QUALITY SYSTEMS INC, 424B4, 1996-03-06

QUALITY SYSTEMS INC
424B4, 1996-03-06
COMPUTER INTEGRATED SYSTEMS DESIGN

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<PAGE> 1

1,500,000 SHARES This filing is made
pursuant to Rule
424(b)(4) under the
LOGO Securities Act of
LOGO 1933 in connection
COMMON STOCK with Registration
------------------------------ No. 333-00161

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 March 5, 1996, the last sale price per share
of the Common Stock as reported by the Nasdaq National Market was $22.75. 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>
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................ $22.25 $1.22 $21.03 $21.03
- -------------------------------------------------------------------------------------------------
Total(3)................. $33,375,000 $1,830,000 $21,030,000 $10,515,000
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</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 $500,000.

(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 $38,381,250,
$2,104,500, $21,030,000, and $15,246,750, 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 March 11,
1996.

BEAR, STEARNS & CO. INC.
PACIFIC GROWTH EQUITIES, INC.
CRUTTENDEN ROTH
INCORPORATED

THE DATE OF THIS PROSPECTUS IS MARCH 5, 1996
<PAGE> 2

LOGO

Quality Systems' health care
[PHOTO] [PHOTO] 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
[PHOTO] access to treatment and
outcome data.

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 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.
[PHOTO]
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> 3

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 currently holds a 25% interest in
Clinitec and a unilateral right to increase its interest to 51%, and has entered
into an agreement in principle (the "Clinitec Agreement in Principle") to
acquire Clinitec as a wholly-owned subsidiary. Clinitec's principal 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> 4

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 the acquisition of an increased ownership
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>

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

(1) Excludes 132,125 shares of Common Stock which were subject to outstanding
options as of February 12, 1996 at a weighted average exercise price of
$4.61 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> 5

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

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
--------------------------- ----------------
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 $3,895 $ 7,162
Maintenance and other services............. 5,377 5,606 6,368 4,727 5,159
------- ------- ------- ------ -------
11,651 11,752 12,049 8,622 12,321
Cost of products and services................. 6,992 6,527 6,060 4,498 5,865
------- ------- ------- ------ -------
Gross profit.................................. 4,659 5,225 5,989 4,124 6,456
Earnings from operations...................... 517 855 986 433 2,488
Net earnings.................................. $ 623 $ 906 $ 962 $ 524 $ 1,670
======= ======= ======= ====== =======
Net earnings per share(1)..................... $ 0.15 $ 0.21 $ 0.21 $ 0.11 $ 0.35
======= ======= ======= ====== =======
Weighted average shares used in computation... 4,187 4,342 4,606 4,641 4,709
======= ======= ======= ====== =======
</TABLE>

<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
-----------------------------------
PRO FORMA AS ADJUSTED
-------------------------
51% OF 100% OF
ACTUAL CLINITEC(2) CLINITEC(3)
------- ----------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments.......... $ 7,662 $27,031 $23,635
Working capital............................................... 9,302 28,938 25,542
Total assets.................................................. 15,386 34,898 35,163
Shareholders' equity.......................................... 11,681 29,730 30,882
</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 was $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 December 31, 1995, and adjusted to
reflect the sale of 1,000,000 shares of Common Stock by the Company in the
offering at the public offering price of $22.25 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."

(3) Gives pro forma effect to the acquisition of all of Clinitec for $4.9
million in cash and $6.9 million in value of the Company's Common Stock as
if such acquisition had occurred on December 31, 1995, and adjusted to
reflect the sale of 1,000,000 shares of Common Stock by the Company in the
offering at the public offering price of $22.25 per share and the
application of the estimated net proceeds reflect additional shares
therefrom. See "Use of Proceeds."

5
<PAGE> 6

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
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> 7

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> 8

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

A principal component of the Company's business strategy is the acquisition of a
controlling interest in Clinitec. While the Company has entered into a
non-binding agreement in principle to acquire Clinitec as a wholly-owned
subsidiary, there can be no assurance that such acquisition will be consummated.
However, if such acquisition is not consummated, the Company will in any event
exercise its contractual right to acquire shares resulting in a 51% ownership
interest in Clinitec unless the Board of Directors of the Company determines, in
accordance with its fiduciary duties, that the exercise of such contractual
right would have a material adverse financial effect on the Company's business
and prospects and its shareholders. 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 Clinitec will not have an adverse effect upon the Company's
operating results. In addition, Clinitec has sold only a limited quantity of its
principal products to date and there can be no assurance that its product will
achieve broad 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."

8
<PAGE> 9

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 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."

9
<PAGE> 10

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, 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> 11

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 the offering price of $22.25 per
share, after deducting estimated underwriting discounts and expenses of the
offering payable by the Company, are approximately $20.5 million.

The Company may use up to $4.9 million of the net proceeds from the offering to
increase its ownership interest in Clinitec. The Company intends to use the
balance of the proceeds 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 March 5, 1996)............................... 29 1/2 18 1/4
</TABLE>

At February 12, 1996 there were approximately 198 holders of record of the
Company's outstanding shares of Common Stock, and at March 5, 1996 the closing
sale price of the Common Stock on the Nasdaq National Market was $22.75 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> 12

CAPITALIZATION

The following table sets forth the actual capitalization of the Company at
December 31, 1995. The pro forma and as adjusted capitalization of the Company
set forth in the table below gives effect to: (i) the acquisition of Clinitec
shares resulting in a 51% interest in Clinitec and, alternatively, (ii) the
acquisition of 100% of Clinitec, in each case as adjusted to reflect the sale of
1,000,000 shares of Common Stock offered by the Company hereby (at the offering
price of $22.25 per share) and the receipt of the estimated net proceeds
therefrom, respectively. The pro forma information with respect to a 51%
interest in Clinitec gives effect to the Company's exercise of its contractual
right to increase its interest to such level for $3,000,000 in cash. The pro
forma information with respect to 100% of Clinitec gives effect to the terms of
the Clinitec Agreement in Principle which provides for a payment by the Company
of $4.9 million in cash and $6.9 million in value of the Company's Common Stock,
amounting to 310,000 shares based upon the offering price of $22.25 per share.

<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------------
51% OF CLINITEC(1) 100% OF CLINITEC(2)(3)
------------------------ ------------------------
PRO FORMA PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED PRO FORMA AS ADJUSTED
------- --------- ------------ --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Shareholders' equity:
Common stock, $.01 par value, 20,000,000
shares authorized, 4,638,000 shares
issued and outstanding(4)............. $ 46 $ 46 $ 56 $ 50 $ 60
Additional paid-in capital............... 6,764 6,764 27,279 13,654 34,169
Unrealized loss on available-for-sale
securities............................ (46) (46) (46) (46) (46)
Retained earnings (deficit).............. 4,917 2,441 2,441 (3,301) (3,301)
------- ------ ------- ------- -------
Total shareholders' equity................. $11,681 $9,205 $29,730 $10,357 $30,882
======= ====== ======= ======= =======
</TABLE>

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

(1) Gives pro forma effect to the acquisition of an additional interest in
Clinitec, providing the Company with a 51% ownership interest, as if such
acquisition had occurred at December 31, 1995. See "Use of Proceeds" and
"Business -- Relationship with Clinitec."

(2) Gives pro forma effect to the acquisition of Clinitec as a wholly-owned
subsidiary as if such acquisition had occurred at December 31, 1995. See
"Use of Proceeds" and "Business -- Relationship with Clinitec."

(3) Assumes 5,948,000 shares outstanding after giving effect to the estimated
issuance of 310,000 shares of Common Stock as part of the Clinitec Agreement
in Principle and the sale of 1,000,000 shares of Common Stock offered by the
Company hereby.

(4) Excludes 607,500 shares of Common Stock reserved for issuance under the
Company's 1989 Plan of which 134,125 shares of Common Stock were subject to
outstanding options at a weighted average exercise price of $2.44. See
"Directors and Executive Officers -- 1989 Stock Option Plan."

12
<PAGE> 13

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 the end of each such fiscal year are derived from
the audited financial statements of the Company. The statement of operations
data of the Company for the nine months ended December 31, 1994 and 1995 and the
balance sheet data as of December 31, 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 nine
months ended December 31, 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 acquisition of an additional
interest in Clinitec. See "Capitalization." 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
51% OF
CLINITEC(1)
NINE MONTHS ----------
ENDED
YEAR ENDED MARCH 31, DECEMBER 31, YEAR ENDED
----------------------------------------------- ---------------- MARCH 31,
1991 1992 1993 1994 1995 1994 1995 1995
------- ------- ------- ------- ------- ------ ------- ----------
<S> <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 $3,895 $ 7,162 $ 5,735
Maintenance and other services....... 4,281 4,738 5,377 5,606 6,368 4,727 5,159 6,368
------- ------- ------- ------- ------- ------ ------- -------
13,125 11,710 11,651 11,752 12,049 8,622 12,321 12,103
Cost of products and services......... 8,815 7,506 6,992 6,527 6,060 4,498 5,865 6,080
------- ------- ------- ------- ------- ------ ------- -------
Gross profit.......................... 4,310 4,204 4,659 5,225 5,989 4,124 6,456 6,023
Operating expenses:
Selling, general and
administrative..................... 4,003 3,458 3,008 3,052 3,536 2,581 2,847 3,900
Research and development............. 961 1,148 1,134 1,318 1,467 1,110 1,121 1,724
------- ------- ------- ------- ------- ------ ------- -------
Total operating expenses.............. 4,964 4,606 4,142 4,370 5,003 3,691 3,968 5,624
------- ------- ------- ------- ------- ------ ------- -------
Earnings (loss) from operations....... (654) (402) 517 855 986 433 2,488 399
Interest and investment income........ 302 204 192 400 429 249 340 429
Equity in loss of Clinitec............ -- -- -- -- -- -- (41) --
Minority interest in loss of
Clinitec............................. -- -- -- -- -- -- -- 191
------- ------- ------- ------- ------- ------ ------- -------
Earnings (loss) before income tax
provision............................ (352) (198) 709 1,255 1,415 682 2,787 1,019
Income tax provision(3)............... -- -- 86 349 453 158 1,117 374
------- ------- ------- ------- ------- ------ ------- -------
Net earnings (loss)................... $ (352) $ (198) $ 623 $ 906 $ 962 $ 524 $ 1,670 $ 645(1)
======= ======= ======= ======= ======= ====== ======= =======
Net earnings (loss) per share(4)...... $ (0.08) $ (0.05) $ 0.15 $ 0.21 $ 0.21 $ 0.11 $ 0.35 $ 0.14
======= ======= ======= ======= ======= ====== ======= =======
Weighted average shares outstanding... 4,187 4,187 4,187 4,342 4,606 4,641 4,709 4,741(5)
======= ======= ======= ======= ======= ====== ======= =======

<CAPTION>
PRO FORMA
51% OF PRO FORMA
CLINITEC(1) 100% OF CLINITEC(2)
------------- --------------------------
NINE MONTHS NINE MONTHS
ENDED YEAR ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31
1995 1995 1995
------------ ---------- -------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Sales of computer systems, upgrades
and supplies....................... $ 8,228 $ 5,735 $ 8,228
Maintenance and other services....... 5,159 6,368 5,159
------- -------- -------
13,387 12,103 13,387
Cost of products and services......... 6,244 6,080 6,244
------- -------- -------
Gross profit.......................... 7,143 6,023 7,143
Operating expenses:
Selling, general and
administrative..................... 3,859 4,209 4,091
Research and development............. 1,290 1,915 1,433
------- ------- -------
Total operating expenses.............. 5,149 6,124 5,524
------- ------- -------
Earnings (loss) from operations....... 1,994 (101) 1,619
Interest and investment income........ 349 429 349
Equity in loss of Clinitec............ -- -- --
Minority interest in loss of
Clinitec............................. 165 -- --
------- -------- -------
Earnings (loss) before income tax
provision............................ 2,508 328 1,968
Income tax provision(3)............... 1,058 297 1,000
------- -------- -------
Net earnings (loss)................... $ 1,450 $ 31(2) $ 968
======= ======== =======
Net earnings (loss) per share(4)...... $ 0.30 $ 0.01 $ 0.18
======= ======== =======
Weighted average shares outstanding... 4,844(5) 5,136(6) 5,239(6)
======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------
51% OF
CLINITEC(7)
AS OF MARCH 31, --------
-------------------------------------------- PRO
1991 1992 1993 1994 1995 ACTUAL FORMA
------ ------ ------ ------- ------- ------- --------
<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 $ 7,662 $ 6,506
Working capital................................ 4,604 4,691 5,204 6,857 8,032 9,302 8,413
Total assets................................... 8,942 8,805 9,596 11,094 12,668 15,386 14,373
Total liabilities and minority interest........ 2,844 2,906 3,074 3,054 3,480 3,705 5,168
Shareholders' equity........................... 6,098 5,899 6,522 8,040 9,188 11,681 9,205

DECEMBER 31, 1995
------------------------------------------
51% OF
CLINITEC(7) 100% OF CLINITEC(7)
-------------- -------------------------
PRO FORMA PRO PRO FORMA
AS ADJUSTED(8) FORMA AS ADJUSTED(8)
-------------- -------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and short term
investments.................................. $27,031 $ 3,110 $23,635
Working capital................................ 28,938 5,017 25,542
Total assets................................... 34,898 14,638 35,163
Total liabilities and minority interest........ 5,168 4,281 4,281
Shareholders' equity........................... 29,730 10,357 30,882
</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." Of the purchase price, $4.2
million has been allocated to in-process research and development and is to
be written off, net of an income tax benefit of $1.7 million, at the time of
the purchase. The effect of this writeoff has not been reflected in the pro
forma operating results.

(2) Gives pro forma effect to the acquisition of 100% of Clinitec as if such
acquisition had occurred on April 1, 1994. See "Use of Proceeds" and
"Business -- Relationship with Clinitec". Of the purchase price, $13.8
million has been allocated to in-process research and development and is to
be written off, net of an income tax benefit of $5.5 million, at the time of
purchase. The effect of this writeoff 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 135,000 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) Assumes as outstanding 220,000 shares being offered by the Company hereby,
which represents the approximate number of shares that have to be sold to
fund the cash portion of the purchase of Clinitec and an estimated 310,000
new shares to be issued by the Company as the non-cash portion of the
purchase price.

(7) Gives pro forma effect to the acquisition of an additional interest in
Clinitec, as if such acquisition had occurred on December 31, 1995, and the
writeoff referenced in footnote 1 or 2 above, as applicable.

(8) 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 the public offering price of
$22.25 per share and the application of the estimated net proceeds
therefrom.

13
<PAGE> 14

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 nine 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> 15

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.

If the Company acquires Clinitec as a wholly-owned subsidiary as contemplated by
the Clinitec Agreement in Principle, the Company expects to take a writeoff for
purchased in-process research and development of $13.8 million and record a
related income tax benefit of $5.5 million in the quarter in which the
transaction is consummated. If, however, the Company increases its ownership
interest in Clinitec to 51%, the Company expects to take a writeoff for
purchased in-process research and development of $4.2 million and record a
related income tax benefit of $1.7 million in the quarter in which such
transaction is consummated. See "Business -- Relationship with Clinitec." The
exact amount of the writeoff will be subject to change pending the timing of the
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>
NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------- ---------------
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% 45.2% 58.1%
Maintenance and other services................... 46.2 47.7 52.9 54.8 41.9
----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0
Cost of products and services...................... 60.0 55.5 50.3 52.2 47.6
----- ----- ----- ----- -----
Gross profit....................................... 40.0 44.5 49.7 47.8 52.4
Operating expenses:
Selling, general and administrative.............. 25.8 26.0 29.3 29.9 23.1
Research and development......................... 9.7 11.2 12.2 12.9 9.1
----- ----- ----- ----- -----
Total operating expenses........................... 35.5 37.2 41.5 42.8 32.2
----- ----- ----- ----- -----
Earnings from operations........................... 4.5 7.3 8.2 5.0 20.2
Interest and investment income..................... 1.6 3.4 3.6 2.9 2.7
Equity in loss of Clinitec......................... -- -- -- -- (.3)
----- ----- ----- ----- -----
Earnings before income tax provision............... 6.1 10.7 11.8 7.9 22.6
Income tax provision............................... 0.8 3.0 3.8 1.8 9.0
----- ----- ----- ----- -----
Net earnings....................................... 5.3% 7.7% 8.0% 6.1% 13.6%
===== ===== ===== ===== =====
</TABLE>

FOR THE NINE-MONTH PERIODS ENDED DECEMBER 31, 1995 AND 1994.

NET REVENUES. Net revenues for the nine months ended December 31, 1995
increased 42.9% to $12.3 million from $8.6 million for the nine months ended
December 31, 1994. This increase was due primarily to sales of computer systems,
upgrades, including software user licenses, and supplies, which grew 83.9% to
$7.2 million from $3.9 million. This growth resulted from an increase in the
number of larger systems and increased sales of upgrades. Net revenues from
maintenance and other services grew 9.2% to $5.2 million from $4.7 million.

15
<PAGE> 16

This growth resulted from a larger client base for recurring revenues and
increased time and material billings for additional services.

COST OF PRODUCTS AND SERVICES. Cost of products and services for the nine
months ended December 31, 1995 increased 30.4% to $5.9 million from $4.5 million
for the nine months ended December 31, 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 47.6% from 52.2%. This
decrease was due to an increase in the proportion of revenues from lower cost
items.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the nine months ended December 31, 1995 increased 10.3% to $2.8
million from $2.6 million for the nine months ended December 31, 1994. This
increase was 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 net revenues, to 23.1% from 29.9%.

RESEARCH AND DEVELOPMENT. Research and development expenses remained unchanged
at $1.1 million for the nine months ended December 31, 1995 compared to the nine
months ended December 31, 1994. This lower than normal increase resulted from a
higher proportion of capitalized software. Total research and development
expenditures and capitalized software increased to $1.2 million from $1.1
million. 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 an 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 nine
months ended December 31, 1995 increased 35.8% to $340,000 from $249,000 for the
nine months ended December 31, 1994. Current period investment results represent
an annualized yield of approximately 6% on the Company's combined balances for
cash and cash equivalents and short-term investments. Interest and investment
income for the nine months ended December 31, 1994 included prior year first
quarter realized losses of $81,000 from sales of short-term investments.

INCOME TAX PROVISION. Income tax provision for the nine months ended December
31, 1995 increased 606.5% to $1.1 million from $158,100 for the nine months
ended December 31, 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 40.1% and 23.2%. 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

16
<PAGE> 17

ended March 31, 1994, and as a percentage of net revenues, to 12.2% from 11.2%.
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, and
as a percentage of net revenues to 11.2% from 9.7%.

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 $580,000 and $1.5 million for the nine months ended December 31,
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.

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
$1.7 million and $(1.4) million for nine months ended December 31, 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 capitalized software. The amounts for the period
ended December 31, 1995 were reduced by the Company's purchase of a 25% equity
interest in Clinitec for $1.0 million.

17
<PAGE> 18

At December 31, 1995, the Company had cash and cash equivalents of $6.4 million
and short-term investments of $1.3 million. Short-term investments include debt
securities issued by foreign governments of $311,000 and an investment in a
hedge fund which trades in special situation securities of $530,000. 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 make an additional investment in 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 seven quarters ended December 31, 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 DECEMBER
1994 1994 1994 1995 1995 1995 1995
------ --------- -------- ------ ------ --------- --------
(IN THOUSANDS)
<S> <C> <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 $2,514
Maintenance and other
services.................... 1,491 1,646 1,590 1,641 1,680 1,660 1,819
------ ------ ------ ------ ------ ------ ------
3,073 2,794 2,755 3,427 3,804 4,184 4,333
Cost of products and services.... 1,652 1,456 1,390 1,562 1,713 2,072 2,080
------ ------ ------ ------ ------ ------ ------
Gross profit..................... 1,421 1,338 1,365 1,865 2,091 2,112 2,253
Operating expenses:
Selling, general and
administrative.............. 836 844 901 955 926 1,002 919
Research and development....... 329 387 394 357 355 301 465
------ ------ ------ ------ ------ ------ ------
Total operating expenses......... 1,165 1,231 1,295 1,312 1,281 1,303 1,384
Earnings from operations......... 256 107 70 553 810 809 869
Interest and investment income
(loss)......................... (12) 133 128 180 104 101 135
Equity in loss of Clinitec....... -- -- -- -- (10) (8) (23)
------ ------ ------ ------ ------ ------ ------
Earnings before income tax
provision...................... 244 240 198 733 904 902 981
Income tax provision............. 44 54 60 295 367 374 376
------ ------ ------ ------ ------ ------ ------
Net earnings..................... $ 200 $ 186 $ 138 $ 438 $ 537 $ 528 $ 605
====== ====== ====== ====== ====== ====== ======
</TABLE>

18
<PAGE> 19

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> 20

BUSINESS

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 currently holds a 25% interest in
Clinitec and a unilateral right to increase its interest to 51%, and has entered
into a non-binding agreement in principle (the "Clinitec Agreement in
Principle") to acquire Clinitec as a wholly-owned subsidiary. Clinitec's
principal 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.

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> 21

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> 22

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> 23

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> 24

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> 25

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> 26

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 a unilateral contractual right (the "Option"), exercisable until August
1997, to purchase additional shares from Clinitec for $3 million ($1.5 million
of which would be distributed pro rata to the Clinitec stockholders other than
QSI) which would result in the Company holding a 51% ownership interest in
Clinitec.

On February 13, 1996, the Company entered into the Clinitec Agreement in
Principle, which is non-binding, to acquire all of Clinitec. Such acquisition
would be achieved through the exercise of the Option and the acquisition of all
remaining shares of Clinitec for approximately $4.9 million in cash and $6.9
million in QSI stock (valuing each QSI share at the public offering price
contemplated hereby) to be distributed pro rata to all Clinitec stockholders
other than the Company. As part of such acquisition, Patrick Cline, the current
President of Clinitec, will remain as such and will become a Director and an
Executive Vice President of the Company. The Clinitec Agreement in Principle
contemplates that the closing of such transaction will occur on or before March
31, 1996; however, there can be no assurance that the acquisition will occur by
such date, if at all. If such acquisition is not consummated, the Company will
in any event exercise its contractual right to acquire shares resulting in a 51%
ownership interest in Clinitec unless the Board of Directors of the Company
determines, in accordance with its fiduciary duties, that the exercise of such
contractual right would have a material adverse financial effect on the
Company's business and prospects and its shareholders.

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. 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.

If the Company acquires all of Clinitec, it anticipates maintaining Clinitec as
a separate subsidiary and selling Clinitec software products in conjunction with
QSI products, as well as on a stand-alone basis.

26
<PAGE> 27

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.

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

27
<PAGE> 28

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 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.

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<PAGE> 29

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,
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 1994 and 1995,
and the nine months ended December 31, 1995 the Company expended approximately
$1.3 million, $1.5 million and $1.1 million 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.

29
<PAGE> 30

and the FDA could require supplemental filings or object to certain of these
applications. See "Risk Factors -- Uncertainty in Health Care Industry;
Government Regulation."

EMPLOYEES

As of February 12, 1996, the Company employed 125 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.

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.

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<PAGE> 31

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information concerning the executive
officers and directors of the Company as of February 12, 1996.

<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------- ---- --------------------------------------------------
<S> <C> <C>
Sheldon Razin 58 Chairman of the Board, Chief Executive Officer,
President and Director
Robert Beck 55 Executive Vice President
Robert McGraw 38 Vice President Chief Financial Officer
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 57 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.

ROBERT MCGRAW has been hired by the Company as its Vice President Chief
Financial Officer and will begin his employment on February 19, 1996. Prior to
joining the Company, Mr. McGraw was the Chief Financial Officer of CVD Financial
Corporation, an asset-based commercial lender, from March 1994 to February 1996.
He was an independent financial consultant from August 1989 to February 1991 and
from March 1992 to February 1994. From March 1991 to February 1992, Mr. McGraw
was Chief Financial Officer of MGV International, Inc., a diversified middle
market company with a personal computer manufacturing plant and wholesale
distribution operations. Mr. McGraw is a Certified Public Accountant and holds
an M.B.A. from UCLA and a B.A. with highest honors in Business Economics from
University of California, Santa Barbara.

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<PAGE> 32

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 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

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<PAGE> 33

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.

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.

In the event that the acquisition of 100% of Clinitec is consummated, it is
anticipated that Patrick Cline will join the Company's Board of Directors and
will become an Executive Vice President of the Company. Mr. Cline is a
co-founder of Clinitec and has served as its Chairman of the Board of Directors,
Chief Executive Officer and President since its inception in January 1994. Prior
to co-founding Clinitec, Mr. Cline served, from July 1987 to January 1994, as
Vice President of Sales and Marketing with Script Systems, a subsidiary of
InfoMed, a healthcare information systems company. From January 1994 to May
1994, after the founding of Clinitec, Mr. Cline continued to serve, on a part
time basis, as Script Systems' Vice President of Sales and Marketing. Mr. Cline
has held senior positions in the health care information systems industry since
1981.

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<PAGE> 34

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
Research 1994 105,000 -- -- 1,010
and Development 1993 105,000 -- -- 419
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 such date pursuant to stock options granted by the
Company. As of February 12, 1996, Mr. Beck had been granted options to
purchase 75,000 shares and had exercised 53,750 shares of such options.

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<PAGE> 35

The Company has hired Robert McGraw to be its Chief Financial Officer. Mr.
McGraw will commence employment with the Company on February 19, 1996 at a
salary of $125,000 per year and will be granted options to purchase 30,000
shares of the Company's Common Stock. In addition, upon the consummation of the
acquisition of Clinitec contemplated by the Clinitec Agreement in Principle,
five key employees of Clinitec will enter into employment agreements with QSI
for three year terms. The Company anticipates that such Clinitec employees will
receive aggregate compensation of approximately $840,000 per year.

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.

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<PAGE> 36

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.

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. In addition, upon the consummation of the acquisition of
Clinitec contemplated by the Clinitec Agreement in Principle, the Company
intends to enter into employment agreements with certain key employees of
Clinitec. See "Executive Compensation."

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

36
<PAGE> 37

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 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.

CERTAIN TRANSACTIONS

The Company sold a computer system for $334,600 to Heart Institute of
Nevada during the quarter ended December 31, 1995. John Bowers, M.D., the
founder and Chief Executive Officer of Heart Institute of Nevada, is a member of
the Company's Board of Directors. The Company's gross profit on the sale is
comparable to the gross profit on sales of similar computer systems.

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<PAGE> 38

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 February 12, 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
Duncan-Hurst Capital Management Inc.(5)....... 299,400 6.4 -- 299,400 5.3
Graeme Frehner................................ 76,554 1.7 20,000 56,554 1.0
John Bowers, M.D.............................. 31,230 * -- 31,230 *
Fen Frehner(6)................................ 25,000 * 13,000 12,000 *
George Bristol................................ 13,500 * -- 13,500 *
David Razin(7)................................ 12,000 * 10,000 2,000 *
Greg Flynn(8)................................. 10,030 * -- 10,030 *
William Bowers................................ 10,000 * -- 10,000 *
Donn Neufeld(9)............................... 8,000 * -- 8,000 *
Michael Yerrid(10)............................ 7,500 * 5,000 2,500 *
Robert Beck(11)............................... 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)(12)...................... 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) As reflected in Schedule 13D dated January 30, 1996. Duncan-Hurst's address
is 4365 Executive Drive, Suite 1520, San Diego, CA 92121. Duncan-Hurst has
sole voting power of 171,650 of the 299,400 shares it beneficially owns.
(6) Mr. Frehner is currently the Company's Manager of Software Research and
Development and is the son of Graeme Frehner.
(7) Includes 10,000 shares of Common Stock subject to stock options which are
currently exercisable or may become exercisable within 60 days after
February 12, 1996. Mr. Razin is currently the Company's Director of Product
Development and is the son of Janet and Sheldon Razin.
(8) Includes 8,000 shares of Common Stock subject to stock options which are
currently exercisable or may become exercisable within 60 days after
February 12, 1996.
(9) Includes 8,000 shares of Common Stock subject to stock options which are
currently exercisable or may become exercisable within 60 days after
February 12, 1996.
(10) Includes 7,500 shares of Common Stock subject to stock options which are
currently exercisable or may become exercisable within 60 days after
February 12, 1996. Mr. Yerrid is currently the Company's Client Services
Manager.
(11) Includes 2,500 shares of Common Stock subject to stock options which are
currently exercisable or may become exercisable within 60 days after
February 12, 1996.
(12) Includes shares of Common Stock subject to stock options which are
currently exercisable or may become exercisable within 60 days after
February 12, 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.

38
<PAGE> 39

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 February 12, 1996, there were 4,638,491 shares of Common Stock outstanding
and held of record by 198 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 147,125 stock options
outstanding as of February 12, 1996 will be exercised before the offering and
excluding any shares issuable upon the consummation of the Clinitec Agreement in
Principle. 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.

39
<PAGE> 40

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 the Representatives (as
defined under "Underwriting") 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.

40
<PAGE> 41

UNDERWRITING

Pursuant to the Underwriting Agreement, and subject to the terms and conditions
thereof, the Underwriters named below acting through Bear, Stearns & Co. Inc.,
Pacific Growth Equities, Inc. and Cruttenden Roth Incorporated, representatives
of the several Underwriters (the "Representatives"), have agreed, severally, to
purchase from the Company and the Selling Shareholders the respective number of
shares of Common Stock set forth below opposite their respective names:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
------------------------------------------------------------------ ---------
<S> <C>
Bear, Stearns & Co. Inc........................................... 422,000
Pacific Growth Equities, Inc...................................... 422,000
Cruttenden Roth Incorporated...................................... 211,000
Alex. Brown & Sons Incorporated................................... 25,000
Donaldson, Lufkin & Jenrette Securities Corporation............... 25,000
Hambrecht & Quist LLC............................................. 25,000
Lehman Brothers Inc............................................... 25,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................ 25,000
Montgomery Securities............................................. 25,000
Morgan Stanley & Co. Incorporated................................. 25,000
Oppenheimer & Co., Inc............................................ 25,000
Robertson, Stephens & Company..................................... 25,000
Smith Barney Inc.................................................. 25,000
Brean Murray, Foster Securities Inc............................... 15,000
Cowen & Company................................................... 15,000
Dain Bosworth Incorporated........................................ 15,000
Furman Selz LLC................................................... 15,000
M.H. Meyerson & Co., Inc.......................................... 15,000
Needham & Company, Inc............................................ 15,000
Punk, Ziegel & Knoell............................................. 15,000
The Robinson-Humphrey Company, Inc................................ 15,000
Sands Brothers & Co., Ltd......................................... 15,000
Scott & Stringfellow, Inc......................................... 15,000
Vector Securities International, Inc.............................. 15,000
Wedbush Morgan Securities Inc..................................... 15,000
Wessels, Arnold & Henderson, L.L.C................................ 15,000
---------
Total................................................... 1,500,000
=========
</TABLE>

In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions therein set forth, to purchase all shares of Common Stock
offered hereby if any of such shares are purchased.

The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $.73 per share. The Underwriters
may allow and such dealers may reallow a concession not in excess of $.10 per
share to certain other dealers. After the public offering, the public offering
price and such concessions may be changed. The Representatives have informed the
Company that the Underwriters do not intend to confirm sales to accounts over
which they exercise discretionary authority.

The offering of the shares of Common Stock is made for delivery when, as and if
accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any order for the purchase of the shares.

41
<PAGE> 42

Certain Selling Shareholders have granted to the Underwriters an option,
exercisable not later than 30 days from the date of the effectiveness of the
offering, to purchase up to an aggregate of 225,000 additional shares of Common
Stock to cover over-allotments. To the extent the Underwriters exercise the
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage thereof which the number of shares of Common
Stock to be purchased by it shown in the table above bears to the total number
of shares in such table and the Selling Shareholders will be obligated, pursuant
to the option, to sell such shares to the Underwriters. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of the 1,500,000 shares of Common Stock offered hereby. If purchased, these
additional shares will be sold by the Underwriters on the same terms as those on
which the 1,500,000 shares are being offered.

The officers and directors of the Company, and the Selling Shareholders have
agreed not to offer, sell, transfer, assign or otherwise dispose of any of the
Common Stock owned by them prior to the expiration of 90 days from the date of
this Prospectus without the prior written consent of the Representatives. After
such 90 day period, such persons will be entitled to sell, distribute or
otherwise dispose of the Common Stock that they hold subject to the provisions
of applicable securities laws.

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.

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

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 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, 1994 and 1995 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
financial statement schedule of the Company included elsewhere in the
Registration Statement have been audited by

42
<PAGE> 43

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.

The balance sheet of Clinitec International, Inc. as of December 31, 1995 and
the statements of operations, shareholders' equity and cash flows for the year
then ended, included in this Prospectus and the Registration Statement, have
been included herein in reliance on the report of Coopers & Lybrand, L.L.P.,
independent accountants, given on the authority of that firm 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.

43
<PAGE> 44

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRO FORMA FINANCIAL INFORMATION:
Pro Forma Consolidated Balance Sheet as of December 31, 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 nine months ended December 31,
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-8
Balance Sheets as of March 31, 1994 and 1995......................................... F-9
Statements of Operations for each of the three years in the period ended March 31,
1995............................................................................... F-10
Statements of Shareholders' Equity for each of the three years in the period ended
March 31, 1995..................................................................... F-11
Statements of Cash Flows for each of the three years in the period ended March 31,
1995............................................................................... F-12
Notes to Financial Statements for each of the three years in the period ended March
31, 1995........................................................................... F-13
INTERIM FINANCIAL STATEMENTS OF QUALITY SYSTEMS, INC.:
Balance Sheet as of December 31, 1995 (unaudited).................................... F-20
Statements of Operations for the nine months ended December 31, 1994 and 1995
(unaudited)........................................................................ F-21
Statements of Cash Flows for the nine months ended December 31, 1994 and 1995
(unaudited)........................................................................ F-22
Notes to Financial Statements for the nine months ended December 31, 1994 and 1995
(unaudited)........................................................................ F-23
AUDITED FINANCIAL STATEMENTS OF CLINITEC INTERNATIONAL, INC.:
Independent Auditors' Reports........................................................ F-24
Balance Sheets as of December 31, 1994 and 1995...................................... F-26
Statements of Operations for the period from January 31, 1994 (inception) to
December 31, 1994 and the year ended December 31, 1995............................. F-27
Statements of Shareholders' Equity for the period from January 31, 1994 (inception)
to
December 31, 1994 and the year ended December 31, 1995............................. F-28
Statements of Cash Flows for the period from January 31, 1994 (inception) to
December 31, 1994 and the year ended December 31, 1995............................. F-29
Notes to Financial Statements for the period from January 31, 1994 (inception) to
December 31, 1994 and the year ended December 31, 1995............................. F-30
</TABLE>

F-1
<PAGE> 45

QUALITY SYSTEMS, INC.

PRO FORMA CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 (UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, SEPTEMBER 30,
1995 1995 51% OF CLINITEC 100% OF CLINITEC
------------ -------------- ------------------------- -------------------------
QSI CLINITEC COMBINED PRO FORMA PRO FORMA PRO FORMA PRO FORMA
------------ -------------- -------- ADJUSTMENTS --------- ADJUSTMENTS ---------
----------- -----------
(NOTE 2) (NOTE 3)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..... $ 6,397 $ 344 $ 6,741 $(1,500)(a) $ 5,241 $(4,896)(g) $ 1,845
Short-term investments........ 1,265 1,265 1,265 1,265
Accounts receivable, net...... 4,365 311 4,676 4,676 4,676
Inventories................... 725 30 755 755 755
Other current assets.......... 155 26 181 181 181
------- ------ ------- ------- ------- ------- -------
Total current
assets.............. 12,907 711 13,618 (1,500) 12,118 (4,896) 8,722
Equipment and improvements,
net......................... 467 154 621 621 621
Capitalized software costs,
net......................... 580 216 796 (216)(e) 580 (216)(k) 580
Investment in Clinitec
International, Inc.......... 985 985 3,000 (a) -- 11,790 (g) --
41 (b) 41 (h)
(2,865)(c) (12,039)(i)
(1,161)(e) (777)(k)
Cash surrender value of life
insurance................... 316 316 316 316
Other assets.................. 131 12 143 595 (c) 738 1,167 (i) 1,310
Goodwill...................... 3,089 (i) 3,089
------- ------ ------- ------- ------- ------- -------
Total assets.......... $15,386 $1,093 $16,479 $(2,106) $14,373 $(1,841) $14,638
======= ====== ======= ======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............. $ 943 $ 25 $ 968 $ -- $ 968 $ -- $ 968
Accrued payroll and related
expenses.................... 493 21 514 514 514
Other accrued expenses........ 475 14 489 489 489
Deferred service revenue...... 1,030 1,030 1,030 1,030
Deferred compensation......... 316 316 316 316
Estimated costs to complete
system installations........ 337 40 377 377 377
Income taxes payable.......... 11 11 11 11
------- ------ ------- ------- ------- ------- -------
Total current
liabilities......... 3,605 100 3,705 3,705 3,705
DEFERRED TAX LIABILITY........ 100 100 9 (b) 347 9 (h) 576
238 (c) 467 (i)
------- ------ ------- ------- ------- ------- -------
Total liabilities..... 3,705 100 3,805 247 4,052 476 4,281
MINORITY INTEREST............. 1,116 (e) 1,116
SHAREHOLDERS' EQUITY:
Preferred stock............... 985 985 3,000 (a) -- (985)(k)
(3,985)(e)
Common stock.................. 46 857 903 (857)(e) 46 4 (g) 50
(857)(k)
Additional paid-in capital.... 6,764 6,764 6,764 6,890 (g) 13,654
Unrealized loss on
available-for-sale
securities.................. (46) (46) (46) (46)
Retained earnings (deficit)... 4,917 (849) 4,068 (1,500)(a) 2,441 32 (h) (3,301)
32 (b) (8,250)(i)
(2,508)(c) 849 (k)
2,349 (e)
------- ------ ------- ------- ------- ------- -------
Total shareholders'
equity.............. 11,681 993 12,674 (3,469) 9,205 (2,317) 10,357
------- ------ ------- ------- ------- ------- -------
Total liabilities and
shareholders'
equity.............. $15,386 $1,093 $16,479 $(2,106) $14,373 $(1,841) $14,638
======= ====== ======= ======= ======= ======= =======
</TABLE>

F-2
<PAGE> 46

QUALITY SYSTEMS, INC.

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

<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
MARCH 31, DECEMBER 31,
1995 1994 51% OF CLINITEC 100% OF CLINITEC
---------- -------------- ------------------------- -------------------------
QSI CLINITEC COMBINED PRO FORMA PRO FORMA PRO FORMA PRO FORMA
---------- -------------- -------- ADJUSTMENTS --------- ADJUSTMENTS ---------
----------- -----------
(NOTE 2) (NOTE 3)
<S> <C> <C> <C> <C> <C> <C> <C>
NET REVENUES:
Sales of computer systems,
upgrades and supplies.... $ 5,681 $ 54 $ 5,735 $ $ 5,735 $ $ 5,735
Maintenance and other
services................. 6,368 6,368 6,368 6,368
------- ----- ------- ------- ------- ------- -------
12,049 54 12,103 12,103 12,103
COST OF PRODUCTS AND
SERVICES................. 6,060 20 6,080 6,080 6,080
------- ----- ------- ------- ------- ------- -------
Gross profit............... 5,989 34 6,023 6,023 6,023
------- ----- ------- ------- ------- ------- -------
OPERATING EXPENSES:
Selling, general and
administrative........... 3,536 364 3,900 3,900 309(j) 4,209
Research and development... 1,467 59 1,526 198(d) 1,724(f) 389(j) 1,915(l)
------- ----- ------- ------- ------- ------- -------
5,003 423 5,426 198 5,624 698 6,124
------- ----- ------- ------- ------- ------- -------
Earnings (loss) from
operations............... 986 (389) 597 (198) 399 (698) (101)
Interest and investment
income................... 429 429 429 429
Minority interest in loss
of Clinitec.............. 191(e) 191
------- ----- ------- ------- ------- ------- -------
Earnings before income tax
provision (benefit)...... 1,415 (389) 1,026 (7) 1,019 (698) 328
Income tax provision
(benefit)................ 453 453 (79)(d) 374(f) (156)(j) 297(l)
------- ----- ------- ------- ------- ------- -------
Net earnings (loss)........ $ 962 $(389) $ 573 $ 72 $ 645(f) $ (542) $ 31(l)
======= ===== ======= ======= ======= ======= =======
Net earnings per share..... $ 0.21 $ 0.14 $ 0.01
======= ======= =======
Weighted average shares
used in calculation...... 4,606 4,741 5,136
======= ======= =======
</TABLE>

F-3
<PAGE> 47

QUALITY SYSTEMS, INC.

PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1995 51% OF CLINITEC 100% OF CLINITEC
------------- -------------- ------------------------- -------------------------
QSI CLINITEC COMBINED PRO FORMA PRO FORMA PRO FORMA PRO FORMA
------------- -------------- -------- ADJUSTMENTS --------- ADJUSTMENTS ---------
----------- -----------
(NOTE 2) (NOTE 3)
<S> <C> <C> <C> <C> <C> <C> <C>
NET REVENUES:
Sales of computer
systems, upgrades and
supplies............... $ 7,162 $1,066 $ 8,228 $ $ 8,228 $ $ 8,228
Maintenance and other
services............... 5,159 5,159 5,159 5,159
------- ------ ------- ------- ------- ------- -------
12,321 1,066 13,387 13,387 13,387
COST OF PRODUCTS AND
SERVICES............... 5,865 379 6,244 6,244 6,244
------- ------ ------- ------- ------- ------- -------
Gross profit............. 6,456 687 7,143 7,143 7,143
OPERATING EXPENSES:
Selling, general and
administrative......... 2,847 1,012 3,859 3,859 232 (j) 4,091
Research and
development............ 1,121 20 1,141 149 (d) 1,290(f) 292 (j) 1,433(l)
------- ------ ------- ------- ------- ------- -------
3,968 1,032 5,000 149 5,149 524 5,524
------- ------ ------- ------- ------- ------- -------
Earnings (loss) from
operations............. 2,488 (345) 2,143 (149) 1,994 (524) 1,619
Interest and investment
income................. 340 9 349 349 349
Equity in loss of
Clinitec............... (41) (41 ) 41 (b) 41 (h)
Minority interest in loss
of Clinitec............ 165 (e) 165
------- ------ ------- ------- ------- ------- -------
Earnings (loss) before
income tax provision... 2,787 (336) 2,451 57 2,508 (483) 1,968
Income tax provision..... 1,117 1,117 (59)(d) 1,058(f) (117)(j) 1,000(l)
------- ------ ------- ------- ------- ------- -------
Net earnings (loss)...... $ 1,670 $ (336) $ 1,334 $ 116 $ 1,450(f) $ (366) $ 968(l)
======= ====== ======= ======= ======= ======= =======
Net earnings per share... $ 0.35 $ 0.30 $ 0.18
======= ======= =======
Weighted average shares
used in calculation.... 4,709 4,844 5,239
======= ======= =======
</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
sheets give effect on a purchase accounting basis to the acquisition of an
additional interest (the Acquisition) in Clinitec International, Inc.
(Clinitec). The "51% of Clinitec" pro forma information reflects the Company's
exercise of its option to purchase an additional 26% equity interest in Clinitec
for $3 million (resulting in a 51% majority ownership in Clinitec by the
Company). The "100% of Clinitec" pro forma information reflects the Company's
purchase of 100% of the outstanding common shares of Clinitec for $4.9 million
in cash and $6.9 million in the Company's common shares (valuing each QSI share
at the public offering price contemplated hereby), pursuant to an agreement in
principle entered into with Clinitec. The pro forma consolidated statements of
operations for the fiscal year ended March 31, 1995 are 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 statements of operations for the nine months ended December 31,
1995 are comprised of the results of QSI for the nine months ended December 31,
1995 and the results of Clinitec for the nine months ended September 30, 1995.
The pro forma consolidated balance sheets as of December 31, 1995 have been
prepared by consolidating the balance sheet of QSI as of December 31, 1995 with
the balance sheet of Clinitec as of September 30, 1995.

The pro forma consolidated statements of operations for the fiscal year
ended March 31, 1995 and the nine months ended December 31, 1995 assume that the
Acquisition occurred at April 1, 1994. The pro forma consolidated balance sheet
as of December 31, 1995 assume that the Acquisition occurred on December 31,
1995. The pro forma consolidated statements of operations and balance sheets 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 -- 51% OF CLINITEC

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 shareholders of $1.5 million.

b) To reverse QSI's portion of Clinitec's net loss and the related tax
asset (initially recorded using the equity accounting method) due to the
pro forma change to the consolidation method.

F-5
<PAGE> 49

QUALITY SYSTEMS, INC.

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED)

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>
Clinitec's net tangible assets..................................... $ 777
QSI's additional cash investment................................... 3,000
Dividend paid to Clinitec's shareholders........................... (1,500)
-------
Adjusted net tangible assets....................................... 2,277
Less 49% minority interest......................................... (1,116)
-------
Net tangible assets applicable to 51% interest..................... 1,161
QSI's investment, including $1 million for original 25%
investment....................................................... 4,026
-------
Excess of purchase price over tangible net assets.................. $ 2,865
=======
Allocated to:
In-process research and development of $4,180, net of $1,672 tax
liability..................................................... $ 2,508
Intangible assets relating to existing technology of $595, net of
$238 tax liability............................................ 357
-------
$ 2,865
=======
</TABLE>

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

e) To eliminate Clinitec's equity accounts and QSI's investment account and
set up 49% minority interest and minority interest in loss of Clinitec.

f) In accordance with FASB Interpretation No. 4, the Company is required to
write-off the amount allocated to in-process research and development
acquired in the acquisition of $4.2 million, net of tax benefit of $1.7
million. This write-off will be reflected in the period in which the
Acquisition is consummated and has not been reflected in the Pro Forma
Consolidated Statement of Operations, but is reflected in the Pro Forma
Consolidated Balance Sheet.

3. PRO FORMA ADJUSTMENTS -- 100% OF CLINITEC

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

g) To reflect the acquisition of 100% of the outstanding common shares of
Clinitec for $4.9 million in cash and $6.9 million in QSI's common
shares.

h) To reverse QSI's portion of Clinitec's net loss and the related tax
asset (initially recorded using the equity accounting method) due to the
pro forma change to the consolidation method.

F-6
<PAGE> 50

QUALITY SYSTEMS, INC.

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED)

i) To record purchase accounting adjustments resulting from the acquisition
of the aggregate 100% ownership interest based on an appraisal of the
fair value of the net assets of Clinitec as follows:

<TABLE>
<S> <C>
Clinitec's net tangible assets..................................... $ 777
QSI's investment, including $1 million for original 25%
investment....................................................... 12,816
-------
Excess of purchase price over tangible net assets.................. $12,039
=======
Allocated to:
In-process research and development of $13,750 net of $5,500 tax
liability..................................................... $ 8,250
Intangible assets relating to existing technology of $1,167, net
of $467 tax liability......................................... 700
Goodwill......................................................... 3,089
-------
$12,039
=======
</TABLE>

j) To record amortization of the intangible assets and the corresponding
tax benefit related to existing technology and goodwill, based on the
straight line method over a three and ten year useful life,
respectively.

k) To eliminate Clinitec's equity accounts and QSI's investment account.

l) In accordance with FASB Interpretation No. 4, the Company is required to
write-off the $13.8 million in-process research and development acquired
in the acquisition, net of tax benefit of $5.5 million. This write-off
will be reflected in the period in which the Acquisition is consummated
and has not been reflected in the Pro Forma Consolidated Statement of
Operations, but is reflected in the Pro Forma Consolidated Balance
Sheet.

4. PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING

Pro forma weighted average shares for the 51% of Clinitec Acquisition
assume as outstanding 135,000 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.

Pro forma weighted average shares for the 100% of Clinitec Acquisition
assume as outstanding 220,000 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 $4.9 million cash portion of the purchase of Clinitec and 310,000
new shares to be issued by the Company to fund the $6.9 million portion of the
purchase price to be paid in QSI's common stock, valuing each QSI share at the
offering price of $22.25 per share.

F-7
<PAGE> 51

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, California
June 2, 1995, except for Note 8, the
date of which is February 13, 1996

F-8
<PAGE> 52

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 $63 (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-9
<PAGE> 53

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 profit.................................................. 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-10
<PAGE> 54

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-11
<PAGE> 55

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 $910, respectively.

See notes to financial statements.

F-12
<PAGE> 56

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-13
<PAGE> 57

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-14
<PAGE> 58

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-15
<PAGE> 59

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-16
<PAGE> 60

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-17
<PAGE> 61

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-18
<PAGE> 62

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 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.

On February 13, 1996, the Company entered into a non-binding letter of
intent to exercise its option to acquire 51% of Clinitec and to enter into a
merger between a newly-formed subsidiary of the Company and Clinitec for an
aggregate consideration payable to all Clinitec shareholders other than QSI of
$11,790,000, of which $4,896,000 will be paid in cash and $6,894,000 will be
paid in the Company's common shares, valued at the price of the Company's
secondary public offering, expected to be completed in March 1996.

F-19
<PAGE> 63

QUALITY SYSTEMS, INC.

BALANCE SHEET
AS OF DECEMBER 31, 1995 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................................... $ 6,397
Short-term investments............................................................. 1,265
Accounts receivable, net........................................................... 4,365
Inventories........................................................................ 725
Other current assets............................................................... 155
-------
Total current assets..................................................... 12,907
Equipment and improvements, net.................................................... 467
Capitalized software costs, net.................................................... 580
Investment in Clinitec International, Inc.......................................... 985
Cash surrender value of life insurance............................................. 316
Other assets....................................................................... 131
-------
Total assets............................................................. $15,386
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................... $ 943
Accrued payroll and related expenses............................................... 493
Other accrued expenses............................................................. 475
Deferred service revenue........................................................... 1,030
Deferred compensation.............................................................. 316
Estimated costs to complete system installations................................... 337
Income taxes payable............................................................... 11
-------
Total current liabilities................................................ 3,605
DEFERRED TAX LIABILITY............................................................. 100
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 20,000,000 shares authorized; 4,638,491 shares issued
and outstanding.................................................................. 46
Additional paid-in capital......................................................... 6,764
Unrealized loss on available-for-sale securities, net of tax benefit of $35........ (46)
Retained earnings.................................................................. 4,917
-------
Total shareholders' equity............................................... 11,681
-------
Total liabilities and shareholders' equity............................... $15,386
=======
</TABLE>

See notes to financial statements.

F-20
<PAGE> 64

QUALITY SYSTEMS, INC.

STATEMENTS OF OPERATIONS

FOR THE NINE MONTHS ENDED DECEMBER 31, 1994 AND 1995 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
------------------
1994 1995
------ -------
<S> <C> <C>
NET REVENUES:
Sales of computer systems, upgrades and supplies (Note 3)................. $3,895 $ 7,162
Maintenance and other services............................................ 4,727 5,159
------ ------
8,622 12,321
COST OF PRODUCTS AND SERVICES............................................. 4,498 5,865
------ ------
Gross profit.............................................................. 4,124 6,456
OPERATING EXPENSES:
Selling, general and administrative....................................... 2,581 2,847
Research and development.................................................. 1,110 1,121
------ ------
3,691 3,968
------ ------
EARNINGS FROM OPERATIONS.................................................. 433 2,488
Interest and investment income............................................ 249 340
Equity in loss of Clinitec International, Inc............................. (41)
------ ------
EARNINGS BEFORE INCOME TAX PROVISION...................................... 682 2,787
Income tax provision...................................................... 158 1,117
------ ------
NET EARNINGS.............................................................. $ 524 $ 1,670
====== ======
NET EARNINGS PER SHARE.................................................... $ 0.11 $ 0.35
====== ======
Weighted average common and common equivalent shares...................... 4,641 4,709
====== ======
</TABLE>

See notes to financial statements.

F-21
<PAGE> 65

QUALITY SYSTEMS, INC.

STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1994 AND 1995 (UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................................. $ 524 $ 1,670
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization of equipment and improvements............ 166 161
Amortization of capitalized software costs............................. 145 203
Realized gains from sales of short-term investments.................... (28) 9
Unrealized (gains) losses on trading securities........................ (92) (55)
Equity in loss of Clinitec International, Inc. ........................ 41
Gain on sale of fixed assets........................................... (8)
Deferred income taxes.................................................. (91) 173
Changes in:
Accounts receivable................................................. (60) (1,368)
Inventories......................................................... 4 58
Other current assets................................................ 2 12
Accounts payable.................................................... (196) 346
Accrued expenses.................................................... 30 48
Deferred service revenue............................................ 72 79
Estimated costs to complete system installations.................... (145) 120
Income taxes payable and taxes related to equity accounts........... 249 33
------- -------
Net cash provided by operating activities................................ 580 1,522
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of short-term investments............................ 10,344 1,092
Purchases of short-term investments...................................... (8,501) (1,010)
Investment in Clinitec International, Inc. .............................. (1,026)
Additions to equipment and improvements, net............................. (71) (101)
Proceeds from sale of fixed assets....................................... -- 16
Additions to capitalized software costs.................................. (136) (281)
Increase in deferred offering costs...................................... -- (68)
Change in other assets................................................... 31 9
------- -------
Net cash provided by (used in) investing activities...................... 1,667 (1,369)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options.................................. 44 159
------- -------
Net increase in cash and cash equivalents................................ 2,291 312
Cash and cash equivalents, beginning of period........................... 1,093 6,085
------- -------
Cash and cash equivalents, end of period................................. $ 3,384 $ 6,397
======= =======
</TABLE>

Supplemental Information: During the nine months ended December 31, 1994 and
1995, the Company made income tax payments of $10 and $911, respectively.

F-22
<PAGE> 66

QUALITY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1994 AND 1995 (UNAUDITED)

1. BASIS OF PRESENTATION

The information set forth in these financial statements of Quality Systems,
Inc. (the Company) as of December 31, 1995 and for the nine months ended
December 31, 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 nine months ended December 31, 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. RELATED PARTY

The Company sold a computer system for $334,600 to Heart Institute of
Nevada during the quarter ended December 31, 1995. John Bowers, M.D., the
Founder and Chief Executive Officer of Heart Institute of Nevada, is a member of
Quality Systems, Inc. Board of Directors. The Company's gross profit on the sale
is comparable to the gross profit on sales of similar computer systems.

4. 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-23
<PAGE> 67

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, California
December 17, 1995

F-24
<PAGE> 68

REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors and Stockholders
Clinitec International, Inc.:

We have audited the accompanying balance sheet of Clinitec International,
Inc. as of December 31, 1995, and the related statements of operations,
shareholders' equity and cash flows for the year then ended. 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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Clinitec International, Inc.
as of December 31, 1995 and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.

COOPERS & LYBRAND L.L.P

2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 13, 1996

F-25
<PAGE> 69

CLINITEC INTERNATIONAL, INC.

BALANCE SHEETS

(IN THOUSANDS)

A S S E T S

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
----- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................ $ 112 $ 718
Receivables, net of allowance of $5 in 1995
Trade................................................................. 338
Affiliates............................................................ 34 33
Inventories.............................................................. 22 144
Prepaid expenses and other current assets................................ 12 73
----- ------
Total current assets............................................. 180 1,306
Equipment and furniture, net............................................... 81 173
Capitalized software costs, net............................................ 68 202
Deferred tax asset, net.................................................... -- 128
Other assets............................................................... 13 10
----- ------
Total assets..................................................... $ 342 $1,819
===== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Customer deposits........................................................ $ -- $ 616
Accounts payable and accrued expenses.................................... 36 50
Accrued payroll.......................................................... 15 65
Deferred revenue......................................................... 35
Deferred tax liability................................................... 29
----- ------
Total current liabilities........................................ 51 795
----- ------
Deferred tax liability..................................................... -- 59
----- ------
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, no par value; 1,000,000 shares authorized;
359,382 shares issued and outstanding as of December 31, 1995......... 985
Common stock, no par value; 3,000,000 shares authorized;
970,000 shares and 1,078,250 shares issued and outstanding as of
December 31, 1994 and 1995, respectively.............................. 680 941
Accumulated deficit...................................................... (389) (961)
----- ------
Total shareholders' equity....................................... 291 965
----- ------
Total liabilities and shareholders' equity....................... $ 342 $1,819
===== ======
</TABLE>

See notes to financial statements.

F-26
<PAGE> 70

CLINITEC INTERNATIONAL, INC.

STATEMENTS OF OPERATIONS

(IN THOUSANDS)

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 31, 1994
(INCEPTION) TO YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
REVENUES................................................... $ 54 $ 1,493
Cost of sales-hardware..................................... 20 449
----- ------
Gross profit............................................... 34 1,044
----- ------
OPERATING EXPENSES:
Payroll and related expenses............................... 861
Selling, general and administrative........................ 364 538
Research and development................................... 59 150
----- ------
423 1,549
----- ------
LOSS FROM OPERATIONS....................................... (389) (505)
Interest income............................................ -- 17
----- ------
LOSS BEFORE INCOME TAX BENEFIT............................. (389) (488)
Income tax benefit......................................... 40
----- ------
NET LOSS................................................... $(389) $ (448)
===== ======
</TABLE>

See notes to financial statements.

F-27
<PAGE> 71

CLINITEC INTERNATIONAL, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE PERIOD FROM JANUARY 31, 1994 (INCEPTION) TO DECEMBER 31, 1994
AND THE YEAR ENDED DECEMBER 31, 1995

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK TOTAL
------------------- ------------------- ACCUMULATED SHAREHOLDERS'
SHARE AMOUNT SHARE AMOUNT DEFICIT EQUITY
--------- ------ --------- ------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1994
(inception)................. -- $ -- -- $ -- $ -- $ --
Issuance of common stock.... 970,000 680 -- -- 680
Net loss.................... (389) (389)
--------- ---- ------- ---- ----- -----
Balance, January 1, 1995...... 970,000 680 -- (389) 291
Issuance of common stock.... 10,000 5 -- -- 5
Exercise of stock options... 55,100 130 -- -- 130
Issuance of common stock for
services................. 43,150 126 -- -- 126
Issuance of preferred stock,
net...................... -- -- 359,382 985 985
Distribution upon
termination of
S-Corporation election... -- -- (124) (124)
Net loss.................... -- -- (448) (448)
--------- ---- ------- ---- ----- -----
Balance, December 31, 1995.... 1,078,250 $941 359,392 $985 $(961) $ 965
========= ==== ======= ==== ===== =====
</TABLE>

See notes to financial statements.

F-28
<PAGE> 72

CLINITEC INTERNATIONAL, INC.

STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 31,
1994
(INCEPTION) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
--------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................ $(389) $ (448)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................ 9 28
Amortization of capitalized software costs................... 9 57
Common stock issued for services............................. 126
Deferred tax benefit......................................... (40)
Changes in:
Receivables................................................ (34) (337)
Inventories................................................ (22) (122)
Prepaid expenses and other current assets.................. (12) (61)
Accounts payable and accrued expenses...................... 51 64
Customer deposits.......................................... 616
Deferred revenue........................................... 35
Other...................................................... 3
----- -----
Net cash used in operating activities................... (388) (79)
----- -----
Cash flows from investing activities:
Additions to equipment and furniture............................ (90) (120)
Additions to capitalized software costs......................... (77) (191)
Change in other assets.......................................... (13)
----- -----
Net cash used in investing activities................... (180) (311)
----- -----
Cash flows from financing activities:
Proceeds from issuance of common stock.......................... 680 5
Proceeds from exercise of stock options......................... 130
Proceeds from issuance of preferred stock, net.................. 985
Distributions................................................... (124)
----- -----
Net cash provided by financing activities............... 680 996
Net increase in cash and cash equivalents......................... 112 606
Cash and cash equivalent, beginning of period..................... -- 112
----- -----
Cash and cash equivalents, end of period.......................... $ 112 $ 718
===== =====
</TABLE>

See notes to financial statements.

F-29
<PAGE> 73

CLINITEC INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Nature of Operations:

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

The systems are marketed throughout the United States to single and
multiple medical users including sole practitioners and large medical
organizations. Sales are effectuated through direct sales and selected reseller
and partnering channels and include software, hardware and maintenance
contracts.

Use of Estimates in the Preparation of Financial Statements:

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

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.

Concentration of Credit Risk:

Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of cash and cash equivalents.
The Company has its cash and cash equivalents placed with two financial
institutions.

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 and
consist primarily of finished goods.

F-30
<PAGE> 74

CLINITEC INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Equipment and Furniture:

Equipment and furniture 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-ine method. Useful lives range from five to
seven years.

Upon retirement or other disposition, the cost of the asset and the related
accumulated depreciation are removed from the accounts and any gain or loss is
included in income.

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. Development costs are
capitalized and amortized over the economic life (generally three years) of the
related product. 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 an "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.

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

Stock Splits:

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 issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
(Statement No. 123). Statement No. 123 requires the Company to value all
stock-based compensation based on the estimated fair market value at the grant
date and spread the deemed cost over the vesting period. Statement No. 123
permits a choice of whether to charge operations or disclose the calculated cost
as pro forma information. This standard requires disclosure, beginning in 1996,
of the deemed cost effective with 1995 grants. The Company has not yet
quantified its cost or determined its method of adoption under Statement No.
123.

F-31
<PAGE> 75

CLINITEC INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

2. ACCOUNTS RECEIVABLE:

The Company entered into a software license agreement, for a user license
of its software over a seven year period, for $250,000. The Company received
$100,000 at signing and the remaining $150,000 is to be received in thirty-six
equal monthly payments, plus interest (defined as "reasonable" in the
agreement,) over three years.

Major Customers:

In fiscal year 1995, revenues of approximately $287,000 (19%) were
generated from a customer. In addition, at December 31, 1995, accounts
receivable, net, included approximately $81,000 from this customer.

3. EQUIPMENT AND FURNITURE:

Equipment and improvements consisted of the following at December 31, 1994
and 1995 (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1995
---- ----
<S> <C> <C>
Computers and electronic test equipment....................... $48 $136
Purchased computer software................................... 17 27
Furniture and fixtures........................................ 25 46
--- ----
90 209
Accumulated depreciation and amortization..................... (9) (36)
--- ----
$81 $173
=== ====
</TABLE>

4. SOFTWARE DEVELOPMENT:

Capitalized software development costs consist of the following at December
31, 1994 and 1995
(in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1995
---- ----
<S> <C> <C>
Software development.......................................... $77 $268
Less accumulated amortization................................. (9) (66)
--- ----
$68 $202
=== ====
</TABLE>

Amortization expense included in the statement of operations amounted to
$9,000 and $57,000 for the period January 31, 1994 (inception) to December 31,
1994 and the year ended December 31, 1995, respectively.

5. EMPLOYEE BENEFIT PLAN:

The Company had 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.

F-32
<PAGE> 76

CLINITEC INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

6. COMMITMENTS AND CONTINGENCIES:

Leases:

The Company leases its principal facility and other sales offices under
noncancelable operating lease agreements which expires May 1997. The Company has
rental commitments in 1996 and 1997 of $57,000 and $18,000, respectively.

Total rental expense for the period from January 31, 1994 (inception) to
December 31, 1994 and for the year ended December 31, 1995 was approximately
$10,000 and $44,000, respectively.

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 $329,000,
$276,000, $144,000, and $116,000 in fiscal 1996, 1997, 1998, and 1999,
respectively. Certain agreements have provisions for the payment of cash or
stock bonuses based on specified performance criteria. Under one of the
agreements, an employee is entitled to receive common shares in the amount of
8,150 annually for the years ending December 31, 1996, 1997 and 1998 if certain
sales levels are attained.

7. INCOME TAXES:

The significant components of deferred tax assets and liabilities at
December 31, 1995 are as follows
(in thousands):

<TABLE>
<CAPTION>
ASSETS LIABILITIES
------ -----------
<S> <C> <C>
Deferred tax:
Federal tax loss carryforward................................... $128
State tax loss carryforward..................................... 41
Depreciation.................................................... $ 6
Capitalized software............................................ 82
---- ---
169 88
Less valuation allowance........................................ 41
---- ---
$128 $88
==== ===
</TABLE>

A valuation allowance was established against the Company's state deferred
tax asset due to the short carryforward period associated with the net operating
loss carryforward.

At December 31, 1995, the Company had a net operating loss carryforward of
approximately $412,000 for federal tax purposes which expires in 2010, if not
utilized. The net operating loss carryforward for state tax purposes is $412,000
and expires in 1997. These carryforwards may be applied as a reduction to future
taxable income of the Company, if any.

8. RELATED PARTY TRANSACTIONS:

During 1994 and 1995, approximately $52,000 and $104,000, respectively, of
sales were to customers who are affiliated through ownership interests.

F-33
<PAGE> 77

CLINITEC INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

9. STOCKHOLDERS' EQUITY:

Common Stock:

During 1995, the Company issued 43,150 shares of common stock in
consideration for approximately $126,000 of employment services.

Stock Options:

Stock options were offered to certain initial customers to promote the
Company's software and to establish strategic development partner relationships.
Each of the stock options were tied to a fixed option price at the date of
exercise.

<TABLE>
<CAPTION>
OPTION PRICE
SHARES PER SHARE
------- -------------
<S> <C> <C>
Balance as of January 31, 1994 (inception).................. 74,500 $1.55 - $3.68
Granted...................................................
Exercised.................................................
Expired...................................................
Balance as of January 1, 1995............................... 74,500 $1.55 - $3.68
Granted................................................... -- --
Exercised................................................. (55,100) $1.80 - $3.68
Expired................................................... (19,400) --
Balance as of December 31, 1995............................. -- --
</TABLE>

Dividends:

Upon termination of the Company's S election, dividends of approximately
$124,000 were distributed to the shareholders.

Preferred Stock:

In May 1995, the Company entered into an agreement with Quality Systems,
Inc. ("QSI") for QSI to market the Company's product. As part of this agreement,
QSI acquired 338,300 shares of convertible preferred stock, representing a 25%
equity interest, for $1 million and an option to acquire an additional 26%
equity interest for $3 million, exercisable at a conversion price of $2.96 per
share at any time through August 1997. The preferred stock is convertible to
common stock on a 1:1 basis, which may be adjusted based on certain provisions
limiting dilution. There were 21,082 shares issued pursuant to these
antidilutive provisions. The holders of preferred stock are entitled to the
number of votes equal to the shares of common stock into which the preferred
stock is convertible at the record date. Dividends on the convertible preferred
stock are noncumulative and holders have a liquidation preference over all other
stockholders of $2.06 per share.

Under the provisions of the agreement, the Company must use the net
proceeds received upon exercise of the option for working capital purposes,
except that the Company may distribute up to $1.5 million of such proceeds to
the Company's existing stockholders, excluding QSI.

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
resulted in a charge of $57,000 relating to deferred tax liabilities existing as
of the date of change. Such charge is included as a component of the income tax
benefit for 1995.

F-34
<PAGE> 78

CLINITEC INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

10. SUBSEQUENT EVENTS:

On February 13, 1996, the Company entered into a non-binding letter of
intent with QSI whereby QSI will exercise its option to acquire 51% of the
Company and enter into a merger between a newly-formed subsidiary of QSI and the
Company for an aggregate consideration payable to all Clinitec shareholders
other than QSI of $11,790,000, of which $4,896,000 will be paid in cash and
$6,894,000 will be paid in QSI's common shares, valued at the price of the QSI's
secondary public offering, expected to be completed in March 1996.

F-35
<PAGE> 79

[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 [PHOTO]
care provider to
retrieve and update
patient records
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> 80

- ---------------------------------------------------------
- ---------------------------------------------------------
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
Certain Transactions.................... 37
Principal and Selling Shareholders...... 38
Description of Capital Stock............ 39
Shares Eligible for Future Sale......... 39
Underwriting............................ 41
Legal Opinions.......................... 42
Experts................................. 42
Additional Information.................. 43
Index to Financial Statements........... F-1
</TABLE>

UNTIL MARCH 30, 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
LOGO
LOGO
COMMON STOCK
--------------------

PROSPECTUS
--------------------
BEAR, STEARNS & CO. INC.

PACIFIC GROWTH EQUITIES, INC.

CRUTTENDEN ROTH
INCORPORATED
MARCH 5, 1996
- ---------------------------------------------------------
- ---------------------------------------------------------