14.9 million during comparable periods.       
The increase in net revenues from sales of computer systems, upgrades and       
supplies was principally due to increased sales of the Company's Clinical       
Product Suite, NextGen-epm and NextGen-emr products offset by a decrease in     
sales of Legacy systems.  The increase in maintenance and other services        
net revenue resulted primarily from the Company's increased client base         
together with an increase in revenues generated from the Company's              
electronic data interchange services.  Revenue from the Company's               
electronic data interchange services increased 37.6% to $3.8 million for        
the year ending March 31, 2000 compared to $2.8 million in the year ending      
March 31, 1999.                                                                 

Cost of Products and Services.  Cost of products and services for the year      
ended March 31, 2000 increased 3.5% to $16.4 million from $15.8 million for     
the year ended March 31, 1999 while the cost of products and services as a      
percentage of net revenues decreased to 45.1% compared to 46.8% during the      
comparable periods.  The decrease in cost of products and services as a         
percentage of net revenues resulted from a combination of: the effects of       
the increase of maintenance and other services revenues, a change in the        
mix of new systems sales toward systems with lower hardware content, a          
leveling out of product development, customer service, support and training     
costs, and an increase in the cost of electronic data interchange services.     
In the year ended March 31, 2000, the Company was able to leverage its          
existing infrastructure on to a higher level of computer systems, upgrades      
and supplies sales.  This contributed to the reduction in cost of products      
and services as a percentage of revenue during the year ended March 31,         
2000.  Also, new computer systems sales in the year ended March 31, 2000        
had a lower level of hardware content compared to the year ended March 31,      
1999.  System sales without significant hardware components generally yield     
higher margins than those systems sales with a higher level of hardware         
content.  The mixture of sales with and without significant hardware            
components fluctuates from period to period.  The effect of the mentioned       
items was slightly offset by an increase in revenue from electronic data        
interchange services which yield a lower margin than other products and         
services.                                                                       

Selling, General and Administrative.  Selling, general and administrative       
expenses for the year ending March 31, 2000 decreased 6.3% to $12.6 million     
from $13.5 million.                                                             

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The decrease in selling, general and administrative expenses was primarily      
the result of the integration of Clinitec and Micromed along with a             
reduction in bad debt expense for the year ended March 31, 2000 compared to     
the year ended March 31, 1999.                                                  

Selling, general and administrative expenses as a percentage of net revenue     
declined to 34.8% for the year ended March 31, 2000 compared to 39.9% in        
the year ended March 31, 1999.  The decline in selling, general and             
administrative expenses as a percentage of net revenue was due to the           
decrease in selling, general and administrative expense along with the          
increase in revenue described above.                                            

Research and Development Costs.  Research and development costs for the         
year ended March 31, 2000 increased 3.4% to $3.7 million from $3.6 million      
for the year ended March 31, 1999.  The increase is the result of increased     
research and development efforts by Clinitec and Micromed.  Research and        
development costs as a percentage of net revenues decreased to 10.2% as         
compared to 10.7% for the respective fiscal years as a result of the effect     
of costs associated with the increased research and development efforts         
growing at a proportionately lower rate than net revenues during the            
comparable years.                                                               

Investment Income.  Investment income for the year ended March 31, 2000         
increased 83.8% to $759,000 from $413,000 for the year ended March 31,          
1999.  During the year ended March 31, 1999, the Company liquidated certain     
investments and incurred a loss of $241,000. Also contributing to the           
comparative increase in investment income was an increase in average funds      
available for investment during the year ended March 31, 2000.                  

Provision for (Benefit from) Income Taxes.  The provision for income taxes      
for the year ended March 31, 2000 was $1,862,000 as compared to $713,000        
for the year March 31, 1999.  The provision for income taxes for the years      
ended March 31, 2000 and 1999 respectively, differ from the combined            
statutory rates primarily due to the effect of varying state tax rates          
together with the impact of non-deductible amortization of certain              
intangible assets acquired in the May 1996 acquisition of Clinitec.             

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FOR THE YEARS ENDED MARCH 31, 1999 AND 1998.                                    

For the year ended March 31, 1999, the Company's net income was $584,000,       
or $0.09 per share on a basic and diluted basis. In comparison, after           
recognizing a $10.2 million charge for purchased in-process research and        
development in connection with the MicroMed acquisition, the Company            
incurred a net loss of $(4.6) million, or $(0.77) per share on a basic and      
diluted basis, for the year ended March 31, 1998. Excluding the charge, net     
of the related income tax benefit, net income for the year ended March 31,      
1998 would have been $1.7 million, or $0.29 per share and $0.28 per share       
on a basic and diluted basis, respectively.                                     

Net Revenues. Net revenues for the year ended March 31, 1999 increased 8.3%     
to $33.8 million from $31.2 million for the year ended March 31, 1998.          
Sales of computer systems, upgrades and supplies decreased 6.9% to $18.9        
million from $20.3 million while net revenues from maintenance and other        
services grew 36.5% to $14.9 million from $10.9 million during the              
comparable periods. The decrease in net revenues from sales of computer         
systems, upgrades and supplies was principally due to the impact of             
adopting SOP 97-2 as of April 1, 1998 resulting in the deferral of certain      
revenues from system contracts executed and shipped during the year ended       
March 31, 1999 combined with the effect of a slight decrease in new system      
sales during fiscal 1999. The increase in maintenance and other services        
net revenue resulted principally from an increase in revenues from the          
Company's increased client base together with an increase in revenues           
generated from the Company's electronic data interchange services.              

Cost of Products and Services. Cost of products and services for the year       
ended March 31, 1999 increased 17.2% to $15.8 million from $13.5 million        
for the year ended March 31, 1998 while cost of products and services as a      
percentage of net revenues increased to 46.8% from 43.3% during the             
comparable periods. The increase in cost of products and services in amount     
during the 1999 fiscal year as compared to the 1998 fiscal year resulted        
from a combination of the effects of: the increase in maintenance and other     
service revenues; increased product development, customer service, support,     
and training personnel at both Clinitec and MicroMed during the 1999 fiscal     
year; a change in the mix of new systems sales toward systems with higher       
hardware content in the fiscal 1999 year; and, the impact of the                
acquisition of MicroMed. The increase in the cost of products and services      
as a percentage of net revenues for the year ended March 31, 1999 as            
compared to the year ended March 31, 1998 resulted primarily from a             
combination of the overall increase in the costs associated with the            
above-described infrastructure expansion growing at a proportionately           
greater rate on a year to year basis than the growth in net revenues            
together with an increase in the percentage of revenues from new systems        
sales with higher hardware content. Systems sales with significant hardware     
components generally yield lower margins than those systems sales without       
significant hardware components. The mixture of sales with and without          
significant hardware components fluctuates from period to period.               

Selling, General and Administrative Expenses. Selling, general and              
administrative expenses for the year ended March 31, 1999 increased 8.1% to     
$13.5 million from $12.5 million for the year ended March 31, 1998              
primarily as a result of: the inclusion of such MicroMed expenses for the       
entire year ended March 31, 1999 as compared to the inclusion of such           
MicroMed expenses for only that portion of the corresponding year ended         

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March 31, 1998 following the May 1997 MicroMed acquisition; an additional       
$236,000 provision for doubtful accounts relating to one of MicroMed's          
customers; an increase in Clinitec's and MicroMed's selling efforts, sales      
personnel and administrative infrastructure offset in part by a decrease in     
such infrastructure at QSI. In addition, primarily as a result of the less      
mature Clinitec and MicroMed infrastructures, selling, general and              
administrative expenses as a percentage of net revenues remained relatively     
unchanged at 39.9% and 40.0% for the respective years despite an increase       
in net revenues.                                                                

Research and Development Costs. Research and development costs for the year     
ended March 31, 1999 increased 17.3% to $3.6 million from $3.1 million for      
the year ended March 31, 1998. The increase is the result of increased          
research and development efforts by Clinitec and MicroMed as well as            
consolidation of MicroMed's research and development costs for the entire       
1999 fiscal year as compared to consolidating such expenses only for that       
portion of the corresponding 1998 fiscal year following the May 1997            
purchase of the MicroMed business. Research and development costs as a          
percentage of net revenues increased to 10.7% as compared to 9.8% for the       
respective fiscal years as a result of the effect of costs associated with      
the increased research and development efforts growing at a proportionately     
greater rate than net revenues during the comparable years.                     

Purchased In-Process Research and Development. In connection with the           
acquisition of MicroMed in May 1997, the purchase price allocated to in-        
process research and development for which technological feasibility had        
not been established was $10.2 million. In accordance with Statement of         
Financial Accounting Standards No. 86, "Accounting for the Costs of             
Computer Software to be Sold, Leased or Otherwise Marketed," software           
development costs must be expensed until technological feasibility has been     
established. Accordingly, the purchase price allocated to MicroMed's            
purchased in-process research and development was expensed during the year      
ended March 31, 1998. There was no similar acquisition transaction during       
the year ended March 31, 1999.                                                  

Investment Income. Investment income for the year ended March 31, 1999          
decreased 57.5% to $413,000 from $971,000 for the year ended March 31,          
1998. The Company had an investment in a fund which traded in special           
situation securities. During the year ended March 31, 1999, the investment      
was liquidated and the Company incurred a loss of $241,000 after                
recognizing an unrealized gain of $120,000 during fiscal 1998 relating to       
this investment. Over the life of this investment, the Company incurred a       
net gain of $22,000 in connection therewith. Also contributing to the           
change in investment income for the fiscal 1999 year as compared to the         
fiscal 1998 year was a decrease in average funds available for investment       
during the year ended March 31, 1999. The decrease in available funds is        
primarily the result of the timing and amounts of the cash payments in May      
1997 and June 1998 made to acquire MicroMed, together with amounts used to      
fund the growth of Clinitec and MicroMed.                                       

Provision for (Benefit from) Income Taxes. The provision for income taxes       
for the year ended March 31, 1999 was $713,000 as compared to a benefit of      
$2.5 million for the year ended March 31, 1998. The provision for and           
benefit from income taxes for the years ended March 31, 1999 and 1998,          
respectively, differ from the combined statutory rates primarily due to the     
effect of varying state tax rates together with the impact of non-              
deductible amortization of certain intangible assets acquired in the May        
1996 acquisition of Clinitec.                                                   

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LIQUIDITY AND CAPITAL RESOURCES.        

Cash and cash equivalents increased $1.7 million in the year ended March        
31, 2000 after declining by $1.9 million and $5.7 million in the years          
ended March 31, 1999 and March 31, 1998, respectively.  The large decreases     
in cash and cash equivalents in fiscal 1998 and 1997 were as a result of        
payments made in connection with the Clinitec and MicroMed acquisitions.        

Net cash provided by operating activities was $3.6 million, $3.3 million        
and $2.2 million for the years ended March 31, 2000, 1999 and 1998,             
respectively. Net cash provided by operations for the year ended March 31,      
2000 consisted principally of net income before depreciation and                
amortization and increases in deferred service revenue, offset by an            
increase in accounts receivable and a decrease in accounts payable.             
Net cash provided by operations for the year ended March 31, 1999 consisted     
primarily of the Company's net loss adjusted for the principal non-cash         
operating expenses of depreciation, amortization and the $10.2 million          
charge for purchased in-process research and development incurred in            
connection with the acquisition of MicroMed together with increases in          
deferred service revenue and other current liabilities offset in part by an     
increase in accounts receivable and deferred income tax benefits. The           
increase in accounts receivable during each of the fiscal years resulted        
primarily from increased sales and the timing of sales in each period.          

Net cash used in investing activities was $1.8 million, $5.1 million and        
$7.8 million for the years ended March 31, 2000, 1999 and 1998,                 
respectively. Net cash used in investing activities for the year ended          
March 31, 2000 was principally composed of investments in capitalized           
software and fixed assets.  Net cash used in investing activities for the       
years ended March 31, 1999 and 1998 was principally impacted by the $3.8        
million and $5.3 million, respectively, paid in connection with the             
MicroMed acquisition. Net cash used for additions to equipment,                 
improvements and capitalized software for the years ended March 31, 2000,       
1999 and 1998 were $1.7 million, $1.7 million and $2.7 million                  
respectively.  There were no material short-term investment sales or            
purchases during the years ended March 31, 2000 and 1998.  Net cash used in     
investing activities for the year ended March 31, 1999 were offset in part      
by cash provided from net sales of short-term investments of $467,000.          

Net cash used in financing activities for the years ended March 31, 2000        
and 1999 was $85,000 and $197,000, respectively, which includes $111,000        
and $247,000 used in each fiscal year to repurchase 17,400 shares and           
40,100 shares, respectively, of the Company's Common Stock. Net cash            
provided by (used in) financing activities for the years ended March 31,        
2000, 1999 and 1998 also includes the proceeds from the exercise of             
employee stock options.                                                         

The Company has no significant capital commitments and currently                
anticipates that additions to equipment and improvements for fiscal 2001        
will be comparable to fiscal 2000.                                              

At March 31, 2000, the Company had cash and cash equivalents of $15.9           
million and short-term investments of $243,000. The Company believes that       
its cash and cash equivalents and short-term investments on hand at March       
31, 2000, together with the cash flows from operations, if any, will be         
sufficient to meet its working capital and capital expenditure                  
requirements for the next year.                                                 

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YEAR 2000 IMPLICATIONS.     

INTRODUCTION.                                                                   

The Company is aware of issues associated with the programming code in          
existing computer systems as the millennium approaches. In particular,          
software applications that use only two digits to identify a year in the        
date field may fail or create errors in the year 2000 ("Year 2000 Issues").     
Year 2000 Issues create risk for the Company from unforeseen problems in        
computer systems that the Company sells to customers on a nationwide basis      
which are used, among other things, to process their financial transactions     
and schedule patients ("Company Products"), as well as systems that the         
Company uses internally to provide certain services to its customers and to     
process its own financial transactions ("Internal Use Systems").  The           
potential costs and uncertainties associated with Year 2000 Issues will         
depend upon a number of factors, including the Company's proprietary and        
third party developed software, hardware (hardware and third party              
developed software will hereinafter be referred to collectively as "Third       
Party Products") and the nature of the industry in which the Company            
operates.                                                                       

Company Products and Third Party Products sold by the Company may fail to       
operate properly or as expected due to Year 2000 Issues. Such failures          
could result in system failures or miscalculations causing disruptions of       
customers' operations, including among other things, an inability to            
process transactions, send invoices, conduct communications, schedule and       
treat patients or engage in similar normal business activities. Further,        
products and services used by the Company's customers, but not supplied by      
the Company, could fail to operate properly or as expected due to Year 2000     
Issues. Customers' efforts to plan for such events could result in the          
deferral, delay or cancellation by customers of current installations of        
and plans to purchase systems from the Company. Similarly, Internal Use         
Systems, including both information systems and non-information systems,        
may not operate properly or as expected due to Year 2000 Issues. Year 2000      
Issues could result in system failures or miscalculations causing               
disruption of the Company's operations, including among other things, an        
inability to process its own and certain of its customers financial             
transactions, send invoices, conduct communications, or engage in similar       
normal business activities.                                                     

The Company cannot be sure that Year 2000 Issues will not affect its            
business.  Thus far, the Company has incurred no materially adverse             
problems related to Year 2000 Issues associated with the computer systems,      
software, other property and equipment we use.  However, the Company cannot     
guarantee that Year 2000 Issues will not adversely affect its business,         
operating results or financial condition at some point in the future.           

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STATE OF READINESS.                                                             

The Company has undertaken various initiatives intended to address Year         
2000 Issues. The Company has identified individuals and/or working groups       
to (1) develop and implement the Company's definition of Year 2000              
readiness; (2) assess Company Products, Third Party Products and Internal       
Use Systems for possible Year 2000 Issues; (3) monitor development, testing     
and remediation efforts with respect to Company Products, Third Party           
Products and Internal Use Systems; (4) monitor and coordinate the Company's     
deployment plans and results with respect to Year 2000 releases of Company      
Products, Third Party Products and Internal Use Systems; and, (5) develop       
contingency plans with respect to Company Products, Third Party Products        
and Internal Use Systems.  Although the Company's efforts to address Year       
2000 Issues do not fall precisely into sequential phases, generally these       
efforts are comprised of an assessment phase, a development phase (only         
with respect to Company Products and certain proprietary Internal Use           
Systems), a deployment or remediation phase, and a contingency planning         
phase.                                                                          

Company Products. The NextGen Suite of Applications and CPS are designed to     
be Year 2000 compliant and contain no known Year 2000 Issues when               
configured and used in accordance with the related documentation, and           
provided that the underlying operating system of the host machine and any       
other software used with or in the host machine are also Year 2000              
compliant.  However, there can be no assurance that such products do not        
contain undetected errors or defects associated with Year 2000 Issues.          

The Company's Legacy Product has required significant development and           
remediation efforts in connection with Year 2000 Issues with many of these      
efforts commencing in 1997. The Company completed its development efforts       
in connection with Year 2000 Issues associated with the Legacy Product and      
certain associated ancillary products during calendar 1999.  Also during        
calendar 1999, the Company completed deployment of Version 9 of its Legacy      
Product which has been designed to be Year 2000 compliant.                      

Third Party Products Sold by the Company. The Company works closely with        
vendors of significant Third Party Products sold by the Company and has         
communicated with them to determine the extent to which their products and      
services are, or will be, Year 2000 compliant. In addition, Company             
Products have been tested, and the Company plans to continue testing            
Company Products, with certain Third Party Products. Based upon its current     
assessments, the Company believes that it has received adequate assurances      
that significant Third Party Product vendors expect to successfully address     
their significant identified Year 2000 Issues on a timely basis. Due to         
uncertainties associated with Third Party Product vendors, the Company is       
unable to predict whether a material adverse effect on the Company's            
business, results of operations and financial condition may result form         
Year 2000 Issues related to Third Party Products despite the Company's          
current assessment to the contrary.                                             

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Internal Use Systems. Based upon the Company's assessment efforts to date,      
the Company believes that its critical Internal Use Systems are Year 2000       
compliant.                                                                      

Certain of the Internal Use Systems are proprietary and were developed by       
the Company. Company personnel have used similar techniques to identify         
Year 2000 issues with its Company Products and proprietary Internal Use         
Systems.                                                                        

The proprietary Internal Use Systems have either been modified by Company       
personnel or replaced with third party developed systems which the Company      
believes will not fail as a result of Year 2000 Issues. The Company has         
communicated with developers and/or vendors of certain of its third party       
developed Internal Use Systems to determine the extent to which those           
products and services are Year 2000 compliant. Based upon its current           
assessments, the Company believes that it has received adequate assurances      
that critical third party developed Internal Use Systems are Year 2000          
compliant.                                                                      

Contingency Plans. The Company is currently engaged in contingency planning     
to address company-wide personnel, resource, technical and communication        
matters in connection with foreseeable scenarios that may develop from Year     
2000 Issues despite the Company's remediation efforts. The Company expects      
that its development, remediation, testing, deployment and contingency          
planning efforts with respect to Company Products, Third Party Products and     
Internal Use Systems will continue up to and beyond March 31, 2000. The         
Company's contingency planning includes possible (1) failure by the Company     
and its vendors to complete efforts to avoid or minimize the impact of Year     
2000 Issues on a timely basis; (2) failure of customers to be ready for, or     
cooperate with, the deployment of Year 2000 compliant Company Products on a     
timely basis; and, (3) delay, deferral or cancellation by customers of          
current installations and prospective purchase decisions with respect to        
Company Products.  A reasonably likely "worst case" scenario has not yet        
been identified, but it is anticipated that such scenario would include the     
failure of significant communications and computing infrastructures by the      
Company, its customers and its suppliers together with failures of              
infrastructures encompassing utilities, transportation, banking and             
government.                                                                     

COSTS.                                                                          

The total cost to address the Company's Year 2000 Issues were not material      
to the Company's financial condition. The Company does not separately track     
all of its internal personnel costs incurred in connection with identifying     
and resolving Year 2000 Issues. Excluding internal costs, total                 
expenditures to address Year 2000 Issues were less than $100,000.  All of       
these expenditures have been funded from operations.                            

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Item 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.            
-----------------------------------------------------------   

Not Applicable.                                                                 

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.                            
--------------------------------------------                    

The Financial Statements of the Company identified in the Index to              
Financial Statements appearing under "Item 14. Exhibits, Financial              
Statement Schedules, and Reports on Form 8-K." of this report are               
incorporated herein by reference to Item 14.                                    

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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.                    
---------------------------------------------------           

Except for information concerning the Company's executive officers which is     
included under the caption "Executive Officers of the Registrant."              
following Part I, Item 4 of this report, the information required by Item       
10 is incorporated herein by reference from the Company's definitive proxy      
statement scheduled to be filed with the Securities and Exchange Commission     
on or before July 29, 2000 for the Company's 2000 annual shareholders'          
meeting.                                                                        

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Item 11. EXECUTIVE COMPENSATION.                                                
-----------------------                                       

The information required by Item 11 is incorporated herein by reference         
from the Company's definitive proxy statement scheduled to be filed with        
the Securities and Exchange Commission on or before July 29, 2000 for the       
Company's 2000 annual shareholders' meeting.                                    

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Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.        
 ---------------------------------------------------------------

The information required by Item 12 is incorporated herein by reference         
from the Company's definitive proxy statement scheduled to be filed with        
the Securities and Exchange Commission on or before July 29, 2000 for the       
Company's 2000 annual shareholders' meeting.                                    

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Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.                        
-----------------------------------------------               

The information required by Item 13 is incorporated herein by reference         
from the Company's definitive proxy statement scheduled to be filed with        
the Securities and Exchange Commission on or before July 29, 2000 for the       
Company's 2000 annual shareholders' meeting.                                    

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PART IV.      

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.      
    ------------------------------------------------------------------
                                                            Page
                                                            ----------
(a)  Documents filed as part of this report.                  

(1)  Index to Financial Statements.                           

      Independent Auditors' Report.                          F-1

Consolidated Balance Sheets                         
        at March 31, 2000 and 1999                           F-2

Consolidated Statements of Operations               
and Comprehensive Operations for the            
        Years Ended March 31, 2000, 1999 and 1998            F-3

Consolidated Statements of Shareholders' Equity     
        for the Years Ended March 31, 2000, 1999 and 1998    F-4

Consolidated Statements of Cash Flows for           
        the Years Ended March 31, 2000, 1999 and 1998        F-5

      Notes to Financial Statements                          F-7

(2)  Financial Statement Schedule.                            

      Schedule II - Valuation and Qualifying Accounts       F-21

(3)  Exhibits.                                                

INDEX TO EXHIBITS     
                                                            Sequential
                                                            Page
Exhibit                                                              No.        
-------                                                          ----------     
3.1  Articles of Incorporation of the Company,                          
as amended, are hereby incorporated by                    
reference to Exhibit 3.1 to the Registrant's              
Annual Report on Form 10-K for the year ended             
March 31, 1984, File No. 2-80056.                         

3.2  Bylaws of the Company, as amended, are hereby                      
incorporated by reference to Exhibit 3.3 to               
the Company's Registration Statement on                   
Form S-1, File No. 2-80056.                               

3.2.1  Certificate of Amendment of Bylaws of the                            
Registrant is hereby incorporated by                      
reference to Exhibit 3.2.1 to the                         
Registrant's Registration Statement on                    
Form S-1, File No. 333-00161.                             

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INDEX TO EXHIBITS     
(continued)     
                                                            Sequential
                                                            Page
Exhibit                                                         No.             
-------                                                     ----------          

3.2.2  Text of Sections 2 and 3 of Article II of the                        
Bylaws of the Registrant is hereby incorporated           
by reference to Exhibit 3.2.2 to the Registrant's         
Quarterly report on Form 10-QSB for the period            
ended December 31, 1996, File No. 0-13801.                

3.2.3  Certificate of Amendment of Bylaws of the                            
Registrant.                                            74 

10.2*  1989 Incentive Stock Option Plan is hereby                           
incorporated by reference to Exhibit 4.1 to               
the Registrant's Registration Statement on                
Form S-8, File No. 33-31949.                              

10.2.1*  Form of Incentive Stock Option Agreement is                            
hereby incorporated by reference to                       
Exhibit 10.2 to the Registrant's Registration             
Statement on Form S-1, File No. 333-00161.                

10.2.2*  Form of Non-Qualified Stock Option Agreement                           
is hereby incorporated by reference to                    
Exhibit 10.3 to the Registrant's Registration             
Statement on Form S-1, File No. 333-00161.                

10.3*  Form of Incentive Stock Option Agreement is                          
hereby incorporated by reference to                       
Exhibit 10.2 to the Company's Registration                
Statement on Form S-1, File No. 2-80056.                  

10.4*  1993 Deferred Compensation Plan, is hereby                           
incorporated by reference to Exhibit 10.5                 
to the Registrant's Annual Report on                      
Form 10-KSB for the year ended March 31, 1994,            
File No. 0-13801.                                         

10.4.2*  Profit Sharing and Retirement Plan, as                                 
amended, is hereby incorporated by reference              
to Exhibit 10.4.2 to the Registrant's Annual              
Report on Form 10-KSB for the year ended                  
March 31, 1994, File No. 0-13801.                         

10.4.3*  Profit Sharing and Retirement Plan, as                                 
amended, amendments No. 2 and 3, are hereby               
incorporated by reference to Exhibit 10.4.3               
to the Registrant's Annual Report on                      
Form 10-KSB for the year ended March 31, 1996,            
File No. 0-13801.                                         

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INDEX TO EXHIBITS     
(continued)               
                                                            Sequential
                                                            Page
Exhibit                                                              No.        
-------                                                          ----------     

10.5 Lease Agreement dated March 11, 1993 between the                     
Registrant and Craig Development Corporation, is            
hereby incorporated by reference to Exhibit 10.35           
to the Registrant's Annual Report on Form 10-K for          
the year ended March 31, 1993, File No. 0-13801.            

10.6 Lease agreement dated September 12, 1994 between the                 
Registrant and Koll/Realty Orangewood Business              
Center General Partnership, is hereby incorporated          
by reference to Exhibit 10.8 to the Registrant's            
Annual Report on Form 10-KSB for the year ended             
March 31, 1995, File No. 0-13801.                           

10.7 Series "A" Convertible Preferred Stock Purchase                      
Agreement, as amended, dated April 21, 1995 between         
the Registrant and Clinitec International, Inc.,            
is hereby incorporated by reference to Exhibit 10.11        
to the Registrant's Annual Report on Form 10-KSB for        
the year ended March 31, 1995, File No. 0-13801.            

10.8 Form of Indemnification Agreement is hereby                          
incorporated by reference to Exhibit 10.10 to               
the Registrant's Registration Statement on                  
Form S-1, File No. 333-00161.                               

10.9 Marketing agreement, as amended, dated April 1,                      
1995 between the Registrant and Clinitec                    
International, Inc., is hereby incorporated                 
by reference to Exhibit 10.12 to the Registrant's           
Annual Report on Form 10-KSB for the year ended             
March 31, 1995, File No. 0-13801.                           

10.10 Agreement and Plan of Merger, dated May 16, 1996,                     
by and among Quality Systems, Inc., CII                     
Acquisition Corporation, Clinitec International,            
Inc. and certain shareholders of Clinitec                   
International, Inc. and certain exhibits is                 
hereby incorporated by reference to Exhibit 2 to            
the Registrant's Current Report on Form 8-K,                
dated May 17, 1996 and filed May 30, 1996.                  

10.11* Employment agreement dated May 16, 1996 by and                         
between CII Acquisition Corporation and                     
Patrick Cline is hereby incorporated by reference           
to Exhibit 10.1 to the Registrant's Current                 
Report on Form 8-K/A dated May 17, 1996 and filed           
June 21, 1996.                                              

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INDEX TO EXHIBITS     
(continued)     

                                                            Sequential
                                                            Page
Exhibit                                                             No.       
-------                                                         ----------    

10.12 Shareholder Rights Agreement, dated as of November                  
25, 1996, by and between Quality Systems, Inc.            
and U.S. Stock Transfer Corp. is hereby                   
incorporated by reference to the Exhibit to the           
Registrant's Registration Statement on Form 8-A,          
File No. 001-12537.                                       

10.13 Asset Purchase Agreement, dated May 15, 1997,                       
by and among MicroMed Healthcare Information              
Systems, Inc., MHIS Acquisition Corp., Quality            
Systems, Inc., and certain shareholders of                
MicroMed Healthcare Information Systems, Inc.             
is hereby incorporated by reference to Exhibit            
2 of Registrant's Current Report on Form 8-K,             
dated May 15, 1997 and filed  May 29, 1997,               
File No. 0-13801.                                         

10.14* 1998 Employee Stock Contribution Plan is hereby                      
incorporated by reference to Exhibit 4.1 to               
the Registrant's Registration Statement on                
Form S-8, File No. 333-63131.                             

10.15* 1998 Stock Option Plan is hereby incorporated by                     
reference to Exhibit 4.1 to the Registrant's              
Registration Statement on Form S-8,                       
File No. 333-67115.                                       

10.16* Memorandum of Understanding regarding the April 3,                   
2000 resignation of Sheldon Razin between Sheldon         
Razin and Quality Systems, Inc.                           

10.17* Memoradum of Understanding Relating to Director Nominees             
is hereby incorporated by reference to Registrant's       
Definitive Proxy Statement for the Company's 1999         
Shareholder's Meeting, File No. 001-12537.                

21 List of Subsidiaries.                                  78        

23.1 Independent Auditor's Consent -                                    
Deloitte & Touche LLP.                               80   

27.1 Financial Data Schedule, is filed herewith.            82          

*  This exhibit is a management contract or a                     
compensatory plan or arrangement.                           

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INDEX TO EXHIBITS       
(continued)     

(b) Reports on Form 8-K:  None                              

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SIGNATURES.     

In accordance with Section 13 or 15(d) of the Securities Exchange Act of        
1934, the registrant caused this report to be signed on its behalf by the       
undersigned, thereunto duly authorized.                                         

                                                        [Enlarge/Download Table]

     QUALITY SYSTEMS, INC.                                                            
                                                                                      
By: /s/PATRICK CLINE                            Date:       June 26, 2000             
-----------------------------           ---------------------------                   
       PATRICK CLINE                                                                  
 Interim Chief Executive Officer                                                      

In accordance with the Securities Exchange Act of 1934, this report has               
been signed below by the following persons on behalf of the registrant and            
in the capacities and on the dates indicated.                                         

        Signature                   Title                  Date                       
        ---------                   -----                  ----                       
                                                                                      
 /s/  SHELDON RAZIN         Chairman of the Board       June 26, 2000                 
--------------------------  of Directors                                              
      SHELDON RAZIN                                                                   

 /s/  AHMED HUSSEIN                Co-Chairman of the Board     June 26, 2000         
--------------------------  of Directors                                              
      AHMED HUSSEIN                                                                   

 /s/  PATRICK CLINE                Interim Chief Executive      June 26, 2000         
--------------------------  Officer                                                   
      PATRICK CLINE                                                                   

 /s/  PAUL HOLT                    Interim Chief Financial                            
--------------------------  Officer, Secretary          June 26, 2000                 
      PAUL HOLT                           (Principal Financial and Accounting Officer)

 /s/  MOHAMMED TAWFICK EL-BARDAI                                                      
--------------------------  Director                   June 26, 2000                  
      MOHAMMED TAWFICK EL-BARDAI                                                      

 /s/  DALE HANSON                                                                     
--------------------------  Director                   June 26, 2000                  
      DALE HANSON                                                                     

 /s/  FRANK MEYER                                                                     
--------------------------  Director                   June 26, 2000                  
      FRANK MEYER                                                                     

 /s/ WILLIAM SMALL                                                                    
--------------------------  Director                   June 26, 2000                  
     WILLIAM SMALL                                                                    

 /s/ EMAD ZIKRY                                                                       
--------------------------  Director                   June 26, 2000                  
     EMAD ZIKRY                                                                       


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<AUDIT-REPORT>                                                                  
INDEPENDENT AUDITORS' REPORT      
----------------------------      

Board of Directors and Shareholders                                             
Quality Systems, Inc.                                                       

We have audited the accompanying consolidated balance sheets of Quality         
Systems, Inc. and subsidiaries as of March 31, 2000 and 1999, and the           
related consolidated statements of operations and comprehensive operations,     
shareholders' equity and cash flows for each of the three years in the          
period ended March 31, 2000. Our audits also included the financial             
statement schedule listed in the Index of Item 14. (a) (2). These financial     
statements and schedule are the responsibility of the Company's management.     
Our responsibility is to express an opinion on these financial statements       
and schedule 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 audits 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, such consolidated financial statements present fairly, in       
all material respects, the financial position of Quality Systems, Inc. and      
subsidiaries as of March 31, 2000 and 1999, and the results of their            
operations and their cash flows for each of the three years in the period       
ended March 31, 2000 in conformity with accounting principles generally         
accepted in the United States of America. Also, in our opinion, the related     
financial statement schedule, when considered in relation to the basic          
financial statements taken as a whole, presents fairly in all material          
respects the information set forth therein.                                     

DELOITTE & TOUCHE LLP                                                           
Costa Mesa, California                                                          
May 19, 2000                                                                    

</AUDIT-REPORT>                                                                 

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QUALITY SYSTEMS, INC.     
CONSOLIDATED BALANCE SHEETS       
(in thousands)        

                                                        [Enlarge/Download Table]

                                                             March 31,                
                                                         ----------------             
                                ASSETS                     2000     1999              
                                                         -------  -------             
                                                                                      
Current Assets:                                                                       
  Cash and cash equivalents                              $15,926  $14,196             
  Short-term investments                                     243      245             
  Accounts receivable, less allowance for                                             
    doubtful accounts of $1,121 and $754, respectively    13,710   12,488             
  Inventories                                              1,010      772             
  Deferred Tax Asset                                                        2,066  765
  Other current assets                                       430      254             
                                                         -------  -------             
      Total current assets                                33,385   28,720             

Equipment and Improvements, net                            1,797    1,783             
Capitalized Software Costs, net                            1,984    2,144             
Deferred Tax Asset                                         3,042    3,254             
Excess of Cost Over Net Assets of                                                     
  Acquired Business, net of accumulated                                               
  amortization of $1,294 and $954, respectively            2,112    2,452             
Other Assets                                               1,816    1,865             
                                                         -------  -------             
      Total assets                                       $44,136  $40,218             
                                                         =======  =======             

                   LIABILITIES AND SHAREHOLDERS' EQUITY                               

Current Liabilities:                                                                  
  Accounts payable                                       $ 1,246  $ 1,813             
  Deferred service revenue                                 5,691    4,484             
  Other current liabilities                                5,116    4,257             
                                                         -------  -------             
      Total liabilities                                   12,053   10,554             
                                                         -------  -------             

Commitments and Contingencies                                                         

Shareholders' Equity:                                                                 
  Common stock, $0.01 par value, 20,000                                               
    shares authorized, 6,201 and 6,214                                                
    shares issued and outstanding, respectively               62       62             
  Additional paid-in capital                              35,483   35,568             
  Accumulated deficit                                     (3,462)  (5,966)            
                                                         -------  -------             
        Total shareholders' equity                        32,083   29,664             
                                                         -------  -------             
        Total liabilities and shareholders' equity       $44,136  $40,218             
                                                         =======  =======             

See notes to consolidated financial statements.                                 

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QUALITY SYSTEMS, INC.       
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS      
(in thousands, except per share amounts)      

                                                                [Download Table]

                                                 Years Ended March 31,     
                                             ----------------------------- 
                                               2000       1999       1998  
                                             -------    -------    ------- 
                                                                           
Net Revenues:                                                              
  Sales of computer                                                        
    systems, upgrades and supplies           $19,247    $18,875    $20,273 
  Maintenance and other services              17,126     14,941     10,943 
                                             -------    -------    ------- 
                                              36,373     33,816     31,216 

Cost of Products and Services                 16,395     15,834     13,509 
                                             -------    -------    ------- 
Gross Profit                                  19,978     17,982     17,707 

Selling, General and                                                       
  Administrative Expenses                     12,645     13,495     12,485 
Research and Development Costs                 3,726      3,603      3,072 
Purchased In-Process                                                       
  Research and Development                      -           -       10,200 
                                             -------    -------    ------- 
Income (Loss) from Operations                  3,607        884     (8,050)

Investment Income                                759        413        971 
                                             -------    -------    ------- 
Income (Loss) before Provision                                             
  for (Benefit from) Income Taxes              4,366      1,297     (7,079)
Provision for                                                              
  (Benefit from) Income Taxes                  1,862        713     (2,463)
                                             -------    -------    ------- 
Net Income (Loss) and                                                      
  Comprehensive Income (Loss)                $ 2,504    $   584    $(4,616)
                                             =======    =======    ======= 

Net Income (Loss) per Share,                                               
  basic and diluted                          $  0.40    $  0.09   $ (0.77) 
                                             =======    =======    ======= 

See notes to consolidated financial statements.                                 

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QUALITY SYSTEMS, INC.   
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY       
(in thousands)      

                                                                [Download Table]

                           Common                              
                       Shares  Issued  Additional              
                       --------------    Paid-in   Accumulated 
                       Number  Amount    Capital     Deficit   
                       ------  ------  ----------   ---------- 
                                                               
Balance at                                                     
 April 1, 1997          5,997      60      34,144       (1,934)

Exercise of                                                    
  Stock Options            31    -             48        -     
Tax Benefit                                                    
  Resulting from                                               
  Stock Options          -       -             10        -     
Purchases of                                                   
  Common Stock            (40)   -           (271)       -     
Net Loss                 -       -           -          (4,616)
                       ------  ------  ----------   ---------- 
Balance at                                                     
  March 31, 1998        5,988      60      33,931       (6,550)

Shares Issued in                                               
  Acquisition of                                               
  MicroMed Healthcare                                          
  Information                                                  
  Systems, Inc.           245       3       1,833        -     
Exercise of                                                    
  Stock Options            33    -             50        -     
Purchases of                                                   
  Common Stock            (52)     (1)       (246)       -     
Net Income               -       -           -            584  
                       ------  ------  ----------  ----------  
Balance at                                                     
  March 31, 1999        6,214  $   62  $   35,568  $   (5,966) 

Exercise of                                                    
  Stock Options             4    -             25        -     
Tax Benefit Resulting                                          
  From Stock Options     -       -              1              
Purchases of                                                   
  Common Stock            (17)   -           (111)       -     
Net Income               -       -           -          2,504  
                       ------  ------  ----------  ----------  
Balance at                                                     
  March 31, 2000        6,201  $   62  $   35,483  $   (3,462) 


See notes to consolidated financial statements.                                 

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QUALITY SYSTEMS, INC.   
CONSOLIDATED STATEMENTS OF CASH FLOWS   
(in thousands)    

                                                                [Download Table]

                                                Years Ended March 31,           
                                        ----------------------------------      
                                             2000        1999        1998       
                                        ----------  ----------  ----------      
                                                                                
Cash Flows from Operating Activities:                                           
Net income (loss)                       $   2,504         $     584   $  (4,616)
  Adjustments to reconcile net                                                  
    income (loss) to net cash                                                   
    provided by operating activities:                                           
      Purchased in-process                                                      
        research and development              -          -       $ 10,200       
      Depreciation and amortization         2,204       2,465       1,895       
      Provision for bad debts                 529         954         339       
(Loss) gain on short-term                                                       
        investments and other                 132         261         (90)      
    Deferred income taxes                    (1,088)       (592)     (3,336)    
      Changes, net of                                                           
        amounts acquired, in:                                                   
          Accounts receivable              (1,751)     (3,496)     (3,514)      
          Inventories                        (238)        556        (257)      
          Other current assets               (176)         (2)        116       
          Accounts payable                   (567)        486         (72)      
          Deferred service revenue          1,207       2,240         590       
          Income taxes payable                                                  
            and taxes related to                                                
            equity accounts                   723         344         397       
          Other current liabilities           136        (453)        590       
                                        ----------  ----------  ----------      
Net Cash Provided By                                                            
  Operating Activities                      3,615       3,347       2,242       
                                        ----------  ----------  ----------      
Cash Flows from Investing Activities:                                           
  Proceeds from sales of                                                        
    short-term investments                     29         542          -        
  Purchases of short-term investments         (50)        (75)         -        
  Additions to equipment                                                        
    and improvements                         (588)       (521)       (810)      
  Additions to                                                                  
    capitalized software costs             (1,130)     (1,204)     (1,861)      
Purchase of net assets of MicroMed                                              
    Healthcare Information Systems, Inc.      -        (3,840)     (5,327)      
  Change in other assets                      (60)         37         234       
                                        ----------  ----------  ----------      
Net Cash Used In Investing Activities      (1,799)     (5,061)     (7,764)      
                                        ----------  ----------  ----------      

See notes to consolidated financial statements.                                 

                                     F-5                                        

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                             QUALITY SYSTEMS, INC.                              
              CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)                 
                               (in thousands)                                   

                                                Years Ended March 31,           
                                        ----------------------------------      
                                             2000        1999        1998       
                                        ----------  ----------  ----------      
                                                                                
Cash Flows from Financing Activities:                                           
  Purchases of Common Stock             $    (111) $     (247) $     (271)      
  Proceeds from                                                                 
    exercise of stock options                  25          50          48       
                                        ----------  ----------  ----------      

Net Cash Used In Financing Activities         (86)       (197)       (223)      
                                        ----------  ----------  ----------      
Net Increase (Decrease) in Cash                                                 
  and Cash Equivalents                      1,730      (1,911)     (5,745)      
Cash and Cash                                                                   
  Equivalents, beginning of year           14,196      16,107      21,852       
                                        ----------  ----------  ----------      
Cash and Cash Equivalents, end of year  $  15,926  $   14,196  $   16,107       
                                        ==========  ==========  ==========      

Supplemental Information - During fiscal 2000, 1999 and 1998 the Company        
made income tax payments of $2,421, $951 and $485, respectively.                

                                                                [Download Table]

                                                Years Ended March 31,     
                                        ----------------------------------
                                             2000        1999        1998 
                                        ----------  ----------  ----------
                                                                          
Detail of businesses                                                      
  acquired in purchase transactions:                                      
Purchased In-Process                                                      
  Research and Development              $     -     $    -      $  10,200 
Fair Value of Assets Acquired                 -          -          1,480 
Liabilities Assumed                           -          -           (677)
Common Stock Issued in Acquisition            -        (1,836)      -     
Acquisition Obligation                        -         5,676      (5,676)
                                        ----------  ----------  ----------
Cash Paid for the                                                         
  Acquisition, net of cash acquired     $     -  $      3,840  $    5,327 
                                        ==========  ==========  ==========

See notes to consolidated financial statements.                                 

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QUALITY SYSTEMS, INC.       
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        

NOTE 1 - DESCRIPTION OF BUSINESS                                                

Quality Systems, Inc. ("QSI") and its wholly-owned subsidiaries, Clinitec       
International, Inc. ("Clinitec") and MicroMed Healthcare Information            
Systems, Inc. ("MicroMed"), (collectively the "Company") develop and market     
proprietary computer information systems for medical and dental group           
practices, community health centers, physician hospital organizations,          
management service organizations, and dental schools. The Company's             
proprietary software systems include general patient information,               
appointment scheduling, billing, insurance claims submission and                
processing, managed care plan implementation and referral management,           
treatment outcome studies, treatment planning, drug formularies, electronic     
medical records, dental charting and letter generation. In addition to          
providing fully integrated solutions, the Company provides its clients with     
comprehensive hardware and software maintenance and support services,           
system training services and electronic claims submission services.             

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                             

Principles of Consolidation - The consolidated financial statements include     
the accounts of the Company and its wholly owned subsidiaries. All              
significant inter-company amounts have been eliminated.                         

Basis of Presentation - The accompanying consolidated financial statements      
have been prepared in accordance with accounting principals generally           
accepted in the United States of America.                                       

Revenue Recognition - In October 1997, the American Institute of Certified      
Public Accounts issued Statement of Position ("SOP") 97-2, "Software            
Revenue Recognition" ("SOP 97-2"), which was later amended in part by SOP       
98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, Software      
Revenue Recognition" ("SOP 98-4"). As of April 1, 1998, the Company has         
adopted SOP 97-2, as amended by SOP 98-4. SOP 97-2 provides guidance on         
applying generally accepted accounting principles in recognizing revenue on     
software transactions and supersedes the guidance contained in SOP 91-1         
which the Company has heretofore been following. The Company generates          
revenues from licensing rights to use its software products directly to         
end-users. The Company also generates revenues from sales of hardware and       
third party software, and implementation, training, software customization      
and post-contract support ("maintenance") services performed for customers      
who license the Company's products. A typical system contract contains          
multiple elements of two or more of the above items. In accordance with SOP     
97-2, revenue is allocated to each element of the contract based on             
vendor specific  evidence of each element's fair market value. Provided the     
fees are fixed and determinable and collection is considered probable,          
revenue from licensing rights and sales of hardware and third party             
software are recognized upon shipment. Revenue from implementation,             
training and software customization services is recognized as the               
corresponding services are performed. Maintenance revenue is recognized         
ratably over the contractual maintenance period.                                

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QUALITY SYSTEMS, INC.       
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)      

Cash Equivalents - The Company considers all highly liquid interest earning     
deposits purchased with an original maturity of three months or less to be      
cash equivalents.                                                               

Short-Term Investments - The Company classifies its short-term investments      
into one of the following categories:                                           

Held to maturity - Debt securities for which the Company has the intent 
and the ability to hold to maturity.                                    

Trading - Debt securities that do not meet the "intent-to-hold"         
criteria and equity securities, both of which are bought and held       
principally for the purpose of being sold in the near term.             

Available-for-sale - Debt securities that do not meet the "intent-to-   
hold" criteria and which are not classified as trading securities, as   
well as all equity securities not otherwise classified as trading       
securities.                                                             

Held to maturity securities are carried in the balance sheet at cost            
(unless there are declines in the values of individual securities that are      
not due to temporary declines), and realized gains and losses are recorded      
in the statement of operations in the period that they are earned or            
incurred. Trading securities are carried in the balance sheet at fair           
market value and unrealized gains and losses are recorded in the statement      
of operations. Available-for-sale securities are carried in the balance         
sheet at fair market value; realized gains and losses are recorded in the       
statement of operations when they are earned or incurred, and unrealized        
gains and losses, net of tax effect, are recognized as a component of           
shareholders' equity. Realized gains and losses from investment                 
transactions are determined on a first-in, first-out basis.                     

Accounts Receivable -The Company provides credit terms ranging from 30 days     
to 12 months for most system and maintenance contract sales and generally       
does not require collateral. The Company performs ongoing credit                
evaluations of its customers and maintains reserves for potential credit        
losses.                                                                         

Inventories - Inventories are valued at lower of cost (first-in, first-out)     
or market. Certain inventories are maintained for customer support pursuant     
to service agreements and are amortized over a five-year period using the       
straight-line method.                                                           

Equipment and Improvements - Equipment and improvements are stated at cost      
less accumulated depreciation and amortization. Depreciation and                
amortization of equipment and improvements are provided over the estimated      
useful lives of the assets, or the related lease terms if shorter, by the       
straight-line method. Useful lives range from five to seven years.              

Software Development Costs - Development costs incurred in the research and     
development of new software products and enhancements to existing software      
products are expensed as incurred until technological feasibility has been      
established. After technological feasibility is established, any additional     
development costs are capitalized in accordance with Statement of Financial     
Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer     
Software to be Sold, Leased or Otherwise Marketed." Such costs are              

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QUALITY SYSTEMS, INC.       
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)      

generally amortized on a straight line basis over the lesser of three years     
or the economic life of the related product. The Company performs a             
periodic review of the recoverability of such capitalized software costs.       
At the time a determination is made that capitalized amounts are not            
recoverable based on the estimated cash flows to be generated from the          
applicable software, any remaining capitalized amounts are written off.         

Excess of Cost Over Net Assets of Acquired Business and Intangible Assets -     
Excess of costs over net assets of acquired business and intangible assets      
are being amortized using the straight-line method over ten years and five      
years, respectively. The Company performs a periodic review of the              
recoverability of such unamortized amounts. At the time a determination is      
made that any portion of such unamortized amounts are not recoverable based     
on the estimated cash flows to be generated, the excess amount is written       
off.                                                                            

Long Lived Assets - The Company accounts for the impairment and disposition     
of long-lived assets in accordance with Statement of Financial Accounting       
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived          
Assets and for Long-Lived Assets to Be Disposed Of.  In accordance with         
SFAS No. 121, long-lived assets to be held are reviewed for events or           
changes in circumstances which indicate that their carrying value may not       
be recoverable.  The Company periodically reviews the carrying value of         
long-lived assets to determine whether or not an impairment to such value       
has occurred and has determined that there was no impairment at March 31,       
2000.                                                                           

Income Taxes - Income taxes are provided for the tax effects of                 
transactions reported in the financial statements and consist of taxes          
currently due plus deferred taxes related primarily to differences between      
the basis of assets and liabilities for financial and tax reporting. The        
deferred tax assets and liabilities represent the future tax return             
consequences of those differences, which will either be taxable or              
deductible when the assets and liabilities are recovered or settled.            
Deferred taxes also are recognized for operating losses that are available      
to offset future taxable income and tax credits that are available to           
offset future income taxes. Valuation allowances are established as a           
reduction of net deferred tax assets when management cannot determine that      
it is now more likely than not that the deferred assets will be realized.       

Earnings per Share - Pursuant to SFAS No 128, "Earnings Per Share," ("SFAS      
No. 128"), the Company provides dual presentation of "basic" and "diluted"      
earnings per share ("EPS"). SFAS No. 128 replaced "primary" and "fully          
diluted" EPS under Accounting Principles Board ("APB") Opinion No. 15.          

Basic EPS excludes dilution from common stock equivalents and is computed       
by dividing income available to common stockholders by the weighted average     
number of common shares outstanding for the period. Diluted EPS reflects        
the potential dilution from common stock equivalents, similar to fully          
diluted EPS, but uses only the average stock price during the period as         
part of the computation.                                                        

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QUALITY SYSTEMS, INC.         
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)      

The following table reconciles the weighted average shares outstanding for      
basic and diluted net income (loss) per share for the periods presented.        

                                                                [Download Table]

                                                   Years Ended March 31,   
                                                 ------------------------- 
                                                   2000     1999     1998  
                                                 -------  -------  ------- 
                                    (in thousands except per share amounts)

                                                                           
Net income (loss)                                $ 2,504  $  584   $(4,616)
                                                 -------  -------  ------- 
Basic net income (loss) per common share:                                  
  Weighted average of common shares outstanding    6,208    6,176    5,981 
                                                 -------  -------  ------- 
Basic net income(loss) per common share          $  0.40  $  0.09  $ (0.77)
                                                 =======  =======  ======= 
Diluted net income (loss) per share:                                       
  Weighted average of common shares outstanding    6,208    6,176    5,981 
  Weighted average of common shares equivalents-                           
      Weighted average options outstanding            53        9      -   
                                                 -------  -------  ------- 
  Weighted average number of common                                        
    and common equivalent shares                   6,261    6,185    5,981 
                                                 -------  -------  ------- 
Diluted net income(loss) per common share         $ 0.40  $  0.09 $  (0.77)
                                                 =======  =======  ======= 

Stock-Based Compensation - The Company accounts for stock-based awards to       
employees using the intrinsic value method in accordance with APB Opinion       
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25").              

Comprehensive Income (Loss) - In fiscal 1999, the Company adopted SFAS No.      
130, "Reporting Comprehensive Income" ("SFAS No. 130"). This statement          
establishes standards for the reporting of comprehensive income and its         
components. Comprehensive income, as defined, includes all changes in           
equity (net assets) during a period, from non-owner sources. For the years      
ended, March 31, 2000, 1999, and 1998, there were no significant                
differences between net income (loss) and comprehensive income (loss).          

Segment Disclosures - In fiscal 1999, the Company adopted SFAS No. 131,         
"Disclosures About Segments of an Enterprise and Related Information"           
("SFAS No. 131"). The Company adopted SFAS No. 131 effective with the           
fiscal year ended March 31, 1999. SFAS No. 131 establishes standards for        
reporting information regarding operating segments in annual financial          
statements and requires selected information for those segments to be           
presented in interim financial reports issued to shareholders. SFAS No. 131     
also establishes standards for related disclosures about major customers,       
products and services, and geographic areas. Operating segments are             
identified as components of an enterprise about which separate discrete         
financial information is available for evaluation by the chief operating        
decision maker, or decision making group, in making decisions on how to         
allocate resources and assess performance.                                      

The Company views its operations and manages its business as one segment,       
healthcare information solutions, which includes software, hardware and         
related services. Substantially all of the Company's operations are in the      
United States.                                                                  

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QUALITY SYSTEMS, INC.   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

No one customer accounted for 10% or more of the Company's revenues in          
fiscal 2000, 1999, or 1998. As a result, the financial information              
disclosed herein represents all of the material financial information           
related to the Company's principal operating segment.                           

Use of Estimates - The preparation of financial statements in conformity        
with generally accepted accounting principles requires management to make       
estimates and assumptions that affect the reported amounts of assets and        
liabilities and disclosure of contingent assets and liabilities at the date     
of the financial statements and the reported amounts of revenues and            
could differ from those estimates made in the current year.                     

Reclassifications - Certain amounts in the accompanying financial               
statements have been reclassified to conform with the March 31, 2000            
presentation.                                                                   

New Accounting Pronouncements - In June 1998, the FASB issued SFAS No. 133,     
Accounting for Derivative Instruments and Hedging Activities ("SFAS No.         
133"), which the Company is required to adopt in fiscal 2002.   This            
statement establishes accounting and reporting standards for derivative         
instruments, including certain derivative instruments embedded in other         
contracts for hedging activities.  As of March 31, 2000, the Company had no     
derivative instruments nor had it engaged in hedging activities, but it         
will continue to evaluate the effects of adopting SFAS No. 133.                 

NOTE 3 - CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS                            

At March 31, 2000 and 1999, the Company had cash equivalents of $15.1           
million and $12.9 million, respectively, invested in a major national           
brokerage firm's institutional fund that specializes in U.S. government         
securities and commercial paper with high credit ratings.                       

At March 31, 2000 and 1999, all short-term investments consist of trading       
securities. The Company bears no off-balance sheet risk on its investments.     

Investment income for each of the three years ended March 31, 2000 consists     
of the following:                                                               

                                                                [Download Table]

                                                Years Ended March 31,     
                                        ----------------------------------
                                           2000        1999        1998   
                                        ----------  ----------  ----------
                                                  (in thousands)          
                                                                          
Interest Income                         $   783     $   674     $   884   
Net Gains (Losses) on                                                     
  Short-Term Investments --                                               
    Realized                                  0        (220)        146   
    Unrealized                              (24)        (38)        (58)  
Other                                         0          (3)         (1)  
                                        ----------  ----------  ----------
                                        $   759     $   413     $   971   
                                        ==========  ==========  ==========

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QUALITY SYSTEMS, INC.   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)    

NOTE 4 - CAPITALIZED SOFTWARE COSTS                                             

Capitalized software costs at March 31, 2000 and 1999 were net of               
accumulated amortization of $3.3 million and $2.0 million, respectively.        

Information related to net capitalized software costs is as follows:            

                                                                [Download Table]

                                                Years Ended March 31,     
                                        ----------------------------------
                                           2000        1999        1998   
                                        ----------  ----------  ----------
                                                  (in thousands)          
                                                                          
Beginning of year                       $ 2,144     $ 2,183     $ 1,041   
Capitalized                               1,130       1,204       1,861   
Amortization                             (1,290)     (1,243)       (719)  
                                        ----------  ----------  ----------
End of year                             $ 1,984     $ 2,144     $ 2,183   
                                        ==========  ==========  ==========

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QUALITY SYSTEMS, INC.   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)  

NOTE 5 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS                    

                                                                [Download Table]

                                                  March 31,               
                                            ----------------------        
                                               2000        1999           
                                            ----------  ----------        
                                                (in thousands)            
INVENTORIES:                                                              

                                                                          
Computer systems and components                           $   785   $  529
Replacement parts for certain client                                      
  systems, net of accumulated amortization                                
  of $594 and $652, respectively                188         194           
Miscellaneous parts and supplies                 37          49           
                                            ----------  ----------        
                                            $ 1,010     $   772           
                                            ==========  ==========        

                                                                [Download Table]

EQUIPMENT AND IMPROVEMENTS:                                               

                                                                          
Computers and electronic test equipment             $ 3,175     $ 2,870   
Furniture and fixtures                                  964         899   
Vehicles                                                 72          72   
Leasehold improvements                                  133         198   
                                                    ----------  ----------
                                                      4,344       4,039   
Accumulated depreciation and amortization            (2,547)     (2,256)  
                                                    ----------  ----------
                                                    $ 1,797     $ 1,783   
                                                    ==========  ==========

                                                                [Download Table]


OTHER ASSETS:                                                             

                                                                          
Intangible assets, net of accumulated                                     
  amortization of $1,196 and $841, respectively     $   574     $   929   
Other                                                 1,242         936   
                                                    ----------  ----------
                                                    $ 1,816     $ 1,865   
                                                    ==========  ==========

                                                                [Download Table]


OTHER CURRENT LIABILITIES:                                                

                                                                          
Accrued payroll and related expenses                $ 1,322     $ 1,369   
Deferred compensation                                 1,021         821   
Income taxes payable                                  1,445         897   
Other accrued expenses                                1,328       1,170   
                                                    ----------  ----------
                                                    $ 5,116     $ 4,257   
                                                    ==========  ==========

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QUALITY SYSTEMS, INC.     
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)    

NOTE 6 - INCOME TAXES                                                           

The income tax provision (benefit) consists of the following components:        

                                                                [Download Table]

                                                Years Ended March 31,     
                                         ---------------------------------
                                             2000        1999        1998 
                                        ----------  ----------  ----------
                                                   (in thousands)         
                                                                          
Federal-                                                                  
  Current taxes                         $   2,308   $   1,095   $     672 
  Deferred taxes                             (808)       (473)     (2,832)
                                        ----------  ----------  ----------
                                            1,500         622      (2,160)
State-                                  ----------  ----------  ----------
  Current taxes                               642         210         201 
  Deferred taxes                             (280)       (119)       (504)
                                        ----------  ----------  ----------
                                              362          91        (303)
                                        ----------  ----------  ----------
                                        $   1,862   $     713   $  (2,463)
                                        ==========  ==========  ==========

The income tax provision (benefit) differs from an amount computed at the       
Federal statutory rate as follows:                                              

                                                                [Download Table]

                                                Years Ended March 31,     
                                        ----------------------------------
                                             2000        1999        1998 
                                        ----------  ----------  ----------
                                                  (in thousands)          
                                                                          
Federal income tax provision                                              
  (benefit) at statutory rate (34%)     $   1,485   $     441   $  (2,407)
Increases (decreases) resulting from:                                     

  Non-deductible amortization                                             
    of purchased intangible assets            160         161         144 
  State income taxes                          222          96        (201)
Other                                          (5)         15           1 
                                        ----------  ----------  ----------
                                        $   1,862  $      713   $  (2,463)
                                        ==========  ==========  ==========

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QUALITY SYSTEMS, INC.     
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)    

The net deferred tax benefits in the accompanying consolidated balance          
sheets include the following components:                                        

                                                                [Download Table]

                                                      March 31,           
                                               ----------------------     
                                                  2000        1999        
                                               ----------  ----------     
                                                   (in thousands)         
                                                                          
Deferred tax assets -                                                     
  Short-term investments                       $    14     $    10        
  Accounts receivable                            1,459         298        
  Inventories                                       70          56        
Purchased in-process research and development    3,130       3,388        
  Intangible assets                                128          83        
  Accrued compensation                             291         280        
  Accrued liability for deferred compensation      348         277        
 Other Accrued  Liabilities                                          12  -
  Deferred revenue                                 109         297        
  State income taxes                               139          54        
  Net operating loss carryforward                   -           84        
                                               ----------  ----------     
                                                 5,700       4,827        
Deferred tax liabilities -                     ----------  ----------     
Inventories                                        (18)        (21)       
  Equipment and improvements                       (12)        (12)       
  Accumulated depreciation                         (57)        (76)       
  Capitalized software                            (495)       (490)       
  Deferred revenue                                 (10)       (209)       
                                               ----------  ----------     
                                                  (592)       (808)       
                                               ----------  ----------     
                                               $ 5,108     $ 4,019        
                                               ==========  ==========     

The deferred tax assets and liabilities have been shown net in the              
accompanying balance sheets based on the long-term or short-term nature of      
the items which give rise to the deferred amount.                               

NOTE 7 - EMPLOYEE BENEFIT PLANS                                                 

QSI, Clinitec and MicroMed each have a profit sharing and retirement plan       
(collectively, the "Retirement Plans") for the benefit of substantially all     
of their employees. Participating employees may defer up to 15% of their        
compensation per year. The Company's annual contribution is determined by       
the Company's Board of Directors and the Retirement Plans may be amended or     
discontinued at the discretion of the Board of Directors. Contributions of      
$73,000, $53,000 and $43,000 were made to the Retirement Plans for the          
fiscal years ended March 31, 2000, 1999 and 1998, respectively.                 

During the fiscal year ended March 31, 1994, QSI initiated a deferred           
compensation plan (the "Deferral Plan") for the benefit of officers and key     
employees. Participating employees may defer all or a portion of their          
compensation for a Deferral Plan year. In addition, the Company may, but is     
not required to, make contributions into the Deferral Plan on behalf of         
participating employees. Each participating employee's deferred                 
compensation and share of Company contributions has been invested in a life     

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QUALITY SYSTEMS, INC.     
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)    

insurance policy which has death benefit and mutual fund features.              
Investment decisions are made by each participating employee from a family      
of mutual funds. The Company is the owner and beneficiary of the life           
insurance policies and has an obligation to pay the greater of the death        
benefit or the net cash surrender value upon each employee's death or           
termination. The net cash surrender value of the life insurance policies        
and the related Company obligation for deferred compensation was $1,021,000     
and $821,000 at March 31, 2000 and 1999, respectively. The Company made         
contributions of $10,000, $8,000 and $8,000 to the Deferral Plan for the        
fiscal years ended March 31, 2000, 1999 and 1998, respectively.                 

NOTE 8 - EMPLOYEE STOCK OPTION PLANS                                            

During fiscal 1990, the Company's shareholders approved a stock option plan     
(the "1989 Plan") under which 1,000,000 shares of Common Stock have been        
reserved for the issuance of options. The 1989 Plan provides that salaried      
officers, key employees and non-employee directors of the Company may, at       
the discretion of the Board of Directors, be granted options to purchase        
shares of Common Stock at an exercise price not less than 85% of their fair     
market value on the option grant date. Upon an acquisition of the Company       
by merger or asset sale, each outstanding option will be subject to             
accelerated vesting under certain circumstances. The 1989 Plan terminated       
on June 30, 1999, however there remain 274,359 outstanding options under        
the 1989 plan which remain eligible for exercise until the expiration of        
their respective terms.                                                         

In September 1998, the Company's shareholders approved a stock option plan      
(the "1998 Plan") under which 1,000,000 shares of Common Stock have been        
reserved for the issuance of options. The 1998 Plan provides that               
employees, directors and consultants of the Company, at the discretion of       
the Board of Directors, be granted options to purchase shares of Common         
Stock. The exercise price of each option granted shall be determined by the     
Company's Board of Directors at the date of grant. Upon an acquisition of       
the Company by merger or asset sale, each outstanding option will be            
subject to accelerated vesting under certain circumstances. The 1998 Plan       
terminates on December 31, 2007, unless sooner terminated by the Board. At      
March 31, 2000, 899,000 shares were available for future grant under the        
1998 Plan.                                                                      

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QUALITY SYSTEMS, INC.     
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)    

A summary of option transactions under the 1989 & 1998 Plans for the three      
years ended March 31, 2000 is as follows:                                       

                                                        [Enlarge/Download Table]

                                                                 Weighted                                             
                                                                  Average                                             
                                                     Number      Exercise                                             
                                                    of Shares      Price                                              
                                                   -----------  ----------                                            
                                                                                                                      
Outstanding, April 1, 1997 (43,000 exercisable                                                                        
  at a weighted average price of $2.98)                267,500       15.20                                            
Granted (weighted average fair value of $662,000)      164,831        7.37                                            
Exercised                                              (30,250)       1.60                                            
Cancelled                                             (182,549)      21.08                                            
                                                   -----------                                                        
Outstanding, March 31, 1998 (50,500 exercisable                                                                       
  at a weighted average price of $3.45)                219,532        6.31                                            
Granted (weighted average fair value of $123,000)       60,000        7.26                                            
Exercised                                              (33,000)       1.50                                            
Cancelled                                              (66,250)       7.56                                            
                                                   -----------                                                        
Outstanding, March 31, 1999 (53,821 exercisable                                                                       
  at a weighted average price of $7.09)                180,282   $    7.04                                            
Granted (weighted average fair value of $775,000)               220,250          6.58                                 
Exercised                                                                                           (4,625)  5.52     
Cancelled                                                                                      (23,048)           6.86
                                                                                  -----------                         
Outstanding, March 31, 2000 (107,867 exercisable                                                                      
  at a weighted average price of $7.11)                                 372,859          6.80                         
                                                   ===========  ==========                                            

The outstanding stock options vest ratably over a four-year period              
commencing from the respective option grant dates. Stock options                
outstanding at March 31, 2000 are summarized as follows:                        

Options Outstanding -                 Weighted                                  
     Average
     Number         Remaining       Weighted
Range of       Outstanding at    Contractual      Average               
Exercise Prices    March 31, 2000    Life (Yrs.)   Exercise Price               
---------------    --------------    -----------   --------------               
$ 3.69 - $ 6.25       127,625           3.8            $ 6.04                   
6.38 -   8.13       226,734           3.6              6.91                 
9.38 -  23.50        18,500           3.6             10.71                 
--------------                            
$ 3.69 - $23.50       372,859           3.7            $ 6.80                   
===============    ==============    ===========   ==============               

Options Exercisable -                Number           Weighted                  
Range of       Exercisable at       Average 
Exercise Prices    March 31, 2000    Exercise Price 
---------------    --------------    -------------- 
$ 3.69 - $ 6.25         2,500            $ 4.31     
6.38 -   8.13       100,492              6.90   
9.38 -  23.50         4,875             12.82   
--------------
$ 3.69 - $23.50       107,867            $ 7.11     
===============    ==============    ============== 

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QUALITY SYSTEMS, INC.   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)    

The Company continues to account for its stock-based awards using the           
intrinsic value method in accordance with APB No. 25. Accordingly, no           
compensation expense has been recognized in the financial statements for        
employee stock option grants which had market value excersize prices. SFAS      
No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123")            
requires the disclosure of pro forma net income (loss) and pro forma net        
income (loss) per share had the Company adopted the fair value method as of     
the beginning of fiscal 1996. Under SFAS No. 123, the fair value of stock-      
based awards to employees is calculated through the use of option pricing       
models, even though such models were developed to estimate the fair value       
of freely tradable, fully transferable options without vesting                  
restrictions, which significantly differ from the Company's stock option        
awards. These models also require subjective assumptions, including future      
stock price volatility and expected time to exercise, which greatly affect      
the calculated values.                                                          

The Company's calculations were made using the Black-Scholes option pricing     
model with the following assumptions: expected life -- twelve months            
following full vesting or approximately 42 months from the date of the          
grant; stock volatility -- ranging from 50% to 60% in fiscal 2000, ranging      
from 44% to 81% in fiscal 1999, and ranging from 47% to 59% in fiscal 1998;     
risk free interest rates -- 6.0% in fiscal 2000, 5.5% in fiscal 1999, and       
5.9% in fiscal 1998; and, no dividends during the expected term. The            
Company's calculations are based on a single option valuation approach and      
forfeitures are recognized as they occur. If the computed fair values of        
the fiscal 2000, 1999 and 1998 awards had been amortized to expense over        
the vesting period of the awards, pro forma net income would have been          
$2,111,000 or $0.34 per share, in fiscal 2000; the pro forma net income         
would have been $410,000, or $0.06 per share, in fiscal 1999; and the pro       
forma net loss would have been $(4,801,000), or $(0.80) per share, in           
fiscal 1998. These amounts are based on calculated values for option awards     
in fiscal 2000, 1999 and 1998 of $775,000, $123,000 and $662,000,               
respectively.                                                                   

NOTE 9 - COMMITMENTS AND CONTINGENCIES                                          

Litigation - On April 22, 1997, a purported class action was filed in           
California Superior Court on behalf of all persons who purchased the            
Company's Common Stock between June 26, 1995 and July 3, 1996. The              
complaint alleges that the Company and certain of its officers and              
directors, as well as other defendants not affiliated with the Company,         
violated sections of the California Corporations Code by issuing positive       
statements about the Company that allegedly were knowingly false, in part,      
in order to assist the Company and certain of its officers and directors in     
selling Common Stock at an inflated price in the Company's March 5, 1996        
public offering and at other points during the period specified. On January     
25, 1999 the court denied plaintiffs' motion to certify the class               
representative and class legal counsel. On May 9, 2000, the Court of            
Appeals affirmed the order disqualifying the class legal counsel as final.      
The Plaintiff will seek new class counsel however, the Company and its          
named officers and directors will have the opportunity to oppose class          
certification.  On May 14, 1997, a second purported class action was filed      
in the same court essentially repeating the allegations of the April 22,        
1997 suit.                                                                      

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QUALITY SYSTEMS, INC    
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)    

On July 1, 1997, a third purported class action was filed in the United         
States District Court repeating essentially the same factual allegations as     
the April 22, 1997 suit and purports to state claims under the Federal          
securities laws. By court order dated August 13, 1997, this action was          
stayed temporarily and the Court reserved jurisdiction to list the stay         
after all matters are final in the class action filed on April 22, 1997.        
The Company and its named officers and directors deny all allegations of        
wrongdoing made against them in these suits, consider the allegations           
groundless and without merit, and intend to vigorously defend against these     
actions.                                                                        

On March 23, 1999, a purported class action and derivative complaint was        
filed in California Superior Court on behalf of the Company's non-director      
shareholders alleging that certain of the Company's directors breached          
their fiduciary duties principally by failing to assure the maximization of     
shareholder value.  The parties in this action have agreed to a settlement      
which calls for a dismissal of the action with prejudice, release given to      
each of the defendants, and payment of the nominal sum of $100,000 (paid by     
the Company's Directors and Officers Liability Insurance Company) in full       
settlement of plaintiff's motion for attorney's fees.  The settlement           
further expressly provides that it does not constitute an admission of any      
liability of defendants, which defendants continue to vigorously deny.          

The Company is a party to various other claims, legal actions and               
complaints arising in the ordinary course of business. The Company believes     
such matters are without merit, or involve such amounts that unfavorable        
disposition would not have a material adverse effect on the Company's           
financial statements.                                                           

Rental Commitments - The Company leases its facilities and offices under        
non-cancelable operating lease agreements expiring at various dates through     
July 2002. The Company has rental commitments under these agreements in         
fiscal 2001, 2002 and 2003 of $827,000, $216,000, and $72,000,                  
respectively. Total rental expense for all operating leases was $901,000,       
$807,000 and $672,000 for the years ended March 31, 2000, 1999 and 1998,        
respectively.                                                                   

NOTE 10 - ACQUISITIONS                                                          

MicroMed - On May 15, 1997, the Company acquired substantially all of the       
assets of MicroMed, a developer and marketer of proprietary information         
systems utilizing a graphical user interface client/server platform for         
medical group practices. The purchase price consisted of an initial cash        
payment of $4.8 million paid at the closing of the transaction and an           
additional payment of $5.7 million due no later than June 29, 1998. The         
additional payment, paid on June 29, 1998, consisted of $3.8 million in         
cash and 245,454 shares of QSI Common Stock valued at $1.8 million, or          
$7.48 per share.                                                                

The acquisition was recorded as a purchase transaction. In connection with      
this treatment, the $10.6 million paid, by the Company, including related       
acquisition costs, together with a $550,000 loan payable by MicroMed to the     
Company as of the acquisition date and $677,000 of assumed MicroMed             
liabilities was allocated to $1.3 million of acquired identified assets,        
$10.2 million of acquired in-process research and development, and $264,000     
of purchase price in excess of assets acquired.                                 

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QUALITY SYSTEMS, INC    
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)    

The technological feasibility of the acquired in-process research and           
development had not been established at the dates the purchase price was        
allocated and, accordingly, the allocated value was charged to operations       
during the year ended March 31, 1998. If the MicroMed acquisition had been      
consummated as of the beginning of the year ended March 31, 1998, the           
impact on pro forma revenues, net loss and net loss per share would not         
have been material for the year ended March 31, 1998.                           

NOTE 11 - SHAREHOLDER RIGHTS PLAN                                               

Each  share of the Company's Common Stock included a Right to purchase from     
the Company one share of Common Stock for $40, subject to adjustment. These     
Rights were be exercisable only if a person or group without prior consent      
of the Company's board became the beneficial owner of 15% or more of the        
Common Stock. The terms of the Rights served to deter potential attempts to     
acquire control of the Company without the approval of the Company's Board      
of Directors. In August 1999, the Company's Board of Directors terminated       
the shareholder rights plan and authorized the redemption of all                
outstanding Rights issued under the Rights agreement.                           

NOTE 12 - STOCK REPURCHASE PLAN                                                 

In February 1997, the Company's Board of Directors authorized the               
repurchase on the open market of up to 10% of the shares of the Company's       
outstanding Common, subject to compliance with applicable laws and              
regulations. This authorization has been renewed annually and currently         
expires on June 7, 2001.  As of March 31, 2000, the Company has repurchased     
109,900 shares at a cash cost of $629,000. The Company's management could,      
in the exercise of its judgment, decide not to effect any additional            
repurchases, or to repurchase fewer shares than authorized.                     

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QUALITY SYSTEMS, INC.     
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS     

ALLOWANCE FOR DOUBTFUL ACCOUNTS     
(in thousands)      

                                                                [Download Table]

                                 Column C - Additions                      
                                 ---------------------                     
                                                                   Column E
                      Column B      (1)        (2)                 Balance 
                     Balance at  Charged to Charged to              at end 
      Column A      beginning of costs and    other      Column D     of   
    Description        period     expenses   accounts   Deductions  Period 
------------------  ------------ ---------- ----------  ---------- --------
                                                                           
Fiscal Year Ended:                                                         

  March 31, 2000     $  754       $  529      $  -       $ 162     $1,121  
  March 31, 1999        521          954         -         721        754  
  March 31, 1998     $  297       $  339      $  -       $ 115     $  521  
                     ============ ========== ========== ========== ========

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Exhibit 3.2.3     

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                                                         Exhibit 3.2.3

CERTIFICATE OF AMENDMENT OF BYLAWS.     

The undersigned hereby certifies that she is the duly elected and acting        
Secretary of Quality Systems, Inc., a California corporation ("QSI"), and       
that the following amendment was duly adopted by the Board of Directors of      
QSI at a duly called and noticed meeting thereof, held on the ninth of          
September, 1998:                                                                

WHEREAS, Article III, Section 2 of the Bylaws of the Corporation            
currently provides that the authorized number of directors of the       
Corporation shall be not less than five (5) and not more than nine      
(9), with the exact number of directors having been fixed within those  
limits at six (6); and                                                  

WHEREAS, the exact number of directors, within the limits specified, may    
be altered from time to time by an amendment of the last sentence of    
Article III, Section 2 of the Bylaws duly adopted by the Board of       
Directors or the shareholders; and                                      

WHEREAS, it is deemed to be advisable and in the best interests of this     
Corporation and its shareholders that this Board of Directors adopt     
an amendment to the last sentence of Article III, Section 2 of the      
Bylaws so as to increase the actual number of directors to seven (7)    
from six (6);                                                           

NOW, THEREFORE, BE IT RESOLVED, that the last sentence of Article III,      
Section 2 of the Bylaws of the Corporation be, and hereby is, amended   
to read in its entirety as follows:                                     

"The exact number of directors shall be seven     
(7) until changed as provided in this Section 2." 

and that the foregoing amendment has not been rescinded, modified or            
revoked and is in full force and effect.                                        

Executed in Tustin, California this ninth day of September, 1998.       

                           /s/
                                          --------------------------
                     TBD

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Exhibit 10.16 

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                                                         Exhibit 10.16

MEMORANDUM OF UNDERSTANDING     

     1.   Sheldon Razin ("Razin") will go on vacation, effective
March 31, 2000, and return April 3, 2000.  He will resign as CEO on             
April 3, 2000.  The press announcement will not contain negative remarks        
and will indicate his continued Chairmanship pursuant to the 8/99 MOU.          

2.   Razin's existing options to purchase QSII shares 
(approx. 30,000 shares) shall vest in equal installments over the next          
four years, as if he had remained as CEO.                                       

   3.   Razin will receive as a severance his current salary
through September 30, 2000.                                                     

 4.   Razin will remain on the Company's insurance plans
until age 65, at the Company's expense.                                         

5.   Razin will take over his Center Club membership, 
health club membership, and be permitted to buy his company car at              
FMV (blue book).  He will transfer his cellphone into his name, and             
may purchase certain personal items, such as his desk, which will be            
identified later.                                                               

   6.   Razin will be designated an employee if necessary to
accomplish items 2 and 4 above.                                                 

  7.   Razin will vacate his office no later than April 7,
2000.                                                                           
         QUALITY SYSTEMS, INC.

By:         
-----------------------              -------------------------                  
Sheldon Razin                                                           

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Exhibit 21    

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                                                        Exhibit 21

QUALITY SYSTEMS, INC.   

List of Subsidiaries  

1.   Clinitec International, Inc., a California Corporation,            
is a wholly-owned subsidiary of Quality Systems, Inc.         

2.   MicroMed Healthcare Information Systems, Inc.,                     
a California Corporation, is a wholly-owned subsidiary of     
Quality Systems, Inc.                                         

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Exhibit 23.1      

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                                                          Exhibit 23.1

INDEPENDENT AUDITORS' CONSENT     

We consent to the incorporation by reference in Registration Statements         
Number 2-82773, 33-31949, 333-63131 and 333-67115 on Form S-8 of our report     
dated May 19, 2000, appearing in this Annual Report on Form 10-K for            
Quality Systems, Inc. for the year ended March 31, 2000.                        

DELOITTE & TOUCHE LLP                                                           
Costa Mesa, California                                                          
June 21, 2000                                                                   

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Exhibit 27.1      

Dates Referenced Herein   and   Documents Incorporated By Reference

				Referenced-On Page
This 10-K Filing		Date		First		Last			Other Filings
		3/11/93		49
		3/31/93		49
		3/31/94		48		67
		9/12/94		49
		3/31/95		49
		4/1/95		49
		4/21/95		49
		6/26/95		23		70
		3/5/96		23		70
		3/31/96		48					10KSB
		5/16/96		49
		5/17/96		49					8-K/A, 10-C, 8-K
		5/30/96		49
		6/21/96		49
		7/3/96		23		70
		11/25/96		50
		12/31/96		48					10QSB
		3/31/97		30					10-K
		4/1/97		69
		4/22/97		23		71
		5/14/97		24		70
		5/15/97		50		71			8-K
		5/29/97		50					8-K
		7/1/97		24		71
		8/13/97		24		71
		8/15/97		24
		3/31/98		17		73			10-K
		4/1/98		17		59
		6/29/98		71
		1/25/99		23		70
		3/23/99		24		71
		3/31/99		11		71			10-K, 10-K/A
		6/30/99		68					10-Q
		2/25/00		23
For The Period Ended		3/31/00		1		81
		4/3/00		26		77
		4/7/00		77
		5/9/00		23		70
		5/15/00		24
		5/19/00		53		81
		5/31/00		1		28
		6/21/00		81
		6/26/00		52
Filed On / Filed As Of		6/28/00
		7/29/00		2		46
		9/30/00		77					10-Q
		6/7/01		72
		12/31/07		68
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