QUALITY SYSTEMS INC, S-1, 1996-01-11

QUALITY SYSTEMS INC
S-1, 1996-01-11
COMPUTER INTEGRATED SYSTEMS DESIGN

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 11, 1996

REGISTRATION NO. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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QUALITY SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------

<TABLE>
<S> <C> <C>
CALIFORNIA 7373 95-2888568
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>

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17822 EAST 17TH STREET
TUSTIN, CALIFORNIA 92680
(714) 731-7171
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------

SHELDON RAZIN
CHAIRMAN AND PRESIDENT
QUALITY SYSTEMS, INC.
17822 EAST 17TH STREET, SUITE 210
TUSTIN, CALIFORNIA 92680
(714) 731-7171
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------

COPIES TO:

<TABLE>
<S> <C>
BRUCE R. HALLETT, ESQ. DHIYA EL-SADEN, ESQ.
LISA SCHECHTER GOON, ESQ. SCOTT J. CALFAS, ESQ.
MATTHEW V. WATERMAN, ESQ. GIBSON, DUNN & CRUTCHER
BROBECK, PHLEGER & HARRISON LLP 333 SOUTH GRAND AVENUE
4675 MACARTHUR COURT, SUITE 1000 LOS ANGELES, CALIFORNIA 90071
NEWPORT BEACH, CALIFORNIA 92660 (213) 229-7000
(714) 752-7535
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
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TITLE OF EACH CLASS AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT
OF SECURITIES TO BE OFFERING AGGREGATE OF REGISTRATION
TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE(1)(2) FEE(3)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock
($.01 par
value)............ 1,725,000 $26.875 $46,359,375 $15,986
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</TABLE>

(1) Includes up to 225,000 shares of Common Stock which may be purchased by the
Underwriters to cover over-allotments, if any.

(2) Estimated pursuant to Rule 457(c) solely for the purpose of calculating the
registration fee.

(3) Calculated pursuant to Rule 457(c) promulgated under the Securities Act of
1933, as amended, using the average of the high and low prices per share of
the Registrant's Common Stock on January 5, 1996, as reported by the Nasdaq
National Market.
------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2

QUALITY SYSTEMS, INC.

CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS OF FORM S-1

<TABLE>
<CAPTION>
FORM S-1 REGISTRATION STATEMENT
ITEM AND HEADING HEADING IN PROSPECTUS
- ------------------------------------------------ ------------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.... Facing Page; Cross Reference Sheet;
Outside Front Cover Page; Additional
Information
2. Inside Front and Outside Back Cover Pages
of Prospectus............................. Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges........ Prospectus Summary; Risk Factors; The
Company; Selected Financial Data
4. Use of Proceeds........................... Prospectus Summary; Use of Proceeds;
Capitalization
5. Determination of Offering Price........... Outside Front Cover Page of Prospectus;
Underwriting
6. Dilution.................................. Not Applicable
7. Selling Security Holders.................. Principal and Selling Shareholders
8. Plan of Distribution...................... Outside and Inside Front Cover Pages;
Underwriting
9. Description of Securities to be
Registered................................ Outside Front Cover Page; Prospectus
Summary; Capitalization; Description of
Capital Stock
10. Interests of Named Experts and Counsel.... Legal Opinions; Experts
11. Information with Respect to the
Registrant................................ Outside and Inside Front Cover Pages;
Prospectus Summary; Risk Factors; The
Company; Use of Proceeds; Price Range for
Common Stock and Dividends;
Capitalization; Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Directors and
Executive Officers; Principal and Selling
Shareholders; Description of Capital
Stock; Shares Eligible for Future Sale;
Legal Opinions; Experts; Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... Not Applicable
</TABLE>
<PAGE> 3

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED JANUARY 11, 1996

1,500,000 SHARES

LOGO
LOGO

COMMON STOCK
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Of the 1,500,000 shares of Common Stock offered hereby, 1,000,000 shares are
being sold by Quality Systems, Inc. ("QSI" or the "Company") and 500,000 shares
are being sold by certain Selling Shareholders. The Company will not receive any
of the proceeds from the sale of shares by the Selling Shareholders. See "Use of
Proceeds." The Common Stock of the Company is quoted on the Nasdaq National
Market under the symbol "QSII." On January 10, 1996, the last sale price per
share of the Common Stock as reported by the Nasdaq National Market was $23.50.
See "Price Range for Common Stock and Dividends."

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

THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" AT PAGES 6 THROUGH 10.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<S> <C> <C> <C> <C>
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
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Per Share................ $ $ $ $
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Total(3)................. $ $ $ $
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</TABLE>

(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."

(2) Before deducting expenses payable by the Company estimated at $450,000.

(3) Certain of the Selling Shareholders have granted to the Underwriters a
30-day option to purchase up to 225,000 additional shares of Common Stock at
the Price to Public, less Underwriting Discount, solely to cover
over-allotments, if any. If the Underwriters exercise such option in full,
the total Price to Public, Underwriting Discount and Commissions, Proceeds
to Company and Proceeds to Selling Shareholders will be $ ,
$ , $ , and $ , respectively. See "Underwriting."
---------------------------------------------------------

The shares are offered by the Underwriters when, as and if delivered to and
accepted by the Underwriters, and subject to various prior conditions, including
their right to reject orders in whole or in part. It is expected that delivery
of share certificates will be made in New York, New York on or about
, 1996.

PACIFIC GROWTH EQUITIES, INC. CRUTTENDEN ROTH
INCORPORATED

The date of this Prospectus is , 1996
<PAGE> 4

[QSI LOGO]

[PHOTO] [PHOTO] Quality Systems' health care
information systems automate
medical and dental practices and
improve efficiency in such areas
as billing, patient scheduling
and insurance processing. These
systems also permit enhanced
quality of care by giving the
health care professional access
to treatment and outcome data.

[PHOTO]

The Company's health care information
systems automate both medical and dental
physician group practices, management
services organizations ("MSOs"),
physician hospital organizations
("PHOs"), health maintenance
organizations ("HMOs") and community [PHOTO]
health centers with a focus on improving
overall practice efficiency. These
systems offer a broad range of
applications for a wide variety of health
care organizations.

QSI provides hardware and software system
support to its clients seven days a week,
24 hours a day. The Company offers a
selection of other client services
including training, consulting and custom
software development.

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

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS
(IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMPANY'S COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

<PAGE> 5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial data appearing elsewhere in this Prospectus. Unless
otherwise indicated, all information in this Prospectus assumes that the
Underwriters' over-allotment option is not exercised.

THE COMPANY

Quality Systems, Inc. ("QSI" or the "Company") develops and markets health care
information systems that automate medical and dental group practices, physician
hospital organizations ("PHOs"), management service organizations ("MSOs"),
health maintenance organizations ("HMOs") and community health centers. In
response to the growing need for more comprehensive, cost-effective information
solutions for physician and dental practice management, the Company's systems
provide clients with the ability to redesign patient care and other workflow
processes, to improve productivity and reduce information processing and
administrative costs and to provide multi-site access to patient information.
The Company's proprietary software systems include general patient information
and summary medical records, appointment scheduling, billing, insurance claims
submission and processing, managed care implementation and referral management,
treatment outcome studies, treatment planning, drug formularies, word processing
and accounting. In addition to providing fully integrated information solutions
to its clients, the Company provides comprehensive hardware and software
installation, maintenance and support services, system training services and
electronic claims submission services. The Company is also introducing patient
medical records automation for medical and dental practices utilizing
proprietary software developed by Clinitec International Inc. ("Clinitec"), a
developer of electronic medical records software systems.

The Company currently has an installed base of more than 475 operating health
care information systems serving PHOs, MSOs, HMOs and other health care
organizations, each of which consists of one to 120 physicians or dentists.
According to Medical Data International, it is estimated that the physician
practice management information systems market is currently $1.8 billion. The
Company believes that as health care providers are increasingly required to
reduce costs while maintaining the quality of health care, the Company will be
able to capitalize on its strategy of providing fully integrated information
systems and superior customer service.

The Company was founded in 1974, with an early focus on providing information
systems and services primarily for dental group practices. The Company's initial
"turnkey" systems were designed to improve productivity while reducing
information processing costs and personnel requirements. In the mid-1980's, the
Company capitalized on the opportunity presented by the increasing pressure of
cost containment on physicians and health care organizations and further
expanded its information processing systems into the broader medical market.
Today, the Company develops and provides integrated UNIX-based health care
information systems for both the medical and dental markets. These systems
operate on a stand-alone basis or in a networked environment and are expandable
to accommodate client needs.

Augmenting its practice management software, the Company added electronic
medical records software to its product line in 1995 through a strategic
relationship with Clinitec. The Company presently holds a 25% interest in
Clinitec and expects to increase its holdings to 51% by March 31, 1996. The
Clinitec product, NextGen, permits scanning, annotation, retrieval and analysis
of medical records in all formats, from documents to photographs and X-rays.
NextGen has been developed using a client/server platform, a graphical user
interface for compatibility with UNIX, Microsoft Windows, Windows NT and Windows
95 operating systems, and a relational database for flexibility in screen
customization and logic flow. The Company is also in the process of developing
an alternative client/server version of its "back office" products utilizing a
graphical user interface with screens and templates similar to those in the
NextGen product to enable a more seamless integration of the QSI and NextGen
applications. With the addition of NextGen, the Company is able to provide its
clients with a comprehensive information management solution. NextGen, in
conjunction with the Company's practice management software, was first installed
at a beta site in August 1995 and is currently being installed in two additional
sites. General release of the combined systems is expected to occur in the
quarter ending June 30, 1996.

3
<PAGE> 6

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered
By the Company................................ 1,000,000 shares
By the Selling Shareholders................... 500,000 shares
Total...................................... 1,500,000 shares
Common Stock to be outstanding after the
offering................................... 5,653,491 shares(1)
Use of proceeds................................. For acquisition of shares resulting in a majority
interest in Clinitec and for general corporate
purposes, including the financing of product sales
growth, development of new products, working
capital requirements and potential other
acquisitions. See "Use of Proceeds."
Nasdaq National Market symbol................... QSII
</TABLE>

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(1) Excludes 119,125 shares of Common Stock which were subject to outstanding
options as of January 4, 1996 at a weighted average exercise price of $2.55
per share under the Company's 1989 Stock Option Plan (the "1989 Plan"). See
"Directors and Executive Officers -- 1989 Stock Option Plan" and Note 6 to
Notes to Financial Statements.

4
<PAGE> 7

SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
--------------------------- -----------------
1993 1994 1995 1994 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Net revenues:
Sales of computer systems, upgrades and
supplies................................ $ 6,274 $ 6,146 $ 5,681 $ 2,730 $ 4,648
Maintenance and other services............ 5,377 5,606 6,368 3,137 3,340
------- ------- ------- ------- -------
11,651 11,752 12,049 5,867 7,988
Cost of products and services................ 6,992 6,527 6,060 3,108 3,785
------- ------- ------- ------- -------
Gross profit................................. 4,659 5,225 5,989 2,759 4,203
Earnings from operations..................... 517 855 986 363 1,619
Net earnings................................. $ 623 $ 906 $ 962 $ 386 $ 1,065
======= ======= ======= ======= =======
Net earnings per share(1).................... $ 0.15 $ 0.21 $ 0.21 $ 0.08 $ 0.23
======= ======= ======= ======= =======
Weighted average shares used in
computation............................... 4,187 4,342 4,606 4,643 4,679
======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1995
------------------------
PRO FORMA AS
ACTUAL ADJUSTED(2)
------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments............... $ 6,295 $ 27,297
Working capital.................................................... 8,201 29,224
Total assets....................................................... 14,363 35,148
Shareholders' equity............................................... 10,471 29,651
</TABLE>

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

(1) Net earnings per share reflects primary earnings per share for all periods
indicated. Primary and fully diluted net earnings per share were the same
for all periods except for the year ended March 31, 1994, for which fully
diluted net earnings per share were $0.20.

(2) Gives pro forma effect to the acquisition of an additional interest in
Clinitec, providing the Company with a 51% ownership interest in Clinitec as
if such acquisition had occurred on September 30, 1995, and adjusted to
reflect the sale of 1,000,000 shares of Common Stock by the Company in the
offering at an assumed public offering price of $23.50 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."

5
<PAGE> 8

RISK FACTORS

Prospective investors should consider carefully the following factors, in
addition to the other information contained or incorporated by reference in this
Prospectus. Unless the context otherwise requires, as used in these risk
factors, the term Company shall also include Clinitec after it becomes a
majority-owned subsidiary of QSI.

DEPENDENCE ON PRINCIPAL PRODUCT AND NEW PRODUCT DEVELOPMENT

The Company currently derives substantially all of its net revenues from sales
of its health care 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 health care 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 and successful introduction 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 in a timely manner, meet the requirements of health care providers or
achieve market acceptance. If new products or product enhancements do not
achieve market acceptance, the Company's business, operating results and
financial condition could be 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. See "Business -- Products," "-- Relationship with
Clinitec" and "-- Product Enhancement and Development."

COMPETITION

Among the Company's principal competitors are health care information systems
companies such as IDX Corporation, Medic Computer Systems, Physician Computer
Networks, Inc., and Cycare Systems, Inc. Furthermore, the Company also competes
indirectly and to varying degrees with other major health group information
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 will not have a
material adverse effect on the Company's business, financial condition and
results of operations. 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.

The Company believes that once a health care provider has chosen a particular
health care 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. As the health care industry undergoes further consolidation, each
sale of the Company's systems assumes even greater importance to the Company's
business, financial condition and results of operations. The Company's inability
to make initial sales of its systems to health care providers that are replacing
or substantially modifying their health care information systems could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Industry Background," "-- Sales and
Marketing" and "-- Competition."

6
<PAGE> 9

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. 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 could be materially adversely affected.

The Company is currently developing a new generation of its software products
that will be designed for the client/server environment. 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 and Windows
95, or that any such development, even if successful, will be completed
concurrently with or prior to introductions by competitors of products designed
for the client/server environment. Any such failure or delay could adversely
affect the Company's competitive position or could make the Company's current
product line designed for the UNIX environment obsolete.

FLUCTUATIONS 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
supplies; 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 little 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. In addition, 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 health care 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 and the installation cycle is typically two to three months from
contract execution to completion of installation. 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 and there can be no
assurance that the Company's recent revenue growth or its profitability will
continue on a quarterly or annual basis. 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

7
<PAGE> 10

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. 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.

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
arrangements with the party asserting the claim. As competing health care
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 an
adverse effect on the Company's business, financial condition and results of
operations. 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.

CLINITEC RELATIONSHIP

A principal component of the Company's business strategy is the acquisition of
shares resulting in a majority interest in Clinitec. The Company's future
financial results will depend in part on the Company's ability to successfully
integrate Clinitec's business with the Company's, including Clinitec's ability
to hire and retain high quality personnel for its operations. There can be no
assurance that the Company will be able to successfully coordinate its business
activities with those of Clinitec. Furthermore, there can be no assurance that
the Company will be successful in integrating Clinitec products with those of
the Company or that the acquisition of a majority interest in Clinitec will not
have an adverse effect upon the Company's operating results. In addition,
Clinitec has sold only a limited quantity of products to date and there can be
no assurance that its product will receive market acceptance. See "Use of
Proceeds" and "Business -- Relationship with Clinitec."

ABILITY TO MANAGE GROWTH

The Company has recently experienced a period of growth and increased personnel
which has placed, and will continue to place, a significant strain on the
Company's resources. The Company 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 time frame, 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 financial and administrative 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. See "Business -- Relationship with
Clinitec."

PRODUCT LIABILITY

Certain of the Company's products provide applications that relate to patient
medical information. Any failure by the Company's products to provide accurate
and timely information could result in claims against the Company. 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

8
<PAGE> 11

a material adverse effect on the Company's business, financial condition and
results of operations. Even unsuccessful claims could result in the Company's
expenditure of funds in litigation and management time and resources. 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
coverages, 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, financial condition and results of operations.

UNCERTAINTY IN HEALTH CARE INDUSTRY; GOVERNMENT REGULATION

The health care industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation of
health care facilities. During the past several years, the health care industry
has been subject to an increase in governmental regulation of, among other
things, reimbursement rates and certain capital expenditures. Certain
legislators have announced that they intend to examine proposals to reform
certain aspects of the U.S. health care system including proposals which may
increase governmental involvement in health care, lower reimbursement rates and
otherwise change the operating environment for the Company's clients. Health
care 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
health care 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 health care reforms might have on its business, financial condition and
results of operations.

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/hardware
products, application of detailed recordkeeping 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. See "Business -- Governmental
Regulation."

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. 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. Loss of services of key
employees could have a material adverse effect on the Company's business,
results of operations and financial condition. The Company does not maintain key
man life insurance on any of its employees. The Company may need to grant
additional options to key employees and provide other forms of incentive
compensation to attract and retain such key personnel. See "Business -- Product
Enhancement and Development" and "-- Employees."

STOCK OWNERSHIP OF OFFICERS AND DIRECTORS

The Company's executive officers and directors will beneficially own
approximately 32.9% of the Company's outstanding shares of Common Stock
immediately following this offering, or 29.0% in the event the over-allotment
option is exercised. Accordingly, these shareholders will be able to
significantly influence the outcome of the election of the Company's directors
and of corporate actions requiring shareholder approval,

9
<PAGE> 12

such as mergers and acquisitions. Such a high level of ownership by such persons
may have a significant effect in delaying, deferring or preventing a change in
control of the Company and may adversely affect the voting and other rights of
other holders of Common Stock.

VOLATILITY OF STOCK PRICE; NO DIVIDENDS

The trading price of the Common Stock has been and is likely to continue to be
subject to significant fluctuations in response to variations in quarterly
operating results, the gain or loss of significant contracts, changes in
management, announcements of technological innovations or new products by the
Company or its competitors, legislative or regulatory changes, general trends in
the industry and other events or factors. In addition, the stock market has
experienced extreme price and volume fluctuations which have particularly
affected the market price for many technology companies for reasons frequently
unrelated to the operating performance of these companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock. The Company currently intends to retain any future earnings for use in
its business and does not anticipate any cash dividends in the future. See
"Price Range for Common Stock and Dividends."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market after this
offering could adversely affect the market price of the Common Stock. Upon the
completion of this offering, the Company will have 5,653,491 shares of Common
Stock outstanding. Of this amount, the 1,500,000 shares sold in this offering
(plus any additional shares sold upon the Underwriters' exercise of their
over-allotment option) and approximately 2,289,357 other shares (subject in
certain cases to the volume and other limitations of Rule 144 as promulgated
under the Securities Act of 1933, as amended ("Rule 144")) will be available for
immediate sale in the public market as of the date of this Prospectus. An
additional 1,864,134 shares will be available for sale in the public market
(subject to the volume and other restrictions of Rule 144) following the
expiration of the 90-day lock-up agreement with the Representatives of the
Underwriters. See "Principal and Selling Shareholders," "Shares Eligible for
Future Sale" and "Underwriting."

BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS

The Company has not yet identified specific uses for all of the net proceeds of
this offering. Accordingly, the Company's management will retain broad
discretion as to the allocation of the net proceeds of this offering. The
Company will not receive any of the proceeds from the sale of shares of Common
Stock offered by the Selling Shareholders. See "Use of Proceeds."

10
<PAGE> 13

THE COMPANY

The Company was incorporated under the laws of California in April 1974. The
Company's executive offices are located at 17822 East 17th Street, Suite 210,
Tustin, California 92680 and its telephone number at that location is (714)
731-7171.

QS Quality Systems, Inc.(R), QS Quality Systems(R), and Quality Systems,
Inc.(R), are trademarks of the Company, and QSI(R) is a service mark of the
Company. NextGen(TM) is a trademark of Clinitec. This Prospectus also includes
trade names and trademarks of companies other than the Company.

USE OF PROCEEDS

The net proceeds to be received by the Company from the sale of the 1,000,000
shares of Common Stock offered hereby, at an assumed offering price of $23.50
per share, after deducting estimated underwriting discounts and expenses of the
offering payable by the Company, are approximately $21.7 million.

The Company intends to use the net proceeds from the offering as follows: (i) $3
million to purchase shares of Clinitec pursuant to an option held by the
Company, thereby providing the Company a 51% ownership interest in Clinitec; and
(ii) approximately $18.7 million for general corporate purposes, including the
financing of product sales growth, development of new products, working capital
requirements and the possible acquisitions of complementary businesses and
technologies. The Company currently has no agreement or understanding with
respect to any such acquisitions. Pending the use thereof, the Company intends
to invest the net proceeds in short-term, interest-bearing investment-grade
securities. See "Business -- Relationship with Clinitec."

The Company will not receive any of the proceeds from the sale of shares of
Common Stock offered by the Selling Shareholders.

PRICE RANGE FOR COMMON STOCK AND DIVIDENDS

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
reported high and low closing sales prices as reported by Nasdaq.

<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
FISCAL 1994:
First Quarter................................... $ 2-3/4 $ 1-3/4
Second Quarter.................................. 2-1/4 1-1/2
Third Quarter................................... 2-3/4 1-3/4
Fourth Quarter.................................. 8-1/4 2-1/2
FISCAL 1995:
First Quarter................................... $ 7 $ 4-1/4
Second Quarter.................................. 4-3/4 3-1/2
Third Quarter................................... 4-3/8 2-1/2
Fourth Quarter.................................. 3-3/4 2-1/8
FISCAL 1996:
First Quarter................................... $ 4-7/8 $ 3
Second Quarter.................................. 17-1/8 4-1/2
Third Quarter................................... 31-1/2 14-1/16
Fourth Quarter (through January 10, 1996)....... 29-1/2 23-1/2
</TABLE>

At January 10, 1996 there were approximately 203 holders of record of the
Company's outstanding shares of Common Stock, and the closing sale price of the
Common Stock on the Nasdaq National Market was $23.50 per share.

The Company anticipates that all future 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.

11
<PAGE> 14

CAPITALIZATION

The following table sets forth the actual capitalization of the Company at
September 30, 1995, and the pro forma and as adjusted capitalization of the
Company after giving effect to the acquisition of a majority interest in
Clinitec and the sale of 1,000,000 shares of Common Stock offered hereby
(assuming an offering price of $23.50 per share) and the receipt of the
estimated net proceeds therefrom, respectively.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
-------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(1) ADJUSTED(1)
------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Shareholders' equity:
Common stock, $.01 par value, 20,000,000 shares
authorized, 4,569,241 shares issued and
outstanding(2)......................................... $ 46 $ 46 $ 56
Additional paid-in capital................................ 6,169 6,169 27,859
Unrealized loss on available-for-sale securities.......... (57) (57) (57)
Retained earnings......................................... 4,313 1,793 1,793
------- ------------ ------------
Total shareholders' equity.................................. $10,471 $7,951 $ 29,651
======= ========== ==========
</TABLE>

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

(1) Gives pro forma effect to the acquisition of an additional interest in
Clinitec, providing the Company with a 51% ownership interest in Clinitec as
if such acquisition had occurred at September 30, 1995. See "Use of
Proceeds" and "Business -- Relationship with Clinitec."

(2) Excludes 810,875 shares of Common Stock reserved for issuance under the
Company's 1989 Plan of which 201,375 shares of Common Stock were subject to
outstanding options at a weighted average exercise price of $1.89. See
"Directors and Executive Officers -- 1989 Stock Option Plan."

12
<PAGE> 15

SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

The following selected financial data with respect to the Company's statements
of operations for each of the five years in the period ended March 31, 1995 and
the balance sheet data as of March 31, 1991, 1992, 1993, 1994 and 1995 are
derived from the audited financial statements of the Company. The statement of
operations data of the Company for the six months ended September 30, 1994 and
1995 and the balance sheet data as of September 30, 1995 are unaudited and were
prepared by management of the Company on the same basis as the audited financial
statements included elsewhere herein and, in the opinion of the Company, include
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the information set forth therein. The results for the six months
ended September 30, 1995 are not necessarily indicative of the results to be
expected for the full year ending March 31, 1996 or future periods. The pro
forma financial data presented in the table below are derived from the unaudited
pro forma consolidated financial statements of the Company included elsewhere in
this Prospectus, which give effect to the Company's planned acquisition of a
majority interest in Clinitec. The following information should be read in
conjunction with the Financial Statements of the Company and Clinitec and the
related notes thereto, the pro forma consolidated financial statements of the
Company and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
PRO FORMA(1)
SIX MONTHS --------------------------
ENDED SIX MONTHS
YEAR ENDED MARCH 31, SEPTEMBER 30, YEAR ENDED ENDED
----------------------------------------------- --------------- MARCH 31, SEPTEMBER 30,
1991 1992 1993 1994 1995 1994 1995 1995 1995
------- ------- ------- ------- ------- ------ ------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Sales of computer systems,
upgrades and supplies.... $ 8,844 $ 6,972 $ 6,274 $ 6,146 $ 5,681 $2,730 $4,648 $ 5,735 $ 5,221
Maintenance and other
services................. 4,281 4,738 5,377 5,606 6,368 3,137 3,340 6,368 3,340
------- ------- ------- ------- ------- ------ ------ ------- -------
13,125 11,710 11,651 11,752 12,049 5,867 7,988 12,103 8,561
Cost of products and
services................... 8,815 7,506 6,992 6,527 6,060 3,108 3,785 6,080 3,983
------- ------- ------- ------- ------- ------ ------ ------- -------
Gross profit................. 4,310 4,204 4,659 5,225 5,989 2,759 4,203 6,023 4,578
Operating expenses:
Selling, general and
administrative........... 4,003 3,458 3,008 3,052 3,536 1,680 1,928 3,900 2,578
Research and development... 961 1,148 1,134 1,318 1,467 716 656 1,645 716
------- ------- ------- ------- ------- ------ ------ ------- -------
Total operating expenses..... 4,964 4,606 4,142 4,370 5,003 2,396 2,584 5,545 3,294
------- ------- ------- ------- ------- ------ ------ ------- -------
Earnings (loss) from
operations................. (654) (402) 517 855 986 363 1,619 478 1,284
Interest and investment
income..................... 302 204 192 400 429 121 205 429 208
Equity in loss of Clinitec... -- -- -- -- -- -- (18) -- --
Minority interest in loss of
Clinitec................... -- -- -- -- -- -- -- 191 133
------- ------- ------- ------- ------- ------ ------ ------- -------
Earnings (loss) before income
tax provision.............. (352) (198) 709 1,255 1,415 484 1,806 1,098 1,625
Income tax provision(3)...... -- -- 86 349 453 98 741 406 717
------- ------- ------- ------- ------- ------ ------ ------- -------
Net earnings (loss).......... $ (352) $ (198) $ 623 $ 906 $ 962 $ 386 $1,065 $ 692 $ 908
======= ======= ======= ======= ======= ====== ====== ======= =======
Net earnings (loss) per
share(4)................... $ (0.08) $ (0.05) $ 0.15 $ 0.21 $ 0.21 $ 0.08 $ 0.23 $ 0.15 $ 0.19
======= ======= ======= ======= ======= ====== ====== ======= =======
Weighted average shares
outstanding................ 4,187 4,187 4,187 4,342 4,606 4,643 4,679 4,734(5) 4,807(5)
======= ======= ======= ======= ======= ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
AS OF MARCH 31, ----------------------
-----------------------------------------------
1991 1992 1993 1994 1995 ACTUAL PRO FORMA(6)
------- ------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and short term
investments........................... $ 3,197 $ 3,453 $ 4,778 $ 6,071 $ 7,322 $ 6,295 $ 5,597
Working capital......................... 4,604 4,691 5,204 6,857 8,032 8,201 7,524
Total assets............................ 8,942 8,805 9,596 11,094 12,668 14,363 13,448
Total liabilities and minority
interest.............................. 2,844 2,906 3,074 3,054 3,480 3,892 5,497
Shareholders' equity.................... 6,098 5,899 6,522 8,040 9,188 10,471 7,951

<CAPTION>
SEPTEMBER 30, 1995
PRO FORMA
AS ADJUSTED(6)(7)
------------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and short term
investments........................... $27,297
Working capital......................... 29,224
Total assets............................ 35,148
Total liabilities and minority
interest.............................. 5,497
Shareholders' equity.................... 29,651
</TABLE>

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

(1) Gives pro forma effect to the acquisition of an additional interest in
Clinitec, providing the Company with a 51% ownership interest in Clinitec as
if such acquisition had occurred on April 1, 1994. See "Use of Proceeds" and
"Business -- Relationship with Clinitec."

(2) Of the purchase price for the additional shares of Clinitec, $3.8 million
has been allocated to in-process research and development and is to be
written off, net of tax benefit of $1.3 million, at the time of the
purchase. The effect of this write-off has not been reflected in the pro
forma operating results.

(3) The income tax provision for the year ended March 31, 1993 is net of an
extraordinary credit resulting from the tax benefit from utilization of net
operating loss carryforwards.

(4) Net earnings (loss) per share reflects primary earnings (loss) per share for
all periods indicated. Primary and fully diluted net earnings (loss) per
share were the same for all periods except for the year ended March 31,
1994, for which fully diluted net earnings per share were $0.20.

(5) Assumes as outstanding 128,000 shares being offered by the Company hereby,
which represents the approximate number of shares that have to be sold to
fund the purchase of the additional shares of Clinitec.

(6) Gives pro forma effect to the acquisition of an additional interest in
Clinitec, providing the Company with a 51% ownership interest in Clinitec as
if such acquisition had occurred on September 30, 1995 and the writeoff
referenced in footnote 2 above.

(7) Pro forma amounts adjusted to give effect to the sale of 1,000,000 shares of
Common Stock by the Company in the offering at an assumed public offering
price of $23.50 per share and the application of the estimated net proceeds
therefrom.

13
<PAGE> 16

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Since fiscal 1993, approximately one-half of the Company's revenues have been
derived from sales of computer systems, upgrades and supplies, with the balance
derived from systems maintenance agreements and other support services. On sales
of its systems, upgrades and supplies, the Company recognizes revenues upon
shipment of products. Revenues attributable to the Company's software products
included with the systems are also recognized upon shipment, unless the
Company's installation obligations after shipment are significant, in which case
revenues are recognized on a percentage of completion basis. Revenues from
systems maintenance are typically recognized ratably over the life of the
contract. In the last five years, more than 90% of the Company's clients have
elected to purchase the Company's maintenance and support services.

During the past five years, the Company's systems sales have been impacted by a
number of factors which have had the effect of reducing systems sales and
systems upgrade sales while at the same time increasing the relative
profitability of these sales. Historically, the costs for the hardware
components used in the Company's systems have consistently declined while the
performance and capacity of such components have continually increased.
Consistent with the marketplace, the Company has adjusted its systems pricing to
its clients to reflect these decreased hardware costs. In addition, the Company
increasingly encounters prospective clients that already own, or desire to
acquire from third parties, significant quantities of hardware which may be
utilized with the Company's software. In such instances, the sales generated
from such clients are lower than they otherwise would be.

As a result of these market changes, the Company has increasingly focused its
efforts on the sale of its software user licenses and services, resulting in
higher margins. Aiding these efforts has been the continuing increase in the
capacity of the hardware components which the Company markets. The Company has
had a growing market for the sale of additional software user licenses to its
existing clients as such clients can often add more software user capacity to
their system with minimal or no change to their current central processing unit.
Such clients frequently also purchase hardware peripherals from the Company for
use with the newly purchased software user licenses.

The first six months of fiscal 1996 have seen a marked increase in the Company's
system revenues. The Company attributes this increase to the dynamic changes
currently occurring in the health care industry and to growing acceptance of the
Company's products and services. Health care providers, faced with economic
pressures to reduce costs and increase productivity, are increasingly aligning
with HMOs, hospitals and other health care organizations as well as
consolidating with other health care providers into larger, more efficient
business entities. This trend results in an increase in the number of large and
complex health care organizations that are potential clients for the Company's
sophisticated systems. In addition, the continued growth of these organizations
after they become clients of the Company presents the potential for the Company
to increase sales of upgrades and additional software user licenses. The
Company's ability to address the complex software requirements of such newly
forming or growing business entities, in particular in the area of managed care,
is a key to success in this changing health care delivery environment.

The sales cycle for the Company's systems typically ranges from three to 12
months from initial contact to contract execution. The installation cycle is
typically two to three months from contract execution to completion of
installation. 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.

14
<PAGE> 17

The Company's research and development expenses consist primarily of personnel
and equipment costs required to conduct the Company's product development
effort. The Company believes that significant investments in research and
development are required to remain competitive. As a consequence, in recent
years, the Company has increased the amount of its expenditures on research and
development, mainly through the employment of additional development personnel.
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 and
amortized over periods ranging from three to five years.

In connection with the acquisition of a 51% interest in Clinitec, the Company
expects to take a writeoff for purchased in-process research and development of
$3.8 million in the quarter ending March 31, 1996. The exact amount of this
writeoff is subject to change pending the timing of this transaction and
ultimate purchase allocations to be made by the Company.

The following discussion should be read in conjunction with, and is qualified in
its entirety by, the Financial Statements and related notes thereto included
elsewhere in this Prospectus. 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 statement of operations.

<TABLE>
<CAPTION>
SIX MONTHS
ENDED SEPTEMBER
YEAR ENDED MARCH 31, 30,
------------------------- ---------------
1993 1994 1995 1994 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues:
Sales of computer systems, upgrades and
supplies...................................... 53.8% 52.3% 47.1% 46.5% 58.2%
Maintenance and other services................... 46.2 47.7 52.9 53.5 41.8
----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0
Cost of products and services...................... 60.0 55.5 50.3 53.0 47.4
----- ----- ----- ----- -----
Gross profit....................................... 40.0 44.5 49.7 47.0 52.6
Operating expenses:
Selling, general and administrative.............. 25.8 26.0 29.3 28.6 24.1
Research and development......................... 9.7 11.2 12.2 12.2 8.2
----- ----- ----- ----- -----
Total operating expenses........................... 35.5 37.2 41.5 40.8 32.3
----- ----- ----- ----- -----
Earnings from operations........................... 4.5 7.3 8.2 6.2 20.3
Interest and investment income..................... 1.6 3.4 3.6 2.1 2.6
Equity in loss of Clinitec......................... -- -- -- -- (0.3)
----- ----- ----- ----- -----
Earnings before income tax provision............... 6.1 10.7 11.8 8.3 22.6
Income tax provision............................... 0.8 3.0 3.8 1.7 9.3
----- ----- ----- ----- -----
Net earnings....................................... 5.3% 7.7% 8.0% 6.6% 13.3%
===== ===== ===== ===== =====
</TABLE>

FOR THE SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994

NET REVENUES. Net revenues for the six months ended September 30, 1995
increased 36.1% to $8.0 million from $5.9 million for the six months ended
September 30, 1994. This increase was due primarily to sales of computer
systems, upgrades, including software user licenses, and supplies, which grew
70.4% to $4.6 million from $2.7 million. This growth resulted from an increase
in the number of larger systems and from increased sales of upgrades. Net
revenues from maintenance and other services grew 6.5% to $3.3 million from $3.1
million.

15
<PAGE> 18

COSTS OF PRODUCTS AND SERVICES. Cost of products and services for the six
months ended September 30, 1995 increased 21.8% to $3.8 million from $3.1
million for the six months ended September 30, 1994. This increase was due
primarily to the increase in systems sold and in net revenues. As a percentage
of net revenues, cost of products and services decreased to 47.4% from 53.0%.
This decrease was due to an increase in the proportion of revenue from lower
cost items.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the six months ended September 30, 1995 increased
14.8% to $1.9 million from $1.7 million for the six months ended September 30,
1994. This increase was primarily attributable to increases in sales and
administrative personnel. These increases were more than offset by increased
sales during the same period, resulting in a decrease in selling, general and
administrative expenses, as a percentage of revenues, to 24.1% from 28.6%.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the
six months ended September 30, 1995 decreased 8.4% to $656,000 from $716,000 for
the six months ended September 30, 1994. The decrease in research and
development expenses resulted from a higher proportion of capitalized software.
Total research and development expenditures and capitalized software increased
to $869,000 from $793,000. The Company anticipates increased expenditures in
capitalized software in connection with developing an alternate version of
certain of its products for the client/server environment to take advantage of
new more powerful technologies and to allow for a more seamless integration of
the Company's and Clinitec's NextGen applications.

INTEREST AND INVESTMENT INCOME. Interest and investment income for the six
months ended September 30, 1995 increased 69.4% to $205,000 from $121,000 for
the six months ended September 30, 1994. Current period investment results
represent an annualized yield of approximately 6.0% on the Company's combined
balances for cash and cash equivalents and short-term investments. Interest and
investment income for the six months ended September 30, 1994 included prior
year first quarter realized losses of $81,000 from sales of short-term
investments and first quarter unrealized losses of $10,000 from trading
securities.

INCOME TAX PROVISION. Income tax provision for the six months ended September
30, 1995 increased 656.1% to $741,000 from $98,000 for the six month ended
September 30, 1994. This increase was due to increased earnings before income
tax provision and an increase in effective tax rates. The effective tax rates
for the respective periods were 41.0% and 20.2%. The rate for the prior period
was lower due to utilization of a deferred tax valuation allowance related to
net operating loss carryforwards.

FOR THE YEARS ENDED MARCH 31, 1995 AND 1994.

NET REVENUES. Net revenues were relatively unchanged for the year ended March
31, 1995 increasing 2.5% to $12.0 million from $11.8 million for the year ended
March 31, 1994. Revenues derived from maintenance and other services increased
13.6% to $6.4 million from $5.6 million as a result of the Company's larger
installed base of systems and higher prices for services. Revenues attributable
to sales of computer systems, upgrades and supplies decreased 7.6% to $5.7
million from $6.1 million due to decreased systems sales during fiscal 1995.

COST OF PRODUCTS AND SERVICES. Cost of products and services for the year ended
March 31, 1995 decreased 7.2% to $6.1 million from $6.5 million for the year
ended March 31, 1994. This decrease was due to an increase in the proportion of
revenues from lower cost items comprising net revenues and also resulted in
these costs, as a percentage of net revenues, decreasing to 50.3% from 55.5%.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended March 31, 1995 increased 15.9% to
$3.5 million from $3.1 million for the year ended March 31, 1994 as a result of
increases in selling efforts and sales personnel, thereby increasing these
expenses, as a percentage of net revenues, to 29.3% from 26.0%.

RESEARCH AND DEVELOPMENT EXPENSES. The amount of expenditures charged to
research and development expense for the year ended March 31, 1995 increased
11.3% to $1.5 million from $1.3 million for the year ended March 31, 1994. Total
research and development expenditures, including the amount charged to
capitalized software, increased 10.4% to $1.7 million from $1.5 million, and as
a percentage of net revenues, to

16
<PAGE> 19

13.8% from 12.8%. This increase was primarily attributable to development of
enhancements and additions to the Company's systems.

INTEREST AND INVESTMENT INCOME. Interest and investment income for the year
ended March 31, 1995 increased 7.3% to $429,000 from $400,000 for the year ended
March 31, 1994. This increase was due to an increase in funds available for
investment.

INCOME TAX PROVISION. Income tax provision for the year ended March 31, 1995
increased 29.8% to $453,000 from $349,000 for the year ended March 31, 1994.
This was due to increased earnings before income tax provision and an increase
in effective tax rates. The effective tax rates for the respective periods were
32.0% and 27.8%. These lower than normal rates were due to utilization of a
deferred tax valuation allowance related to net operating loss carryforwards.

FOR THE YEARS ENDED MARCH 31, 1994 AND 1993.

NET REVENUES. Net revenues were relatively unchanged for the year ended March
31, 1994, increasing 0.9% to $11.8 million from $11.7 million for the year ended
March 31, 1993. Revenues derived from maintenance and other services increased
4.3% to $5.6 million from $5.4 million. Revenues from sales of computer systems,
upgrades and supplies decreased 2.0% to $6.1 million from $6.3 million.

COST OF PRODUCTS AND SERVICES. Cost of products and services for the year ended
March 31, 1994 decreased 6.7% to $6.5 million from $7.0 million for the year
ended March 31, 1993. This decrease was due to an increase in the proportion of
revenues from lower cost items comprising net revenue and to successful results
from the Company's cost containment program, resulting in reducing costs, as a
percentage of revenues, to 55.5% from 60.0%.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were relatively unchanged in the year ended March 31,
1994, increasing 1.5% to $3.1 million from $3.0 million for the year ended March
31, 1993, and as a percentage of net revenues to 26.0% from 25.8%.

RESEARCH AND DEVELOPMENT EXPENSES. The amount of expenditures charged to
research and development expense for the year ended March 31, 1994 increased
16.2% to $1.3 million from $1.1 million for the year ended March 31, 1993. Total
research and development expenditures, including the amount charged to
capitalized software, increased 17.1% to $1.5 million from $1.3 million, and as
a percentage of net revenues to 12.8% from 11.0%.

INTEREST AND INVESTMENT INCOME. Interest and investment income for the year
ended March 31, 1994 increased 108.3% to $400,000 from $192,000 for the year
ended March 31, 1993. This increase was due to an increase in funds available
for investment and a change in the investment mix in order to increase yields.

INCOME TAX PROVISION. Income tax provision for the year ended March 31, 1994,
increased 305.8% to $349,000 from $86,000 for the year ended March 31, 1993. The
income tax expense for the year ended March 31, 1994, resulted from an initial
tax expense of $331,000 which was offset by a $245,000 tax benefit from
utilization of tax loss carryforwards. The effective tax rates were 27.8% and
12.1%, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations primarily through cash
generated from operations. Net cash provided by operating activities was $1.8
million, $1.2 million and $1.2 million for the years ended March 31, 1993, 1994
and 1995 and $563,000 and $128,000 for the six months ended September 30, 1994
and 1995, respectively. Net cash provided from operating activities consists
principally of net earnings plus increases in income taxes payable offset by
increases in accounts receivables. The amounts for the period ended September
30, 1995 were reduced principally by an increase in accounts receivable of $1.7
million.

Net cash provided by (used in) investing activities was $1.3 million, $(4.0)
million, and $3.6 million for the years ended March 31, 1993, 1994 and 1995 and
$1.1 million and $(1.3) million for six months ended September 30, 1994 and
1995, respectively. Net cash provided by (used in) investing activities consists
principally of changes in short-term investments as well as additions to
equipment and improvements and

17
<PAGE> 20

capitalized software. The amounts for the period ended September 30, 1995 were
reduced by the Company's purchase of a 25% equity interest in Clinitec for $1.0
million.

At September 30, 1995, the Company had cash and cash equivalents of $5.0 million
and short-term investments of $1.3 million. Short-term investments include debt
securities issued by foreign governments of $314,000 and an investment in a
hedge fund which trades in special situation securities of $517,000. The Company
does not believe these investments have significant principal risk; however,
there can be no assurance that the markets for these securities will not change,
causing a loss of principal.

Except for the Company's intention to exercise its option to obtain a majority
interest of Clinitec, and to expend funds on capitalized software in connection
with alternative versions of certain of its products for the client/server
environment to take advantage of more powerful technologies and to enable a more
seamless integration of the Company's and Clinitec's NextGen applications, the
Company has no significant capital commitments and currently anticipates that
additions to property and equipment for the remainder of fiscal 1996 and fiscal
1997 will be comparable to recent past years. See "Use of Proceeds" and
"Business -- Relationship with Clinitec."

The Company believes that the net proceeds from the sale of the Common Stock
offered hereby, together with its current cash balances and cash flow from
operations, if any, will be sufficient to meet its working capital and capital
expenditure requirements through fiscal 1997.

QUARTERLY RESULTS

The following tables set forth certain unaudited statement of operations data
for the six quarters ended September 30, 1995. These data have been derived from
unaudited financial statements that, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of such information when read in conjunction with the
Company's audited financial statements and notes thereto.

The Company believes that results of operations for the interim periods are not
necessarily indicative of the results to be expected for any future period.

<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------
JUNE SEPTEMBER DECEMBER MARCH JUNE SEPTEMBER
1994 1994 1994 1995 1995 1995
------ --------- -------- ------ ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Sales of computer systems, upgrades and
supplies............................. $1,582 $ 1,148 $1,165 $1,786 $2,124 $ 2,524
Maintenance and other services.......... 1,491 1,646 1,590 1,641 1,680 1,660
------ ------ ------ ------ ------ ------
3,073 2,794 2,755 3,427 3,804 4,184
Cost of products and services............. 1,652 1,456 1,390 1,562 1,713 2,072
------ ------ ------ ------ ------ ------
Gross profit.............................. 1,421 1,338 1,365 1,865 2,091 2,112
Operating expenses:
Selling, general and administrative..... 836 844 901 955 926 1,002
Research and development................ 329 387 394 357 355 301
------ ------ ------ ------ ------ ------
Total operating expenses.................. 1,165 1,231 1,295 1,312 1,281 1,303
Earnings from operations.................. 256 107 70 553 810 809
Interest and investment income (loss)..... (12) 133 128 180 104 101
Equity in loss of Clinitec................ -- -- -- -- (10) (8)
------ ------ ------ ------ ------ ------
Earnings before income tax provision...... 244 240 198 733 904 902
Income tax provision...................... 44 54 60 295 367 374
------ ------ ------ ------ ------ ------
Net earnings.............................. $ 200 $ 186 $ 138 $ 438 $ 537 $ 528
====== ====== ====== ====== ====== ======
</TABLE>

18
<PAGE> 21

The Company's revenues and operating results have fluctuated from quarter to
quarter as a result of a number of factors including, without limitation, the
size and timing of orders from major 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 supplies; 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. 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 and there can be no assurance that the Company's recent revenue growth or
its profitability will continue on a quarterly or annual basis. 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.

19
<PAGE> 22

BUSINESS

INDUSTRY BACKGROUND

Health care costs in the United States have risen dramatically over the past two
decades relative to the overall rate of inflation. Consequently, broad pressures
to reduce costs without sacrificing the quality of care have caused significant
changes in the health care industry. While reimbursement for health care has
historically

20
<PAGE> 23

been based on a fee-for-service model of payment, managed care organizations and
other payors are increasingly utilizing alternative reimbursement models,
including fixed fee and capitation, that shift the financial risk of delivering
health care from payors to both physicians and institutional providers.
Pressures to control costs have also contributed to the movement of care from
more expensive inpatient settings, such as hospitals, to outpatient settings,
such as clinics and physician offices. Today, outpatient care providers,
particularly physician groups, deliver an increasing amount of health care
services, bear an increasing share of the financial risk and control a
substantial portion of total health care resources.

To compete in the changing health care 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 health care organizations such as PHOs, MSOs and HMOs. These
organizations are designed to take advantage of economies of scale associated
with managing health care services for large patient populations across
inpatient and outpatient settings, while achieving improved quality, reduced
costs and strengthened negotiating positions with managed care entities. In the
managed care environment, health care organizations are increasingly entering
into 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 practices, billing procedures
and reimbursement policies impacting medical practices. In addition, to operate
effectively, health care organizations must efficiently manage patient care and
other workflow processes which may extend across multiple care locations and
business entities.

To compete under the constraints of managed care while maintaining quality of
services, health care 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 all levels of "back-office" data with
clinical information such 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 physician as the primary care giver. In
addition, large health care organizations increasingly require information
systems that can deliver high-performance in environments with multiple
concurrent computer users.

Many existing health care information systems, including systems designed for
physicians 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 health care industry continues to evolve, physician groups and
health care organizations will increasingly require systems that compile
structured clinical information from multiple sources and enable measurement of
treatment outcomes and management of clinical processes. Such systems must be
integrated with financial and administrative information systems in order to
maintain patient flow while continuing to reduce costs and improve quality of
care. The Company believes that systems which integrate patient clinical data
with administrative, financial and other practice management data are best
positioned to succeed in the current managed care environment.

As health care organizations transition to new platforms and newer technologies,
they 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 re-education,
nor can they risk choosing a system which has not proven its ability to handle
high volume processing with continuous dependability. The Company believes that
successful systems vendors in this market will have a sufficient installed base
and adequate resources to offer high quality, fully integrated products and the
value-added services needed to expand and support clients throughout this
evolution process.

THE QSI SOLUTION

In response to the growing need for more comprehensive, cost-effective health
care information solutions for physician and dental practice management, the
Company's systems provide clients with the ability to redesign patient care and
other workflow processes and improve productivity through multi-site and
multi-entry access

21
<PAGE> 24

to patient information. Utilizing proven third-party hardware solutions combined
with the Company's proprietary software configured to maximize the efficiency of
a health care organization's information processing requirements, the Company's
solutions enable a seamless integration of a variety of administrative and
patient information operations. In addition, as a result of its strategic
relationship with Clinitec, the Company provides clients with an integrated
medical records management system as part of a total information management
solution. Leveraging over 20 years of experience in the health care 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.

QSI's systems automate many aspects of group practice management, including the
retention of general patient information, appointment scheduling, billing,
insurance claims submission and processing, managed care implementation and
referral management, treatment outcome studies, treatment planning, drug
formularies, word processing and accounting. The Company 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, which enables the Company to
continue providing a wide range of flexible and functional systems to
accommodate clients from solo practitioners to large group practices.

STRATEGY

The Company provides its clients with health care information systems designed
to improve the quality and reduce the cost of health care delivery. The
Company's strategy is to build on its experience as a provider of information
systems solutions for health care organizations.

Key elements of the Company's strategy include:

Providing Increased Automation and Integration of Practice Management
Systems. The Company's strategy is to provide user-friendly, comprehensive
medical and dental practice management information systems that meet the
information processing requirements of physician specialties and practices
and are designed to manage the financial, administrative and practice
management requirements of these practices. These products enable a single
user to perform a larger number of tasks and operate more efficiently by
providing real-time access to comprehensive patient information.

Expanding Professional and Technical Service Offerings. The Company will
continue to expand its professional and technical services, including
information systems planning, process redesign, new product offerings,
project management, contract programming, client management, training
services and network design, to assist health care organizations. In
addition, the Company intends to expand its electronic data interchange
capabilities by increasing the number of insurance carriers and services
offered.

Leveraging Clinitec Relationship for Sale of NextGen Products. Leveraging
on its recent alliance with Clinitec, the Company's strategy includes
integration of a medical records management system into its product line.
The Company believes that the "front office" electronic medical records
solutions offered by Clinitec's NextGen software are a natural adjunct to
the "back office" applications of QSI's existing software solutions.

Targeting Large Health Care Provider Groups. The number of physicians and
dentists practicing in group settings or as a part of managed care
organizations has increased significantly in recent years. The Company
believes the number and size of such groups will continue to grow as
economic pressures drive health care providers to affiliate with or form
new larger group practices. The Company believes that the proven ability of
its integrated information solutions to meet the needs of physician and
dental groups, particularly those with eight or more affiliated physicians
and six or more affiliated dentists, will allow the Company to capitalize
on the continued growth of the group practice market. In addition, the
Company intends to aggressively pursue certain target markets including
large, federally funded community health centers and other opportunities
that arise due to the increase in managed care.

22
<PAGE> 25

Offering Comprehensive Services and Support. The Company believes its
success is attributable in part to its exceptional customer service and
support. The Company provides support to its clients seven days a week, 24
hours a day. In addition, the Company's policy is to respond to user
defined system-down emergencies with a response time of 15 minutes or less.
Further, the Company's employees have the ability to service clients by
remote access, allowing for quick response to client inquiries and quick
resolutions to system issues. The Company believes that its commitment to
provide extensive support has contributed significantly to the development
of its business.

PRODUCTS

The Company's health care information systems consist primarily of proprietary
software applications and third-party hardware and software. The systems range
in capacity from one to hundreds of users, allowing the Company to address the
needs of both small and large clients. The software configuration of a typical
system includes a basic medical or dental application and additional software
applications. A typical system also consists of third party hardware components,
including a UNIX-based central processing unit, disk drives, a magnetic tape
unit, video display terminals, PCs, one or more printers, and telecommunications
equipment. The systems are modular in design and may be expanded to grow with
changing client requirements.

The Company purchases all the hardware components of its systems as well as the
requisite operating system licenses from manufacturers or distributors of those
components. It assembles and tests the hardware components and incorporates
QSI's proprietary application software and other third party software into
completed systems. The Company provides systems tailored to accommodate
particular client requirements. The Company continually evaluates the hardware
components of its systems with a view to utilizing hardware that is functional,
reliable and cost-effective.

23
<PAGE> 26

The Company's systems include application and system software modules that
provide comprehensive solutions for physician and dental practices. Clients
typically purchase a base medical or dental application and add on additional
applications as desired. Systems have ranged in price from approximately $10,000
to over $900,000 depending upon size of group practice, number of system users
and number of sites. The primary system software is comprised of the
applications set forth in the table below.

24
<PAGE> 27

In addition to the primary packages set forth above, the Company offers the
following add-on applications.

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
ADD-ON APPLICATIONS DESCRIPTION
- ------------------------------------------------------------------------------------------------
<S> <C>
Managed Care Automates eligibility verification, scheduling, referral
authorization and claims adjudication. Creates and tracks outside
referral authorization requests with authorized procedures,
diagnosis and number of visits. Maintains licensing and credential
information on referral providers. Provides various statistical
reports to manage patient care in an at-risk environment.
- ------------------------------------------------------------------------------------------------
QSI Dental School Automates student transaction grading, tracks academic progress
and manages faculty rotations and student/patient assignment.
- ------------------------------------------------------------------------------------------------
Health Care Eligibility Enables a dental client to administer a dental insurance plan.
Maintains accurate records of member enrollment and provides
premium payment tracking, month-end processing, account balance
tracking, automatic banking, word processing and file maintenance.
- ------------------------------------------------------------------------------------------------
Accounting packages:
- General Ledger Provides general journal and ledger capabilities, including income
statements, balance sheets, monthly journals, batch listings,
transaction registers, charts of accounts worksheets, and ledger
file listings.
- Accounts Payable Produces and tracks batch/voucher listings, batch record listings,
paid batch listings, check edit reports, distributions, void check
distributions and vendor forecasts. Maintains a detailed check
register.
- Payroll Maintains organized payroll registers and payroll history, from
which information can be accessed quickly and efficiently.
Includes check reconciliation, system maintenance, earnings
reports and payroll processing features.
- ------------------------------------------------------------------------------------------------
QUIC Network Provides clearing house services for electronic insurance claims
and electronic patient statements. Billing and status data is
transferred automatically over the Company's remote access to its
clients.
- ------------------------------------------------------------------------------------------------
NextGen (Clinitec) Provides for electronic medical records. Automates the collection
of clinical information through the use of pen-based wireless PCs,
or fixed PC workstations. Stores patient medical histories,
scanned images, X-rays, annotated documents, recorded voice and
user-customizable exam data. Automates document generation and
prescriptions. Allows for extensive outcome tracking and for a
"chartless office."
- ------------------------------------------------------------------------------------------------
Third Party Packages.... Word processing applications, report writers, accounting packages,
procedure code editors and maximizers and other software that a
client may reasonably request.
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>

The Company continues to make enhancements to its hardware and software packages
to provide increased functionality and flexibility to its clients. Recent
enhancements include additional interfaces for electronic claims submission and
insurance payments, increased ability to control managed care plans and fees,
electronic patient eligibility, extensions for community health centers, drug
formulary tracking, enhanced patient scheduling, and software to support
paperless collections. The Company has continued to take advantage of new
releases in the IBM RS6000 family, as well as new PC-based products utilizing
the SCO UNIX operating system. This introduction of a PC-based UNIX system for
physician and dental group practices allowed the Company increased pricing
flexibility and enabled the Company's systems to be used in smaller practice
settings. In addition, the Company has added enhanced telecommunications,
full-featured color terminals and more versatile printer options.

25
<PAGE> 28

RELATIONSHIP WITH CLINITEC

On April 21, 1995, the Company entered into a strategic relationship with
Clinitec, a developer of electronic medical records software systems. As part of
this relationship, the Company acquired a 25% equity interest in Clinitec for $1
million. In addition to its 25% ownership position in Clinitec, the Company
holds an option, exercisable until August 1997, to purchase additional shares in
Clinitec for $3 million which will result in the Company holding a majority
interest in Clinitec. The Company will provide notice to Clinitec of its
exercise of this option concurrent with the closing of this offering. Clinitec's
software product, NextGen, has been developed using a graphical user interface
client/server platform for compatibility with the UNIX, Microsoft Windows,
Windows NT and Windows 95 operating systems and a relational database back end
to permit flexibility in screen customization and logic flow. As part of its
agreement with Clinitec, the Company received the non-exclusive right to market
NextGen for medical applications, and the world-wide exclusive right to market
NextGen for dental markets.

NextGen operates in a client/server environment, using a desktop, laptop or
pen-based PC configuration. Medical records data can include:

- User customized templates for data capture and automatic document
generation

- Scanned or electronically acquired images including X-rays and
photographs

- Other records, documents and notes, including electronically captured
handwriting and annotations

- Digital voice recordings embedded in documents

In addition, specific templates designed into the system will permit research
and analysis of particular conditions and diagnoses, including the interaction
between various prescribed pharmaceuticals, and will allow for extensive
outcomes reporting.

NextGen offers software applications that are complementary to those offered by
QSI. The key "back office" applications incorporated into QSI's solutions such
as practice management, eligibility, claims processing and accounting can be
augmented by the "front office" applications of the NextGen software. Because
the Company's products are UNIX-based, the Company is able to add NextGen as
part of an integrated system. To address the client/server marketplace, the
Company is in the process of developing an alternative version of its products
for the client/server environment. In addition to a graphical user interface,
these client/server versions will include screens and templates similar to those
in NextGen to enable a more seamless integration of the QSI and NextGen
applications. The Company intends to leverage its existing client base for sales
of NextGen.

SALES AND MARKETING

The Company sells and markets its products nationwide through a direct sales
force operating from sales offices in California, Florida, Georgia,
Massachusetts, New York and Texas. 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 practice as well as trade journal
advertising, direct mail advertising, and telemarketing. These employees are
knowledgeable about medical and dental group practice management, as well as
computer information systems and the Company's products. Typically, these
employees make presentations to potential clients by demonstrating the QSI
system and its capabilities on the prospective client's premises. In addition,
the Company performs remote demonstrations by utilizing a prospective client's
PC or by sending the prospective client a telecommunications kit including a
terminal.

The Company's sales cycle can vary significantly and typically ranges from three
to 12 months from initial contact to contract execution. Standard payment terms
include a 25% down payment with the balance due when the hardware is installed
and the installed system is ready for training. As part of the fees paid by its
clients, the Company receives up-front licensing fees, a monthly service fee
based on client configuration and the number of user ports and a nominal annual
license renewal fee based on the number of user ports.

26
<PAGE> 29

Several clients have purchased the Company's system and, in turn, are providing
time-share services to local single and group practice practitioners. Under the
time-share 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 time-share client, implementation of time-share arrangements has
resulted in the purchase of additional system capacity by the client offering
the time-share services, as well as new system purchases made by the time-share
clients. 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 practices
associated with the organization or hospital on either a time-sharing basis or
by directing the Company to contract with those practices for the sale of
stand-alone turnkey systems.

The Company has 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, the dealer markets and sells QSI systems to
prospects in a local territory. These prospects are generally smaller health
care facilities than those actively pursued by the Company. The Company's
PC-based 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 lieu of the Company.

The Company often assists prospective clients in identifying third party sources
for financing the purchase of QSI 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. Most of the
clients purchasing QSI systems have been assisted by the Company in finding
sources of financing for such purchases.

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, 1995 or 1994.

CUSTOMER SERVICE AND SUPPORT

The Company believes its success is attributable in part to its exceptional
customer service and support. The Company provides support to its clients seven
days a week, 24 hours a day. In addition, the Company's policy is to respond to
user defined system-down emergencies with a response time of 15 minutes or less.
All Company systems have a dedicated port for dial-up remote access,
facilitating rapid diagnosis by QSI technicians of system inquiries. Most
inquiries can be resolved without the need to dispatch Company technicians.
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 offers clients support services for all system components, including
hardware and software maintenance, for a fixed monthly fee. In the last five
years, more than 90% of the Company's clients have elected to purchase the
Company's maintenance and support services. Hardware maintenance services are
coordinated through the Company's headquarters in California, with support from
field service locations in Northern and Southern California, New Jersey, North
Carolina and Wisconsin. The Company also subcontracts with IBM to perform
specific hardware maintenance tasks under QSI's direction. This arrangement has
provided the Company with economies of scale associated with IBM's service
infrastructure while still maintaining service standards.

The Company's continuing system software support staff operates from the
Company's offices in California and a location in Virginia. The 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.
The Company's on-line access to all client systems enables the support staff to
provide immediate assistance to clients. This assistance ranges from correcting
minor procedural problems in the client's system to performing complex

27
<PAGE> 30

data base reconstructions or software updates. The Company also utilizes an
automated on-line support system which assists clients in resolving minor
problems and facilitates automated electronic retrieval of problems along with
symptoms following a client's call to the Company's automated support system.
Additionally, the on-line support system maintains a complete call record at the
client's facility and the Company.

IMPLEMENTATION AND TRAINING

The Company provides implementation and training services from its headquarters
in California as well as remote locations in Florida, Kansas, Texas, and
Washington. The Company believes that its system delivery, implementation and
support services are key elements of its successful client relationships. When a
client signs a contract for the purchase of a system, a client manager, trained
in physician group practice procedures, is assigned to ensure that the client is
fully informed of system options and that the proper 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 system, Company personnel convert the relevant
client data into the system. Typically, the Company interfaces electronically to
convert the client's data from another computer system, allowing for 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. In some situations, the data may be retained by
the client on ledger cards or other hard copy. In such situations, the Company
maintains a data entry staff to input the required data.

One or more trainers experienced in group practice procedures are assigned to
conduct an intensive training program for the client's employees. The program
includes a combination of computer assisted instruction ("CAI"), remote training
techniques and training classes conducted by QSI staff at the client's
office(s). CAI consists of workbooks, computer interaction and personal
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's 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. The Company also provides
ongoing training through electronic classrooms where employees at different
locations from the same or different companies can simultaneously interact
on-line with a trainer. In addition, the Company's on-line "help" documentation
feature facilitates client training as well as ongoing support.

COMPETITION

The market for health care information systems is intensely competitive and the
Company faces significant competition from a number of different sources. 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 20 year experience in the industry. The industry is
highly fragmented and includes numerous competitors, none of which the Company
believes dominates the overall market for group practice management systems. The
Company has not encountered substantial competition in the dental group
practices market of six or more dentists. The Company believes that numerous
firms sell computerized data processing systems to group dental practices
consisting of five or fewer dentists.

Among the Company's principal competitors for medical group practice clients are
health care information systems companies such as IDX Corporation, Medic
Computer Systems, Physician Computer Networks, Inc., and Cycare Systems, Inc.
Furthermore, the Company also competes indirectly and to varying degrees with
other major health care information 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 will not have a material adverse effect on the Company's business,

28
<PAGE> 31

financial condition and results of operations. 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.

PRODUCT ENHANCEMENT AND DEVELOPMENT

The computer software and hardware and medical practice management industries
are characterized by rapid technological change requiring the Company to engage
in continuing efforts to improve its systems. During fiscal years 1995 and 1994,
and the six months ended September 30, 1995 the Company expended approximately
$1,467,200, $1,318,200 and $656,200 respectively, on research and development
activities. In addition, many of the Company's product enhancements have
resulted from software development work performed under contracts with QSI
clients. To the extent the Company fails to achieve technological advances
comparable to those made by others in the computer and medical practice
management industries, its products and services may become obsolete. See "Risk
Factors -- Technological Change."

GOVERNMENTAL REGULATION

The health care industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation of
health care facilities. During the past several years the health care industry
has been subject to an increase in governmental regulation of, among other
things, reimbursement rates and certain capital expenditures. Certain
legislators have announced that they intend to examine proposals to reform
certain aspects of the U.S. health care system including proposals which may
increase governmental involvement in health care, lower reimbursement rates and
otherwise change the operating environment for the Company's clients. Health
care 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
health care organizations for cost-effective data management and thereby enhance
the marketability of the Company's systems and related services. The Company
cannot predict what impact, if any, such proposals or health care reforms might
have on the Company's business, financial condition and results of operations.

EMPLOYEES

As of January 4, 1996, the Company employed 126 persons. 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.

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<PAGE> 32

PROPERTIES

The Company's principal administrative, data processing, marketing and
development operations are located in approximately 15,800 square feet of leased
space in Tustin, California under a lease which expires in October 1996. In
addition, the Company leases approximately 13,200 square feet of space in Santa
Ana, California to house its assembly and warehouse operations, and an aggregate
of approximately 1875 feet of space in Florida, Georgia, New York, Texas and
Washington to house field sales, training and service operations. These leases,
including options, have expiration dates ranging from month-to-month to October
31, 1996 and provide for aggregate annual rental payments of approximately
$379,000. The Company believes that its facilities are adequate for its current
needs and that suitable additional or substitute space is available, if needed.

LEGAL PROCEEDINGS

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

30
<PAGE> 33

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information concerning the executive
officers and directors of the Company as of January 4, 1996.

<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------------------- ---- ----------------------------------------------
<S> <C> <C>
Sheldon Razin 58 Chairman of the Board, President and Director
Robert Beck 54 Executive Vice President
Greg Flynn 38 Vice President Sales and Marketing
Abe LaLande 45 Vice President Hardware Research and
Development
Donn Neufeld 39 Vice President Software and Operations
Janet Razin 55 Vice President, Corporate Secretary and
Director
Irma Carmona 40 Corporate Controller
John Bowers, M.D. 57 Director(1)
William Bowers 67 Director(1)
George Bristol 47 Director(1)
Graeme Frehner 56 Director
Gordon Setran 73 Director(1)
</TABLE>

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

(1) Member of Audit Committee

Officers are appointed by, and serve at the discretion of, the Board of
Directors. Except for Sheldon Razin and Janet Razin, who are husband and wife,
there are no family relationships between any of the directors or executive
officers of the Company. The Board has established an Audit Committee on which
John Bowers, M.D., George Bristol, Gordon Setran and William Bowers serve.

SHELDON RAZIN is the founder of the Company and has served as Chairman of the
Board of Directors and Chief Executive Officer since the Company's inception. He
also has served as the Company's President since its inception except for the
period from August 1990 to August 1991. Additionally, Mr. Razin served as
Treasurer from the Company's inception until October 1982. Prior to founding the
Company, he held various technical and managerial positions with Rockwell
International Corporation and was a founder of the Company's predecessor,
Quality Systems, a sole proprietorship engaged in the development of software
for commercial and space applications and in management consulting work. Mr.
Razin holds a B.S. degree in Mathematics from the Massachusetts Institute of
Technology. Mr. Razin is the husband of Janet Razin.

ROBERT BECK joined the Company, and has served as its Executive Vice President,
since April 1992. In this capacity, he is heavily involved in the Company's
sales and marketing efforts. Mr. Beck has been associated with turnkey
healthcare computing applications since 1975, holding a variety of increasingly
responsible management positions in several companies. Prior to joining the
Company, Mr. Beck served as Executive Vice President of Sandata, a provider of
DME and Home Health Care Turnkey Systems. Mr. Beck's experience includes
founding and running a corporation, The Hamilton Computer Group, Inc., which was
at one time a major competitor to the Company. He holds a B.A. degree in
Mathematics and Statistics from Hunter College.

GREG FLYNN has served as the Company's Vice President Sales and Marketing since
January 1996 after serving 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. 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. Prior to joining the Company, Mr.
Flynn was a scriptreader/script consultant for a film production company. He
holds a B.A. degree in English from the University of California, Santa Barbara.

ABE LALANDE has served as the Company's Vice President Hardware Research and
Development since February 1989. From 1979 to 1982, he served as the Company's
senior field service engineer, and from 1982 to

31
<PAGE> 34

1988, he served as Vice President Field Service and Production. During fiscal
1989, Mr. LaLande left the Company for three months to work for Toshiba America,
Inc. Prior to joining the Company, Mr. LaLande held various senior field service
engineering positions with Mini-Computer Systems (October 1978 to April 1979),
Varian Associates (February 1978 to October 1978) and General Automation (July
1977 to February 1978), all of which are computer manufacturing companies. He
holds an A.A. degree in Electronic Engineering from Fullerton College and an
A.S. degree in Computer Science from Control Data Institute.

DONN NEUFELD has served as the Company's Vice President Operations since June
1986 and as its Vice President-Software since 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.

JANET RAZIN has served as a Director, Vice President and Corporate Secretary of
the Company since its inception and served as the Company's Controller until
November 1981. She served as Vice President Chief Financial Officer from October
1982 until October 1984. Prior to joining the Company, she was a computer
programmer for Rockwell International Corporation. Mrs. Razin holds a B.A.
degree in Mathematics from Northeastern University. Mrs. Razin is the wife of
Sheldon Razin.

IRMA CARMONA has served as the Company's Corporate Controller since June 1994.
Since joining the Company in February 1980, Ms. Carmona has held a variety of
increasingly responsible financial positions within the organization including
Manager of Accounting from June 1984 until June 1994. Prior to joining the
Company, Ms. Carmona was a staff accountant for Thomas Cook Bankers.

JOHN BOWERS, M.D., has served as a Director since June 1987, and is the founder
and Chief Executive Officer of the Heart Institute of Nevada, a major
freestanding Cardiac Catheterization and Diagnostic Center. In 1970, Dr. Bowers
moved to Las Vegas, Nevada to associate with Dr. P.R. Akre, who organized the
first catheterization laboratory in Nevada. He subsequently became Director of
Cardiology at Sunrise Hospital and Valley Hospital. On June 1, 1975, he founded
Cardiology Associates of Nevada, John A. Bowers, M.D., FACC, a professional
corporation, and the forerunner of the Heart Institute of Nevada. Prior to 1970,
Dr. Bowers practiced cardiology in Santa Paula, California, after serving in the
Air Force at Vandenberg Air Force Base, California and Wright-Patterson Air
Force Base, Dayton, Ohio. Dr. Bowers graduated from Indiana University School of
Medicine in 1960.

WILLIAM BOWERS has served as a Director since June 1989. He was co-founder and
Chairman of MSI Data Corporation, a leading manufacturer of "on-the-move"
hand-held data collection systems, headquartered in Costa Mesa, California.
Founded in 1967, MSI was a public company until it was acquired by Symbol
Technologies, Inc. in 1988. Mr. Bowers is also a Director of D.H. Technology,
Inc., a publicly-owned company. Mr. Bowers has two Bachelors degrees, one in
Advertising from USC and another in Electrical Engineering from UCLA.

GEORGE BRISTOL, who has served as a Director since December 1982, has been a
member of the corporate finance group of Ernst & Young LLP, an international
professional services firm, since February 1992. Prior to this, Mr. Bristol was
a Managing Director with the investment banking firms of Dean Witter Reynolds
Inc. from September 1989 and Prudential Securities, Inc., for more than eight
years, until September 1989. Prior to joining Prudential Securities, Inc., Mr.
Bristol served as First Vice President of Blyth Eastman Paine Webber
Incorporated, an investment banking firm. He holds a B.A. degree from the
University of Michigan and an M.B.A. degree from the Harvard Business School.

GRAEME FREHNER, a co-founder of the Company, has served as a Director since
November 1982. He served as the Company's Vice President-Software from October
1982 to January 1996, when he retired from active management in the Company.
Despite this retirement, he intends to consult with the Company from time to
time. Mr. Frehner joined Quality Systems, the Company's predecessor, shortly
after it was founded. Prior to that time, he held a number of technical,
managerial and consulting positions with Planning Research Corporation and with
Autonetics, formerly a division of North American Aviation and currently a
division of Rockwell International Corporation. Mr. Frehner holds a B.S. degree
in Mathematics, Education and Physics from Brigham Young University.

32
<PAGE> 35

GORDON SETRAN has served as a Director since November 1982, and was a Vice
President of California Federal Savings & Loan Association from 1975 until his
retirement in December 1985. Mr. Setran was a founder, President and Director of
First Federal Savings & Loan Association of Corona which was acquired by
California Federal Savings & Loan Association in 1975.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE. The following table provides certain summary
information concerning compensation paid or accrued by the Company and its
subsidiaries, to or on behalf of the Company's Chief Executive Officer and each
of the four other most highly compensated executive officers of the Company
(determined as of the end of the last fiscal year) (the "Named Executive
Officers") for the fiscal years ended March 31, 1993, 1994 and 1995:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------- ------------------
FISCAL OTHER ANNUAL SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION(1) UNDERLYING OPTIONS COMPENSATION(2)
- -------------------------------- ------ -------- --------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Sheldon Razin................... 1995 $213,750 $ 6,882 -- $ 2,873
Chairman and President 1994 180,000 23,372 -- 2,235
1993 180,000 19,518 -- 1,172

Robert Beck(3).................. 1995 144,996 -- -- 2,740
Executive Vice President 1994 144,996 -- -- 2,478
1993 140,054 -- 75,000 728

Greg Flynn...................... 1995 108,929 -- -- 1,224
Vice President Sales 1994 97,152 -- 22,000 945
and Marketing 1993 89,760 -- 20,000 378

Abe LaLande..................... 1995 105,000 -- -- 1,185
Vice President Hardware 1994 105,000 -- -- 1,010
Research 1993 105,000 -- -- 419
and Development

Donn Neufeld.................... 1995 104,250 -- -- 1,178
Vice President Software 1994 96,000 -- 30,000 935
and Operations 1993 96,000 -- -- 394
</TABLE>

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

(1) This column reflects perquisite compensation which exceeds the lesser of
$50,000 or 10% of the Named Executive Officer's total salary and bonus with
the exception of Mr. Razin, which is included regardless. For the fiscal
year ended March 31, 1995, no Named Executive Officer received perquisites
exceeding that limit. For fiscal years ended March 31, 1995, 1994, and 1993,
respectively, Mr. Razin's perquisites included $5,982, $22,472 and $18,578
for the value of the use of a Company car, which includes insurance
premiums, depreciation, and miscellaneous expenses.

(2) This column reflects (i) amounts attributable to Company contributions to
the Company's Deferred Compensation Plan (or, for fiscal year ended March
31, 1993, contributions to the Company's Profit-Sharing and Retirement Plan
for Employees) and (ii) income attributable to the provision of additional
life insurance for the Named Executive Officers. For fiscal year ended March
31, 1995 such amounts were, respectively, as follows: Mr. Razin, $2,138 and
$735; Mr. Beck $1,570 and $1,170; Mr. Flynn $1,089 and $135; Mr. LaLande,
$1,050 and $135; and Mr. Neufeld, $1,043 and $135. For fiscal year ended
March 31, 1994, such amounts were, respectively, as follows: Mr. Razin,
$1,500 and $735; Mr. Beck, $1,308 and $1,170; Mr. Flynn, $810 and $135; Mr.
LaLande, $875 and $135; and Mr. Neufeld, $800 and $135. For fiscal year
ended March 31, 1993, such amounts were, respectively, as follows: Mr.
Razin, $417 and $755; Mr. Beck, $0 and $728; Mr. Flynn, $239 and $139; Mr.
LaLande, $280 and $139; and Mr. Neufeld, $255 and $139.

(3) The Company has an arrangement with Robert Beck under which Mr. Beck will
receive, if the Company attains an aftertax profit of at least $2.5 million
in any fiscal year in which the Company's sales are at least $25.0 million,
a one-time grant of options for shares representing the difference between
225,000 shares of Common Stock and the number of shares of Common Stock Mr.
Beck has purchased up to

33
<PAGE> 36

such date pursuant to stock options granted by the Company. As of January 4,
1996, Mr. Beck had been granted options to purchase 75,000 shares and had
exercised 53,750 shares of such options.

STOCK OPTIONS. No options were granted to the Named Executive Officers in the
last fiscal year.

AGGREGATED OPTION EXERCISE TABLE. The following table sets forth information (on
an aggregated basis) concerning the number of shares of the Company's Common
Stock acquired upon exercise of options granted by the Company, and shares of
the Company's Common Stock subject to exercisable and unexercisable stock
options which the Named Executive Officers held at the end of the 1995 fiscal
year. None of the Named Executive Officers held any stock appreciation rights at
the end of that fiscal year.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

<TABLE>
<CAPTION>
NUMBER OF UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES MARCH 31, 1995 MARCH 31, 1995(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sheldon Razin................. 0 $ 0 0 0 $ 0 $ 0
Robert Beck................... 8,000 22,875 10,750 37,500 18,813 65,625
Greg Flynn.................... 2,000 3,125 15,500 26,500 28,375 47,625
Abe LaLande................... 10,000 24,375 12,500 7,500 20,313 12,188
Donn Neufeld.................. 0 0 13,500 24,500 22,875 42,625
</TABLE>

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

(1) The value of unexercised in-the-money options is the market price of the
shares at fiscal year end ($3.25) less the exercise price of the option.

1989 STOCK OPTION PLAN

The Company's 1989 Stock Option Plan (the "1989 Plan") was adopted by the Board
of Directors on July 19, 1989 and approved by the shareholders on September 6,
1989. One million shares of Common Stock have been authorized for issuance under
the 1989 Plan. The number of shares issued to directors under the 1989 Plan when
added to the number of shares issuable to directors upon the exercise of stock
options granted under any other stock option plan maintained by the Company
shall not exceed 750,000.

The 1989 Plan provides that salaried officers or key employees, and non-employee
directors of the Company or its subsidiaries may, at the discretion of the Plan
Administrator, 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. However, any option granted to a person who owns stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company (or its parent or any subsidiary) must have a purchase price of at least
110% of the fair market value on the grant date, and a term not longer than five
years.

The plan may be administered by the Board of Directors of the Company ("Board")
or a Committee consisting of three or more directors who are appointed by, and
serve at the pleasure of, the Board (the "Committee"). A Committee has not been
appointed. The Board as Plan Administrator has complete discretion to determine
which eligible individuals are to receive option grants, the number of shares
subject to each such grant, the status of any granted option as either an
incentive stock option or a non-statutory stock option under the federal tax
laws, the vesting schedule to be in effect for the option grant, and the maximum
term for which any granted option is to remain outstanding. Option grants to
nonemployee directors must be approved by the Board. Upon an acquisition of the
Company by merger or asset sale, each outstanding option may be subject to
accelerated vesting under certain circumstances.

The Board may amend or modify the 1989 Plan at any time. The 1989 Plan will
terminate on May 30, 1999, unless sooner terminated by the Board.

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<PAGE> 37

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company does not have a compensation committee or any other committee of the
Board of Directors performing equivalent functions. Instead, the full Board of
Directors makes decisions regarding executive officer compensation. During the
Company's last complete fiscal year ended March 31, 1995, the members of the
Board of Directors were Sheldon Razin, Janet Razin, John Bowers, M.D., William
Bowers, George Bristol, Graeme Frehner and Gordon Setran.

EMPLOYMENT CONTRACTS

The Company does not presently have any employment contracts in effect with the
President or any of the other Named Executive Officers other than the
arrangement referenced above in "Executive Compensation" regarding Robert Beck.
In connection with the Company's arrangement with Mr. Beck, Mr. Razin has agreed
that in the event he sells more than 20% of the Common Stock of the Company
beneficially owned by him at such time of sale, then Mr. Beck shall be entitled
to sell, in the same transaction as Mr. Razin and on the same terms and
conditions, a pro rata amount of the Common Stock held by Mr. Beck at such time
pursuant to stock options granted by the Company. On December 12, 1995, Mr. Beck
waived any and all rights under that agreement with respect to the offering
contemplated hereby.

DIRECTOR COMPENSATION

Directors of the Company who are also employees of the Company are not
compensated for their services as directors or committee members. Directors of
the Company who are not also employees receive a fee of $2,500 per year for
serving on the Board of Directors. Directors who serve on a committee of the
Board of Directors receive an annual fee of $1,000 and a fee of $250 for each
committee meeting attended, together with reasonable expenses of attendance at
committee meetings.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company's Articles of Incorporation provide that the liability of the
Company's directors for monetary damages shall be eliminated to the fullest
extent permissible under California law. This is intended to eliminate the
personal liability of a director for monetary damages in an action brought by or
in the right of the Company for breach of a director's duties to the Company or
its shareholders except for liability: (1) for acts or omissions that involve
intentional misconduct or a knowing and culpable violation of law; (2) for acts
or omissions that a director believes to be contrary to the best interests of
the Company or its shareholders or that involve the absence of good faith on the
part of the director; (3) for any transaction from which a director derived an
improper personal benefit; (4) for acts or omissions that show a reckless
disregard for the director's duty to the Company or its shareholders in
circumstances in which the director was aware, or should have been aware, in the
ordinary course of performing a director's duties, of a risk of serious injury
to the Company or its shareholders; (5) for acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the Company or its shareholders; (6) with respect to certain
transactions, or the approval of transactions in which a director has a material
financial interest; and (7) expressly imposed by statute, for approval of
certain improper distributions to shareholders or certain loans or guarantees.
This provision does not eliminate or limit liability of an officer for any act
or omission as an officer, notwithstanding that the officer is also a director
or that his actions, if negligent or improper, have been ratified by the Board
of Directors. Further, the provision has no effect on claims under federal or
state securities laws and does not affect the availability of injunctions and
other equitable remedies available to the Company's shareholders for any
violation of a director's fiduciary duty to the Company or its shareholders.
Although the validity and scope of the legislation underlying the provision have
not yet been interpreted to any significant extent by the California courts, the
provision may relieve directors of monetary liability to the Company for grossly
negligent conduct, including conduct in situations involving attempted takeovers
of the Company.

35
<PAGE> 38

with such agents or both, for breach of duty to the Company and its
shareholders, in excess of the indemnification otherwise permitted by Section
317 of the California Corporations Code, subject to the limits on such excess
indemnification set forth in Section 204 of the California Corporations Code.

The Bylaws of the Company provide that a person sued as an agent of the Company
may be indemnified by the Company for reasonable expenses incurred thereby, if
(a) in the case of other than derivative suits, such person has acted in good
faith and in a manner he or she reasonably believed to be in the best interests
of the Company (and in the case of a criminal proceeding, had no reasonable
cause to believe that his or her conduct was unlawful), and (b) in the case of a
derivative suit, such person has acted in good faith in a manner he or she
believed to be in the best interests of the Company and its shareholders, and
with such care, including reasonable inquiry, as an ordinarily prudent person,
in a like position would use under similar circumstances. The Bylaws further
provide that no indemnification shall be made in the case of a derivative suit
in respect of any claim as to which such person has been adjudged to be liable
to the corporation, except with court approval, nor shall indemnification be
made for amounts paid in settling or otherwise disposing of a threatened or
pending action, with or without court approval, or for expenses incurred in
defending a threatened or pending action which is settled or otherwise disposed
of without court approval. Indemnification under the Bylaws is mandatory in the
case of an agent of the Company (present or past) who is successful on the
merits in defense of a suit against him or her in such capacity. In all other
cases where indemnification is permitted by the Bylaws, a determination to
indemnify such person must be made by a majority of a quorum of disinterested
directors, a majority of disinterested shareholders, or the court in which the
suit is pending.

The Company has entered into agreements to indemnify its directors in addition
to the indemnification provided for in the Articles of Incorporation and Bylaws.
Among other things, these agreements provide that the Company will indemnify,
subject to certain requirements, each of the Company's directors for certain
expenses (including attorneys' fees), judgments, fines and settlement amounts
incurred by such person in any action or proceeding, including any action by or
in the right of the Company, on account of services by such person as a director
or officer of the Company, or as a director or officer of any other company or
enterprise to which the person provides services at the request of the Company.

36
<PAGE> 39

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of January 4, 1996, and as
adjusted to reflect the sale by the Company and the Selling Shareholders of the
shares of Common Stock offered hereby, by (i) each person known by the Company
to beneficially own more than 5% of the outstanding shares of Common Stock, (ii)
each of the Selling Shareholders, (iii) each of the Company's directors, (iv)
each of the Named Executive Officers and (v) all directors and executive
officers of the Company as a group:

<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED SHARES BENEFICIALLY
PRIOR TO OWNED
OFFERING(1) NUMBER OF AFTER OFFERING(1)
------------------- SHARES BEING -------------------
PERSON NUMBER PERCENT OFFERED NUMBER PERCENT
- ---------------------------------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Janet Razin and Sheldon Razin(2)(3)........... 2,186,220 47.1% 451,000 1,735,220 30.7%
Ahmed Hussein(4).............................. 350,000 7.5 -- 350,000 6.2
Graeme Frehner................................ 76,554 1.7 20,000 56,554 1.0
John Bowers, M.D.............................. 31,230 * -- 31,230 *
Fen Frehner(5)................................ 25,000 * 13,000 12,000 *
George Bristol................................ 13,500 * -- 13,500 *
David Razin(6)................................ 12,000 * 10,000 2,000 *
Greg Flynn(7)................................. 10,030 * -- 10,030 *
William Bowers................................ 10,000 * -- 10,000 *
Donn Neufeld(8)............................... 8,000 * -- 8,000 *
Michael Yerrid(9)............................. 5,000 * 5,000 -- *
Robert Beck(10)............................... 2,600 * -- 2,600 *
Gordon Setran................................. 1,500 * -- 1,500 *
Abe LaLande................................... 1,000 * 1,000 -- *
All directors and executive officers as a
group (12 persons)(11)...................... 2,340,634 50.3% 472,000 1,868,634 32.9%
</TABLE>

- ---------------
* Less than one percent
(1) For purposes of this table, information as to shares of Common Stock
assumes that (i) the persons in the table do not purchase shares in the
offering and (ii) the Underwriters' over-allotment option is not exercised.
Except as otherwise indicated, to the Company's knowledge, the persons
named in the table have sole voting and sole investment power with respect
to all shares beneficially owned, subject to community property laws where
applicable.
(2) Janet Razin and Sheldon Razin, each of whom is an officer and director of
the Company, are married to one another and own their shares as community
property.
(3) The address of each of these persons is c/o Quality Systems, Inc., 17822
East 17th Street, Suite 210, Tustin, California 92680.
(4) As reflected in Schedule 13D dated December 8, 1995. Mr. Hussein's address
is 401 E. 34th Street, Apt. #N-25A, New York, NY 10016.
(5) Mr. Frehner is currently the Company's Manager of Software Research and
Development and is the son of Graeme Frehner.
(6) Includes 10,000 shares of Common Stock subject to stock options which are
currently exercisable or may become exercisable within 60 days after
January 4, 1996. Mr. Razin is currently the Company's Director of Product
Development and is the son of Janet and Sheldon Razin.
(7) Includes 8,000 shares of Common Stock subject to stock options which are
currently exercisable or may become exercisable within 60 days after
January 4, 1996.
(8) Includes 8,000 shares of Common Stock subject to stock options which are
currently exercisable or may become exercisable within 60 days after
January 4, 1996.
(9) Includes 5,000 shares of Common Stock subject to stock options which are
currently exercisable or may become exercisable within 60 days after
January 4, 1996. Mr. Yerrid is currently the Company's Client Services
Manager.
(10) Includes 2,500 shares of Common Stock subject to stock options which are
currently exercisable or may become exercisable within 60 days after
January 4, 1996.
(11) Includes shares of Common Stock subject to stock options which are
currently exercisable or may become exercisable within 60 days after
January 4, 1996, and are, respectively, as follows: Mr. Beck, 2,500; Mr.
Flynn, 8,000; Mr. Neufeld, 8,000; and all directors and officers as a
group, 18,500 shares.

37
<PAGE> 40

DESCRIPTION OF CAPITAL STOCK

The Company's authorized capital stock consists of 20,000,000 shares of Common
Stock, $.01 par value per share.

COMMON STOCK

As of January 4, 1996, there were 4,638,491 shares of Common Stock outstanding
and held of record by 203 shareholders. Each holder of Common Stock is entitled
to one vote for each share held. Following this offering, the holders of Common
Stock, voting as a single class, will be entitled to elect all of the directors
of the Company. Matters submitted for shareholder approval generally require a
majority vote.

The shareholders, upon giving the notice required by California law and the
Company's Bylaws, may cumulate votes for the election of directors. Under
cumulative voting, each shareholder may give one nominee, whose name is placed
in nomination prior to the commencement of voting, a number of votes equal to
the number of directors to be elected, multiplied by the number of votes to
which a shareholder's shares are normally entitled, or distribute such number of
votes among as many nominees as the shareholder sees fit. The effect of
cumulative voting is that the holders of a majority of the outstanding shares of
Common Stock may not be able to elect all of the Company's directors.

Holders of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor. See
"Price Range for Common Stock and Dividends." In the event of a liquidation,
dissolution or winding up of the Company, holders of Common Stock would be
entitled to share ratably in the Company's assets remaining after the payment of
liabilities. Holders of Common Stock have no preemptive or other subscription
rights. The shares of Common Stock are not convertible into any other security.
The outstanding shares of Common Stock are, and the shares being offered hereby
will be, upon issuance and sale, fully paid and nonassessable.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Company's Common Stock is U.S. Stock
Transfer Corporation.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have 5,653,491 shares of
Common Stock outstanding, assuming only 15,000 of the 134,125 stock options
outstanding as of January 4, 1996 will be exercised before the offering. Of this
amount, the 1,500,000 shares sold in this offering (plus any additional shares
sold upon the Underwriters' exercise of their over-allotment option) and
approximately 2,289,357 other shares (subject in certain cases to the volume and
other limitations of Rule 144) will be available for immediate sale in the
public market as of the date of this Prospectus.

Upon the expiration of a 90-day Lockup Period (as defined below), approximately
1,864,134 shares of the Company's Common Stock will become available for sale in
the public market subject to compliance with Rule 144.

In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned shares for at least two years
is entitled to sell within any three-month period a number of shares that does
not exceed the greater of (i) 1% of the then outstanding shares of the Common
Stock (approximately 56,535 shares immediately after this offering) or (ii) the
average weekly trading volume during the four calendar weeks preceding such
sale, subject to the filing of a Form 144 with respect to such sale. A person
(or persons whose shares are aggregated) who is not deemed to have been an
affiliate of the Company at any time during the 90 days immediately preceding
the sale who has beneficially owned his or her shares for at least three years
is entitled to sell such shares pursuant to Rule 144(k) without regard to the
limitations described above. Persons deemed to be affiliates must always sell
pursuant to Rule 144, even after the applicable holding periods have been
satisfied.

38
<PAGE> 41

In addition, the Commission has published a notice of proposed rulemaking which,
if adopted as proposed, would shorten the applicable holding periods under Rule
144(d) and Rule 144(k) to one and two years, respectively (from the current two
and three-year periods). The Company cannot predict whether such amendments will
be adopted or the effect thereof on the trading market for its Common Stock. The
Company is unable to estimate the number of shares that will be sold under Rule
144, since this will depend on the market price for the Common Stock of the
Company, the personal circumstances of the sellers and other factors. There can
be no assurance that a significant public market for the Common Stock will be
sustained after the offering. Any future sale of substantial amounts of Common
Stock in the open market may adversely affect the market price of the Common
Stock offered hereby.

The Selling Shareholders of the Company, who in the aggregate will beneficially
own, following the offering, 1,805,774 shares of Common Stock, have agreed that
they will not, without the prior written consent of Pacific Growth Equities,
Inc. offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock beneficially owned by them for a period of 90 days (the "Lockup Period")
after the date of this Prospectus. In addition, the Company has agreed pursuant
to the Underwriting Agreement that it will not sell any Common Stock without the
prior consent of the Representatives of the Underwriters for a period of 90 days
from the date of this Prospectus, except that the Company may, without such
consent, grant certain options to purchase stock pursuant to the Company's 1989
Plan.

On November 6, 1989, the Company filed a registration statement on Form S-8
under the Securities Act to register shares of the Common Stock issued or
reserved for issuance under the 1989 Plan, thus permitting the resale of such
shares by nonaffiliates in the public market without restriction under the
Securities Act.

39
<PAGE> 42

UNDERWRITING

The Underwriters named below, represented by Pacific Growth Equities, Inc. and
Cruttenden Roth Incorporated (the "Representatives"), have severally agreed,
subject to the terms and conditions set forth in the Underwriting Agreement, to
purchase from the Company and the Selling Shareholders the number of shares of
Common Stock indicated below opposite their respective names at the public
offering price less underwriting discounts and commissions set forth on the
cover page of this Prospectus. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent and
that the Underwriters are committed to purchase all of the shares if they
purchase any.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Pacific Growth Equities, Inc......................................
Cruttenden Roth Incorporated......................................

---------
Total................................................... 1,500,000
=========
</TABLE>

The Representatives have advised the Company and the Selling Shareholders that
the Underwriters propose initially to offer the Common Stock to the public on
the terms set forth on the cover page of this Prospectus. The Underwriters may
allow to selected dealers a concession of not more than $ per share,
and the Underwriters may allow, and such dealers may reallow, a concession of
not more than $ per share to certain other dealers. After the public
offering, the offering price and the other selling terms may be changed by the
Representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters and to certain other conditions, including the right to
reject orders in whole or in part.

Certain of the Selling Shareholders have granted an option to the Underwriters,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to a maximum 225,000 additional shares of Common Stock to cover
overallotments, if any, at the same price per share as the initial shares to be
purchased from the Company and the Selling Shareholders by the Underwriters. To
the extent that the Underwriters exercise this option, the Underwriters will be
committed, subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the table shown above. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with this offering. The Company will not receive any proceeds from
the sale of shares of Common Stock by the Selling Shareholders.

The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.

All of the Company's officers and directors have agreed not to offer for sale,
sell or otherwise dispose of any shares of the Company's Common Stock for a
period of 90 days after the date of this Prospectus without the prior written
consent of Pacific Growth Equities, Inc. The Company has agreed that it will not
issue, sell or grant options to purchase or otherwise dispose of any shares of
its Common Stock or securities convertible into or exchangeable for its Common
Stock, except with respect to options or other rights outstanding on the date of
this Prospectus or pursuant to the 1989 Stock Option Plan, for a period of 90
days after the date of this Prospectus without the prior written consent of the
Representatives.

In connection with this offering, certain Underwriters and selling group members
(if any) who are qualifying registered market makers on Nasdaq may engage in
passive market making transactions in the Common Stock on Nasdaq in accordance
with Rule 10b-6A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), during the two business day period before commencement of sales
in this offering. The passive market making transactions must comply with
applicable price and volume limits and be identified as

40
<PAGE> 43

such. In general, a passive market maker may display its bid at a price not in
excess of the highest independent bid for the security. If all independent bids
are lowered below the passive market maker's bid, however, such bid must then be
lowered when certain purchase limits are exceeded. Net purchases by a passive
market maker on each day are generally limited to a specified percentage of the
passive market maker's average daily trading volume in the Common Stock during a
price period and must be discontinued when such limit is reached. Passive market
making may stabilize the market price of the Common Stock at a level above that
which might otherwise prevail and, if commenced, may be discontinued at any
time.

LEGAL OPINIONS

Certain legal matters with respect to the issuance of the Common Stock offered
hereby will be passed upon for the Company and the Selling Shareholders by
Brobeck, Phleger & Harrison LLP, Newport Beach, California. Certain legal
matters relating to the offering will be passed upon for the Underwriters by
Gibson, Dunn & Crutcher, Los Angeles, California. Gibson, Dunn & Crutcher has,
from time to time, performed legal services for the Company and may, if
requested, do so in the future.

EXPERTS

The financial statements of the Company as of March 31, 1995 and 1994 and for
each of the three years in the period ended March 31, 1995 and the financial
statements of Clinitec as of December 31, 1994 and for the period from January
31, 1994 (inception) to December 31, 1994 included in this Prospectus and the
Registration Statement have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports thereon appearing elsewhere herein and in
the Registration Statement, and are included in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed a Registration Statement on Form S-1 (the "Registration
Statement") with the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended (the "Securities Act"), pertaining to the
Common Stock covered by this Prospectus. This Prospectus omits certain
information and exhibits included in that Registration Statement, copies of
which may be obtained upon payment of a fee prescribed by the Commission or may
be examined free of charge at the principal office of the Commission in
Washington, D.C.

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by the
Company can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices located
at Room 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661
and at Suite 1300, 7 World Trade Center, New York, New York 10048. Copies of
such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Company's Common Stock is listed on the Nasdaq National Market
(Symbol: QSII), and reports and information concerning the Company can be
inspected at the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W. Washington, D.C. 20006.

41
<PAGE> 44

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRO FORMA FINANCIAL INFORMATION:
Pro Forma Consolidated Balance Sheet as of September 30, 1995 (unaudited)............ F-2
Pro Forma Consolidated Statement of Operations for the year ended March 31, 1995
(unaudited)........................................................................ F-3
Pro Forma Consolidated Statement of Operations for the six months ended September 30,
1995 (unaudited)................................................................... F-4
Notes to Pro Forma Consolidated Financial Statements (unaudited)..................... F-5

AUDITED FINANCIAL STATEMENTS OF QUALITY SYSTEMS, INC.:
Independent Auditors' Report......................................................... F-7
Balance Sheets as of March 31, 1994 and 1995......................................... F-8
Statements of Operations for each of the three years in the period ended March 31,
1995............................................................................... F-9
Statements of Shareholders' Equity for each of the three years in the period ended
March 31, 1995..................................................................... F-10
Statements of Cash Flows for each of the three years in the period ended March 31,
1995............................................................................... F-11
Notes to Financial Statements for each of the three years in the period ended March
31, 1995........................................................................... F-12

INTERIM FINANCIAL STATEMENTS OF QUALITY SYSTEMS, INC.:
Balance Sheet as of September 30, 1995 (unaudited)................................... F-19
Statements of Operations for the six months ended September 30, 1994 and 1995
(unaudited)........................................................................ F-20
Statements of Cash Flows for the six months ended September 30, 1994 and 1995
(unaudited)........................................................................ F-21
Notes to Financial Statements for the six months ended September 30, 1994 and 1995
(unaudited)........................................................................ F-22

AUDITED FINANCIAL STATEMENTS OF CLINITEC INTERNATIONAL, INC.:
Independent Auditors' Report......................................................... F-23
Balance Sheet as of December 31, 1994................................................ F-24
Statement of Operations for the period from January 31, 1994 (inception) to
December 31, 1994.................................................................. F-25
Statement of Shareholders' Equity for the period from January 31, 1994 (inception) to
December 31, 1994.................................................................. F-26
Statement of Cash Flows for the period from January 31, 1994 (inception) to
December 31, 1994.................................................................. F-27
Notes to Financial Statements for the period from January 31, 1994 (inception) to
December 31, 1994.................................................................. F-28

INTERIM FINANCIAL STATEMENTS OF CLINITEC INTERNATIONAL, INC.:
Balance Sheet as of September 30, 1995 (unaudited)................................... F-31
Statements of Operations for the nine months ended September 30, 1994 and 1995
(unaudited)........................................................................ F-32
Statements of Cash Flows for the nine months ended September 30, 1994 and 1995
(unaudited)........................................................................ F-33
Notes to Financial Statements for the nine months ended September 30, 1994 and 1995
(unaudited)........................................................................ F-34
</TABLE>

F-1
<PAGE> 45

QUALITY SYSTEMS, INC.

PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1995 (UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, JUNE 30,
1995 1995
------------- --------- PRO FORMA PRO FORMA
QSI CLINITEC COMBINED ADJUSTMENTS PRO FORMA AS ADJUSTED
------------- --------- -------- ----------- --------- -----------
(NOTE 2) (NOTE 3)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........... $ 5,008 $ 802 $ 5,810 $(1,500)(a) $ 4,310 $26,010
Short-term investments.............. 1,287 1,287 1,287 1,287
Accounts receivable, net............ 4,722 201 4,923 4,923 4,923
Inventories......................... 764 64 828 828 828
Deferred tax asset.................. 104 104 104 104
Other current assets................ 78 19 97 97 97
------- ------ ------- ------- -------
Total current assets...... 11,963 1,086 13,049 11,549 33,249
Equipment and improvements, net..... 492 111 603 603 603
Capitalized software costs, net..... 587 93 680 (93)(c) 587 587
Investment in Clinitec
International, Inc................ 982 982 (982)(a,b,c,d)
Cash surrender value of life
insurance......................... 270 270 270 270
Other assets........................ 69 13 82 357(c) 439 439
------- ------ ------- ------- -------
Total assets.............. $14,363 $ 1,303 $15,666 $(2,218) $13,448 $35,148
======= ====== ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................... $ 1,014 $ 36 $ 1,050 $ -- $ 1,050 $ 1,050
Accrued payroll and related
expenses.......................... 555 51 606 606 606
Other accrued expenses.............. 489 176 665 665 665
Deferred service revenue............ 1,011 1,011 1,011 1,011
Deferred compensation............... 270 270 270 270
Estimated costs to complete system
installations..................... 247 247 247 247
Income taxes payable................ 176 176 176 176
------- ------ ------- ------- -------
Total current
liabilities............. 3,762 263 4,025 4,025 4,025
DEFERRED TAX LIABILITY.............. 130 130 143(c) 273 273
------- ------ ------- ------- -------
Total liabilities......... 3,892 263 4,155 143 4,298 4,298
MINORITY INTEREST................... 1,199(d) 1,199 1,199
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock..................... 1,000 1,000 (1,000)(a,d)
Common stock........................ 46 824 870 (824)(d) 46 56
Additional paid-in capital.......... 6,169 6,169 6,169 27,859
Unrealized loss on
available-for-sale securities..... (57) (57 ) (57) (57)
Retained earnings................... 4,313 (784) 3,529 (1,736)(f) 1,793 1,793
------- ------ ------- ------- -------
Total shareholders'
equity.................. 10,471 1,040 11,511 (3,560) 7,951 29,651
------- ------ ------- ------- -------
Total liabilities and
shareholders' equity.... $14,363 $ 1,303 $15,666 $(2,218) $13,448 $35,148
======= ====== ======= ======= =======
</TABLE>

F-2
<PAGE> 46

QUALITY SYSTEMS, INC.

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1995 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1995 1994
---------- ------------ PRO FORMA
QSI CLINITEC COMBINED ADJUSTMENTS PRO FORMA
---------- ------------ -------- ----------- ---------
(NOTE 2)
<S> <C> <C> <C> <C> <C>
NET REVENUES:
Sales of computer systems, upgrades and
supplies............................... $ 5,681 $ 54 $ 5,735 $ $ 5,735
Maintenance and other services........... 6,368 6,368 6,368
------- ----- ------- ------- -------
12,049 54 12,103 12,103
COST OF PRODUCTS AND SERVICES............ 6,060 20 6,080 6,080
------- ----- ------- ------- -------
Gross profit............................. 5,989 34 6,023 6,023
------- ----- ------- ------- -------
OPERATING EXPENSES:
Selling, general and administrative...... 3,536 364 3,900 3,900
Research and development................. 1,467 59 1,526 119(e) 1,645
------- ----- ------- ------- -------
5,003 423 5,426 119 5,545
------- ----- ------- ------- -------
Earnings (loss) from operations.......... 986 (389) 597 (119) 478
Interest and investment income........... 429 429 429
Minority interest in loss of Clinitec.... 191(d) 191
------- ----- ------- ------- -------
Earnings before income tax provision
(benefit).............................. 1,415 (389) 1,026 72 1,098
Income tax provision (benefit)........... 453 453 (28)(e) (425)
------- ----- ------- ------- -------
Net earnings (loss)...................... $ 962 $ (389) $ 573 $ 100 $ 673
======= ===== ======= ======= =======
Net earnings per share................... $ 0.21 $ 0.15
======= =======
Weighted average shares used in
calculation............................ 4,606 4,734
======= =======
</TABLE>

F-3
<PAGE> 47

QUALITY SYSTEMS, INC.

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, JUNE 30,
1995 1995
------------- ---------- PRO FORMA
QSI CLINITEC COMBINED ADJUSTMENTS PRO FORMA
------------- ---------- -------- ----------- ---------
(NOTE 2)
<S> <C> <C> <C> <C> <C>
NET REVENUES:
Sales of computer systems, upgrades and
supplies............................... $ 4,648 $ 573 $5,221 $ $ 5,221
Maintenance and other services........... 3,340 3,340 3,340
------ ----- ------ ------ ------
7,988 573 8,561 8,561
COST OF PRODUCTS AND SERVICES............ 3,785 198 3,983 3,983
------ ----- ------ ------ ------
Gross profit............................. 4,203 375 4,578 4,578
OPERATING EXPENSES:
Selling, general and administrative...... 1,928 650 2,578 2,578
Research and development................. 656 656 60(e) 716
------ ----- ------ ------ ------
2,584 650 3,234 60 3,294
------ ----- ------ ------ ------
Earnings (loss) from operations.......... 1,619 (275) 1,344 (60) 1,284
Interest and investment income........... 205 3 208 208
Equity in loss of Clinitec............... (18) (18) 18(b) --
Minority interest in loss of Clinitec.... 133(d) 133
------ ----- ------ ------ ------
Earnings (loss) before income tax
provision.............................. 1,806 (272) 1,534 91 1,625
Income tax provision..................... 741 741 (24)(e) 717
------ ----- ------ ------ ------
Net earnings (loss)...................... $ 1,065 $ (272) $ 793 $ 115 $ 908
====== ===== ====== ====== ======
Net earnings per share................... $ 0.23 $ 0.19
====== ======
Weighted average shares used in
calculation............................ 4,679 4,807
====== ======
</TABLE>

F-4
<PAGE> 48

QUALITY SYSTEMS, INC.

NOTES TO PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The unaudited pro forma consolidated statements of operations and balance
sheet give effect on a purchase accounting basis to the acquisition of an
additional 26% equity interest in Clinitec International, Inc. (Clinitec) for $3
million (the Acquisition) (resulting in a 51% majority ownership in Clinitec by
the Company). The pro forma consolidated balance sheet also gives effect to the
Offering and the application of the estimated net proceeds therefrom. The pro
forma consolidated statement of operations for the fiscal year ended March 31,
1995 is comprised of the results of Quality Systems, Inc. (QSI) for the fiscal
year ended March 31, 1995 and the results of Clinitec for the year ended
December 31, 1994. The pro forma consolidated statement of operations for the
six months ended September 30, 1995 is comprised of the results of QSI for the
six months ended September 30, 1995 and the results of Clinitec for the six
months ended June 30, 1995. The pro forma consolidated balance sheet as of
September 30, 1995 has been prepared by consolidating the balance sheet of QSI
as of September 30, 1995 with the balance sheet of Clinitec as of June 30, 1995.

The pro forma consolidated statements of operations for the fiscal year
ended March 31, 1995 and the six months ended September 30, 1995 assume that the
Acquisition occurred at April 1, 1994. The pro forma consolidated balance sheet
as of September 30, 1995 assumes that the Acquisition of the majority interest
in Clinitec and the Offering occurred on September 30, 1995. The pro forma
consolidated statements of operations and balance sheet do not purport to
represent the results of operations or financial position of the Company had the
transactions and events assumed therein occurred on the dates specified, nor are
they necessarily indicative of the results of operations that may be achieved in
the future. The pro forma adjustments are based on management's preliminary
assumptions regarding purchase accounting adjustments. The actual allocation of
the purchase price will be adjusted to the extent that actual amounts differ
from management's estimates in accordance with FAS No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises."

The pro forma consolidated financial information is based upon certain
assumptions and adjustments described in the notes to the pro forma financial
statements. The pro forma consolidated financial information should be read in
conjunction with the historical financial statements, and related notes, of QSI
and Clinitec contained elsewhere herein.

2. PRO FORMA ADJUSTMENTS

The following describe the pro forma adjustments made to reflect the
acquisition of an additional 26% interest in Clinitec:

a) To reflect the acquisition of an additional interest in Clinitec,
providing QSI with a 51% ownership interest through a purchase of
Clinitec convertible preferred stock for $3 million. Concurrent with
this acquisition, Clinitec is expected to distribute dividends to its
common stockholders of $1.5 million.

b) To reverse QSI's equity accounting entry to record its portion of
Clinitec's net loss.

F-5
<PAGE> 49

c) To record purchase accounting adjustments resulting from the acquisition
of the aggregate 51% ownership interest based on an appraisal of the
fair value of the net assets of Clinitec as follows:

<TABLE>
<S> <C>
Net tangible assets................................................ $ 1,248
Intangible assets related to existing technology................... 357
In-process research and development................................ 3,846
Deferred tax liability ($143 related to intangible assets
consisting of existing technology acquired and $1,308 related to
in-process research and development)............................. (1,451)
-------
Total purchase price.......................................... $ 4,000
=======
</TABLE>

d) To eliminate Clinitec's equity accounts and QSI's investment account and
set up 49% minority interest.

e) To record amortization of the intangible assets related to existing
technology based on the straight line method and a three year useful
life and the corresponding tax benefit.

f) To reflect the cumulative effect of the above adjustments on retained
earnings.

In accordance with FASB Interpretation No. 4, the Company is required to
write-off the $3.8 million in-process research and development acquired in the
acquisition, net of tax benefit of $1.3 million. This write-off will be
reflected in the quarter ending March 31, 1996 and has not been reflected in the
Pro Forma Consolidated Financial Statements.

3. PRO FORMA AS ADJUSTED

Pro Forma As Adjusted amounts reflect the issuance of 1,000,000 shares of
QSI common stock for estimated net proceeds of $21.7 million.

4. PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING

Pro forma weighted average shares assume as outstanding 128,000 of the
shares being offered by the Company in the Offering, which represent the
approximate number of shares that have to be sold to fund the incremental
$3,000,000 investment in Clinitec.

F-6
<PAGE> 50

INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders
Quality Systems, Inc.

We have audited the accompanying balance sheets of Quality Systems, Inc. as
of March 31, 1994 and 1995 and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended March 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of Quality Systems, Inc. as of March 31, 1994
and 1995 and the results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP
Costa Mesa, CA
June 2, 1995

F-7
<PAGE> 51

QUALITY SYSTEMS, INC.

BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
MARCH 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................ $ 1,093 $ 6,085
Short-term investments (Note 2).......................................... 4,978 1,237
Accounts receivable, less allowance for doubtful accounts of $66 (1994)
and $77 (1995)......................................................... 2,730 2,997
Inventories (Note 3)..................................................... 895 783
Deferred tax asset (Note 4).............................................. 64 199
Other current assets..................................................... 87 74
------- -------
Total current assets................................................ 9,847 11,375
Equipment and improvements, net (Note 3)................................. 593 535
Capitalized software costs, net (Note 1)................................. 509 502
Cash surrender value of life insurance (Note 5).......................... 65 185
Other assets............................................................. 80 71
------- -------
Total assets........................................................ $11,094 $12,668
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................................... $ 849 $ 597
Accrued payroll and related expenses..................................... 398 427
Other accrued expenses................................................... 455 492
Deferred service revenue................................................. 876 952
Deferred compensation (Note 5)........................................... 65 185
Estimated costs to complete system installations......................... 347 217
Income taxes payable (Note 4)............................................ 473
------- -------
Total current liabilities........................................... 2,990 3,343
DEFERRED TAX LIABILITY (Note 4).......................................... 64 137

COMMITMENTS AND CONTINGENCIES (Note 7)
Shareholders' equity (Note 6):
Common stock, $.01 par value; 20,000,000 shares authorized; 4,445,000 and
4,536,000 shares issued and outstanding, respectively.................. 44 45
Additional paid-in capital............................................... 5,789 5,978
Unrealized loss on available-for-sale securities, net of tax benefit of
$60 (1994)
and $3 (1995).......................................................... (79) (83)
Retained earnings........................................................ 2,286 3,248
------- -------
Total shareholders' equity.......................................... 8,040 9,188
------- -------
Total liabilities and shareholders' equity.......................... $11,094 $12,668
======= =======
</TABLE>

See notes to financial statements.

F-8
<PAGE> 52

QUALITY SYSTEMS, INC.

STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1993, 1994 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
NET REVENUES:
Sales of computer systems, upgrades and supplies.............. $ 6,274 $ 6,146 $ 5,681
Maintenance and other services................................ 5,377 5,606 6,368
------- ------- -------
11,651 11,752 12,049
COST OF PRODUCTS AND SERVICES................................. 6,992 6,527 6,060
------- ------- -------
Gross margin.................................................. 4,659 5,225 5,989

OPERATING EXPENSES:
Selling, general and administrative........................... 3,008 3,052 3,536
Research and development...................................... 1,134 1,318 1,467
------- ------- -------
4,142 4,370 5,003
------- ------- -------
Earnings from operations...................................... 517 855 986
Interest and investment income (Note 2)....................... 192 400 429
------- ------- -------
Earnings before income tax provision.......................... 709 1,255 1,415
Income tax provision (Note 4)................................. 331 349 453
------- ------- -------
Earnings before extraordinary credit.......................... 378 906 962
Extraordinary credit -- tax benefit from utilization of net
operating loss carryforwards................................ 245
------- ------- -------
NET EARNINGS.................................................. $ 623 $ 906 $ 962
======= ======= =======
NET EARNINGS PER SHARE:
Earnings before extraordinary credit........................ $ 0.09 $ 0.21 $ 0.21
Extraordinary credit........................................ $ 0.06 -- --
------- ------- -------
Net earnings per share...................................... $ 0.15 $ 0.21 $ 0.21
======= ======= =======
Fully diluted earnings per share............................ $ 0.15 $ 0.20 $ 0.21
======= ======= =======
</TABLE>

See notes to financial statements.

F-9
<PAGE> 53

QUALITY SYSTEMS, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1993, 1994 AND 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
UNREALIZED
COMMON LOSS ON
SHARES ISSUED ADDITIONAL AVAILABLE- TOTAL
---------------- PAID-IN FOR-SALE RETAINED SHAREHOLDERS'
NUMBER AMOUNT CAPITAL SECURITIES EARNINGS EQUITY
------ ------ ---------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1992......... 4,187 $ 42 $5,100 $ -- $ 757 $ 5,899
Net earnings..................... 623 623
----- --- ------ ---- ------ ------
Balance at March 31, 1993........ 4,187 42 5,100 1,380 6,522
Exercise of stock options........ 258 2 400 402
Tax benefit resulting from stock
options........................ 289 289
Unrealized loss on
available-for-sale securities,
net of tax benefit of $60...... (79) (79)
Net earnings..................... 906 906
----- --- ------ ---- ------ ------
Balance at March 31, 1994........ 4,445 44 5,789 (79) 2,286 8,040
Exercise of stock options........ 91 1 150 151
Tax benefit resulting from stock
options........................ 39 39
Unrealized loss on
available-for-sale securities,
net of tax benefit of $3....... (4) (4)
Net earnings..................... 962 962
----- --- ------ ---- ------ ------
Balance at March 31, 1995........ 4,536 $ 45 $5,978 $(83) $ 3,248 $ 9,188
===== === ====== ==== ====== ======
</TABLE>

See notes to financial statements.

F-10
<PAGE> 54

QUALITY SYSTEMS, INC.

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1993, 1994 AND 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------------
1993 1994 1995
-------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................................ $ 623 $ 906 $ 962
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization of equipment and
improvements........................................... 211 239 220
Amortization of capitalized software costs................ 147 165 198
Realized gains from sales of short-term investments....... (28) (194) (151)
Unrealized (gains) losses on trading securities........... (11) 99 (82)
Deferred income taxes..................................... (62)
Changes in:
Accounts receivable.................................... 264 (284) (267)
Inventories............................................ 374 56 112
Other current assets................................... 5 15 13
Accounts payable....................................... 157 (153) (252)
Accrued expenses....................................... (15) (57) 66
Deferred service revenue............................... 55 32 76
Estimated costs to complete system installations....... (116) 115 (130)
Income taxes payable and taxes related to equity
accounts............................................. 86 263 515
-------- -------- -------
Net cash provided by operating activities......... 1,752 1,202 1,218
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of short-term investments............... 12,042 10,074 12,725
Purchases of short-term investments......................... (10,322) (13,810) (8,758)
Additions to equipment and improvements, net................ (318) (101) (162)
Additions to capitalized software costs..................... (148) (183) (191)
Change in other assets...................................... (1) 17 9
-------- -------- -------
Net cash provided by (used in) investing
activities...................................... 1,253 (4,003) 3,623
CASH FLOWS FROM FINANCING ACTIVITIES --
Proceeds from exercise of stock options................... 402 151
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 3,005 (2,399) 4,992
CASH AND CASH EQUIVALENTS, beginning of year................ 487 3,492 1,093
-------- -------- -------
CASH AND CASH EQUIVALENTS, end of year...................... $ 3,492 $ 1,093 $ 6,085
======== ======== =======
</TABLE>

Supplemental Information: During fiscal 1993, 1994 and 1995, the Company made
income tax payments of $2, $86 and $10, respectively.

See notes to financial statements.

F-11
<PAGE> 55

QUALITY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1993, 1994 AND 1995

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business -- Quality Systems, Inc. (QSI or the Company)
develops and markets proprietary information systems for medical and dental
group practices, physician hospital organizations, management service
organizations, health maintenance organizations and community health centers.
The Company's proprietary software systems include summary medical records and
general patient information, appointment scheduling, billing, insurance claims
submission and processing, managed care implementation and referral management,
treatment outcome studies, treatment planning, drug formularies, word processing
and accounting. In addition to providing fully integrated solutions to its
client, the Company provides its clients with comprehensive hardware and
software maintenance and support services, system training services and
electronic claims submission services.

Revenue Recognition -- Licenses, sales of computer systems and system
upgrades are recognized at the time the basic software and hardware is shipped
and the estimated costs to complete the systems are not considered significant
in accordance with Statement of Position 91-1, Software Revenue Recognition.
Estimated costs to complete are normally insignificant and are charged to
expense in the period in which the sale is recognized. These costs typically
include labor and travel costs associated with training, installation and data
conversion. If estimated costs to complete are significant, revenue is
recognized on a percentage of completion basis.

Maintenance revenue is recognized ratably over the life of the contract.
Advance maintenance revenue billings are included in deferred service revenue on
the accompanying balance sheets. Sales of supplies are recognized at the time of
shipment.

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 adopted Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities (SFAS No. 115), as of the end of the fiscal year ended March 31,
1994. The cumulative effect from the change in accounting principle was not
material in determining net earnings for the year ended March 31, 1994. In
accordance with SFAS No. 115, investments are classified 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"
criterion 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" criterion and equity securities that are not classified
as trading securities.

Held to maturity securities are carried in the balance sheet at cost
(unless there is a decline in the value of the individual securities that is not
due to temporary declines), and realized gains and losses are recorded in the
income statement 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 income statement 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 -- A majority of the Company's system sales are
financed by third-party sources, while the Company provides credit for most
maintenance contract sales. The Company performs ongoing

F-12
<PAGE> 56

QUALITY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1993, 1994 AND 1995 -- (CONTINUED)

credit evaluations of its customers and maintains reserves for potential credit
losses, which have been within management's expectations.

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 and amortized over the economic life of the
related product in accordance with Statement of Financial Accounting Standards
No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed. Accumulated amortization of capitalized software costs
amounted to $750,000 (1994) and $582,400 (1995). The Company performs an annual
review of the recoverability of such capitalized software costs. At the time a
determination has been made that capitalized amounts are not recoverable based
on the estimated cash flows to be generated from the applicable software, any
remaining capitalized amounts would be written off.

Income Taxes -- Effective April 1, 1993, the Company adopted Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109).
Financial statements for prior years have not been restated, and there was no
material cumulative effect from the change in accounting principle.

In accordance with SFAS No. 109, 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 the recoverability of such assets is probable.

Earnings per Share -- Primary and fully diluted earnings per share for the
year ending March 31, 1994 are based on the weighted average number of common
shares and common share equivalents outstanding of 4,342,000 and 4,461,000,
respectively. The difference between primary and fully diluted earnings per
share for the years ended March 31, 1993 and 1995 was not significant and
earnings per share was calculated based on the weighted average number of common
shares and common share equivalents outstanding of 4,187,000 and 4,606,000,
respectively. Common stock equivalents consist primarily of stock options and
are calculated using the treasury stock method.

2. SHORT-TERM INVESTMENTS

Short-term investments consist of the following components (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED MARCH
31,
-------------------
1994 1995
------ ------
<S> <C> <C>
Trading securities............................................... $1,038 $ 927
Available-for-sale securities.................................... 3,940 310
------ ------
$4,978 $1,237
====== ======
</TABLE>

F-13
<PAGE> 57

QUALITY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1993, 1994 AND 1995 -- (CONTINUED)

As of March 31, 1995, trading securities consisted of equity securities
with a fair market value of $913,000 and collateral cash of $790,000 offsetting
firm commitments to purchase additional equity securities with a fair market
value of $776,000 to satisfy short positions.

The following is a summary of available-for-sale securities (in thousands):

<TABLE>
<CAPTION>
MARCH 31,
---------------
1994 1995
------ ----
<S> <C> <C>
Aggregate market.................................................... $3,940 $310
Gross unrealized holding gains...................................... 51
Gross unrealized holding losses..................................... 190 146
Amortized cost basis for:
Overland Express Variable Rate Government Fund.................... 1,590
Other equity securities........................................... 1,947
Debt securities issued by foreign governments, denominated in U.S.
dollars........................................................ 542 457
</TABLE>

Interest and investment income includes realized gains on short-term
investments of $28,000, $194,000 and $151,000 for the years ended March 31,
1993, 1994 and 1995, respectively, unrealized gains of $11,000 and $82,000 for
the years ended March 31, 1993 and 1995, respectively, and unrealized losses of
$99,000 for the year ended March 31, 1994.

3. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS (IN THOUSANDS):

<TABLE>
<CAPTION>
MARCH 31,
-------------
1994 1995
---- ----
<S> <C> <C>
Inventories:
Computer systems and components..................................... $419 $420
Replacement parts for certain client systems, net of accumulated
amortization of $1,126 (1994) and $1,026 (1995).................. 422 308
Maintenance parts..................................................... 34 36
Supplies for resale................................................... 18 17
Discontinued equipment................................................ 2 2
---- ----
$895 $783
==== ====
</TABLE>

<TABLE>
<CAPTION>
MARCH 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Equipment and improvements:
Computers and electronic test equipment........................ $ 1,215 $ 1,251
Furniture and fixtures......................................... 307 312
Vehicles....................................................... 110 110
Leasehold improvements......................................... 119 117
------- -------
1,751 1,790
Accumulated depreciation and amortization........................ (1,158) (1,255)
------- -------
$ 593 $ 535
======= =======
</TABLE>

F-14
<PAGE> 58

QUALITY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1993, 1994 AND 1995 -- (CONTINUED)

4. INCOME TAXES

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

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Federal:
Current taxes............................................... $245 $309 $414
Deferred taxes.............................................. (36)
---- ---- ----
245 309 378
---- ---- ----
State:
Current taxes............................................... 86 40 101
Deferred taxes.............................................. (26)
---- ---- ----
86 40 75
---- ---- ----
$331 $349 $453
==== ==== ====
</TABLE>

The income tax provision differs from an amount computed at statutory rates
as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------
1993 1994 1995
---- ----- ----
<S> <C> <C> <C>
Federal income tax provision at statutory rate............... $241 $ 426 $481
Increases (decreases) resulting from:
State income taxes, net of federal benefit................. 86 121 107
Change in valuation allowance.............................. (204) (86)
Adjustment to reconcile to prior year return............... (43)
Dividends received deduction............................... (9) (10)
Other...................................................... 4 15 4
---- ---- ----
$331 $ 349 $453
==== ==== ====
</TABLE>

The changes in valuation allowances are related to benefits arising from
federal and state net operating loss carryforwards.

F-15
<PAGE> 59

QUALITY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1993, 1994 AND 1995 -- (CONTINUED)

The net deferred tax benefits in the accompanying balance sheets include
the following components (in thousands):

<TABLE>
<CAPTION>
MARCH 31,
---------------
1994 1995
----- -----
<S> <C> <C>
Deferred tax assets:
Short-term investments............................................ $ 104 $ 71
Accounts receivable............................................... 29 33
Inventory......................................................... 26 27
Accumulated depreciation.......................................... 4 5
Accrued vacation and sick leave................................... 147 164
Accrued liability for deferred compensation....................... 28 100
State income taxes................................................ 18
Other accrued expenses............................................ 13
Loss carryforwards................................................ 195
---- ----
546 418
Deferred tax liabilities:
Inventory......................................................... (27) (22)
Accumulated depreciation.......................................... (33) (24)
Capitalized software.............................................. (220) (217)
Deferred revenue.................................................. (180) (93)
---- ----
(460) (356)
Deferred tax asset valuation allowance.............................. (86)
---- ----
$ -- $ 62
==== ====
</TABLE>

As required by SFAS 109, on the accompanying balance sheets deferred tax
assets and liabilities have been shown net based on the long-term or short-term
nature of the items which give rise to the deferred amounts.

5. EMPLOYEE BENEFIT PLANS

The Company has a profit sharing and retirement plan (the Retirement Plan)
for the benefit of substantially all of its employees. The Retirement Plan was
amended during the fiscal year ended March 31, 1994 to add 401(k) features.
Participating employees may defer up to 15% of compensation per year. The
Company's annual contribution is determined by the Company's Board of Directors
and the Retirement Plan may be amended or discontinued at the discretion of the
Board of Directors. Contributions of $10,000, $19,000 and $21,000 were made to
the Retirement Plan for the years ended March 31, 1993, 1994 and 1995,
respectively.

During the fiscal year ended March 31, 1994, the Company 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 have been invested in a life 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

F-16
<PAGE> 60

QUALITY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1993, 1994 AND 1995 -- (CONTINUED)

Company obligation for deferred compensation was $65,000 and $185,000 at March
31, 1994 and 1995, respectively, which have been included in the accompanying
balance sheets. The Company made contributions of $8,000 and $10,000 to the
Deferral Plan for the fiscal years ended March 31, 1994 and March 31, 1995,
respectively.

6. EMPLOYEE STOCK OPTIONS PLANS

1981 Stock Option Plan -- Under a shareholder approved incentive stock
option plan (1981 Plan) for officers and key employees, 365,384 shares of common
stock were reserved for the issuance of options to purchase shares of common
stock at the fair market value at the date of grant. On October 31, 1991, the
1981 incentive stock option plan expired, and no additional shares could be
granted under the plan. As of March 31, 1995, all outstanding shares under this
plan had been exercised. A summary of option transactions follows:

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------------------
1993 1994 1995
----------- ----------- -------
<S> <C> <C> <C>
Options:
Outstanding at beginning of year............. 224,500 199,000 33,300
Granted...................................
Exercised................................. (162,700) (33,300)
Cancelled................................. (25,500) (3,000)
----------- ----------- -------
Outstanding at end of year..................... 199,000 33,300 --
=========== =========== =======
Range of option exercise prices:
Granted...................................... $ -- $ -- $ --
Exercised.................................... $ -- $1.06-$1.69 $ 1.69
Cancelled.................................... $1.06-$2.06 $1.06-$1.69 $ --
</TABLE>

1989 Stock Option Plan -- During fiscal 1990, the Company's shareholders
approved a stock option plan (1989 Plan) under which 1,000,000 shares of common
stock have been reserved for the issuance of options.

The Plan may be administered by the Board of Directors of the Company
(Board) or a Committee consisting of three or more directors who are appointed
by, and serve at the pleasure of, the Board (the Committee). A Committee has not
been appointed. The Board as Plan Administrator has complete discretion to
determine which eligible individuals are to receive option grants, the number of
shares subject to each such grant, the status of any granted option as either an
incentive stock option or a non-statutory stock option under federal tax laws,
the vesting schedule to be in effect for the option grant, and the option grant,
and the maximum term for which any granted option is to remain outstanding.

F-17
<PAGE> 61

QUALITY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1993, 1994 AND 1995 -- (CONTINUED)

Option grants to non-employee directors must be approved by the Board. Upon
an acquisition of the Company by merger or asset sale, each outstanding option
will be subject to accelerated vesting under certain circumstances. The Board
may amend or modify the 1989 Plan at any time. The 1989 Plan will terminate on
May 30, 1999, unless sooner terminated by the Board.

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------------------
1993 1994 1995
------------ ----------- -----------
<S> <C> <C> <C>
Options --
Outstanding at beginning of year.......... 207,000 337,000 272,200
Granted................................ 130,000 101,000 5,000
Exercised.............................. (95,800) (57,500)
Cancelled.............................. (70,000)
----------- ----------- -----------
Outstanding at end of year.................. 337,000 272,200 219,700
=========== =========== ===========
Range of option exercise prices:
Granted................................... $1.38-$1.81 $1.50 $3.75
Exercised................................. $ -- $1.50-$1.69 $1.50-$1.69
Cancelled................................. $ -- $1.63-$1.81 $ --
</TABLE>

At March 31, 1995, options for 155,750 shares were exercisable, and 624,500
shares were available for future grant under the 1989 Plan.

7. COMMITMENTS AND CONTINGENCIES

The Company leases its facilities and office under noncancelable operating
lease agreements which contain lease renewal options through October 1996. The
Company has rental commitments in fiscal 1996 and 1997 of $345,000 and $196,000,
respectively. Total rental expense for all operating leases was $423,000,
$412,000 and $387,000 for the years ended March 31, 1993, 1994 and 1995,
respectively.

The Company is a party to various 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.

8. SUBSEQUENT EVENT

In May 1995, the Company entered into a strategic relationship with
Clinitec International, Inc. (Clinitec), a developer of electronic medical
records software systems marketed under the trade name "NextGen". As part of
this relationship, the Company acquired a 25% equity interest in Clinitec for $1
million, and acquired an option to purchase an aggregate 51% equity interest in
Clinitec for an additional $3 million, exercisable at any time through August
1997.

As part of the agreement with Clinitec, the Company received the
non-exclusive right to market NextGen for medical applications, and the
world-wide exclusive right to market NextGen for dental markets. The Company
anticipates being able to integrate its medical and dental practice management
systems with NextGen software in order to provide medical and dental group
practices with a state-of-the-art healthcare office of the future.

The investment will be accounted for using the equity method of accounting,
whereby the original investment is recorded at cost and is adjusted periodically
to recognize the Company's 25% share of Clinitec's earnings or losses after the
date of investment.

F-18
<PAGE> 62

QUALITY SYSTEMS, INC.

BALANCE SHEET
AS OF SEPTEMBER 30, 1995 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................................... $ 5,008
Short-term investments............................................................. 1,287
Accounts receivable, net........................................................... 4,722
Inventories........................................................................ 764
Deferred tax asset................................................................. 104
Other current assets............................................................... 78
-------
Total current assets..................................................... 11,963
EQUIPMENT AND IMPROVEMENTS, net.................................................... 492
CAPITALIZED SOFTWARE COSTS, net.................................................... 587
INVESTMENT IN CLINITEC INTERNATIONAL, INC.......................................... 982
CASH SURRENDER VALUE OF LIFE INSURANCE............................................. 270
OTHER ASSETS....................................................................... 69
-------
Total assets............................................................. $14,363
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................... $ 1,014
Accrued payroll and related expenses............................................... 555
Other accrued expenses............................................................. 489
Deferred service revenue........................................................... 1,011
Deferred compensation.............................................................. 270
Estimated costs to complete system installations................................... 247
Income taxes payable............................................................... 176
-------
Total current liabilities................................................ 3,762
DEFERRED TAX LIABILITY............................................................. 130
-------
Total liabilities........................................................ 3,892

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 20,000,000 shares authorized; 4,569,000 shares issued
and outstanding.................................................................. 46
Additional paid-in capital......................................................... 6,169
Unrealized loss on available-for-sale securities, net of tax benefit of $43........ (57)
Retained earnings.................................................................. 4,313
-------
Total shareholders' equity............................................... 10,471
-------
Total liabilities and shareholders' equity............................... $14,363
=======
</TABLE>

See notes to financial statements.

F-19
<PAGE> 63

QUALITY SYSTEMS, INC.

STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-----------------
1994 1995
------ ------
<S> <C> <C>
NET REVENUES:
Sales of computer systems, upgrades and supplies........................... $2,730 $4,648
Maintenance and other services............................................. 3,137 3,340
------ ------
5,867 7,988
COST OF PRODUCTS AND SERVICES.............................................. 3,108 3,785
------ ------
Gross profit............................................................... 2,759 4,203

OPERATING EXPENSES:
Selling, general and administrative........................................ 1,680 1,928
Research and development................................................... 716 656
------ ------
2,396 2,584
------ ------
Earnings from operations................................................... 363 1,619
Interest and investment income............................................. 121 205
Equity in loss of Clinitec International, Inc.............................. (18)
------ ------
Earnings before income tax provision....................................... 484 1,806
Income tax provision....................................................... 98 741
------ ------
NET EARNINGS............................................................... $ 386 $1,065
====== ======
NET EARNINGS PER SHARE..................................................... $ 0.08 $ 0.23
====== ======
Weighted average common and common equivalent shares....................... 4,643 4,679
====== ======
</TABLE>

See notes to financial statements.

F-20
<PAGE> 64

QUALITY SYSTEMS, INC.

STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 (UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
---------------------
1994 1995
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings........................................................... $ 386 $ 1,065
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization of equipment and improvements.......... 115 111
Amortization of capitalized software costs........................... 95 127
Realized gains from sales of short-term investments.................. 135 11
Unrealized (gains) losses on trading securities...................... (171) (33)
Equity in loss of Clinitec International, Inc. ...................... 18
Deferred income taxes................................................ 88
Changes in:
Accounts receivable............................................... 99 (1,725)
Inventories....................................................... 49 19
Other current assets.............................................. (9) (4)
Accounts payable.................................................. (172) 417
Accrued expenses.................................................. (41) 125
Deferred service revenue.......................................... 61 59
Estimated costs to complete system installations.................. (82) 30
Income taxes payable and taxes related to equity accounts......... 98 (180)
------- -------
Net cash provided by operating activities.............................. 563 128

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of short-term investments.......................... 6,785 1,068
Purchases of short-term investments.................................... (5,605) (1,049)
Investment in Clinitec International, Inc. ............................ (1,000)
Additions to equipment and improvements, net........................... (48) (67)
Additions to capitalized software costs................................ (77) (213)
Change in other assets................................................. 30 2
------- -------
Net cash provided by (used in) investing activities.................... 1,085 (1,259)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options................................ 44 54
------- -------
Net increase (decrease) in cash and cash equivalents................... 1,692 (1,077)
Cash and cash equivalents, beginning of period......................... 1,093 6,085
------- -------
Cash and cash equivalents, end of period............................... $ 2,785 $ 5,008
======= =======
</TABLE>

Supplemental Information: During the six months ended September 30, 1994 and
1995, the Company made income tax payments of $10 and $832, respectively.

F-21
<PAGE> 65

QUALITY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 (UNAUDITED)

1. BASIS OF PRESENTATION

The information set forth in these financial statements of Quality Systems,
Inc. (the Company) as of September 30, 1995 and for the six months ended
September 30, 1994 and 1995 is unaudited. The information reflects all
adjustments consisting only of normal recurring entries that, in the opinion of
management, are necessary to present fairly the financial position and results
of operations of the Company for the periods indicated. Results of operations
for the interim periods are not necessarily indicative of the results of
operations for the full fiscal year or for any future period.

Certain information in footnote disclosures normally included in financial
statements has been condensed or omitted, in accordance with the rules and
regulations of the Securities and Exchange Commission.

The information contained in these interim financial statements should be
read in conjunction with the Company's audited financial statements contained
elsewhere in this Registration Statement.

2. NET EARNINGS PER SHARE

Net earnings per share for the six months ended September 30, 1994 and 1995
was computed based on the weighted average number of shares actually
outstanding, plus the shares that would be outstanding, using the treasury stock
method, assuming the exercise of all outstanding options which were considered
to be common stock equivalents.

3. NEW ACCOUNTING PRONOUNCEMENT

The Financial Accounting Standards Board has recently issued Financial
Accounting Standards No. 123, Accounting for Stock-based Compensation, which
requires the determination and disclosure of compensation costs implicit in
stock option grants. The Company is required to adopt this standard beginning in
fiscal 1997. The Company does not plan to implement this standard until that
time and has not been able to quantify the effect of this standard.

F-22
<PAGE> 66

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Clinitec International, Inc.

We have audited the accompanying balance sheet of Clinitec International,
Inc. as of December 31, 1994 and the related statements of operations,
shareholders' equity and cash flows for the period from January 31, 1994
(inception) to December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of Clinitec International, Inc. as of December
31, 1994 and the results of its operations and its cash flows for the period
from January 31, 1994 (inception) to December 31, 1994, in conformity with
generally accepted accounting principles.

DELOITTE & TOUCHE LLP
Costa Mesa, CA
December 17, 1995

F-23
<PAGE> 67

CLINITEC INTERNATIONAL, INC.

BALANCE SHEET
AS OF DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................ $ 112
Accounts receivable (Note 5)......................................................... 34
Inventories.......................................................................... 22
Other current assets................................................................. 12
-----
Total current assets....................................................... 180
EQUIPMENT AND IMPROVEMENTS, net (Note 2)............................................. 81
CAPITALIZED SOFTWARE COSTS, net (Note 1)............................................. 68
OTHER ASSETS......................................................................... 13
-----
Total assets............................................................... $ 342
=====
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................................................... $ 35
Accrued payroll and related expenses................................................. 15
Other accrued expenses............................................................... 1
-----
Total current liabilities.................................................. 51

COMMITMENTS AND CONTINGENCIES (Note 4)

SHAREHOLDERS' EQUITY (Note 4):
Common stock, no par value; 3,000,000 shares authorized; 970,000 shares issued and
outstanding........................................................................ 680
Accumulated deficit.................................................................. (389)
-----
Total shareholders' equity................................................. 291
-----
Total liabilities and shareholders' equity................................. $ 342
=====
</TABLE>

See notes to financial statements.

F-24
<PAGE> 68

CLINITEC INTERNATIONAL, INC.

STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 31, 1994 (INCEPTION) TO DECEMBER 31, 1994
(IN THOUSANDS)

<TABLE>
<S> <C>
NET REVENUES (Note 5)........................................................ $ 54
COST OF PRODUCTS AND SERVICES................................................ 20
-----
Gross profit................................................................. 34

OPERATING EXPENSES:
Selling, general and administrative.......................................... 364
Research and development..................................................... 59
-----
423
-----
Net loss........................................................... $(389)
=====
</TABLE>

See notes to financial statements.

F-25
<PAGE> 69

CLINITEC INTERNATIONAL, INC.

STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 31, 1994 (INCEPTION) TO DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
COMMON SHARES
ISSUED TOTAL
------------------ ACCUMULATED SHAREHOLDERS'
NUMBER AMOUNT DEFICIT EQUITY
------- ------ ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, January 31, 1994 (inception)........... -- $ -- $ -- $ --
Issuance of common stock........................ 970,000 680 680
Net loss........................................ (389) (389)
------- ---- ----- -----
BALANCE, December 31, 1994...................... 970,000 $680 $(389) $ 291
======= ==== ===== =====
</TABLE>

See notes to financial statements.

F-26
<PAGE> 70

CLINITEC INTERNATIONAL, INC.

STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 31, 1994 (INCEPTION) TO DECEMBER 31, 1994
(IN THOUSANDS)

<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................................. $(389)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of equipment and improvements........................ 9
Amortization of capitalized software costs......................................... 9
Changes in:
Accounts receivable............................................................. (34)
Inventories..................................................................... (22)
Other current assets............................................................ (12)
Accounts payable................................................................ 35
Accrued expenses................................................................ 16
-----
Net cash used in operating activities......................................... (388)
-----
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment and improvements.............................................. (90)
Additions to capitalized software costs.............................................. (77)
Change in other assets............................................................... (13)
-----
Net cash used in investing activities......................................... (180)
-----
CASH FLOWS FROM FINANCING ACTIVITIES --
Proceeds from issuance of common stock............................................. 680
-----
NET INCREASE IN CASH AND CASH EQUIVALENTS............................................ 112
CASH AND CASH EQUIVALENTS, January 31, 1994 (inception)..............................
-----
CASH AND CASH EQUIVALENTS, December 31, 1994......................................... $ 112
=====
</TABLE>

See notes to financial statements.

F-27
<PAGE> 71

CLINITEC INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 31, 1994 (INCEPTION) TO DECEMBER 31, 1994

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Clinitec International, Inc. (the "Company") was incorporated on January
31, 1994. The Company designs, assembles, markets, installs, maintains and
supports electronic medical records software systems using a client/server
platform, a graphical user interface and a relational database format to permit
flexibility in screen customization and logic flow.

Revenue Recognition -- In accordance with Statement of Position 91-1,
Software Revenue Recognition, sales of electronic medical records software
systems are recorded when the basic software and hardware is shipped if the
Company's future obligations are not considered significant and collection is
probable. Estimated costs to complete system installations and modifications are
charged to expense in the period in which the sale is recorded. If the Company's
future obligations are considered significant, revenue is recognized on the
percentage of completion basis. Maintenance revenue is recognized ratably over
the life of the contract.

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.

Accounts Receivable -- The Company provides credit terms for most sales.
The Company performs ongoing credit evaluations of its customers and maintains
reserves for potential credit losses, which have been within management's
expectations.

Inventories -- Inventories are valued at lower of cost (first-in,
first-out) or market. The Company provides an allowance for excess and obsolete
inventories based on estimates using experience and projected sales.

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 and amortized over the economic life
(generally three years) of the related product in accordance with Statement of
Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed. Accumulated amortization of
capitalized software costs amounted to $9,000 for the period from January 31,
1994 (inception) to December 31, 1994. The Company performs an annual review of
the recoverability of such capitalized software costs. At the time a
determination has been made that capitalized amounts are not recoverable based
on the estimated cash flows to be generated from the applicable software, any
remaining capitalized amounts would be written off.

Income Taxes -- The Company had elected to be taxed as a S corporation
under the provisions of the Internal Revenue Code and similar state statutes.
Accordingly, the Company's taxable income or loss is treated as if it were
distributed to the shareholders. In May 1995, concurrent with the sale of
preferred stock (Note 6), the Company terminated its S corporation status.

The Company accounts for income taxes under Financial Accounting Standards
No. 109, Accounting for Income Taxes (SFAS No. 109). In accordance with SFAS No.
109, 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

F-28
<PAGE> 72

CLINITEC INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 31, 1994 (INCEPTION) TO DECEMBER 31,
1994 -- (CONTINUED)

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 more likely than not the assets are
recoverable.

Stock Split -- During 1995, the Company effected two stock splits
aggregating 4,075:1. All share amounts in the accompanying financial statements
have been restated to reflect the splits.

New Accounting Pronouncement -- The Financial Accounting Standards Board
has recently issued Financial Accounting Standards No. 123, Accounting for
Stock-based Compensation, which requires the determination and disclosure of
compensation costs implicit in stock option grants. The Company is required to
adopt this standard beginning fiscal 1996. The Company does not plan to
implement this standard until that time and has not been able to quantify the
effect of this standard at the present time.

2. EQUIPMENT AND IMPROVEMENTS

Equipment and improvements consisted of the following at December 31, 1994
(in thousands):

<TABLE>
<S> <C>
Computers and electronic test equipment........................................ $48
Purchased computer software.................................................... 17
Furniture and fixtures......................................................... 25
---
90
Accumulated depreciation and amortization...................................... (9)
---
$81
===
</TABLE>

3. EMPLOYEE BENEFIT PLAN

The Company has a Simplified Employee Pension (SEP) plan for the benefit of
substantially all of its employees. The SEP is a type of defined contribution
plan whereby participating employees may defer compensation up to certain annual
IRS limitations. The Company does not make any contributions to the plan.

4. COMMITMENTS AND CONTINGENCIES

Leases -- The Company leases its principal facility and office under a
noncancelable operating lease agreement which expires May 1997. The Company has
rental commitments in fiscal 1995, 1996 and 1997 of $26,200, $26,700 and 18,000,
respectively.

Total rental expense for the period from January 31, 1994 (Inception) to
December 31, 1994 was approximately $10,000.

Litigation -- The Company is a party to various 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.

Employment Agreements -- The Company has entered into employment agreements
of three to five years with certain key employees. Such agreements may normally
be terminated by the Company if specified performance criteria are not met.
Under the term of the agreements, the Company is obligated to pay aggregate base
salaries of $256,000, $256,000, $228,000, $132,000 and $115,000 in fiscal 1995,
1996, 1997, 1998 and 1999, respectively. Certain agreements have provisions for
the payment of cash or stock bonus' based on specified performance criteria. The
aggregate maximum number of shares of common stock which may be issued pursuant
to employment agreements as of December 31, 1994 is 42,600 common shares.

F-29
<PAGE> 73

CLINITEC INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 31, 1994 (INCEPTION) TO DECEMBER 31,
1994 -- (CONTINUED)

Stock Options -- As of December 31, 1994, three customers, who are also
stockholders, hold options to purchase an aggregate of approximately 55,000
common shares at a weighted average price of approximately $2.80 per share, all
of which were exercised in 1995.

5. RELATED PARTY TRANSACTIONS

All significant sales in 1994 were to customers which are also shareholders
in Clinitec. As of December 31, 1994, all accounts receivable were from related
parties.

6. SUBSEQUENT EVENT

In May 1995, the Company entered into a strategic relationship with Quality
Systems, Inc. (QSI) to market the Company's product. As part of this
relationship, the Company sold convertible preferred stock representing a 25%
equity interest in Clinitec to QSI for $1 million and granted QSI an option to
acquire an aggregate 51% equity interest in Clinitec for an additional $3
million, exercisable at any time through August 1997.

F-30
<PAGE> 74

CLINITEC INTERNATIONAL, INC.

BALANCE SHEET
AS OF SEPTEMBER 30, 1995 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................... $ 344
Accounts receivable................................................................. 336
Inventories......................................................................... 30
Other current assets................................................................ 26
------
Total current assets...................................................... 736
EQUIPMENT AND IMPROVEMENT, net...................................................... 154
CAPITALIZED SOFTWARE COSTS, net..................................................... 216
OTHER ASSETS........................................................................ 12
------
Total assets.............................................................. $1,118
======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................................... $ 25
Accrued payroll and related expenses................................................ 21
Other accrued expenses.............................................................. 14
Estimated costs to complete system installations.................................... 40
------
Total current liabilities................................................. 100
------
COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
Series A convertible preferred stock, no par value; 1,000,000 shares authorized,
338,300 shares issued and outstanding............................................. 1,000
Common stock, no par value; 3,000,000 shares authorized; 1,053,800 shares issued
and outstanding................................................................... 843
Accumulated deficit................................................................. (825)
------
Total shareholders' equity................................................ 1,018
------
Total liabilities and shareholders' equity................................ $1,118
======
</TABLE>

See notes to financial statements.

F-31
<PAGE> 75

CLINITEC INTERNATIONAL, INC.

STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 (UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1994 1995
----- ------
<S> <C> <C>
NET REVENUES-.............................................................. $ 36 $1,066
COST OF PRODUCTS AND SERVICES.............................................. 15 379
----- ------
Gross profit............................................................... 21 687

OPERATING EXPENSES:
Selling, general and administrative........................................ 156 988
Research and development................................................... 59 20
----- ------
215 1,008
----- ------
Loss from operations....................................................... (194) (321)
INTEREST AND INVESTMENT INCOME............................................. 9
----- ------
NET LOSS................................................................... $(194) $ (312)
===== ======
</TABLE>

See notes to financial statements.

F-32
<PAGE> 76

CLINITEC INTERNATIONAL, INC.

STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 (UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------
1994 1995
----- -----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................................... $(194) $(312)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of equipment and improvements............... 5 19
Amortization of capitalized software costs................................ 1 43
Compensation expense related to stock grants.............................. 87
Changes in:
Accounts receivable.................................................... (51) (302)
Inventories............................................................ (4) (8)
Other current assets................................................... (3) (14)
Accounts payable....................................................... 19 (10)
Accrued expenses....................................................... 13 19
Estimated costs to complete system installations....................... 40
----- -----
Net cash used in operating activities............................. (214) (438)

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment and improvements..................................... (77) (92)
Additions to capitalized software costs..................................... (20) (191)
Change in other assets...................................................... (13) 1
----- -----
Net cash used in investing activities............................. (110) (282)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock...................................... 450 76
Proceeds from issuance of preferred stock................................... 1,000
Dividends paid on common stock.............................................. (124)
----- -----
Net cash provided by financing activities......................... 450 952
----- -----
NET INCREASE IN CASH AND CASH EQUIVALENTS................................... 126 232
CASH AND CASH EQUIVALENTS, beginning of period.............................. -- 112
----- -----
CASH AND CASH EQUIVALENTS, end of period.................................... $ 126 $ 344
===== =====
</TABLE>

NONCASH FINANCING TRANSACTION --

During the nine months ended September 30, 1994, the Company issued common
shares for a $200,000 receivable, which was paid in full during the fourth
quarter of fiscal 1994.

See notes to financial statements.

F-33
<PAGE> 77

CLINITEC INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 (UNAUDITED)

1. BASIS OF PRESENTATION

The information set forth in these financial statements of Clinitec
International, Inc. (the Company) as of September 30, 1995 and for the nine
months ended September 30, 1994 and 1995 is unaudited. The information reflects
all adjustments consisting only of normal recurring entries that, in the opinion
of management, are necessary to present fairly the financial position and
results of operations of the Company for the periods indicated. Results of
operations for the interim periods are not necessarily indicative of the results
of operations for the full fiscal year.

The information contained in these interim financial statements should be
read in conjunction with the Company's audited financial statements contained
elsewhere in this Registration Statement.

2. SALE OF CONVERTIBLE PREFERRED STOCK

As a result of the above transaction, the Company terminated its S
Corporation election for tax purposes. The cumulative effect of such change in
tax status on the Company's financial position and results of operations was not
significant.

F-34
<PAGE> 78
[PHOTO]

When QSI's technologically advanced health care information system is used in
conjunction with NextGen's power and flexibility, the health care professional
benefits from an integrated solution that positively affects numerous aspects of
patient care and practice management.

Used in conjunction with
a wireless, portable
workstation, NextGen
allows the health care
provider to retrieve and
update patient records [PHOTO]
while moving from
examination room to
examination room, and
even from office to
office.

NextGen processes, manipulates
and manages patient information
in data, visual and audio
formats. NextGen stores patient [PHOTO]
medical histories, scanned
images, X-rays, annotated
documents, recorded voice and
user customizable exam data.

<PAGE> 79

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

No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained or
incorporated by reference in this Prospectus in connection with the offer made
by this Prospectus and, if given or made, such information or representations
must not be relied upon as having been authorized by the Company, the Selling
Shareholders or any of the Underwriters. Neither the delivery of this Prospectus
nor any sale made hereunder shall under any circumstances create any implication
that there has been no change in the affairs of the Company since the date
hereof. This Prospectus does not constitute an offer or solicitation by anyone
in any jurisdiction in which such offer or solicitation is not authorized or
which the person making such offer or solicitation is not qualified to do so or
to any person to whom it is unlawful to make such qualified solicitation.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................... 3
Risk Factors..................................... 6
The Company...................................... 11
Use of Proceeds.................................. 11
Price Range for Common Stock and Dividends....... 11
Capitalization................................... 12
Selected Financial Data.......................... 13
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 14
Business......................................... 20
Directors and Executive Officers................. 31
Principal and Selling Shareholders............... 37
Description of Capital Stock..................... 38
Shares Eligible for Future Sale.................. 38
Underwriting..................................... 40
Legal Opinions................................... 41
Experts.......................................... 41
Additional Information........................... 41
Index to Financial Statements.................... F-1
</TABLE>

Until , 1996 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Shares offered hereby, whether or
not participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligation of dealers to deliver
a Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
- ------------------------------------------------------
- ------------------------------------------------------

- ------------------------------------------------------
- ------------------------------------------------------
1,500,000 SHARES
[QSI LOGO]
[QUALITY SYSTEMS, INC. LOGO]
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------

PACIFIC GROWTH EQUITIES, INC.

CRUTTENDEN ROTH
INCORPORATED

, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 80

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than underwriting
discounts and commissions, payable in connection with the sale and distribution
of the securities being registered. All amounts are estimated except the
Securities and Exchange Commission, NASD registration fees and the Nasdaq
National Market additional listing fee. All of the expenses below will be paid
by the Company.

<TABLE>
<CAPTION>
ITEM AMOUNT
---- --------
<S> <C>
Registration fee.......................................................... $ 15,986
NASD Filing Fee........................................................... 5,136
Nasdaq National Market additional listing fee............................. 17,500
Blue Sky fees and expenses................................................ *
Printing and engraving expenses........................................... *
Legal fees and expenses................................................... *
Accounting fees and expenses.............................................. *
Transfer Agent and Registrar fees......................................... *
Miscellaneous............................................................. *
---
Total................................................................ $450,000
========
</TABLE>

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

* To be filed by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 317 of the California General Corporation Law provides generally that a
person sued as a director, officer or agent of a corporation may be indemnified
by the corporation for reasonable expenses, including counsel fees, if (a) in
the case of other than derivative suits, he has acted in good faith and in a
manner he reasonably believed to be in the best interests of the corporation
(and in the case of a criminal proceeding, had no reasonable cause to believe
that his conduct was unlawful), and (b) in the case of a derivative suit, he has
acted in good faith in a manner he believed to be in the best interests of the
corporation and its shareholders, and with such care, including reasonable
inquiry, as an ordinarily prudent person, in a like position would use under
similar circumstances. Section 317 provides that no indemnification shall be
made in the case of a derivative suit in respect of any claim as to which a
director, officer or agent has been adjudged to be liable to the corporation,
except with court approval, nor shall indemnification be made for costs of and
expenses in connection with settlement, with court approval. Indemnification is
mandatory in the case of a director, officer, or agent who is successful on the
merits in defense of a suit against him. The determination whether to indemnify
a director, officer or agent is made by a majority of disinterested directors, a
majority of disinterested shareholders, or the court in which the suit is
pending.

II-1
<PAGE> 81

to an abdication of the director's duty to the Company or its shareholders; (6)
with respect to certain transactions, or the approval of transactions in which a
director has a material financial interest; and (7) expressly imposed by
statute, for approval of certain improper distributions to shareholders or
certain loans or guarantees. This provision does not eliminate or limit
liability of an officer for any act or omission as an officer, notwithstanding
that the officer is also a director or that his actions, if negligent or
improper, have been ratified by the Board of Directors. Further, the provision
has no effect on claims under federal or state securities laws and does not
affect the availability of injunctions and other equitable remedies available to
the Company's shareholders for any violation of a director's fiduciary duty to
the Company or its shareholders. Although the validity and scope of the
legislation underlying the provision have not yet been interpreted to any
significant extent by the California courts, the provision may relieve directors
or monetary liability to the Company for grossly negligent conduct, including
conduct in situations involving attempted takeovers of the Company.

The Articles also provide that the Company is authorized to provide
indemnification to its agents (as defined in Section 317 of the California
Corporations Code), through the Company's Bylaws or through agreements with such
agents or both, for breach of duty to the Company and its shareholders, in
excess of the indemnification otherwise permitted by Section 317 of the
California Corporations Code, subject to the limits on such excess
indemnification set forth in Section 204 of the California Corporations Code.

The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification by
the Underwriters of the Company and its officers and directors and the Selling
Shareholders, and by the Company and the Selling Shareholders of the
Underwriters, for certain liabilities arising under the Securities Act of 1933
or otherwise.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

During the last three years preceding the date hereof there were no transactions
involving sales of the Registrant's securities.

II-2
<PAGE> 82

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) EXHIBITS

The following Exhibits are attached hereto and incorporated herein by
reference:

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Restated Articles of Incorporation of the Company.
3.2 Bylaws of the Company.(1)
3.2.1 Certificate of Amendment of Bylaws of the Company.
5.1* Form of Opinion of Brobeck, Phleger & Harrison LLP regarding the validity of the
securities being registered.
10.1 1989 Incentive Stock Option Plan.(2)
10.2 Form of Incentive Stock Option Agreement.
10.3 Form of Non-Qualified Stock Option Agreement.
10.4 Quality Systems, Inc. Retirement Savings Plan.(3)
10.5 Deferred Compensation Plan.(4)
10.6 Lease Agreement dated March 11, 1993 between the Registrant and Craig Development
Corporation.(5)
10.7 Lease Agreement dated September 12, 1994 between the Registrant and Koll/Realty
Orangewood Business Center General Partnership.(6)
10.8 Series "A" Convertible Preferred Stock Purchase Agreement, as amended, dated April
21, 1995 between the Registrant and Clinitec International, Inc.(7)
10.9 Marketing Agreement, as amended, dated April 1, 1995 between the Registrant and
Clinitec International, Inc.(8)
10.10 Form of Indemnification Agreement.
23.1 Independent Auditors' Consent -- Deloitte & Touche LLP.
23.2* Consent of Brobeck, Phleger & Harrison LLP (contained in Exhibit 5.1)
24.1 Power of Attorney (contained on signature page on page II-5).
</TABLE>

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

* To be filed by amendment

(1) Incorporated by reference to Exhibit 3.3 of Amendment No. 2 to the Company's
Registration Statement on Form S-1 dated November 30, 1982, File No.
2-80056.

(2) Incorporated by reference to the Company's Registration Statement on Form
S-8, File No. 33-31949.

(3) Incorporated by reference to Exhibit 10.4.2 of the Company's Annual Report
on Form 10-KSB for the year ended March 31, 1994, File No. 0-13801.

(4) Incorporated by reference to Exhibit 10.5 of the Company's Annual Report on
Form 10-KSB for the year ended March 31, 1994, File No. 0-13801.

(5) Incorporated by reference to Exhibit 10.35 of the Company's Annual Report on
Form 10-K for the year ended March 31, 1993, File No. 0-13801.

(6) Incorporated by reference to Exhibit 10.8 of the Company's Annual Report on
Form 10-KSB for the year ended March 31, 1995, File No. 0-13801.

(7) Incorporated by reference to Exhibit 10.11 of the Company's Annual Report on
Form 10-KSB for the year ended March 31, 1995, File No. 0-13801.

(8) Incorporated by reference to Exhibit 10.12 of the Company's Annual Report on
Form 10-KSB for the year ended March 31, 1995, File No. 0-13801.

II-3
<PAGE> 83

(B) FINANCIAL STATEMENT SCHEDULES

Schedule II -- Valuation and Qualifying Accounts

Schedules not listed above have been omitted because the information required to
be set forth therein is not applicable or is shown in the financial statements
or notes thereto.

ITEM 17. UNDERTAKINGS

The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreements certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted as to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue. The undersigned Registrant hereby undertakes that: (1) for purposes
of determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus as filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a form of prospectus filed
by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective, and (2) for the purpose of determining any
liability under the Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

II-4
<PAGE> 84

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Tustin, State of California, on the 10th day of
January 1996.

QUALITY SYSTEMS, INC.

By: /s/ SHELDON RAZIN
----------------------------------
Sheldon Razin
President and Chairman of the Board

POWER OF ATTORNEY

We, the undersigned officers and directors of Quality Systems, Inc., do
hereby constitute and appoint Sheldon Razin and Janet Razin, and each of them,
our true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him/her and in his/her name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same,
with exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in connection therewith,
as fully to all intents and purposes as he/she might or could do in person,
hereby ratifying and confirming all that each of said attorneys-in-fact and
agents, or his/her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ SHELDON RAZIN Chairman, President and Director January 10, 1996
- --------------------------------------- (Principal Executive Officer)
Sheldon Razin

/s/ JANET RAZIN Vice President, Secretary and January 10, 1996
- --------------------------------------- Director
Janet Razin

/s/ IRMA CARMONA Corporate Controller (Principal January 10, 1996
- --------------------------------------- Financial and Accounting Officer)
Irma Carmona

/s/ GRAEME FREHNER Director January 10, 1996
- ---------------------------------------
Graeme Frehner

/s/ JOHN BOWERS, M.D. Director January 10, 1996
- ---------------------------------------
John Bowers, M.D.

/s/ WILLIAM BOWERS Director January 10, 1996
- ---------------------------------------
William Bowers

/s/ GEORGE BRISTOL Director January 10, 1996
- ---------------------------------------
George Bristol

/s/ GORDON SETRAN Director January 10, 1996
- ---------------------------------------
Gordon Setran
</TABLE>

II-5
<PAGE> 85

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT -------------------
BEGINNING CHARGED TO BALANCE AT
DESCRIPTION OF PERIOD COSTS AND EXPENSES DEDUCTIONS END OF PERIOD
- ----------- ----------- ------------------- ---------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Fiscal 1993............................... $ 106 $ 7 $(20) $93
Fiscal 1994............................... 93 7 (34) 66
Fiscal 1995............................... 66 28 (17) 77
</TABLE>

S-1
<PAGE> 86

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ ----------------------------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement.
3.1 Restated Articles of Incorporation of the Company.
3.2 Bylaws of the Company.(1)
3.2.1 Certificate of Amendment of Bylaws of the Company.
5.1* Form of Opinion of Brobeck, Phleger & Harrison LLP regarding the validity of the
securities being registered.
10.1 1989 Incentive Stock Option Plan.(2)
10.2 Form of Incentive Stock Option Agreement.
10.3 Form of Non-Qualified Stock Option Agreement.
10.4 Quality Systems, Inc. Retirement Savings Plan.(3)
10.5 Deferred Compensation Plan.(4)
10.6 Lease Agreement dated March 11, 1993 between the Registrant and Craig Development
Corporation.(5)
10.7 Lease Agreement dated September 12, 1994 between the Registrant and Koll/Realty
Orangewood Business Center General Partnership.(6)
10.8 Series "A" Convertible Preferred Stock Purchase Agreement, as amended, dated April
21, 1995 between the Registrant and Clinitec International, Inc.(7)
10.9 Marketing Agreement, as amended, dated April 1, 1995 between the Registrant and
Clinitec International, Inc.(8)
10.10 Form of Indemnification Agreement.
23.1 Independent Auditors' Consent -- Deloitte & Touche LLP.
23.2* Consent of Brobeck, Phleger & Harrison LLP (contained in Exhibit 5.1)
24.1 Power of Attorney (contained on signature page on page II-5).
</TABLE>