10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

(Mark One)
x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended March 31, 2006
	or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the transition period from_____________ to_____________

Commission file number: 0-13801

Quality Systems, Inc.

(Exact name of Registrant as specified in its charter)

California	95-2888568
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

18191 Von Karman Avenue, Irvine, California 92603

(Address of principal executive offices, including zip code)

(949) 255-2600

(Registrant’s telephone number, including area code)

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

None	None
(Title of each class)	(Name of each exchange on which registered)

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

Common Stock, par value $.01 per Share

(Title of class)

          Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  o            No  x

          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Exchange Act.

Yes  o            No  x

          Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o Accelerated filer  x Non-accelerated filer  o

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o            No  x

          Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  x No  o

          The aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 30, 2005: $564,833,000 (based on the closing sales price of the Registrant’s Common Stock as reported in the NASDAQ National Market System on that date, $33.71 per share).* (1)

          Indicate the number of shares outstanding of each of the Registrant’s classes of Common Stock, as of the latest practicable date.

Common Stock, $.01 par value	26,711,117
(Class)	(Outstanding at June 8, 2006)

          * For purposes of this Report, in addition to those shareholders which fall within the definition of “affiliates” under Rule 405 of the Securities Act of 1933, as amended, holders of ten percent or more of the Registrant’s Common Stock are deemed to be affiliates for purposes of this Report.

          (1)   On January 26, 2006, the Company declared a 2-for-1 stock split with respect to its outstanding shares of common stock for shareholders of record on March 3, 2006. On January 27, 2005, the Company declared a 2-for-1 stock split with respect to its outstanding shares of common stock for shareholders of record on March 4, 2005. All share prices and share amounts set forth herein have been retroactively adjusted to reflect such stock splits.

Documents incorporated by Reference: None.

CAUTIONARY STATEMENT

Statements made in this report, the Annual Report to Shareholders in which this report is made a part, other reports and proxy statements filed with the Securities and Exchange Commission, communications to shareholders, press releases and oral statements made by our representatives that are not historical in nature, or that state our or management’s intentions, hopes, beliefs, expectations or predictions of the future, may constitute “forward-looking statements” within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements can often be identified by the use of forward-looking terminology, such as “could,” “should,” “will,” “will be,” “will lead,” “will assist,” “intended,” “continue,” “believe,” “may,” “expect,” “hope,” “anticipate,” “goal,” “forecast,” “plan,” or “estimate” or variations thereof or similar expressions. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. It is important to note that any such performance and actual results, financial condition or business, could differ materially from those expressed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below as well as those discussed elsewhere in reports filed with the Securities and Exchange Commission. Other unforeseen factors not identified herein could also have such an effect. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial condition or business over time.

PART I

ITEM 1. BUSINESS

General

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

Company Overview

Quality Systems Inc., comprised of the QSI Division (QSI Division) and a wholly owned subsidiary, NextGen Healthcare Information Systems, Inc. (NextGen Division) (collectively, the Company, we, our, or us) develops and markets healthcare information systems that automate certain aspects of medical and dental practices, networks of practices such as physician hospital organizations (PHO’s) and management service organizations (MSO’s), ambulatory care centers, community health centers, and medical and dental schools.

The Company, a California corporation formed in 1974, was founded with an early focus on providing information systems to dental group practices. In the mid-1980’s, we capitalized on the increasing focus on medical cost containment and further expanded our information processing systems to serve the medical market. In the mid- 1990’s we made two acquisitions that accelerated our penetration of the medical market. These two acquisitions formed the basis for the NextGen Division. Today, we serve the medical and dental markets through our two divisions.

The two Divisions operate largely as stand-alone operations, with each Division maintaining its own distinct product lines, product platforms, development, implementation and support teams, sales staffing, and branding. The two

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Divisions share the resources of our “corporate office” which includes a variety of accounting and other administrative functions. Additionally, there are a small number of clients who are simultaneously utilizing software from each of our two Divisions.

The QSI Division, co-located with our Corporate Headquarters in Irvine, California, currently focuses on developing, marketing and supporting software suites sold to dental and certain niche medical practices. In addition, the Division supports a number of medical clients that utilize the Division’s UNIX¹ based medical practice management software product.

The NextGen Division, with headquarters in Horsham, Pennsylvania, and a second significant location in Atlanta, Georgia, focuses principally on developing and marketing products and services for medical practices.

Both Divisions develop and market practice management software which is designed to automate and streamline a number of the administrative functions required for operating a medical or dental practice. Examples of practice management software functions include scheduling and billing capabilities. It is important to note that in both the medical and dental environments, practice management software systems have already been implemented by the vast majority of practices. Therefore, we actively compete for the replacement market.

In addition, both Divisions develop and market software that automates the patient record. Adoption of this software, commonly referred to as clinical software, is in its relatively early stages. Therefore, we are typically competing to replace paper-based patient record alternatives as opposed to replacing previously purchased systems.

Electronic Data Interchange (EDI)/connectivity products are intended to automate a number of manual, often paper-based or telephony intensive communications between patients and/or providers and/or payors. Two of the more common EDI services are forwarding insurance claims electronically from providers to payors and assisting practices with issuing statements to patients. Most client practices utilize at least some of these services from us or one of our competitors. Other EDI/connectivity services are used more sporadically by client practices. We typically compete to displace incumbent vendors for claims and statements accounts, and attempt to increase usage of other elements in our EDI/connectivity product line. In general, EDI services are only sold to those accounts utilizing software from one of our Divisions.

The QSI Division’s practice management software suite utilizes a UNIX operating system. Its Clinical Product Suite (CPS) utilizes a Windows NT² operating system and can be fully integrated with the practice management software from each Division. CPS incorporates a wide range of clinical tools including, but not limited to, periodontal charting and digital imaging of X-ray and inter-oral camera images as part of the electronic patient record. The Division develops, markets, and manages our EDI/connectivity applications. The QSInet Application Service Provider (ASP/Internet) offering is also developed and marketed by the Division.

Our NextGen Division develops and sells proprietary electronic medical records software and practice management systems under the NextGen^®3 product name. Major product categories of the NextGen suite include Electronic Medical Records (NextGen^emr), Enterprise Practice Management (NextGen^epm), Enterprise Appointment Scheduling (NextGen^eas), Enterprise Master Patient Index (NextGen^epi), NextGen Image Control System (NextGen^ics), Managed Care Server (NextGen^mcs), Electronic Data Interchange, System Interfaces, Internet Operability (NextGen^web), a Patient-centric and Provider-centric Web Portal solution (NextMD⁴.com), NextGen Express, a version of NextGen^emr designed for small practices and NextGen Community Health Solution (NextGen^chs). NextGen products utilize Microsoft Windows technology and can operate in a client-server environment as well as via private intranet, the Internet, or in an ASP environment.

We continue to pursue product enhancement initiatives within each Division. The majority of such expenditures are currently targeted to the NextGen Division product line and client base.

¹ UNIX is a registered trademark of the AT&T Corporation.

² Microsoft Windows, Windows NT, Windows 95, Windows 98, Windows XP, and Windows 2000 are registered trademarks of the Microsoft Corporation.

³ NextGen is a registered trademark of NextGen Healthcare Information Systems, Inc.

⁴ NextMD is a registered trademark of NextGen Healthcare Information Systems, Inc.

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Inclusive of divisional EDI revenue, the NextGen Division accounted for approximately 87.0% of our revenue for fiscal 2006 compared to 82.7% in fiscal 2005. Inclusive of divisional EDI revenue, the QSI Division accounted for 13.0% and 17.3% of revenue in fiscal 2006 and 2005, respectively. The NextGen Division’s revenue grew at 41.0% and 35.2% in fiscal 2006 and 2005, respectively, while the QSI Division’s revenue increased by 1.2% and decreased by 6.8% in fiscal 2006 and 2005, respectively.

In addition to the aforementioned software solutions which we offer through our two divisions, each division offers comprehensive hardware and software installation services, maintenance and support services, and system training services.

Industry Background

To compete in the continually changing healthcare environment, providers are increasingly using technology to help maximize the efficiency of their business practices, to assist in enhancing patient care, and to maintain the privacy of patient information.

As the reimbursement environment continues to evolve, more healthcare providers enter into contracts, often with multiple entities, which define the terms under which care is administered and paid for. The diversity of payor organizations, as well as additional government regulation and changes in reimbursement models, have greatly increased the complexity of pricing, billing, reimbursement, and records management for medical and dental practices. To operate effectively, healthcare provider organizations must efficiently manage patient care and other information and workflow processes which increasingly extend across multiple locations and business entities.

In response, healthcare provider organizations have placed increasing demands on their information systems. Initially, these information systems automated financial and administrative functions. As it became necessary to manage patient flow processes, the need arose to integrate “back-office” data with such clinical information as patient test results and office visits. The Company believes information systems must facilitate management of patient information incorporating administrative, financial and clinical information from multiple entities. In addition, large healthcare organizations increasingly require information systems that can deliver high performance in environments with multiple concurrent computer users.

Many existing healthcare information systems 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. We believe that practices that leverage technology to more efficiently handle patient clinical data as well as administrative, financial and other practice management data, will be best able to enhance patient flow, pursue cost efficiencies, and improve quality of care. As healthcare organizations transition to new computer platforms and newer technologies, we believe such organizations will be migrating toward the implementation of enterprise-wide, patient-centric computing systems embedded with automated clinical patient records.

Company Strategy

The Company’s strategy is, at present, to focus on its core software business. Among the key elements central to this strategy are:

• Continued development and enhancement of select software solutions in target markets;

• Continued investments in our infrastructure including but not limited to product development, sales, marketing, implementation, and support;

• Continued efforts to make infrastructure investments within an overall context of maintaining reasonable expense discipline; and

• Addition of new customers through maintaining and expanding sales, marketing and product development activities.

While these are the key elements of our current strategy, there can be no guarantees that our strategy will not change, or that we will succeed in achieving these goals individually or collectively.

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Products

In response to the growing need for more comprehensive, cost-effective healthcare information solutions for physician and dental practices, our systems provide our clients with the ability to redesign patient care and other workflow processes while improving productivity through facilitation of managed access to patient information. Utilizing our proprietary software in combination with third party hardware and software solutions, our products enable the integration of a variety of administrative and clinical information operations. Leveraging more than 30 years of experience in the healthcare information services industry, we believe that we continue to add value by providing our clients with sophisticated, full-featured software systems along with comprehensive systems implementation, maintenance and support services. Any single transaction may or may not include software, hardware or services.

          Practice Management Systems. Our products consist primarily of proprietary healthcare software applications together with third party hardware and other non-industry specific software. The systems range in capacity from one to thousands of users, allowing us to address the needs of both small and large organizations. The systems are modular in design and may be expanded to accommodate changing client requirements.

The QSI Division’s character-based practice management system is available in both dental and medical versions and primarily uses the IBM RS6000⁵ central processing unit and IBM’S AIX⁶ version of the UNIX operating system as a platform for our application software enabling a wide range of flexible and functional systems. The hardware components, as well as the requisite operating system licenses, are purchased from manufacturers or distributors of those components. We configure and test the hardware components and incorporate our software and other third party packages into completed systems tailored to accommodate particular client requirements. We continually evaluate third party hardware components with a view toward utilizing hardware that is functional, reliable and cost-effective.

NextGen^epm is the NextGen division’s practice management offering. NextGen^epm has been developed using a graphical user interface (GUI) client-server platform for compatibility with Windows 2000, Windows NT and Windows XP operating systems and relational databases that are ANSI SQL-compliant. NextGen^epm is scalable and includes a master patient index, enterprise-wide appointment scheduling with referral tracking, clinical support, and centralized or decentralized patient financial management based on either a managed care or fee-for-service model. The system’s multi-tiered architecture allows work to be performed on the database server, the application server and the client workstation.

We also offer practice management solutions for both dental and medical practices through the Internet. These products are marketed under the QSINet and NextGen^web trade names, respectively.

           Clinical Systems. Our dental charting software system, the Clinical Product Suite (CPS), is a comprehensive solution designed specifically for the dental group practice environment. CPS integrates the dental practice management product with a computer-based clinical information system that incorporates a wide range of clinical tools, including:

• Electronic charting of dental procedures, treatment plans and existing conditions;

• Periodontal charting via light-pen, voice-activation, or keyboard entry for full periodontal examinations and PSR scoring;

• Digital imaging of X-ray and intra-oral camera images;

• Computer-based patient education modules, viewable chair-side to enhance case presentation;

• Full access to patient information, treatment plans, and insurance plans via a fully integrated interface with our dental practice management product; and

• Document and image scanning for digital storage and linkage to the electronic patient record.

The result is a comprehensive clinical information management system that helps practices save time, reduce costs, improve case presentation, and enhance the delivery of dental services and quality of care. Clinical information is

⁵ RS6000 is a registered trademark of International Business Machines Corporation.

⁶ AIX is a registered trademark of International Business Machines Corporation.

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managed and maintained electronically thus forming an electronic patient record that allows for the implementation of the “chartless” office.

CPS incorporates Windows-based client-server technology consisting of one or more file servers together with any combination of one or more desktop, laptop, or pen-based PC workstations. The file server(s) used in connection with CPS utilize(s) a Windows NT or Windows 2000 or Windows XP operating system and the hardware is typically a Pentium⁷-based single or multi-processor platform. Based on the server configuration chosen, CPS is scalable from one to hundreds of workstations. A typical configuration may also include redundant disk storage, magnetic tape units, intra- and extra-oral cameras, digital X-ray components, digital scanners, conventional and flat screen displays, and printers. The hardware components, including the requisite operating system licenses, are purchased from third party manufacturers or distributors either directly by the customer or by us for resale to the customer.

NextGen provides clinical software applications that are complementary to, and are integrated with, our medical practice management offerings and interface with many of the other leading practice management software systems on the market. The applications incorporated into our practice management solutions and others such as scheduling, eligibility, billing and claims processing are augmented by clinical information captured by NextGen^emr, including services rendered and diagnoses used for billing purposes. We believe that we currently provide a comprehensive information management solution for the medical marketplace.

NextGen^emr was developed with client-server architecture and a GUI and utilizes Microsoft Windows 2000, Windows NT or Windows XP on each workstation and either Windows 2000, Windows NT, Windows XP or UNIX on the database server. NextGen^emr maintains data using industry standard relational database engines such as Microsoft SQL Server⁸ or Oracle⁹. The system is scalable from one to hundreds of workstations.

NextGenemr stores and maintains clinical data including:
•	Data captured using user-customized input “templates”;
•	Scanned or electronically acquired images, including X-rays and photographs;
•	Data electronically acquired through interfaces with clinical instruments or external systems;
•	Other records, documents or notes, including electronically captured handwriting and annotations; and
•	Digital voice recordings.

NextGen^emr also offers a workflow module, prescription management, automatic document and letter generation, patient education, referral tracking, interfaces to billing and lab systems, physician alerts and reminders, and powerful reporting and data analysis tools. NextGen Express, is a version of NextGen^emr designed for small practices.

In May 2006, the NextGen Division announced the launch of a new community network technology product named NextGen® Community Health Solution (NextGen CHS). The NextGen CHS facilitates cross-enterprise data sharing, enabling individual medical practices in a given community to selectively share critical data such as demographics, referrals, medications lists, allergies, diagnoses, lab results, histories and more. This is accomplished through a secure, community-wide data repository that links health care providers, whether they have the NextGen® Electronic Medical Record (NextGen® EMR) system, another compatible EMR system, or no EMR, together with hospitals, payors, labs and other entities. The product is designed to facilitate a Regional Health Information Organization, or “RHIO.” The result is that for every health care encounter in the community, a patient-centric and complete record is accessible for the provider. The availability, currency and completeness of information plus the elimination of duplicate data entry can lead to significantly improved patient safety, enhanced decision making capabilities, time efficiencies and cost savings.

In fiscal year 2006, we introduced a new service named Practice Solutions. This service provides billing services to single and group practice practitioners.

⁷ Pentium is a registered trademark of Intel Corporation.

⁸ Microsoft and SQL Server is a registered trademark of Microsoft Corporation.

⁹ Oracle is a registered trademark of Oracle Corporation.

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           Connectivity Services. The Company makes available electronic data interchange (“EDI”) capabilities and connectivity services to our customers. The EDI/connectivity capabilities encompass direct interfaces between our products and external third party systems, as well as transaction-based services. Services include:

• Electronic claims submission through our relationships with a number of payors and national claims clearinghouses;

• Electronic patient statement processing, appointment reminder cards and calls, recall cards, patient letters, and other correspondence;

• Electronic insurance eligibility verification; and

• Electronic posting of remittances from insurance carriers into the accounts receivable application.

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

Our QSI Division also provides a web-based application called QSINet which allows clients to access information from their practice management system via the Internet. This application also enables providers to offer their patients convenient services such as on-line appointment scheduling and electronic bill payment through the client’s website, and posts this data directly to the client’s existing practice management system.

Sales and Marketing

We sell and market our products nationwide primarily through a direct sales force. The efforts of the direct sales force are augmented by a small number of reseller relationships established by us. Software license sales to resellers represented less than 10% of total revenue for the years ended March 31, 2006 and 2005.

Our direct sales force typically makes presentations to potential clients by demonstrating the system and our capabilities on the prospective client’s premises. Sales efforts aimed at smaller practices are primarily performed remotely via telephone or internet based presentations. Our sales and marketing employees identify prospective clients through a variety of means, including referrals from existing clients, industry consultants, contacts at professional society meetings, trade shows and seminars, trade journal advertising, direct mail advertising, and telemarketing.

Our sales cycle can vary significantly and typically ranges from six to twenty four months from initial contact to contract execution. Software licenses are normally delivered to a customer almost immediately upon receipt of an order. Implementation and training services are normally rendered based on a mutually agreed upon timetable. As part of the fees paid by our clients, we receive up-front licensing fees. Clients have the option to purchase maintenance services which, if purchased, are invoiced on a monthly or quarterly basis.

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

We continue to concentrate our direct sales and marketing efforts on medical and dental practices, networks of such practices including MSO’s and PHO’s, professional schools, community health centers and other ambulatory care settings.

MSO’s, PHO’s and similar networks to which we have sold systems provide use of our software to those group and single physician practices associated with the organization or hospital on either a service basis or by directing us to contract with those practices for the sale of stand-alone systems.

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We have also entered into marketing assistance agreements with certain of our clients pursuant to which the clients allow us to demonstrate to potential clients the use of systems on the existing clients’ premises.

From time to time we assist prospective clients in identifying third party sources for financing the purchase of our systems. The financing is typically obtained by the client directly from institutional lenders and typically takes the form of a loan from the institution secured by the system to be purchased or a leasing arrangement. We do not guarantee the financing nor retain any continuing interest in the transaction.

We have numerous clients and do not believe that the loss of any single client would have a material adverse effect on us. No client accounted for ten percent or more of net revenue during the fiscal years ended March 31, 2006, 2005, or 2004.

Customer Service and Support

We believe our success is attributable in part to our customer service and support departments. We offer support to our clients seven days a week, 24 hours a day.

Our client support staff is comprised of specialists who are knowledgeable in the areas of software and hardware as well as in the day-to-day operations of a practice. System support activities range from correcting minor procedural problems in the client’s system to performing complex database reconstructions or software updates.

We utilize automated online support systems which assist clients in resolving minor problems and facilitate automated electronic retrieval of problems and symptoms following a client’s call to the automated support system. Additionally, our online support systems maintain call records, available at both the client’s facility and our offices.

We offer our clients support services for most system components, including hardware and software, for a fixed monthly or quarterly fee. Customers also receive access to future unspecified versions of the software, on a when-and-if available basis, as part of support services. We also subcontract, in certain instances, with third party vendors to perform specific hardware maintenance tasks.

Implementation and Training

We offer full service implementation and training services. When a client signs a contract for the purchase of a system that includes implementation and training services, a client manager/implementation specialist trained in medical and/or dental group practice procedures is assigned to assist the client in the installation of the system and the training of appropriate practice staff. Implementation services include loading the software, training customer personnel, data conversion, running test data, and assisting in the development and documentation of procedures. Implementation and training services are provided by our employees as well as certified third parties and certain resellers.

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

During fiscal year 2006, we introduced NextGen E-learning, an on-line learning subscription service which allows end users to train on the software on the internet. E-learning allows end users to self manage their own learning with their personal learning path. The service allows users to track the status of courses taken.

Also in fiscal year 2006, we opened a NextGen training facility adjacent to our corporate offices in Irvine, California and initiated expansion of training facilities in Horsham, Pennsylvania and Atlanta, Georgia.

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Competition

The markets for healthcare information systems are intensely competitive. The industry is highly fragmented and includes numerous competitors, none of which we believe dominates these markets. The electronic patient records and connectivity markets, in particular, are subject to rapid changes in technology, and we expect that competition in these market segments will increase as new competitors enter the market. We believe our principal competitive advantages are the features and capabilities of our products and services, our high level of customer support, and our extensive experience in the industry.

Production Enhancement and Development

The healthcare information management and computer software and hardware industries are characterized by rapid technological change requiring us to engage in continuing investments to update, enhance, and improve our systems. During fiscal years 2006, 2005, and 2004, we expended approximately $11.4 million, $9.6 million, and $8.7 million, respectively, on research and development activities, including capitalized software amounts of $3.3 million, $2.7 million, and $2.6 million, respectively. In addition, a portion of our product enhancements have resulted from software development work performed under contracts with our clients.

Employees

As of June 1, 2006, we employed 538 persons, of which 529 were full-time employees. We believe that our future success depends in part upon recruiting and retaining qualified sales, marketing and technical personnel as well as other employees.

ITEM 1A. RISK FACTORS

The more prominent risks and uncertainties inherent in our business are described below. However, additional risks and uncertainties may also impair our business operations. If any of the following risks actually occur, our business, financial condition or results of operations will likely suffer. Any of these or other factors could harm our business and future results of operations and may cause you to lose all or part of your investment.

We face significant, evolving competition. The markets for healthcare information systems are intensely competitive and we face significant competition from a number of different sources. Several of our competitors have significantly greater name recognition as well as substantially greater financial, technical, product development and marketing resources than we do. There has been significant merger and acquisition activity among a number of our competitors in recent months. Transaction induced pressures, or other related factors may result in price erosion or other negative market dynamics that could have a material adverse effect on our business, results of operations, financial condition and price of our stock.

We compete in all of our markets with other major healthcare related companies, information management companies, systems integrators, and other software developers. Competitive pressures and other factors, such as new product introductions by ourselves or our competitors, may result in price or market share erosion that could have a material adverse effect on our business, results of operations and financial condition. Also, there can be no assurance that our applications will achieve broad market acceptance or will successfully compete with other available software products.

Our inability to make initial sales of our systems to newly formed groups and/or healthcare providers that are replacing or substantially modifying their healthcare information systems could have a material adverse effect on our business, results of operations and financial condition. If new systems sales do not materialize, our near term and longer term revenue will be negatively affected.

Our quarterly operating results have historically fluctuated and may do so in the future. Our revenue may fluctuate in the future 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 specific mix of software, hardware, and services in client orders;

• the length of sales cycles and installation processes;

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• the ability of our clients to obtain financing for the purchase of our products;

• changes in pricing policies or price reductions by us or our competitors;

• the timing of new product announcements and product introductions by us or our competitors;

• changes in revenue recognition or other accounting guidelines employed by us and/or established by the Financial Accounting Standards Board or other rule-making bodies;

• the availability and cost of system components;

• the financial stability of clients;

• market acceptance of new products, applications and product enhancements;

• our ability to develop, introduce and market new products, applications and product enhancements;

• our success in expanding our sales and marketing programs;

• deferrals of client orders in anticipation of new products, applications, product enhancements, or public/private sector initiatives;

• execution of or changes to our strategy;

• personnel changes; and

• general market/economic factors.

Our software products are generally shipped as orders are received and accordingly, we have historically operated with a minimal backlog of license fees. As a result, revenue in any quarter is dependent on orders booked and shipped in that quarter and is not predictable with any degree of certainty. Furthermore, our systems can be relatively large and expensive and individual systems sales can represent a significant portion of our revenue and profits for a quarter such that the loss or deferral of even one such sale can have a significant adverse impact on our quarterly revenue and profitability.

Clients often defer systems purchases until our quarter end, so quarterly results generally cannot be predicted and frequently are not known until the quarter has concluded.

Our sales are dependent upon clients’ initial decisions to replace or substantially modify their existing information systems, and subsequently a decision as to which products and services to purchase. These are major decisions for healthcare providers, and accordingly, the sales cycle for our systems can vary significantly and typically ranges from six to twenty four months from initial contact to contract execution/shipment.

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

We currently recognize revenue pursuant to Statement of Position (SOP) 97-2, as modified by SOP 98-9 and Staff Accounting Bulletin (SAB) 104. SAB 104 summarizes the staff’s views in applying generally accepted accounting principles to revenue recognition in financial statements.

There can be no assurance that application and subsequent interpretations of these pronouncements will not further modify our revenue recognition policies, or that such modifications would not have a material adverse effect on the operating results reported in any particular quarter or year.

Due to all of the foregoing factors, it is possible that our operating results may be below the expectations of public market analysts and investors. In such event, the price of our common stock would likely be materially adversely affected.

The price of our shares and the trading volume of our shares have been volatile historically and may continue to be volatile. Volatility may be caused by a number of factors including but not limited to:

• actual or anticipated quarterly variations in operating results;

• rumors about our performance, software solutions, or merger and acquisition activity;

• changes in expectations of future financial performance or changes in estimates of securities analysts;

• governmental regulatory action;

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• health care reform measures;

• client relationship developments;

• purchases or sales of company stock;

• changes occurring in the markets in general; and

• other factors, many of which are beyond our control.

Furthermore, the stock market in general, and the market for software, healthcare and high technology companies in particular, has experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the trading price of our common stock, regardless of actual operating performance.

Two of our directors are significant shareholders, which makes it possible for them to have significant influence over the outcome of all matters submitted to our shareholders for approval and which influence may be alleged to conflict with our interests and the interests of our other shareholders. Two of our directors and principal shareholders beneficially owned an aggregate of approximately 38% of the outstanding shares of our common stock at March 31, 2006. The Company’s Bylaws permit its shareholders to cumulate their votes, the effect of which is to provide shareholders with sufficiently large concentrations of Company shares the opportunity to assure themselves one or more seats on the Company’s Board. The amounts required to assure a Board position can vary based upon the number of shares outstanding, the number of shares voting, the number of directors to be elected, the number of “broker non-votes”, and the number of shares held by the shareholder exercising cumulative voting rights. In the event that cumulative voting is invoked, it is likely that the two of our directors holding an aggregate of approximately 38% of the outstanding shares of our common stock at March 31, 2006 will each have sufficient votes to assure themselves of one or more seats on our Board. With or without cumulative voting, these shareholders will have significant influence over the outcome of all matters submitted to our shareholders for approval, including the election of our directors and other corporate actions. In addition, such influence by one or both of these affiliates could have the effect of discouraging others from attempting to purchase us, take us over, and/or reducing the market price offered for our common stock in such an event.

We face risks related to litigation advanced by a director and shareholder of the Company. In October 2005, a lawsuit was filed against us and six of our eight directors (those elected by the shareholders, but not nominated by Mr. Ahmed Hussein) by one of our directors, Mr. Ahmed Hussein. The complaint alleges that in connection with our 2005 Annual Shareholders’ Meeting, the certified results from the independent inspector of election included certain proxies that should not have been included in the final vote tabulation. The independent inspector of election certified the election of the eight directors presently serving on the Board after hearing Mr. Hussein’s claim concerning this matter. On March 24, 2006 the California Superior Court issued a ruling in favor of the Company, upholding the validity of the previously announced election results and finding that Mr. Hussein was not entitled to equitable relief. Mr. Hussein has filed a notice of appeal with respect to the Court’s decision. As a result of such litigation, the Company’s operating results and share price may be negatively impacted due to the negative publicity, additional expenses incurred, management distraction, and/or other factors. In addition, litigation of this nature may negatively impact our ability to attract and retain qualified board members. It is also possible that Mr. Hussein will launch further proxy contests or legal action in opposition to the Company’s board nominees at one or more future shareholder meetings with potential negative effects similar to those discussed above.

We are dependent on our principal products and our new product development. We currently derive substantially all of our net revenue from sales of our healthcare information systems and related services. We believe that a primary factor in the market acceptance of our systems has been our ability to meet the needs of users of healthcare information systems. Our future financial performance will depend in large part on our ability to continue to meet the increasingly sophisticated needs of our clients through the timely development and successful introduction and implementation of new and enhanced versions of our systems and other complementary products. We have historically expended a significant percentage of our net revenue on product development and believe that significant continuing product development efforts will be required to sustain our growth. Continued investment in our sales staff and our client implementation and support staffs will also be required to support future growth.

There can be no assurance that we will be successful in our product development efforts, that the market will continue to accept our existing products, or that new products or product enhancements will be developed and implemented in a timely manner, meet the requirements of healthcare providers, or achieve market acceptance. If

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new products or product enhancements do not achieve market acceptance, our business, results of operations and financial condition could be materially adversely affected. At certain times in the past, we have also experienced delays in purchases of our products by clients anticipating our launch of new products. There can be no assurance that material order deferrals in anticipation of new product introductions from ourselves or other entities will not occur.

If the emerging technologies and platforms of Microsoft and others upon which we build our products do not gain broad market acceptance, or if we fail to develop and introduce in a timely manner new products and services compatible with such emerging technologies, we may not be able to compete effectively and our ability to generate revenue will suffer. Our software products are built and depend upon several underlying and evolving relational database management system platforms such as those developed by Microsoft. To date, the standards and technologies upon which we have chosen to develop our products have proven to have gained industry acceptance. However, the market for our software products is subject to ongoing rapid technological developments, quickly evolving industry standards and rapid changes in customer requirements, and there may be existing or future technologies and platforms that achieve industry standard status, which are not compatible with our products.

We face the possibility of subscription pricing. We currently derive substantially all of our revenue from traditional software license, maintenance and service fees, as well as the resale of computer hardware. Today, customers pay an initial license fee for the use of our products, in addition to a periodic maintenance fee. If the marketplace increasingly demands subscription pricing, we may be forced to adjust our sales, marketing and pricing strategies accordingly, by offering a higher percentage of our products and services through these means. Shifting to a significantly greater degree of subscription pricing could materially adversely impact our financial condition, cash flows and quarterly and annual revenue and results of operations, as our revenue would initially decrease substantially. There can be no assurance that the marketplace will not increasingly embrace subscription pricing.

The industry in which we operate is subject to significant 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 our existing products obsolete and unmarketable. There can be no assurance that we will be successful in developing and marketing new products that respond to technological changes or evolving industry standards. New product development depends upon significant research and development expenditures which depend ultimately upon sales growth. Any material shortfall in revenue or research funding could impair our ability to respond to technological advances or opportunities in the marketplace and to remain competitive. If we are 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, our business, results of operations and financial condition may be materially adversely affected.

In response to increasing market demand, we are currently developing new generations of certain of our software products. There can be no assurance that we will successfully develop these new software products or that these products will operate successfully, or that any such development, even if successful, will be completed concurrently with or prior to introduction of competing products. Any such failure or delay could adversely affect our competitive position or could make our current products obsolete.

We face the possibility of claims based upon our Web site. We could be subject to third party claims based on the nature and content of information supplied on our Web site by us or third parties, including content providers or users. We could also be subject to liability for content that may be accessible through our Web site or third party Web sites linked from our Web site or through content and information that may be posted by users in chat rooms, bulletin boards or on Web sites created by professionals using our applications. Even if these claims do not result in liability to us, investigating and defending against these claims could be expensive and time consuming and could divert management’s attention away from our operations.

We face the possibility of claims from activities of strategic partners. We rely on third parties to provide services that impact our business. For example, we use national clearinghouses in the processing of some insurance claims and we outsource some of our hardware maintenance services and the printing and delivery of patient statements for our customers. We also have relationships with certain third parties where these third parties serve as sales channels through which we generate a portion of our revenue. Due to these third-party relationships, we could be subject to

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claims as a result of the activities, products, or services of these third-party service providers even though we were not directly involved in the circumstances leading to those claims. Even if these claims do not result in liability to us, defending and investigating these claims could be expensive and time-consuming, divert personnel and other resources from our business and result in adverse publicity that could harm our business.

We may engage in future acquisitions, which may be expensive and time consuming and from which we may not realize anticipated benefits. We may acquire additional businesses, technologies and products if we determine that these additional businesses, technologies and products are likely to serve our strategic goals. We currently have no commitments or agreements with respect to any acquisitions. The specific risks we may encounter in these types of transactions include but are not limited to the following:

• potentially dilutive issuances of our securities, the incurrence of debt and contingent liabilities and amortization expenses related to intangible assets, which could adversely affect our results of operations and financial conditions;

• use of cash as acquisition currency may adversely impact interest or investment income, thereby potentially negatively affecting our earnings and /or earnings per share;

• difficulty in effectively integrating any acquired technologies or software products into our current products and technologies;

• difficulty in predicting and responding to issues related to product transition such as development, distribution and customer support;

• the possible adverse impact of such acquisitions on existing relationships with third party partners and suppliers of technologies and services;

• the possibility that staff or customers of the acquired company might not accept new ownership and may transition to different technologies or attempt to renegotiate contract terms or relationships, including maintenance or support agreements;

• the possibility that the due diligence process in any such acquisition may not completely identify material issues associated with product quality, product architecture, product development, intellectual property issues, key personnel issues or legal and financial contingencies, including any deficiencies in internal controls and procedures and the costs associated with remedying such deficiencies;

• difficulty in integrating acquired operations due to geographical distance, and language and cultural differences; and

• the possibility that acquired assets become impaired, requiring the Company to take a charge to earnings which could be significant.

A failure to successfully integrate acquired businesses or technology for any of these reasons could have a material adverse effect on the Company’s results of operations.

We face the risks and uncertainties that are associated with litigation against us. We face the risks associated with litigation concerning the operation of our business. The uncertainty associated with substantial unresolved litigation may have an adverse impact on our business. In particular, such litigation could impair our relationships with existing customers and our ability to obtain new customers. Defending such litigation may result in a diversion of management’s time and attention away from business operations, which could have a material adverse effect on our business, results of operations and financial condition. Such litigation may also have the effect of discouraging potential acquirers from bidding for us or reducing the consideration such acquirers would otherwise be willing to pay in connection with an acquisition.

There can be no assurance that such litigation will not result in liability in excess of our insurance coverage, that our insurance will cover such claims or that appropriate insurance will continue to be available to us in the future at commercially reasonable rates.

We rely heavily on our proprietary technology. We are heavily dependent on the maintenance and protection of our intellectual property and we rely largely on license agreements, confidentiality procedures, and employee nondisclosure agreements to protect our intellectual property. Our software is not patented and existing copyright laws offer only limited practical protection.

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

We do not believe that our 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 us with respect to our current or future products or that any such assertion will not require us to enter into a license agreement or royalty arrangement or other financial arrangement with the party asserting the claim. Responding to and defending any such claims may distract the attention of Company management and have a material adverse effect on our business, results of operations and financial condition. In addition, claims may be brought against third parties from which we purchase software, and such claims could adversely affect our ability to access third party software for our systems.

We are dependent on our license rights from third parties. We depend upon licenses for some of the technology used in our products from third-party vendors. Most of these licenses can be renewed only by mutual consent and may be terminated if we breach the terms of the license and fail to cure the breach within a specified period of time. We may not be able to continue using the technology made available to us under these licenses on commercially reasonable terms or at all. As a result, we may have to discontinue, delay or reduce product shipments until we can obtain equivalent technology. Most of our third-party licenses are non-exclusive. Our competitors may obtain the right to use any of the technology covered by these licenses and use the technology to compete directly with us. In addition, if our vendors choose to discontinue support of the licensed technology in the future or are unsuccessful in their continued research and development efforts, we may not be able to modify or adapt our own products.

We face the possibility of damages resulting from internal and external security breaches, and viruses. In the course of our business operations, we compile and transmit confidential information, including patient health information, in our processing centers and other facilities. A breach of security in any of these facilities could damage our reputation and result in damages being assessed against us. In addition, the other systems with which we may interface, such as the Internet and related systems may be vulnerable to security breaches, viruses, programming errors, or similar disruptive problems. The effect of these security breaches and related issues could disrupt our ability to perform certain key business functions and could potentially reduce demand for our services. Accordingly, we have expended significant resources toward establishing and enhancing the security of our related infrastructures, although no assurance can be given that they will be entirely free from potential breach. Maintaining and enhancing our infrastructure security may require us to expend significant capital in the future.

The success of our strategy to offer our EDI services and Internet solutions depends on the confidence of our customers in our ability to securely transmit confidential information. Our EDI services and Internet solutions rely on encryption, authentication and other security technology licensed from third parties to achieve secure transmission of confidential information. We may not be able to stop unauthorized attempts to gain access to or disrupt the transmission of communications by our customers. Anyone who is able to circumvent our security measures could misappropriate confidential user information or interrupt our, or our customers’ operations. In addition, our EDI and Internet solutions may be vulnerable to viruses, physical or electronic break-ins, and similar disruptions.

Any failure to provide secure infrastructure and/or electronic communication services could result in a lack of trust by our customers causing them to seek out other vendors, and/or, damage our reputation in the market making it difficult to obtain new customers.

We are subject to the development and maintenance of the Internet infrastructure which is not within our control. We deliver Internet-based services and, accordingly, we are dependent on the maintenance of the Internet by third parties. The Internet infrastructure may be unable to support the demands placed on it and our performance may decrease if the Internet continues to experience it’s historic trend of expanding usage. As a result of damage to portions of its infrastructure, the Internet has experienced a variety of performance problems which may continue into the foreseeable future. Such Internet related problems may diminish Internet usage and availability of the Internet to us for transmittal of our Internet-based services. In addition, difficulties, outages, and delays by Internet

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service providers, online service providers and other web site operators may obstruct or diminish access to our Web site by our customers resulting in a loss of potential or existing users of our services.

Our failure to manage growth could harm us. We have in the past experienced periods of growth which have placed, and may continue to place, a significant strain on our non-cash resources. We also anticipate expanding our overall software development, marketing, sales, client management and training capacity. In the event we are unable to identify, hire, train and retain qualified individuals in such capacities within a reasonable timeframe, such failure could have a material adverse effect on us. In addition, our ability to manage future increases, if any, in the scope of our operations or personnel will depend on significant expansion of our research and development, marketing and sales, management, and administrative and financial capabilities. The failure of our management to effectively manage expansion in our business could have a material adverse effect on our business, results of operations and financial condition.

Our operations are dependent upon our key personnel. If such personnel were to leave unexpectedly, we may not be able to execute our business plan. Our future performance depends in significant part upon the continued service of our key technical and senior management personnel, many of whom have been with us for a significant period of time. These personnel have acquired specialized knowledge and skills with respect to our business. We maintain key man life insurance on only one of our employees. Because we have a relatively small number of employees when compared to other leading companies in our industry, our dependence on maintaining our relationships with key employees is particularly significant. We are also dependent on our ability to attract high quality personnel, particularly in the areas of sales and applications development.

The industry in which we operate is characterized by a high level of employee mobility and aggressive recruiting of skilled personnel. There can be no assurance that our current employees will continue to work for us. Loss of services of key employees could have a material adverse effect on our business, results of operations and financial condition. Furthermore, we may need to grant additional equity incentives to key employees and provide other forms of incentive compensation to attract and retain such key personnel. Failure to provide such types of incentive compensation could jeopardize our recruitment and retention capabilities.

Our products may be subject to product liability legal claims. Certain of our products provide applications that relate to patient clinical information. Any failure by our products to provide accurate and timely information could result in claims against us. In addition, a court or government agency may take the position that our delivery of health information directly, including through licensed practitioners, or delivery of information by a third party site that a consumer accesses through our Web sites, exposes us to assertions of malpractice, other personal injury liability, or other liability for wrongful delivery/handling of healthcare services or erroneous health information. We maintain insurance to protect against claims associated with the use of our products as well as liability limitation language in our end-user license agreements, but there can be no assurance that our insurance coverage or contractual language would adequately cover any claim asserted against us. A successful claim brought against us in excess of or outside of our insurance coverage could have a material adverse effect on our business, results of operations and financial condition. Even unsuccessful claims could result in our expenditure of funds for litigation and management time and resources.

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

• state and federal privacy and confidentiality laws;

• our contracts with customers and partners;

• state laws regulating healthcare professionals;

• Medicaid laws;

• the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and related rules proposed by the Health Care Financing Administration; and

• Health Care Financing Administration standards for Internet transmission of health data.

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The Health Insurance Portability and Accountability Act of 1996 establishes elements including, but not limited to, federal privacy and security standards for the use and protection of Protected Health Information. Any failure by us or by our personnel or partners to comply with applicable requirements may result in a material liability to us.

Although we have systems and policies in place for safeguarding Protected Health Information from unauthorized disclosure, these systems and policies may not preclude claims against us for alleged violations of applicable requirements. Also, third party sites and/or links that consumers may access through our web sites may not maintain adequate systems to safeguard this information, or may circumvent systems and policies we have put in place. In addition, future laws or changes in current laws may necessitate costly adaptations to our policies, procedures, or systems.

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

We are subject to the effect of payor and provider conduct which we cannot control. We offer certain electronic claims submission products and services as part of our product line. While we have implemented certain product features designed to maximize the accuracy and completeness of claims submissions, these features may not be sufficient to prevent inaccurate claims data from being submitted to payors. Should inaccurate claims data be submitted to payors, we may be subject to liability claims.

Electronic data transmission services are offered by certain payors to healthcare providers that establish a direct link between the provider and payor. This process reduces revenue to third party EDI service providers such as us. Accordingly, we are unable to insure that we will continue to generate revenue at or in excess of prior levels for such services. A significant increase in the utilization of direct links between healthcare providers and payers could have a material adverse effect on our transaction volume and financial results. In addition, we cannot provide assurance that we will be able to maintain our exiting links to payors or develop new connections on terms that are economically satisfactory to us, if at all.

There is significant uncertainty in the healthcare industry in which we operate and we are subject to the possibility of changing government regulation. The healthcare industry is subject to changing political, economic and regulatory influences that may affect the procurement processes and operation of healthcare facilities. During the past several years, the healthcare industry has been subject to an increase in governmental regulation of, among other things, reimbursement rates and certain capital expenditures.

In the past, various legislators have announced that they intend to examine proposals to reform certain aspects of the U.S. healthcare system including proposals which may change governmental involvement in healthcare and reimbursement rates, and otherwise alter the operating environment for us and our clients. Healthcare providers may react to these proposals, and the uncertainty surrounding such proposals, by curtailing or deferring investments, including those for our systems and related services. Cost-containment measures instituted by healthcare providers as a result of regulatory reform or otherwise could result in a reduction in the allocation of capital funds. Such a reduction could have an adverse effect on our ability to sell our systems and related services. On the other hand, changes in the regulatory environment have increased and may continue to increase the needs of healthcare organizations for cost-effective data management and thereby enhance the overall market for healthcare management information systems. We cannot predict what impact, if any, such proposals or healthcare reforms might have on our business, financial condition and results of operations.

The HIPAA regulations, as adopted by the Department of Health and Human Services, established, among other things:

• a national standard for electronic transactions and code sets to be used in those transactions involving certain common health care transactions;

• privacy regulations to protect the privacy of plan participants and patients’ medical records; and

• security regulations designed to establish security controls and measures to protect the privacy and confidentiality of personal identifiable health information when it is electronically stored, maintained or transmitted (even if only internally transmitted within a medical practice).

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As these regulations mature and become better defined, we anticipate that these regulations will continue to directly affect certain of our products and services, but we cannot fully predict the impact at this time. We have taken steps to modify our products, services and internal practices as necessary to facilitate our and our client’s compliance with the final regulations, but there can be no assurance that we will be able to do so in a timely or complete manner. Achieving compliance with these regulations could be costly and distract management’s attention and divert other Company resources, and any noncompliance by us could result in civil and criminal penalties.

In addition, development of related federal and state regulations and policies regarding the confidentiality of health information or other matters may or may not supercede HIPAA and have the potential to positively or negatively affect our business.

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

We may be subject to other e-commerce regulations. We may be subject to additional federal and state statutes and regulations in connection with offering services and products via the Internet. On an increasingly frequent basis, federal and state legislators are proposing laws and regulations that apply to Internet commerce and communications. Areas being affected by these regulations include user privacy, pricing, content, taxation, copyright protection, distribution, and quality of products and services. To the extent that our products and services are subject to these laws and regulations, the sale of our products and services could be harmed.

We are subject to changes in and interpretations of financial accounting matters that govern the measurement of our performance. Based on our reading and interpretations of relevant guidance, principles or concepts issued by, among other authorities, the American Institute of Certified Public Accountants, the Financial Accounting Standards Board, and the United States Securities and Exchange Commission, Management believes our current sales and licensing contract terms and business arrangements have been properly reported. However, there continue to be issued interpretations and guidance for applying the relevant standards to a wide range of sales and licensing contract terms and business arrangements that are prevalent in the software industry. Future interpretations or changes by the regulators of existing accounting standards or changes in our business practices could result in future changes in our revenue recognition and/or other accounting policies and practices that could have a material adverse effect on our business, financial condition, cash flows, revenue and results of operations.

Our per share price may be adversely effected if material weaknesses in our internal controls are identified by ourselves or our independent auditors. Any material weaknesses identified in our internal controls as part of the ongoing evaluation being undertaken by us and our independent public accountants pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 could have an adverse effect on the price at which our stock trades.

No evaluation process can provide complete assurance that our internal controls will detect and correct all failures within the Company to disclose material information otherwise required to be reported. The effectiveness of our controls and procedures could also be limited by simple errors or faulty judgments. In addition, if we continue to expand, either organic growth or through acquisitions (or both), the challenges involved in implementing appropriate controls will increase and may require that we evolve some or all of our internal control processes.

It is also possible that the overall scope of Section 404 of the Sarbanes-Oxley Act of 2002 may be revised in the future, thereby causing our auditors and ourselves to review, revise or reevaluate our internal control processes which may result in the expenditure of additional human and financial resources.

Our earnings will be affected beginning fiscal year 2007 when we begin recognizing employee stock option expense, pursuant to recently issued accounting standards. Stock options have from time to time been an important component of the compensation packages for many of our mid- and senior-level employees. We currently do not deduct the expense of employee stock option grants from our income. However, beginning with the quarter

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ending June 30, 2006 and beyond, we will begin recognizing employee stock option expense for remaining unvested stock options and any future stock option grants, resulting in additional pre-tax compensation expense. Option expensing will have a negative impact upon our earnings per share and may have a negative impact on the price of our stock.

Continuing worldwide political and economic uncertainties may adversely impact our revenue and profitability. The last several years have been periodically marked by concerns including but not limited to inflation, decreased consumer confidence, the lingering effects of international conflicts, energy costs and terrorist and military activities. These conditions can make it extremely difficult for our customers, our vendors and ourselves to accurately forecast and plan future business activities, and they could cause constrained spending on our products and services, and/or delay and lengthen sales cycles.

Our future policy concerning the payment of dividends is uncertain. While we paid special cash dividends in March 2005 and 2006, we have not historically paid dividends, cash or otherwise, and there can be no assurance that we will pay another dividend in the future. Unfulfilled expectations to the contrary could have a material negative impact upon the price of our stock.

Our future policy concerning stock splits is uncertain. While we effected a 2:1 split of our stock in March 2005 and a second 2:1 stock split in March 2006, there can be no assurance that another stock split will occur in the future. Unfulfilled expectations to the contrary could have a material negative impact upon the price of our stock.

ITEM 1B.	UNRESOLVED STAFF COMMENTS
	None.
ITEM 2.	PROPERTIES

Our principal administrative, accounting and QSI Division operations are located in Irvine, California, under a lease that commenced in May 2005, and expires in May 2008. We lease approximately 12,000 square feet of space at this location. In September 2005, we executed a lease for approximately 3,300 square feet of space in a building adjacent to our corporate office in Irvine to house additional corporate staff and NextGen training operations. This lease expires in January 2011. We lease approximately 69,000 square feet of space for the principal office of our NextGen Division in Horsham, Pennsylvania. This lease expires in July 2011. In September 2005, we executed a new lease for approximately 24,000 square feet of space for the NextGen Division in Atlanta, Georgia. This lease expires in October 2011. In addition, we lease approximately 6,000 square feet of space in Santa Ana, California, to house our assembly and warehouse operations of the QSI Division. We also have an aggregate of approximately 3,000 square feet of space in Massachusetts, Minnesota, Utah, Wisconsin, and Washington to house additional sales, training, development and service operations. These leases, excluding options, have expiration dates ranging from month-to-month to October 2011. Should we continue to grow, we will be required to lease additional space. We believe that suitable additional or substitute space is available, if needed, at commercially reasonable rates.

ITEM 3. LEGAL PROCEEDINGS

In the normal course of business, we are involved in various claims and legal proceedings. While the ultimate resolution of these matters, has yet to be determined, we do not believe that their outcome will have a material adverse effect on our financial position, results of operations or liquidity.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security holders during the fourth quarter of fiscal year 2006.

Executive Officers of the Company

Our executive officers as of June 1, 2006 were as follows:

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Name	Age	Position
Louis E. Silverman	47	President, Chief Executive Officer
Patrick B. Cline	45	President, NextGen Healthcare Information Systems Division
Greg Flynn	48	Executive Vice President and General Manger of QSI Division
Paul A. Holt	40	Secretary, Chief Financial Officer

Our executive officers are elected by, and serve at the discretion of, the Board of Directors. Additional information regarding our executive officers is set forth below.

Louis E. Silverman was appointed President and Chief Executive Officer of the company on July 31, 2000. Mr. Silverman was previously Chief Operations Officer of CorVel Corp., a publicly traded national managed care services and technology firm with headquarters in Irvine, California. Mr. Silverman holds a Master of Business Administration degree from Harvard Graduate School of Business Administration and a Bachelor of Arts degree from Amherst College.

Patrick B. Cline currently serves as President of our NextGen Healthcare Information Systems Division. He served as our interim Chief Executive Officer for the April - July 2000 period. Mr. Cline was a co-founder of Clinitec and has served as its President since its inception in January 1994 and throughout its transition to NextGen Healthcare Information Systems. Prior to co-founding Clinitec, Mr. Cline served, from July 1987 to January 1994, as Vice President of Sales and Marketing with Script Systems, a subsidiary of InfoMed, a healthcare information systems company. From January 1994 to May 1994, after the founding of Clinitec, Mr. Cline continued to serve, on a part time basis, as Script Systems’ Vice President of Sales and Marketing. Mr. Cline has held senior positions in the healthcare information systems industry since 1981.

Greg Flynn has served as the QSI Division’s General Manager since April 2000 and as Executive Vice President since August 1998 after serving as Vice President of Sales and Marketing from January 1996 to August 1998. Between June 1992 and January 1996, Mr. Flynn served as Vice President Administration. In these capacities, Mr. Flynn has been responsible for numerous functions related to our ongoing management and sales. Previously, Mr. Flynn served as our Vice President, Corporate Communications. Mr. Flynn joined us in January 1982. He holds a B.A. degree in English from the University of California, Santa Barbara.

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

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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

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Quarter Ended	High		Low
June 30, 2004	$	12.875	$	9.875
September 30, 2004		13.875		10.385
December 31, 2004		16.245		12.025
March 31, 2005		24.450		13.950
June 30, 2005		30.750		20.420
September 30, 2005		35.850		23.305
December 31, 2005		44.615		31.045
March 31, 2006	$	45.970	$	31.810

At June 1, 2006, there were approximately 102 holders of record of our Common Stock. We estimate the number of beneficial holders of our Common Stock to be in excess of 11,000.

In January 2006, the Company announced that its Board of Directors had declared a 2-for-1 stock split with respect to our outstanding shares of common stock for shareholders of record on March 3, 2006. The stock began trading post split on March 27, 2006. In January 2005, the Board of Directors declared a 2-for-1 stock split with respect to our outstanding shares of common stock for shareholders of record on March 4, 2005. The stock began trading post split on March 28, 2005. The dividend per share amount has been adjusted to reflect the stock splits. All share prices in the above table have been retroactively adjusted to reflect such stock split.

In March 2006, we paid a dividend on shares of our Common Stock equal to $0.875 per share. The record date for the dividend was February 24, 2006. In March 2005, we paid a dividend on shares of our Common Stock equal to $0.75 per share. The record date for the dividend was February 24, 2005. These dividend per share amounts have been adjusted to reflect the stock splits noted above. Payment of future dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion.

We did not make any unregistered sales of our common stock during the fourth quarter of 2006.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data with respect to our Consolidated Statements of Income data for each of the five years in the period ended March 31 and the Consolidated Balance Sheet data as of the end of each such fiscal year are derived from our audited financial statements. The following information should be read in conjunction with our Consolidated Financial Statements and the related notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein. All share prices in the table below have been retroactively adjusted to reflect the fiscal year 2006 and 2005 stock splits.

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Consolidated Financial Data

(In Thousands, Except Per Share Data)	Year ended March 31,
	2006		2005		2004		2003		2002
Statements of Income Data:
Revenue	$	119,287	$	88,961	$	70,934	$	54,769	$	44,422
Cost of revenue		39,828		32,669		28,673		23,755		19,253
Gross profit		79,459		56,292		42,261		31,014		25,169
Selling, general and administrative expenses		35,554		24,776		19,482		15,293		13,068
Research and development costs		8,087		6,903		6,139		5,062		4,243
Income from operations		35,818		24,613		16,640		10,659		7,858
Interest income		2,108		876		386		434		643
Income before provision for income taxes		37,926		25,489		17,026		11,093		8,501
Provision for income taxes		14,604		9,380		6,626		4,058		3,233
Net income	$	23,322	$	16,109	$	10,400	$	7,035	$	5,268
Basic net income per share	$	0.88	$	0.63	$	0.42	$	0.29	$	0.22
Diluted net income per share	$	0.85	$	0.61	$	0.40	$	0.28	$	0.21
Basic weighted average shares outstanding		26,413		25,744		24,872		24,508		24,100
Diluted weighted average shares outstanding		27,356		26,406		25,932		25,556		24,960
Balance Sheet Data (at end of period):
Cash and cash equivalents	$	57,255	$	51,157	$	51,395	$	36,443	$	25,698
Working capital		61,724		55,111		53,415		38,717		30,799
Total assets		122,247		99,442		86,678		67,602		52,143
Total liabilities		49,838		36,711		25,673		20,069		12,093
Total shareholders’ equity	$	72,409	$	62,731	$	61,005	$	47,533	$	40,050

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

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

The following discussion should be read in conjunction with, and is qualified in our entirety by, the Consolidated Financial Statements and related notes thereto included elsewhere in this Report. 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.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate estimates, including those related to revenue recognition, uncollectible accounts receivable, and intangible assets, for reasonableness. We base our estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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We believe revenue recognition, the allowance for doubtful accounts, capitalized software costs and tax credits are among the most critical accounting policies that impact our consolidated financial statements. We believe that significant accounting policies, as described in Note 2 of our Consolidated Financial Statements, “Summary of Significant Accounting Policies”, should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Revenue Recognition. We currently recognize revenue pursuant to SOP 97-2, as amended by SOP 98-9. We generate revenue from the sale of licensing rights to use our software products sold directly to end-users and value-added resellers (VARs). We also generate revenue from sales of hardware and third party software, and implementation, training, software customization, EDI, post-contract support (“maintenance”) and other services performed for customers who license our products.

A typical system contract contains multiple elements of the above items. SOP 97-2, as amended, requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of those elements. The fair value of an element must be based on vendor specific objective evidence (VSOE). We limit our assessment of VSOE for each element to either the price charged when the same element is sold separately (using a rolling average of stand alone transactions) or the price established by management having the relevant authority to do so, for an element not yet sold separately. VSOE calculations are updated and reviewed at the end of each quarter.

When evidence of fair value exists for the delivered and undelivered elements of a transaction, then discounts for individual elements are aggregated and the total discount is allocated to the individual elements in proportion to the elements’ fair value relative to the total contract fair value.

When evidence of fair value exists for the undelivered elements only, the residual method, provided for under SOP 98-9, is used. Under the residual method, the Company defers revenue related to the undelivered elements in a system sale based on VSOE of fair value of each of the undelivered elements, and allocates the remainder of the contract price net of all discounts to revenue recognized from the delivered elements. Undelivered elements of a system sale may include implementation and training services, hardware and third party software, maintenance, future purchase discounts, or other services. If VSOE of fair value of any undelivered element does not exist, all revenue is deferred until VSOE of fair value of the undelivered element is established or the element has been delivered.

We bill for the entire contract amount upon contract execution. Amounts billed in excess of the amounts contractually due are recorded in accounts receivable as advance billings. Amounts are contractually due when services are performed or in accordance with contractually specified payment dates.

Provided the fees are fixed and determinable and collection is considered probable, revenue from licensing rights and sales of hardware and third party software is generally recognized upon shipment and transfer of title. Revenue from implementation and training services is recognized as the corresponding services are performed. Maintenance revenue is recognized ratably over the contractual maintenance period.

Contract accounting is applied where services include significant software modification, development or customization. In such instances, the arrangement fee is accounted for in accordance with Statement of Position No. 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (SOP 81-1).

Pursuant to SOP 81-1, the Company uses the percentage of completion method provided all of the following conditions exist:

• the contract includes provisions that clearly specify the enforceable rights regarding goods or services to be provided and received by the parties, the consideration to be exchanged, and the manner and terms of settlement;

• the customer can be expected to satisfy its obligations under the contract;

• the Company can be expected to perform its contractual obligations; and

• reliable estimates of progress towards completion can be made.

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We measure completion using labor input hours. Costs of providing services, including services accounted for in accordance with SOP 81-1, are expensed as incurred.

If a situation occurs in which a contract is so short term that the financial statements would not vary materially from using the percentage-of-completion method or in which we are unable to make reliable estimates of progress of completion of the contract, the completed contract method is utilized.

From time to time, we offer future purchase discounts on our products and services as part of our sales arrangements. Pursuant to AICPA TPA 5100.51, discounts which are incremental to the range of discounts reflected in the pricing of the other elements of the arrangement, which are incremental to the range of discounts typically given in comparable transactions, and which are significant, are treated as an additional element of the contract to be deferred. Amounts deferred related to future purchase options are not recognized until either the customer exercises the discount offer or the offer expires.

Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We perform credit evaluations of our customers and maintain reserves for estimated credit losses. Reserves for potential credit losses are determined by establishing both specific and general reserves. Specific reserves are based on management’s estimate of the probability of collection for certain troubled accounts. General reserves are established based on our historical experience of bad debt expense and the aging of our accounts receivable balances net of deferred revenue and specifically reserved accounts. If the financial condition of our customers were to deteriorate resulting in an impairment of their ability to make payments, additional allowances would be required.

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 with the completion of a working model of the enhancement or product, any additional development costs are capitalized in accordance with Statement of Financial Accounting Standards No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed” (SFAS 86). Such capitalized costs are amortized on a straight line basis over the estimated economic life of the related product, which is generally three years. We perform an annual review of the recoverability of such capitalized software costs. At the time a determination is made that capitalized amounts are not recoverable based on the estimated cash flows to be generated from the applicable software, any remaining capitalized amounts are written off.

Research and Development Tax Credits. During the year ended March 31, 2005, the state of California completed an audit of the Company’s tax returns and did not materially change credits related to research and development. Based on the results of that audit as well the expiration of the statute of limitations on certain amended returns, the provision for income taxes for the year ended March 31, 2005 was reduced by the $0.5 million in tax credits which had not been recognized as of March 31 2004.

During the year ended March 31, 2006, the Company recognized approximately $0.8 million in credits related to research and development.

Management’s treatment of research and development tax credits represented a significant estimate which affected the effective income tax rate for the Company in the years ending March 31, 2006 and 2005. Research and development credits taken by the Company involve certain assumptions and judgments regarding qualification of expenses under the relevant tax codes. While the Company has received all of federal refunds claimed, none of the credits have been audited by the Internal Revenue Service.

Qualified Production Activities Deduction

During the year ended March 31, 2006, the Company recognized approximately $0.8 million in deductions related to the qualified production activities deduction (QPAD) under Internal Revenue Code (IRS). The QPAD calculation was determined using interim guidance provided by proposed IRS Regulations and Notices.

Management’s treatment of this deduction represented an estimate that affected the effective income tax rate for the Company in the current year. The deduction taken by the Company involved certain assumptions and judgments regarding the allocation of indirect expenses as prescribed under the Code and Regulations.

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Overview of Company results

• We have experienced significant growth in our total revenue as a result of revenue growth in our NextGen Division. Our total Company revenue grew 34.1% on a consolidated basis during the twelve months ended March 31, 2006 versus 2005 and 25.4% in the twelve months ended March 31, 2005 versus 2004.

• Consolidated income from operations grew 45.5% in the twelve months ended March 31, 2006 versus 2005 and 47.9% in the twelve months ended March 31, 2005 versus 2004. This performance was driven by the results in our NextGen Division.

• We have benefited and hope to continue to benefit from the increased demands on healthcare providers for greater efficiency and lower costs, as well as increased adoption rates of technology in the healthcare arena.

NextGen Division

• Our NextGen Division has experienced significant growth in revenue and operating income. Divisional revenue grew 41.0% in the twelve months ended March 31, 2006 versus 2005 and 35.2% in the twelve months ended March 31, 2005 versus 2004 while divisional operating income (excluding unallocated corporate expenses) grew 55.4% in the twelve months end March 31, 2006 and 64.1% in the twelve months ended March 31, 2005.

• During the twelve months ended March 31, 2006, we added staffing resources to departments including sales, marketing, support, implementation, software development, and administration and intend to continue to do so, as business conditions and the hiring environment allows, in fiscal year 2007.

• During the twelve months ended March 31, 2006, we executed our first significant sale to Siemens Medical Solutions totaling $4.0 million. We recognized $2.5 million related to this sale during the quarter ended March 31, 2006. The remaining balance will be recognized in future periods.

• Our goals include continuing to further enhance our existing products, developing new products for targeted markets, continuing to add new customers, selling additional software and services to existing customers and expanding penetration of connectivity services to new and existing customers.

QSI Division

• Our QSI Division experienced a revenue increase of 1.2% in the twelve months ended March 31, 2006 versus 2005 and a decline of 6.8% in the twelve months ended March 31, 2005 versus 2004. The Division experienced a 13.3% decrease in operating income (excluding unallocated corporate expenses) in the twelve months ended March 31, 2006 and 14.7% decrease in the twelve months ended March 31, 2005.

• Our goals for the QSI Division include maximizing revenue and profit performance given the constraints present in this Division’s target market.

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The following table sets forth for the periods indicated the percentage of net revenue represented by each item in our Consolidated Statements of Operations.

	Year Ended March 31,
	2006			2005			2004
Revenue:
System sales		55.5	%		54.5	%		55.7	%
Maintenance and other services		33.4			36.8			32.6
Electronic Data Interchange services		11.1			8.7			11.7
Total revenue		100.0			100.0			100.0
Cost of revenue:
System sales		13.6			15.5			18.8
Maintenance and other services		12.6			17.2			14.5
Electronic Data Interchange services		7.2			4.0			7.1
Cost of revenue		33.4			36.7			40.4
Gross profit		66.6			63.3			59.6
Selling, general and administrative expenses		29.8			27.9			27.4
Research and development costs		6.8			7.8			8.7
Income from operations		30.0			27.7			23.5
Interest income		1.8			1.0			0.5
Income before provision for income taxes		31.8			28.7			24.0
Provision for income taxes		12.2			10.5			9.3
Net income		19.6	%		18.1	%		14.7	%

Comparison of the Years Ended March 31, 2006 and March 31, 2005

For the year ended March 31, 2006, our net income was $23.3 million or $0.88 per share on a basic and $0.85 per share on a fully diluted basis. In comparison, we earned $16.1 million or $0.63 per share on a basic and $0.61 on a fully diluted basis in the year ended March 31, 2005. The increase in net income for the year ended March 31, 2006, was achieved primarily through the following:

• a 34.1% increase in consolidated revenue;

• a 41.0% increase in NextGen Division revenue which accounted for 87.0% of consolidated revenue; and

• an increase in our consolidated gross profit margin from 63.3% to 66.6%.

Revenue. Revenue for the year ended March 31, 2006 increased 34.1% to $119.3 million from $89.0 million for the year ended March 31, 2005. NextGen Division revenue increased 41.0% from $73.6 million to approximately $103.7 million in the period, while QSI Division revenue increased slightly by 1.2% during the period from $15.4 million to $15.5 million.

We divide revenue into three categories; “System sales”, “Maintenance and other services” and “Electronic data interchange (EDI) services”. Revenue in the system sales category includes software license fees, third party hardware and software, and implementation and training services related to purchase of the Company’s software systems.

System Sales. Company-wide sales of systems for the twelve months ended March 31, 2006 increased 36.5% to $66.2 million from $48.5 million in the prior year.

Our increase in revenue from sales of systems was principally the result of a 37.0% increase in category revenue at our NextGen Division whose sales in this category grew from $46.6 million during the year ended March 31, 2005 to $63.8 million during the year ended March 31, 2006. This increase was driven primarily by higher sales of NextGen^emr and NextGen^epm software to both new and existing clients, as well as an increase in the delivery of related implementation services offset by a decline in the sale of related hardware, third party software and supplies.

Systems sales revenue in the QSI Division increased to approximately $2.4 million in the year ended March 31, 2006 from $1.9 million in the year ended March 31, 2005.

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The following table breaks down our reported system sales into software, hardware, third party software, supplies, and implementation and training services components by division:

(in thousands)	Software		Hardware, Third Party Software and Supplies		Implementation and Training Services		Total System Sales
Twelve months ended March 31, 2006
QSI Division	$	984	$	1,013	$	411	$	2,408
NextGen Division		48,847		4,094		10,882		63,823
Consolidated	$	49,831	$	5,107	$	11,293	$	66,231
Twelve months ended March 31, 2005
QSI Division	$	889	$	743	$	306	$	1,938
NextGen Division		33,230		4,810		8,550		46,590
Consolidated	$	34,119	$	5,553	$	8,856	$	48,528

NextGen Division software revenue increased 47.0% between the twelve months ended March 31, 2005 and the twelve months ended March 31, 2006. The Division’s software revenue accounted for 76.5% of divisional system sales revenue during the twelve months ended March 31, 2006, an increase from 71.3% in the prior year period.

Software revenue from VARs totaled approximately $7.0 million during the year ended March 31, 2006 compared to $2.7 million in the year ago period. The increase in VAR revenue was impacted in part by revenue from sales to Siemens Medical Solutions.

The increase in software’s share of systems sales was not the result of any new trend or change in emphasis on our part relative to software sales. Software license revenue growth continues to be an area of primary emphasis for the NextGen Division and management was pleased with the Division’s performance in this area.

During the twelve months ended March 31, 2006, 6.4% of NextGen’s system sales revenue was represented by hardware and third party software compared to 10.3% in the same prior year period. We have noted that the last several quarters’ and years’ results have generally included a relatively lower amount of hardware and third party software compared to prior year periods. However, this decrease is not the result of any change in emphasis on our part. The number of customers who purchase hardware and third party software and the dollar amount of hardware and third party software revenue fluctuates each year depending on the needs of customers. The inclusion of hardware and third party software in the Division’s sales arrangements is typically at the request of the customer and is not a priority focus for us.

Implementation and training revenue at the NextGen Division increased 27.3% in the twelve months ended March 31, 2006 compared to the twelve months ended March 31, 2005. The growth in implementation and training revenue is the result of increases in the amount of implementation and training services rendered to our customers. Implementation and training revenue at the NextGen Division slightly decreased its share of divisional system sales revenue to 17.0% in the twelve months ended March 31, 2006 from 18.3% in the twelve months ended March 31, 2005. The amount of implementation and training services revenue and the corresponding rate of growth compared to a prior period in any given year is dependent on several factors including timing of customer implementations, the availability of qualified staff, and the mix of services being rendered. The number of implementation and training staff increased during the twelve months ended March 31, 2006 versus March 31, 2005 in order to accommodate the increased amount of implementation services sold in conjunction with increased software sales. In order to achieve continued increased revenue in this area, additional staffing increases are anticipated, though actual future increases in revenue and staff will depend upon the availability of qualified staff, business mix and conditions, and our ability to retain current staff members.

The NextGen Division’s growth has come in part from investments in sales and marketing activities, including hiring additional sales representatives, trade show attendance, and advertising expenditures. We have also benefited from winning numerous industry awards for the NextGen Division’s flagship NextGen^emr and NextGen^epm software products in fiscal years 2006 and 2005, as well as in prior years, and the apparent increasing acceptance of electronic medical records technology in the healthcare industry.

For the QSI Division, total system sales increased by approximately $0.5 million in the twelve months ended March 31, 2006 compared to the twelve months ended March 31, 2005 due primarily to increases in all three categories. We do not presently foresee any material changes in the business environment for the Division with respect to the constrained environment that has been in place for the past several years.

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EDI, Maintenance and Other. Company-wide revenue from maintenance, EDI, and other services grew 31.2% to $53.1 million from $40.4 million. The increase in this category resulted principally from an increase in maintenance, EDI and Other revenue generated from the NextGen Division’s client base. Total NextGen Division maintenance revenue for the year ended March 31, 2006 grew 35.3% to $24.2 million from $17.9 million in the year ago period, while EDI revenue grew 53.0% to $8.6 million compared to $5.6 million in the year ago period. Other revenue for the NextGen Division, which consists primarily of third party license renewals and time and materials billings grew 103.6% to $7.2 million compared to $3.5 million a year ago. QSI Division maintenance revenue declined 4.7% from $7.3 million to $6.9 million in the same period while divisional EDI revenue declined by approximately 4.2% from $4.9 million to $4.7 million. Other revenue for the QSI Division grew 19.7% to $1.5 million compared to $1.3 million a year ago.

The following table details revenue by category for the twelve month periods ended March 31, 2006 and 2005:

(in thousands)	Maintenance		EDI		Other		Total
Twelve months ended March 31, 2006
QSI Division	$	6,939	$	4,673	$	1,524	$	13,136
NextGen Division		24,185		8,583		7,152		39,920
Consolidated	$	31,124	$	13,256	$	8,676	$	53,056
Twelve months ended March 31, 2005
QSI Division	$	7,279	$	4,877	$	1,273	$	13,429
NextGen Division		17,881		5,611		3,512		27,004
Consolidated	$	25,160	$	10,488	$	4,785	$	40,433

The following table provides the number of billing sites which were receiving maintenance services as of the last business day of the period ended March 31, 2006 and 2005 respectively, as well as the number of billing sites receiving EDI services during the last month of each respective period at each Division of the Company. The table presents summary information only and includes billing entities added and removed for any reason. Note also that a single client may include one or multiple billing sites.

	NextGen						QSI						Consolidated
	Maintenance			EDI			Maintenance			EDI			Maintenance			EDI
March 31, 2005		558			394			296			218			854			612
Billing sites added		292			260			6			19			298			279
Billing sites removed		(19	)		(87	)		(27	)		(48	)		(46	)		(135	)
March 31, 2006		831			567			275			189			1,106			756

Cost of revenue. Cost of revenue for the year ended March 31, 2006 increased 21.9% to $39.8 million from $32.7 million for the year ended March 31, 2005, while the cost of revenue as a percentage of net revenue declined to 33.4% from 36.7% during the same period. Our consolidated gross profit is impacted by the level of hardware content included in system sales, the percentage of EDI revenue in our overall sales mix, and certain headcount expenses directly related to the cost of delivering our products and services. Consolidated gross profit is also impacted by the higher margin revenues of the NextGen Division which increased its share of total company revenue to 87.0% from 82.7% in the prior year.

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The following table details revenue and cost of revenue on a consolidated and divisional basis for the twelve month periods ended March 31, 2006 and 2005:

(in thousands, except percentages)	Year Ended March 31,
	2006		%			2005		%
Consolidated
Revenue	$	119,287		100.0	%	$	88,961		100.0	%
Cost of revenue		39,828		33.4			32,669		36.7
Gross profit		79,459		66.6			56,292		63.3
NextGen Division
Revenue		103,743		100.0			73,594		100.0
Cost of revenue		32,063		30.9			25,004		34.0
Gross profit		71,680		69.1			48,590		66.0
QSI Division
Revenue		15,544		100.0			15,367		100.0
Cost of revenue		7,765		50.0			7,665		49.9
Gross profit	$	7,779		50.0	%	$	7,702		50.1	%

Gross profit margins at the NextGen Division for the year ended March 31, 2006 increased to 69.1% from 66.0% primarily due to a decrease in the proportionate level of hardware and third party software content included in revenue as well as a slight decrease in the relative level of applicable headcount expense associated with delivering our products and services. The QSI Division’s gross profit margin remained consistent at approximately 50.0% in the years ended March 31, 2005 and 2006. For the QSI Division higher hardware and third party software costs offset a decrease in the relative level of applicable headcount expense associated with delivering our products and services.

The following table details the individual components of cost of revenue and gross profit as a percentage of total revenue for our Company and our two divisions:

	Hardware, Third Party Software			Payroll and related Benefits			Outside Services, Amortization of Software Development Costs and Other			Total Cost of Revenue			Gross Profit
Twelve months ended March 31, 2006
QSI Division		9.8	%		19.1	%		21.1	%		50.0	%		50.0	%
NextGen Division		4.6			11.8			14.5			30.9			69.1
Consolidated		5.3			12.7			15.4			33.4			66.6
Twelve months ended March 31, 2005
QSI Division		6.1			17.8			26.0			49.9			50.1
NextGen Division		6.8			12.6			14.6			34.0			66.0
Consolidated		6.7	%		13.5	%		16.5	%		36.7	%		63.3	%

During the twelve months ended March 31, 2006, hardware and third party software constituted a smaller portion of consolidated revenue compared to the same prior year period, driven principally both by the composition of NextGen Division revenue and NextGen Division revenue increasing its share of total Company revenue. This year over year reduction was not the result of any identifiable trend or change in emphasis on our part. The number of customers who purchase hardware and third party software and the dollar amount of hardware and third party software purchased fluctuates each quarter depending on the needs of the customers and is not a priority focus for us.

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Our payroll and benefits expense associated with delivering our products and services decreased to 12.7% of consolidated revenue compared to 13.5% during the prior twelve months ended March 31, 2005. The absolute level of consolidated payroll and benefit expenses grew approximately $3.2 million primarily due to additions to related headcount, payroll and benefits expense associated with delivering products and services in the NextGen Division. Payroll and benefits expense associated with delivering products and services in the QSI Division declined on a percentage of revenue basis. We anticipate continued additions to headcount in the NextGen Division in areas related to delivering products and services in future periods, but due to the uncertainties in the timing of our sales arrangements, our sales mix, the acquisition and training of qualified personnel, and other issues, we cannot accurately predict if related headcount expense as a percentage of revenue will increase or decrease in the future.

We do not currently intend to make any significant changes to related headcount at the QSI Division.

Should the NextGen Division continue to represent an increasing share of our revenue and should the NextGen Division continue to carry higher gross margins than the QSI Division, our consolidated gross margin percentages should increase to more closely match those of the NextGen Division.

As a result of the foregoing events and activities, our gross profit for the Company and the NextGen Division increased for the twelve month period ending March 31, 2006 versus the prior year period and the QSI Division remained fairly consistent for the twelve month period ending March 31, 2006 versus the prior year period.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended March 31, 2006 increased 43.5% to $35.6 million as compared to $24.8 million for the year ended March 31, 2005. The increase resulted primarily from increases of $2.6 million in selling and administrative salaries and related benefits expenses in the NextGen Division, $1.8 million in commission expense in the NextGen Division, $1.2 million in travel expense in the NextGen Division, $2.6 million in other general and administrative expenses primarily in the NextGen Division and $2.6 million in increased corporate related expenses. Approximately $1.0 million of the increase in year over year corporate related expenses was salaries and related benefits. Expenses associated with the Annual Shareholders meeting, the contested director election, and subsequent litigation initiated by Ahmed Hussein also contributed to the increase in corporate expenses. Selling, general and administrative expenses as a percentage of revenue increased to 29.8% in the fiscal year ended March 31, 2006 from 27.9% in the fiscal period ended March 31, 2005 due to selling, general and administrative expenses growing at a faster rate than revenue.

We anticipate increased expenditures for trade shows, advertising and the employment of additional sales representatives primarily at the NextGen Division. We also anticipate increased expenditures at the corporate level related to headcount additions, compensation and professional service fees. While we expect selling, general and administrative expenses to increase on an absolute basis, we cannot accurately predict the impact these additional expenditures will have on selling, general, and administrative expenses as a percentage of revenue.

Research and Development Costs. Research and development costs for the year ended March 31, 2006 and 2005 were $8.1 million and $6.9 million, respectively. The increase in research and development costs was primarily due to increased investment in the NextGen product line. Research and development costs as a percentage of net revenue decreased to 6.8% from 7.8% primarily due to revenue growing at a faster rate than the increase in research and development spending. Research and development costs are expected to continue at or above current levels.

Interest Income. Interest income for the year ended March 31, 2006 increased 140.6% to approximately $2.1 million compared with $0.9 million in the year ended March 31, 2005. The increase was primarily due to the effect of an increase in short term interest rates versus the prior year period as well as comparatively higher amounts available for investment during the fiscal period ended March 31, 2006. During the fourth quarter of fiscal year 2006, the Company paid a dividend of approximately $23.4 million, which reduced the amount of funds available for investment during this period.

Provision for Income Taxes. The provision for income taxes for the year ended March 31, 2006 was approximately $14.6 million as compared to approximately $9.4 million for the year ago period. The effective tax rates for fiscal 2006 and 2005 were 38.5% and 36.8%, respectively. The provision for income taxes for the year ended March 31,

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2005 differs from the combined statutory rates primarily due to the impact of varying state income tax rates and the impact of research and development tax credits. The provision for income taxes for the year ended March 31, 2006 differs from the combined statutory rates primarily due to the impact of varying state income tax rates, research and development tax credits and the qualified production activities deduction. During fiscal 2005, the Company recognized approximately $0.5 million of research and development credits which had not been recognized previously due to the uncertainty concerning the ultimate amount of tax to be credited. During the year ended March 31, 2005, the state of California completed an audit of the Company’s tax returns and did not materially change credits related to research and development. Based on the results of that audit as well the expiration of the statue of limitations on certain amended returns, the provision for income taxes for the year ended March 31, 2005 was reduced by the $0.5 million in tax credits which had not been previously recognized.

Comparison of the Years Ended March 31, 2005 and March 31, 2004

For the year ended March 31, 2005, our net income was $16.1 million or $0.63 per share on a basic and $0.61 per share on a fully diluted basis. In comparison, we earned $10.4 million or $0.42 per share on a basic and $0.40 on a fully diluted basis in the year ended March 31, 2004. The increase in net income for the year ended March 31, 2005, was achieved primarily through the following:

• a 25.4% increase in revenue;

• an increase in our gross profit margin from 59.6% to 63.3%.

Revenue. Revenue for the year ended March 31, 2005 increased 25.4% to $89.0 million from $70.9 million for the year ended March 31, 2004. NextGen Division revenue increased 35.2% from $54.4 million to approximately $73.6 million in the period, while QSI Division revenue declined by 6.8% during the period from approximately $16.5 million to $15.4 million.

We divide revenue into two categories, “System sales” and “Maintenance, EDI, and other services”. Revenue in the system sales category includes software license fees, third party hardware and software, and implementation and training services related to purchase of the Company’s software systems. Revenue in the maintenance and other services category includes maintenance, EDI, and other revenue. Maintenance and EDI revenue are the principle sources of revenue in this category.

System Sales. Company-wide sales of systems for the twelve months ended March 31, 2005 increased 22.8% to $48.5 million from $39.5 million in the prior year.

Our increase in revenue from sales of systems was principally the result of a 24.8% increase in category revenue at our NextGen Division whose sales in this category grew from $37.3 million during the year ended March 31, 2004 to $46.6 million during the year ended March 31, 2005. This increase was driven primarily by higher sales of NextGen^emr and NextGen^epm software to both new and existing clients, as well as an increase in the delivery of related implementation services offset by a decline in the sale of related hardware, third party software and supplies.

Systems sales revenue in the QSI Division declined 11.1% to approximately $1.9 million in the year ended March 31, 2005 from $2.2 million in the year ended March 31, 2004.

The following table breaks down our reported system sales into software, hardware, third party software, supplies, and implementation and training services components by Division:

(in thousands)	Software		Hardware, Third Party Software and Supplies		Implementation and Training Services		Total System Sales
Twelve months ended March 31, 2005
QSI Division	$	889	$	743	$	306	$	1,938
NextGen Division		33,230		4,810		8,550		46,590
Consolidated	$	34,119	$	5,553	$	8,856	$	48,528
Twelve months ended March 31, 2004
QSI Division	$	807	$	1,029	$	345	$	2,181
NextGen Division		24,657		6,139		6,548		37,344
Consolidated	$	25,464	$	7,168	$	6,893	$	39,525

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NextGen Division software revenue increased 34.8% between the twelve months ended March 31, 2004 and the twelve months ended March 31, 2005. The Division’s software revenue accounted for 71.3% of divisional system sales revenue during the twelve months ended March 31, 2005, an increase from 66.0% in the prior year period. The increase in software’s share of systems sales was not the result of any new trend or change in emphasis on our part relative to software sales. Software license revenue growth continues to be an area of primary emphasis for the NextGen Division and management was pleased with the Division’s performance in this area.

During the twelve months ended March 31, 2005, 10.3% of NextGen’s system sales revenue was represented by hardware and third party software compared to 16.4% in the same prior year period. We have noted that the last several quarter’s results have included a relatively lower amount of hardware and third party software compared to prior year periods. However, this decrease was not the result of any change in emphasis on our part. The number of customers who purchase hardware and third party software and the dollar amount of hardware and third party software revenue fluctuates each year depending on the needs of customers. The inclusion of hardware and third party software in the division’s sales arrangements is typically at the request of the customer and is not a priority focus for us.

Implementation and training revenue at the NextGen Division increased 30.5% in the twelve months ended March 31, 2005 compared to the twelve months ended March 31, 2004. Implementation and training revenue at the NextGen Division increased its share of divisional system sales revenue to 18.3% in the twelve months ended March 31, 2005 from 17.5% in the twelve months ended March 31, 2004. The growth in implementation and training revenue is the result of increases in the amount of implementation and training services rendered to our customers. The amount of implementation and training services revenue and the corresponding rate of growth compared to a prior period in any given year is dependant on several factors including timing of customer implementations, the availability of qualified staff, and the mix of services being rendered. The number of implementation and training staff increased during the twelve months ended March 31, 2005 versus March 31, 2004 in order to accommodate the increased amount of implementation services sold in conjunction with increased software sales. In order to achieve continued increased revenue in this area, additional staffing increases are anticipated, though actual future increases in revenue and staff will depend upon the availability of qualified staff, business mix and conditions, and our ability to retain current staff members.

The NextGen Division’s growth has come in part from investments in sales and marketing activities, including hiring additional sales representatives, trade show attendance, and advertising expenditures. We have also benefited from winning numerous industry awards for the NextGen Division’s flagship NextGen^emr and NextGen^epm software products in fiscal years 2005 and 2004, as well as in prior years, and the apparent increasing acceptance of electronic medical records technology in the healthcare industry.

For the QSI Division, total system sales decreased 11.1% in the twelve months ended March 31, 2005 compared to the twelve months ended March 31, 2004. We do not presently foresee any material changes in the business environment for the Division with respect to the constrained environment that has been in place for the past several years. QSI systems sales during the fiscal year ended March 31, 2005 were impacted by year over year declines in hardware and implementation and training services.

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EDI, Maintenance and Other. Company-wide revenue from maintenance, EDI, and other services grew 28.7% to $40.4 million from $31.4 million. The increase in this category resulted principally from an increase in maintenance and EDI revenue generated from the NextGen Division’s client base. Total NextGen Division maintenance revenue for the year ended March 31, 2005 grew 55.7% to $17.9 million from $11.5 million in the year ago period, while EDI revenue grew 86.0% to $5.6 million compared to $3.0 million in the year ago period. QSI Division maintenance revenue declined 3.8% from $7.6 million to $7.3 million in the same period while divisional EDI revenue declined by approximately 7.6% from $5.3 million to $4.9 million.

The following table details revenue by category for the twelve month periods ended March 31, 2005 and 2004:

(in thousands)	Maintenance		EDI		Other		Total
Twelve months ended March 31, 2005
QSI Division	$	7,279	$	4,877	$	1,273	$	13,429
NextGen Division		17,881		5,611		3,512		27,004
Consolidated	$	25,160	$	10,488	$	4,785	$	40,433
Twelve months ended March 31, 2004
QSI Division	$	7,570	$	5,276	$	1,464	$	14,310
NextGen Division		11,481		3,016		2,602		17,099
Consolidated	$	19,051	$	8,292	$	4,066	$	31,409

The following table provides the number of billing sites which were receiving maintenance services as of the last business day of the period ended March 31, 2005 and 2004 respectively, as well as the number of billing sites receiving EDI services during the last month of each respective period at each Division of the Company. The table presents summary information only and includes billing entities added and removed for any reason. Note also that a single client may include one or multiple billing sites.

	NextGen						QSI						Consolidated
	Maintenance			EDI			Maintenance			EDI			Maintenance			EDI
March 31, 2004		421			293			321			234			742			527
Billing sites added		138			144			4			7			142			151
Billing sites removed		(1	)		(43	)		(29	)		(23	)		(30	)		(66	)
March 31, 2005		558			394			296			218			854			612

Cost of revenue. Cost of revenue for the year ended March 31, 2005 increased 13.9% to $32.7 million from $28.7 million for the year ended March 31, 2004, while the cost of revenue as a percentage of net revenue declined to 36.7% from 40.4% during the same period. Our consolidated gross profit is impacted by the level of hardware content included in system sales, the percentage of EDI revenue in our overall sales mix, and certain headcount expenses directly related to the cost of delivering our products and services. Consolidated gross profit is also impacted by the higher margin revenues of the NextGen Division which increased its share of total company revenue to 82.7% from 76.8% in the prior year.

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The following table details revenue and cost of revenue on a consolidated and divisional basis for the twelve month periods ended March 31, 2005 and 2004:

(in thousands, except percentages)	Year Ended March 31,
	2005		%			2004		%
Consolidated
Revenue	$	88,961		100.0	%	$	70,934		100.0	%
Cost of revenue		32,669		36.7			28,673		40.4
Gross profit		56,292		63.3			42,261		59.6
NextGen Division
Revenue		73,594		100.0			54,443		100.0
Cost of revenue		25,004		34.0			20,398		37.5
Gross profit		48,590		66.0			34,045		62.5
QSI Division
Revenue		15,367		100.0			16,491		100.0
Cost of revenue		7,665		49.9			8,275		50.2
Gross profit	$	7,702		50.1	%	$	8,216		49.8	%

Gross profit margins at the NextGen Division for the year ended March 31, 2005 increased to 66.0% from 62.5% primarily due to a decrease in the proportionate level of hardware and third party software content included in revenue as well as a slight decrease in the relative level of applicable headcount expense associated with delivering our products and services. The QSI Division’s gross profit margin improved slightly to 50.1% in the year ended March 31, 2005 from 49.8% in the same period last year due to proportionately lower hardware and third party software content included in revenue.

The following table details the individual components of cost of revenue and gross profit as a percentage of total revenue for our Company and our two divisions:

	Hardware, Third Party Software			Payroll and related Benefits			Outside Services, Amortization of Software Development Costs and Other			Total Cost of Revenue			Gross Profit
Twelve months ended March 31, 2005
QSI Division		6.1	%		17.8	%		26.0	%		49.9	%		50.1	%
NextGen Division		6.8			12.6			14.6			34.0			66.0
Consolidated		6.7			13.5			16.5			36.7			63.3
Twelve months ended March 31, 2004
QSI Division		7.6			16.8			25.8			50.2			49.8
NextGen Division		10.8			14.2			12.5			37.5			62.5
Consolidated		10.0	%		14.8	%		15.6	%		40.4	%		59.6	%

During the twelve months ended March 31, 2005, hardware and third party software constituted a smaller portion of consolidated revenue compared to the same prior year period, driven principally by the composition of NextGen Division revenue. This year over year reduction was not the result of any identifiable trend or change in emphasis on our part. The number of customers who purchase hardware and third party software and the dollar amount of hardware and third party software purchased fluctuates each quarter depending on the needs of the customers and is not a priority focus for us.

Our payroll and benefits expense associated with delivering our products and services decreased to 13.5% of consolidated revenue compared to 14.8% during the prior twelve months ended March 31, 2004. The absolute level of consolidated payroll and benefit expenses grew primarily due to additions to related headcount, payroll and

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benefits expense associated with delivering products and services in the NextGen Division. Payroll and benefits expense associated with delivering products and services in the QSI Division declined slightly on an absolute basis, but increased slightly on a percentage of revenue basis. We anticipate continued additions to headcount in the NextGen Division in areas related to delivering products and services in future periods, but due to the uncertainties in the timing of our sales arrangements, our sales mix, the acquisition and training of qualified personnel, and other issues, we cannot accurately predict if related headcount expense as a percentage of revenue will increase or decrease in the future.

We do not currently intend to make any significant additions to related headcount at the QSI Division.

Should the NextGen Division continue to represent an increasing share of our revenue and should the NextGen Division continue to carry higher gross margins than the QSI Division, our consolidated gross margin percentages should increase to more closely match those of the NextGen Division.

As a result of the foregoing events and activities, our gross profit for the Company and our two operating divisions increased for the twelve month period ending March 31, 2005 versus the prior year period.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended March 31, 2005 increased 27.2% to $24.8 million as compared to $19.5 million for the year ended March 31, 2004. The increase resulted primarily from increases of $2.0 million in selling and administrative salaries and related benefits expenses in the NextGen Division, $0.9 million for corporate related professional services principally in the area of Sarbanes-Oxley compliance, $0.6 million in commission expense principally in the NextGen division, $0.4 million in corporate related salaries and related benefit expenses, $0.4 million in NextGen travel expenses and $1.0 million in other general and administrative expenses primarily in the NextGen Division. Selling, general and administrative expenses as a percentage of revenue slightly increased to 27.9% in the fiscal year ended March 31, 2005 from 27.4% in the fiscal period ended March 31, 2004 due to selling, general and administrative expenses growing at a slightly faster rate than revenue.

We anticipate increased expenditures for trade shows, advertising and the employment of additional sales representatives primarily at the NextGen Division. We are hopeful that we will be able to achieve at least a moderate reduction in expenses related to Sarbanes Oxley Act compliance. While we expect selling, general and administrative expenses to increase on an absolute basis, we cannot accurately predict the impact these additional expenditures will have on selling, general, and administrative expenses as a percentage of revenue.

Research and Development Costs. Research and development costs for the year ended March 31, 2005 and 2004 were $6.9 million and $6.1 million, respectively. The increase in research and development costs was primarily due to increased investment in the NextGen product line. Research and development costs as a percentage of net revenue decreased to 7.8% from 8.7% primarily due to revenue growing at a faster rate than the increase in research and development spending. Research and development costs are expected to continue at or above current levels.

Interest Income. Interest income for the year ended March 31, 2005 increased 127% to approximately $0.9 million compared with $0.4 million in the year ended March 31, 2004. The increase was primarily due to the effect of an increase in short term interest rates versus the prior year period as well as comparatively higher amounts available for investment during the fiscal period ended March 31, 2005. During the fourth quarter of fiscal year 2005, the Company paid a one time dividend of approximately $19.6 million, which reduced the amount of funds available for investment during this period.

Provision for Income Taxes. The provision for income taxes for the year ended March 31, 2005 was approximately $9.4 million as compared to approximately $6.6 million for the year ago period. The effective tax rates for fiscal 2005 and 2004 were 36.8% and 38.9%, respectively. The provision for income taxes for the years ended March 31, 2005 and 2004 differ from the combined statutory rates primarily due to the impact of varying state income tax rates and the impact of research and development tax credits. During fiscal 2005, the Company recognized approximately $0.5 million of research and development credits which had not been recognized previously due to the uncertainly concerning the ultimate amount of tax to be credited. In the quarter ended March 31, 2005, the State of California completed an audit of the Company’s tax returns and did not materially change credits related to research and development. Based on the results of that audit as well the expiration of the statue of limitations on

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certain amended returns, the provision for income taxes for the year ended March 31, 2005 was reduced by the $0.5 million in tax credits which had not been recognized as of March 31, 2004.

Liquidity and Capital Resources

The following table presents selected financial statistics and information for each of the years ended March 31, 2006, 2005 and 2004:

	Year ended March 31,
(in thousands)	2006			2005				2004
Cash and cash equivalents		$	57,225		$	51,157			$	51,395
Net increase (decrease) in cash and cash equivalents		$	6,068		$	(238	)		$	14,952
Net income		$	23,322		$	16,109			$	10,400
Net cash provided by operating activities		$	30,678		$	21,631			$	17,303
Number of days of sales outstanding.			115			119				98

Cash provided by operations has historically been our primary source of cash and has primarily been driven by our net income and secondarily by non-cash expenses including depreciation, amortization of capitalized software, provisions for bad debts and inventory obsolescence, and stock option expenses.

The following table summarizes our statement of cash flows for the year ended March 31, 2006, 2005 and 2004:

	Year ended March 31,
(in thousands)	2006				2005				2004
Net income		$	23,322			$	16,109			$	10,400
Non-cash expenses			5,595				4,352				3,337
Tax benefit from exercise of stock options			4,831				2,680				1,454
Change in deferred revenue			10,439				8,214				5,564
Change in accounts receivable			(12,484	)			(13,879	)			(3,400	)
Change in assets and liabilities			(1,025	)			4,155				(52	)
Net cash provided by operating activities		$	30,678			$	21,631			$	17,303

Net Income

As referenced in the above table, net income makes up the majority of our cash generated from operations for the year ended March 31, 2006, 2005 and 2004. Our NextGen Division’s contribution to net income has increased each year due to that Division’s operating income increasing more quickly than the Company as a whole.

Non-Cash expenses

Non-cash expenses include depreciation, amortization of capitalized software, provisions for bad debts and inventory obsolescence, and stock option expenses. Total non-cash expenses decreased by approximately $1.2 million between the years ended March 31, 2006 versus 2005. The change is primarily related to $4.1 million decrease in deferred income taxes offset by increases in the amortization of capitalized software, depreciation and provision for bad debts.

Tax benefits from stock options

The value of stock options exercised by employees grew in the year ended March 31, 2006 resulting in an increase of approximately $2.2 million dollars of tax benefit in the period ending March 31, 2006.

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Deferred Revenue

Cash from operations benefited significantly from increases in deferred revenue primarily due to an increase in the volume of implementation and maintenance services invoiced by the NextGen Division which had not yet been rendered or recognized as revenue. This benefit is offset by the increase in unpaid deferred revenue. Deferred revenue grew by approximately $10.4 million for the year ended March 31, 2006 versus growth of $8.2 million in the year ago period, resulting in increases to cash provided by operating activities for the respective periods.

Accounts Receivable

Accounts receivable grew by approximately $12.5 million, $13.9 million and $3.4 million for the years ended March 31, 2006, 2005 and 2004, respectively. The increase in accounts receivable in the periods is due to the following factors:

• NextGen division revenue grew 41.0%, 35.2% and 45.8% for the years ended March 31, 2006, 2005 and 2004, respectively;

• The NextGen Division constituted a larger percentage of our receivables at March 31, 2006 compared to March 31, 2005. Turnover of accounts receivable in the NextGen Division is slower than the QSI Division due to the fact that the majority of the QSI Division’s revenue is coming from maintenance and EDI services which typically have shorter payment terms than systems sales related revenue which historically have accounted for a major portion of NextGen Division sales; and

• We experienced an increase in the volume of undelivered services billed in advance by the NextGen Division which were unpaid as of the end of each period and included in accounts receivable. This resulted in an increase in both deferred revenue and accounts receivable of approximately $4.4 million and $4.5 million for the years ended March 31, 2006 and 2005, respectively.

The turnover of accounts receivable measured in terms of days sales outstanding (DSO) decreased from 119 days to 115 days during the year ended March 31, 2006 primarily due to improved turnover of accounts receivable and revenue growing at a faster rate than the accounts receivable balance and the $4.0 million transaction with Siemens Medical Solutions that was paid upfront during fiscal year 2006.

If amounts included in both accounts receivable and deferred revenue were netted, the Company’s turnover of accounts received expressed as days sales outstanding would be 70 days as of March 31, 2006 and 72 days as of March 31, 2005. Provided turnover of accounts receivable, deferred revenue, and profitability remain consistent with the year ended March 31, 2006, we anticipate being able to continue to generate cash from operations during fiscal 2006 primarily from the net income of the Company.

Net cash used in investing activities for the year ended March 31, 2006 was $5.7 million and consisted of additions to equipment and improvements and capitalized software.

Net cash used in financing activities for the year ended March 31, 2006 was $18.9 million and consisted of a dividend paid to shareholders of $23.4 million offset by $4.5 million of proceeds from the exercise of stock options. We recorded a reduction in income tax liability of $4.8 million related to tax deductions received from employee stock option exercises. The benefit was recorded as additional paid in capital.

At March 31, 2006, we had cash and cash equivalents of $57.2 million. We intend to expend some of these funds for the development of products complementary to our existing product line as well as new versions of certain of our products. These developments are intended to take advantage of more powerful technologies and to increase the integration of our products. We have no additional significant current capital commitments.

Contractual Obligations

The following table summarizes our significant contractual obligations at March 31, 2006, and the effect that such obligations are expected to have on our liquidity and cash in future periods:

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Contractual Obligations – Non-cancelable lease obligations	(in thousands)
Year Ending March 31,
2007		$	1,771
2008			2,137
2009			1,905
2010			1,903
2011 and beyond			2,688
		$	10,404

New Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements” (SFAS 154). SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of SFAS 154 will have a material effect on its consolidated financial position, consolidated results of operations, or liquidity.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS 123R) which is a revision of SFAS 123. Statement 123R supersedes APB 25 and amends Statement of Financial Accounting Standards No. 95, “Statement of Cash Flows” (SFAS 95). SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their estimated fair values and the pro forma disclosure alternative is no longer allowable under Statement 123R. Subsequently, in April 2005, the Securities and Exchange Commission (SEC) changed the effective date from the first interim or annual reporting period beginning after June 15, 2005 to the first annual reporting period beginning after June 15, 2005. SFAS 123R will be applicable to the Company beginning April 1, 2006, and the Company intends to adopt the standard using the “modified prospective” method. The “modified prospective” method requires compensation costs to be recognized, beginning with the effective date of adoption, for a) all share-based payments granted after the effective date and b) awards granted to employees prior to the effective date of the statement that remain unvested on the effective date. As permitted by SFAS 123 we have historically accounted for share-based payments to employees using the intrinsic value method prescribed in APB No. 25 “Accounting for Stock Issued to Employees”, and as such, generally have recognized no compensation cost for employee equity incentives. Accordingly, the adoption of SFAS 123R will have an impact on the Company’s results of operations, although it will have no impact on our overall liquidity. The impact of the adoption of SFAS 123R for currently outstanding but unvested options is approximately $7.9 million based on the estimated fair values used to prepare the proforma disclosure information. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current requirements. This requirement may reduce net operating cash flows and increase net financing cash flows in periods after adoption.

ITEM 7A. QUANTITATIVE AND QUALITIVE DISCLOSURE ABOUT MARKET RISKS

We have a significant amount of cash and short-term investments with maturities less than three months. This cash portfolio exposes us to interest rate risk as short-term investment rates can be volatile. Given the short-term maturity structure of our investment portfolio, we believe that it is not subject to principal fluctuations and the effective interest rate of our portfolio tracks closely to various short-term money market interest rate benchmarks.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our Financial Statements identified in the Index to Financial Statements appearing under “Item 15. Exhibits and Financial Statement Schedules” of this report are incorporated herein by reference to Item 15.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based on their evaluation of our disclosure controls and procedures as of March 31, 2006, our officers including our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures result in the effective recordation, processing, summarization and reporting of information that is required to be disclosed in the reports that we file under the Securities Exchange Act of 1934 and the rules thereunder.

Changes in Internal Control over Financial Reporting

During the year ended March 31, 2006, no changes have occurred in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our financial reporting function.

Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of the Company’s management, including our principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Company’s management concluded that its internal control over financial reporting was effective as of March 31, 2006.

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

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

The Company’s independent registered public accounting firm has audited management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of March 31, 2006 as stated in their report which is included herein.

ITEM 9B. OTHER INFORMATION

None.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

Directors and Executive Officers

The names, ages, positions held and business experience of our directors and executive officers as of June 1, 2006 are as follows:

Patrick B. Cline (45) currently serves as a director and as President of our NextGen Healthcare Information Systems Division. He served as our interim Chief Executive Officer for the April - July 2000 period. Mr. Cline was a co-founder of Clinitec; a company acquired by Quality Systems, Inc. in 1996, and has served as its President since its inception in January 1994 and throughout its transition to NextGen Healthcare Information Systems. Prior to co-founding Clinitec, Mr. Cline served, from July 1987 to January 1994, as Vice President of Sales and Marketing with Script Systems, a subsidiary of InfoMed, a healthcare information systems company. From January 1994 to May 1994, after the founding of Clinitec, Mr. Cline continued to serve, on a part time basis, as Script Systems’ Vice President of Sales and Marketing. Mr. Cline has held senior positions in the healthcare information systems industry since 1981. Mr. Cline has been a director of the Company since 2005.

Maurice J. DeWald (66) is a director and since 1992 has been the Chief Executive Officer of Verity Financial Group, Inc., a financial advisory firm. He is a director of Advanced Materials Group, Inc., Mizuho Corporate Bank of California and Integrated Healthcare Holdings, Inc. He was an audit partner/managing partner with the international accounting firm KPMG, LLP and was with that firm from 1962 to 1991. He holds a B.B.A. from the University of Notre Dame and has a California C.P.A. professional certification. Mr. DeWald has been a director of the Company since 2004.

Ibrahim Fawzy (65) is a director and has been president of Fawzy Consultant Group since 1999. Fawzy Consultant Group works mainly in investment industrial projects. Dr. Fawzy has taught mechanical engineering at Cairo University in Egypt since 1969. Previously, he taught mechanical engineering at the University of London in England. Prior to forming his own consultancy group, Dr. Fawzy held several posts with the Egyptian government, including as cultural attaché in London, from 1979 to 1983. Dr. Fawzy was the Minister of Industry and Mineral Wealth from 1993 through 1996 and the Chairman of the General Authority for Investment from 1996 to 1999. Dr. Fawzy is a director of seven companies in Egypt, three of which are public (The Egyptians Abroad for Investment and Development, Misr Canada Lube Oil and El-Nubaria for Agricultural Mechanization). Dr. Fawzy has been a director of the Company since 2005.

Ahmed Hussein (65) is a director and has been since 1997, the Director of National Investment Company, Cairo, Egypt. Mr. Hussein founded National Investment Company in 1996 and has served as a member of its Board of Directors since its inception. Mr. Hussein served as a Senior Vice President of Dean Witter from 1993 to 1996. Mr. Hussein is a director of Nobria Agriculture, a publicly held Egyptian corporation. Mr. Hussein has been a director of the Company since 1999.

Vincent J. Love (65) is a director and is the managing partner of Kramer, Love & Cutler, LLP, a financial consulting group. He was employed by the accounting firm Ernst & Young from 1967 to 1994, and served as a partner of that firm from 1979 to 1994. He is a member of Counsel, the governing body, of the American Institute of Certified Public Accountants and an honorary member of the Executive Committee of the American Arbitration Association. He achieved the rank of Captain in the U.S. Army, has a B.B.A. from the City College of New York, and is a New York, Ohio, and Connecticut C.P.A. Mr. Love has been a director of the Company since 2004.

Steven T. Plochocki (54) is a director. He joined Trinity Hospice, a national hospice provider, as Chief Executive Officer and board member in October 2004. Prior to joining Trinity Hospice, he was Chief Executive Officer of InSight, a national provider of diagnostic imaging services from November 1999 to August 2004. Previously he was Chief Executive Officer of Centratex Support Services, Inc., a support services company for the healthcare industry and had previously held other senior level positions with healthcare industry firms. He holds B.A. in Journalism and Public Relations from Wayne State University and a Master’s degree in Business Management from Central Michigan University. Mr. Plochocki has been a director of the Company since 2004.

Sheldon Razin (68) is a director. He is the founder of the Company and has served as its Chairman of the Board since our inception in 1974. He served as the Company’s Chief Executive Officer from 1974 until April 2000. Since its inception until April 2000, he also served as the our President, except for the period from August 1990 to August

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1991. Additionally, Mr. Razin served as Treasurer from our 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 our 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.

Louis E. Silverman (47) is a director and joined the Company as President and Chief Executive Officer of the Company in July 2000. Mr. Silverman was previously Chief Operations Officer of CorVel Corp., a publicly traded national managed care services and technology firm with headquarters in Irvine, California. Mr. Silverman holds a Master of Business Administration degree from Harvard Graduate School of Business Administration and a Bachelor of Arts degree from Amherst College. Mr. Silverman has been a director of the Company since 2005.

Greg Flynn (48) has served as the QSI Division’s General Manager since April 2000 and as Executive Vice President since August 1998 after serving as Vice President of Sales and Marketing from January 1996 to August 1998. Between June 1992 and January 1996, Mr. Flynn served as Vice President Administration. In these capacities, Mr. Flynn has been responsible for numerous functions related to the Company’s ongoing management and sales. Previously, Mr. Flynn served as our Vice President, Corporate Communications. Mr. Flynn joined us in January 1982. He holds a B.A. degree in English from the University of California, Santa Barbara.

Paul A. Holt (40) was appointed Chief Financial Officer in November 2000. Mr. Holt has served as the Company’s Controller from January 2000 to May 2000 and was appointed interim Chief Financial Officer in May 2000. Prior to joining the Company, Mr. Holt was the Controller of Sierra Alloys Co., Inc., a titanium metal manufacturing company from August 1999 to December 1999. From May 1997 to July 1999, he was Controller of Refrigeration Supplies Distributor, a wholesale distributor and manufacturer of refrigeration supplies and heating controls. From March 1995 to April 1997 he was Assistant Controller of Refrigeration Supplies Distributor. Mr. Holt is a Certified Public Accountant and holds an M.B.A. from the University of Southern California and a B.A. in Economics from the University of California, Irvine.

Our directors serve until the election and qualification of their respective successors. Our executive officers are elected by, and serve at the discretion of, the Board of Directors.

Board of Directors Meetings and Related Matters

Our Bylaws require that at least a majority of the members of the Board shall be independent directors. The Bylaws state that an “independent director” means a person other than an officer or employee of the Company or its subsidiaries or any other individual having a relationship, which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The following persons shall not be considered independent:

(a)	a director who is, or at any time during the past three years was, employed by the Company or by any parent or subsidiary of the Company;
(b)	a director who accepted or who has a family member (as defined below) who accepted any payments from the company or any parent subsidiary of the Company in excess of $60,000 during the current or any of the past three fiscal years, other than for the following:
	i.	compensation for Board or Board committee service;
	ii.	payments arising solely from investments in our securities;
	iii.	compensation paid to a family member who is a non-executive employee of the Company or a parent or subsidiary of the Company;
	iv.	benefits under a tax-qualified retirement plan, or non-discretionary compensation; or

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	v.	loans permitted under Section 13(k) of the Exchange Act of 1934;
(c)	a director who is a family member of an individual who is or at any time during the past three years was, employed by the Company or by any parent or subsidiary of the Company as an executive officer;
(d)	a director who is, or has a family member who is, a partner in, or a controlling shareholder or an executive officer of, any organization to which the Company made, or from which the Company received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenues for that year, or $200,000, whichever is more, other than the following:
	i.	payments arising solely from investments in our securities; or
	ii.	payments under non-discretionary charitable contribution matching programs;
(e)	a director of the Company who is, or has a family member who is, employed as an executive officer of another entity where at any time during the past three years any of the officers of the Company serve on the compensation committee of such other entity; or
(f)	a director who is, or has a family member who is, a current partner of our outside auditor, or was a partner or employee of our outside auditor who worked on our audit at any time during any of the past three years.

A “family member” for these purposes means a person’s spouse, parents, children and siblings, whether by blood, marriage or adoption, or anyone residing in such person’s home.

During the fiscal year ended March 31, 2006, the Board held 10 meetings. There were no actions taken by unanimous written consent. No director attended less than 75% of the aggregate of all meetings of the Board and all meetings of committees of the Board upon which he served.

The Board has an Audit Committee which consists of Messrs. DeWald, Love, and Plochocki. The Audit Committee is comprised entirely of “independent” (as defined in Rule 4200(a)(15) of the Nasdaq listing standards) directors and operates under a written charter adopted by the Board. The duties of the Audit Committee include meeting with the independent public accountants of the Company to review the scope of the annual audit and to review the quarterly and annual financial statements of the Company before the statements are released to our shareholders. The Audit Committee also evaluates the independent public accountants’ performance and makes recommendations to the Board as to whether the independent public accounting firm should be retained by the Company for the ensuing fiscal year. In addition, the Audit Committee reviews our internal accounting and financial controls and reporting systems practices. During the fiscal year ended March 31, 2006, the Audit Committee held 15 meetings. The Audit Committee’s current charter, adopted January 29, 2004, is included as Appendix A to our 2004 Proxy Statement. The Audit Committee and Board have confirmed that the Audit Committee does and will continue to include at least three independent members. The Audit Committee and the Board have confirmed that Mr. DeWald meets applicable NASDAQ listing standards for designation as an “Audit Committee Financial Expert” and being for being “independent.”

The Board has a Nominating Committee which consists of Messrs. DeWald, Love and Plochocki. The Nominating Committee is responsible for identifying and recommending to the Board direct nominee candidates and is composed entirely of independent directors. The Nominating Committee will consider candidate nominees for election as director who are recommended by shareholders. Recommendations should be sent to the Secretary of the Company and should include the candidate’s name and qualifications and a statement from the candidate that he or she consents to being named in the proxy statement and will serve as a director if elected. In order for any candidate to be considered by the Nominating Committee and, if nominated, to be included in the proxy statement, such recommendation must be received by the Secretary not less than 150 days prior to the anniversary date of our most recent annual meeting of shareholders.

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The Nominating Committee believes that it is desirable that directors possess an understanding of our business environment and have the knowledge, skills, expertise and such diversity of experience that the Board’s ability to manage and direct the affairs and business of the Company is enhanced. Additional considerations may include an individual’s capacity to enhance the ability of committees of the Board to fulfill their duties and/or satisfy any independence requirements imposed by law, regulation or listing requirements.

The Nominating Committee may receive suggestions from current Board members, Company executive officers or other sources, which may be either unsolicited or in response to requests from the Nominating Committee for such candidates. The Nominating Committee may also, from time to time, engage firms that specialize in identifying director candidates.

Once a person has been identified by the Nominating Committee as a potential candidate, the Nominating Committee may collect and review publicly available information regarding the person to assess whether the person should be considered further. If the Nominating Committee determines that the candidate warrants further consideration, the Chairman or another member of the Nominating Committee may contact the person. Generally, if the person expresses a willingness to be considered and to serve on the Board, the Nominating Committee may request information from the candidate, review the person’s accomplishments and qualifications and may conduct one or more interviews with the candidate. The Nominating Committee may consider all such information in light of information regarding any other candidates that the Nominating Committee might be evaluating for nomination to the Board. Nominating Committee members may contact one or more references provided by the candidate or may contact other members of the business community or other persons that may have greater first-hand knowledge of the candidate’s accomplishments. With the nominee’s consent, the Nominating Committee may also engage an outside firm to conduct background checks on candidates as part of the nominee evaluation process. The Nominating Committee’s evaluation process does not vary based on the source of the recommendation, though in the case of a shareholder nominee, the Nominating Committee and/or Board may take into consideration the number of shares held by the recommending shareholder and the length of time that such shares have been held.

During the fiscal year ended March 31, 2006 the Nominating Committee held five meetings. The Nominating Committee’s current charter, while not posted on our website, is included as Appendix B to our 2004 Proxy Statement.

The Board has a Compensation Committee which consists of Messrs. DeWald, Love and Plochocki. The Compensation Committee is composed entirely of independent directors, and is responsible for (i) ensuring that senior management will be accountable to the Board through the effective application of compensation policies and (ii) monitoring the effectiveness of our compensation plans applicable to both senior management and the Board (including committees thereof). The Compensation Committee establishes compensation policies applicable to our executive officers. During the fiscal year ended March 31, 2006, the Compensation Committee held 11 meetings.

The Board has a Transaction Committee which consists of Messrs. DeWald, Love and Plochocki. The Transaction Committee is responsible for considering and making recommendations to our Board with respect to all proposals involving (i) a change in control of the Company or (ii) the purchase or sale of assets constituting more than 10% of the our total assets. The Transaction Committee is composed entirely of independent directors. During the fiscal year ended March 31, 2006, the Transaction Committee held five meetings.

Under our Bylaws, if at any time the Chairman of the Board shall be an executive officer of the Company, or for any other reason shall not be an independent director, a non-executive Lead Director (“Lead Director”) shall be selected by the independent directors. The Lead Director shall be one of the independent directors, shall be a member of the Audit Committee and of the Executive Committee, if there is such a committee, and shall be responsible for coordinating the activities of the independent directors. The Lead Director shall assist the Board in assuring compliance with our corporate governance procedures and policies, and shall coordinate, develop the agenda for, and moderate executive sessions of the Board’s independent directors. Such executive sessions shall be held immediately following each regular meeting of the Board, and or at other times as designated by the Lead Director. The Lead Director shall approve, in consultation with the other Independent Directors, the retention of consultants who report directly to the Board. If at any time the Chairman of the Board is one of the independent directors, then he or she shall perform the duties of the Lead Director.

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Until the election of directors at the 2006 Annual Meeting of Shareholders, the Company’s Director Compensation Program provides as follows:

Directors of the Company who are also employees of the Company are not compensated for their services as directors or committee members. Under the terms of the Company’s Director Compensation Program, all non-employee directors of the Company shall receive a retainer of $24,000 per year, plus a fee of $2,000 per meeting of the Board attended. Directors who serve on a committee of the Board shall receive a fee of $1,000 per committee meeting attended. Board members traveling cross country to attend a Board meeting or committee meeting shall receive an additional fee of $1,000. In addition to the cash remuneration above, each newly elected nonemployee director shall receive 24,000 options to purchase Common Stock of the Company upon election to the Board. Thereafter, each nonemployee director reelected to the Board shall receive 20,000 options to purchase Common Stock of the Company upon each annual reelection date. The options are priced at the fair market value of the Company’s Common Stock on the date of grant, fully vest in three months from the date of grant, and expire seven years from the date of grant.

Effective upon the election of directors at the Company’s 2006 Annual Meeting of Shareholders, the Director Compensation Program is amended to provide as follows:

All non-employee directors shall receive a retainer of $30,000 per year plus a fee of $2,000 per meeting of the Board attended. Directors who serve on a committee of the Board shall receive a fee of $1,000 per committee meeting attended. In addition to the cash remuneration above, each newly elected and re-elected nonemployee director shall receive 5,000 options to purchase Common Stock of the Company upon each annual election date. The options shall be priced at the fair market value of the Company’s Common Stock on the date of grant, vest in four equal annual installments from the date of grant (subject to the Vesting Event set forth below), and expire seven years from the date of grant. Such options shall become fully vested at the at the conclusion of such director’s term of service if the director is not re-elected to the Board except where such failure to re-elect the director is the result of (i) a voluntary withdrawal from Board service by such director or (ii) prior removal from the Board for cause under Section 304 of the California Corporations Code (the “Vesting Event”).

Section 16(a) Beneficial Ownership Reporting Compliance

Under Section 16(a) of the Securities Exchange Act of 1934, as amended, the directors and officers of the Company and any person who owns more than ten percent of our Common Stock are required to report their initial ownership of our Common Stock and any subsequent changes in that ownership to the Securities and Exchange Commission (“SEC”) and Nasdaq. Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish the Company with copies of all forms they file in accordance with Section 16(a).

Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Forms 5 were required for those persons, the Company believes that, during the fiscal year ended March 31, 2006, all of its officers, directors and greater than 10% shareholders complied with all filing requirements applicable to such persons with the exception of Ibrahim Fawzy who did not file a Form 3 on a timely basis concerning a single acquisition of director options, and Ahmed Hussein who did not file a Form 4 on a timely basis concerning a single acquisition of director options. Both Messrs. Fawzy and Hussein subsequently made such filings.

Code of Ethics

We have adopted a Code of Business Conduct and Ethics that applies to, among others, our Chief Executive Officer and Chief Financial Officer (our principal accounting officer). This Code is posted on our Website located at www. qsii.com. The code of ethics may be found as follows: From our main Web page, first click on “company info” and then on “corporate governance.” We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of this Code by posting such information on our Website, at the address and location specified above.

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ITEM 11. EXECUTIVE COMPENSATION

Compensation of Executive Officers

The following table sets forth certain compensation information for the three fiscal years ended March 31, 2006, 2005, and 2004, respectively, by the Chief Executive Officer and the other highest paid executive officers of the Company (up to four) serving as such at the end of the 2006 fiscal year whose aggregate total annual salary and bonus for such year exceeded $100,000 (the “Named Executive Officers”).

Summary Compensation Table

Name and Principal Position	Year		Salary ($)		Bonus ($)		Long Term Compensation Awards Securities Underlying Options		All Other ($)(1)
Louis Silverman		2006		343,883		312,934		—		2,341
Chief Executive Officer and		2005		289,042		144,521		85,000		2,113
President		2004		278,500		139,250		—		2,000
Patrick Cline President, NextGen		2006		352,605		312,619		—		11,724
Healthcare Information		2005		299,645		280,110		125,000		6,529
Systems Division		2004		253,900		196,500		18,000		5,600
Gregory Flynn
Executive Vice President,		2006		216,333		14,062		—		4,447
General Manager of QSI		2005		202,167		20,217		38,750		4,155
Division		2004		187,500		18,810		10,000		4,063
Paul Holt		2006		191,154		58,000		—		4,607
Chief Financial Officer		2005		142,051		64,570		33,500		1,962
		2004		119,378		28,541		—		1,479

(1) This column reflects amounts attributable to auto allowance and company contributions to the Company’s Deferred Compensation Plan and/or 401k plan.

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Option /SAR Grants in Last Fiscal Year

The following table provides information with respect to option grants during fiscal 2006 to the Named Executive Officers. No options were granted to the Named Executive Officers during fiscal year 2006. A total of 19,000 options were granted to other Company employees during fiscal year 2006. Non employee directors were granted an aggregate 124,000 options during fiscal year 2006.

	Number of Securities Underlying Options Granted (#)	Percent of Total Options Granted to Employees in Fiscal Year (%)							Potential Realizable Value
									Stock Price Appreciation
					Exercise or Base Price $/Share				for Option Term (#)*
								Expiration Date
Name									5%		10%
Louis Silverman	—		—	%		$	—	—	$	—	$	—
Patrick Cline	—		—	%		$	—	—	$	—	$	—
Gregory Flynn	—		—	%		$	—	—	$	—	$	—
Paul Holt	—		—	%		$	—	—	$	—	$	—

Stock price appreciation of 5% and 10% is assumed pursuant to the rules of the Securities and Exchange Commission. The Company cannot provide assurance that the actual stock price will appreciate over the option term at the assumed levels or at any other defined level.

Aggregated Option /SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values

The following table provides information on option exercises in fiscal 2006 by the Named Executive Officers and unexercised options held by each of them at the close of such fiscal year. No Named Executive Officer exercised any stock appreciation rights during fiscal 2006 or held any stock appreciation rights at the end of such fiscal year. The value of unexercised in the money options was calculated using the closing share price on the last trading day of the fiscal year ($33.10).

					Number of Securities				Value of Unexercised
					Underlying Unexercised				In-the-Money Options at
	Shares Acquired on Exercise (#)				Options at March 31, 2006 (#)				Fiscal Year-End ($)
			Value Realized ($)
Name					Exercisable		Unexercisable		Exercisable		Unexercisable
Louis Silverman		59,936	$	1,816,369		42,508		127,500	$	585,145	$	1,754,719
Patrick Cline		79,500	$	1,632,731		—		205,500	$	—	$	3,566,899
Gregory Flynn		11,912	$	293,017		12,463		68,125	$	171,522	$	1,193,309
Paul Holt		6,000	$	139,592		10,750		50,250	$	147,947	$	781,356

Compensation of Directors

Until the election of directors at the 2006 Annual Meeting of Shareholders, the Company’s Director Compensation Program provides as follows:

Directors of the Company who are also employees of the Company are not compensated for their services as directors or committee members. Under the terms of the Company’s Director Compensation Program, all non-employee directors of the Company shall receive a retainer of $24,000 per year, plus a fee of $2,000 per meeting of the Board attended. Directors who serve on a committee of the Board shall receive a fee of $1,000 per committee meeting attended. Board members traveling cross country to attend a Board meeting or committee meeting shall receive an additional fee of $1,000. In addition to the cash remuneration above, each newly elected nonemployee director shall receive 24,000 options to purchase Common Stock of the

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Company upon election to the Board. Thereafter, each nonemployee director reelected to the Board shall receive 20,000 options to purchase Common Stock of the Company upon each annual reelection date. The options are priced at the fair market value of the Company’s Common Stock on the date of grant, fully vest in three months from the date of grant, and expire seven years from the date of grant.

Effective upon the election of directors at the Company’s 2006 Annual Meeting of Shareholders, the Director Compensation Program is amended to provide as follows:

All non-employee directors shall receive a retainer of $30,000 per year plus a fee of $2,000 per meeting of the Board attended. Directors who serve on a committee of the Board shall receive a fee of $1,000 per committee meeting attended. In addition to the cash remuneration above, each newly elected and re-elected nonemployee director shall receive 5,000 options to purchase Common Stock of the Company upon each annual election date. The options shall be priced at the fair market value of the Company’s Common Stock on the date of grant, vest in four equal annual installments from the date of grant (subject to the Vesting Event set forth below), and expire seven years from the date of grant. Such options shall become fully vested at the at the conclusion of such director’s term of service if the director is not re-elected to the Board except where such failure to re-elect the director is the result of (i) a voluntary withdrawal from Board service by such director or (ii) prior removal from the Board for cause under Section 304 of the California Corporations Code (the “Vesting Event”).

Employment Contracts and Termination of Employment and Change of Control Arrangements

Mr. Silverman has an Employment Agreement (“Agreement”) with the Company which details the terms of his employment as our Chief Executive Officer. The Agreement granted Mr. Silverman a total of 497,040 options which vested equally over a four year period commencing with the effective date of the Agreement (July 20, 2000) and a total of 239,760 options which vested equally over a four year period commencing one year from the effective date of the Agreement, July 20, 2001. At the time the Agreement was entered into, Mr. Silverman was eligible for a cash bonus of up to 50% of his annual base compensation based on performance goals established jointly between himself and the Board.

All share amounts set forth in this disclosure have been adjusted to give effect to a 2 for 1 stock split payable to shareholders of record as of March 4, 2005 and a 2 for 1 stock split payable to shareholders of record as of March 3, 2006.

Mr. Silverman’s employment may be terminated for any reason by himself or the Company upon 60 days written notice. Should Mr. Silverman terminate his employment due to the Company’s breach of the Agreement he will be entitled to (i) a lump sum payment equal to six months base compensation; and (ii) immediate vesting of an additional 25% of all granted, but unvested stock options. Should Mr. Silverman’s employment be terminated without cause or by himself for good reason, he will be entitled to (i) unpaid base compensation and vacation earned and accrued through his date of termination plus a lump sum equal to six months base compensation, (ii) any other performance bonus earned and not paid, and (iii) vesting of an additional 25% of all unvested stock options. Should Mr. Silverman’s employment be terminated due to a “change of control” he will be entitled to (i) unpaid base compensation and vacation earned plus a lump sum payment equal to six months base compensation; (ii) any performance bonus earned but not paid; and (iii) immediate vesting of all unvested options. A “change of control” is defined as the earliest occurrence of any of the following events: the direct or indirect sale, lease, exchange or other transfer of 35% of more of the total assets of the Company, the merger or consolidation of the Company with another company with the effect that the shareholders of the Company immediately prior to the merger hold less than 51% of the combined voting power of the then outstanding securities of the surviving company; the replacement of a majority of our Directors without the approval of the Board; the purchase of 25% or more of the combined voting power of the outstanding securities of the Company with the exception of the purchase of securities by Ahmed Hussein or Sheldon Razin of shares owned by either Sheldon Razin or Ahmed Hussein. The Agreement also grants immediate vesting of all unvested options should a change of control occur whether or not Mr. Silverman’s employment is terminated.

For options other than those discussed above, the Board, as the administrator of our 1989 Stock Option Plan and 1998 Stock Option Plan, has the discretion to accelerate any outstanding options held by the Named Executive

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Officers and employees in the event of an acquisition of the Company by a merger or asset sale in which the outstanding options under each such plan are not to be assumed by the successor corporation or substituted with options to purchase shares of such corporation.

Board Compensation

Information regarding compensation of members of the Board is included above in Part III, Item 10 under the heading “Board of Directors Meetings and Related Matters.”

Compensation Committee Interlocks and Insider Participation

No director or executive officer of the Company is known by the Company to serve as an officer, director or member of a compensation committee of any other entity for which an executive officer or director thereof is also a member of our Board.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Beneficial Ownership Table

The following table sets forth certain information with respect to the beneficial ownership of our Common Stock as of June 1, 2006 by (i) each person known by the Company to beneficially own more than 5% of the outstanding shares of Common Stock, (ii) each of our current directors, (iii) each of the Named Executive Officers (as defined in this Report), and (iv) all current directors and Named Executive Officers of the Company as a group:

Name of Beneficial Owner(1)	Number of Shares of Common Stock Beneficially Owned (2)(4)(5)		Percent of Common Stock Beneficially Owned (3)(4)
Janet Razin and Sheldon Razin		5,176,880		19.4	%
Ahmed Hussein		4,651,600		17.4	%
Patrick Cline		115,500		*
Louis Silverman		76,908		*
Maurice J. DeWald		44,000		*
Vincent J. Love		44,000		*
Steven T. Plochocki		44,000		*
Ibrahim Fawzy		24,000		*
Gregory Flynn		14,995		*
Paul Holt		14,950		*
All directors and Named Executive
Officers as a group (10 persons)		10,206,833		38.2	%

* Less than 1%.

          1. Unless otherwise indicated, the address is c/o Quality Systems, Inc., 18191 Von Karman Avenue, Suite 450, Irvine, California 92612.

          2. Unless otherwise indicated, to our 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.

          3. Applicable percentage ownership is based on 26,711,000 shares of Common Stock outstanding as of June 1, 2006. Any securities not outstanding but subject to options exercisable as of June 1, 2006 or exercisable within 60 days after such date are deemed to be outstanding for the purpose of computing the percentage of outstanding Common Stock beneficially owned by the person holding such options but are not deemed to be

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outstanding for the purpose of computing the percentage of Common Stock beneficially owned by any other person.

          4. Includes shares of Common Stock subject to stock options which were exercisable as of June 1, 2006 or exercisable within 60 days after June 1, 2006, and are, respectively, as follows: Mr. Razin, 44,000 shares; Mr. Hussein, 44,000 shares; Mr. Fawzy, 24,000 shares; Mr. Silverman, 42,508 shares; Mr. Cline, 20,000 shares; Mr. Flynn, 12,463 shares; Mr. Holt, 10,750 shares; Mr. DeWald, 44,000 shares; Mr. Love, 44,000 shares; Mr. Plochocki, 44,000 shares; and all directors and Named Executive Officers as a group, 329,721 shares.

          5. All share amounts set forth in this report have been adjusted to give effect to a 2 for 1 stock payable to shareholders of record as of March 4, 2005 and a 2 for 1 stock split payable to shareholders of record as of March 3, 2006.

Equity Compensation Plan Information

          The following table sets forth information about our common stock that may be issued upon the exercise of options under all our equity compensation plans as of March 31, 2006.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted-Average Exercise Price of outstanding options, warrants and rights (b)			Number of Securities Remaining available for future under equity compensation (excluding securities in column a) (c)
Equity compensation plan approved by security holders		1,798,372		$	16.78		133,300
Equity compensation plans not approved by security holders		—			—		—
Total		1,798,372		$	16.78		133,300

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

David Razin, who is Vice President EDI Services of the Company, is the son of Sheldon Razin, Chairman of the Board. David Razin earned $167,322 in salary and bonus during the fiscal year ended March 31, 2006. Kim Cline, Vice President of Client Services, at our NextGen Healthcare Information System subsidiary, is the sister of Patrick Cline, President of the NextGen Healthcare Information System Division. Kim Cline earned $160,190 in salary and bonus during the fiscal year ended March 31, 2006.

ITEM 14. PRINCIPAL ACCOUNTING AND FEES AND SERVICES

The following table sets forth the aggregate fees billed to the Company by Grant Thornton, LLP for the fiscal years ended March 31, 2006 and 2005.

	2006		2005
Audit fees	$	819,000	$	941,000
Audit related fees	$	—	$	—
Tax fees	$	—	$	7,000
All other fees	$	9,000	$	6,000

49

The Audit Committee’s policy is to preapprove all auditing services and permitted non-audit services (including the fees and terms thereof) to be performed for the Company by its independent auditor, subject to the de minimis exceptions for non-audit services described in Section 10A(i)(1)(B) of the Securities Exchange Act of 1934 which are approved by the Audit Committee prior to the completion of the audit.

50

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)	(1)	Index to Financial Statements:
				Page
		•	Report of Independent Registered Public Accounting Firm	57
		•	Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting	58
		•	Consolidated Balance Sheets March 31, 2006 and March 31, 2005	59
		•	Consolidated Statements of Income — Years Ended March 31, 2006, March 31, 2005 and March 31, 2004	60
		•	Consolidated Statements of Shareholders’ Equity — Years Ended March 31, 2006, March 31, 2005 and March 31, 2004	61
		•	Consolidated Statements of Cash Flows — Years Ended March 31, 2006, March 31, 2005 and March 31, 2004	62
		•	Notes to Consolidated Financial Statements	63
	(2)	The following financial statement schedule for the years ended March 31, 2006, March 31, 2005 and 2004, read in conjunction with the financial statements of Quality Systems, Inc., is filed as part of this Annual Report on Form 10-K.
		•	Schedule II — Valuation and Qualifying Accounts	76
		Schedules other than that listed above have been omitted since they are either not required, not applicable, or because the information required is included in the financial statements or the notes thereto.
	(3)	The exhibits listed in the Index to Exhibits hereof are attached hereto or incorporated herein by reference and filed as a part of this Report.

51

INDEX TO EXHIBITS

EXHIBIT NUMBER		EXHIBIT
	3.1	Articles of Incorporation of the Company, as amended, are hereby incorporated by reference to Exhibit 3.1 to our Annual Report on Form 10-K for the year ended March 31, 1984.
	3.1.1	Amendment to Articles of Incorporation, effective March 4, 2005 is hereby incorporated by reference to Exhibit 3.1.1 of our Annual Report on Form 10-K for the year ended March 31, 2005.
	3.1.2	Amendment to Articles of Incorporation, effective March 2, 2006 is hereby incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed March 6, 2006.
	3.2	Bylaws of the Company, as amended and restated is hereby incorporated by reference to Exhibit 3.2 of our Annual Report on Form 10-K for the year ended March 31, 2005.
	3.3	Certificate of Amendment of Bylaws of the Company is hereby incorporated by reference to Exhibit 3.2.1 to our Registration Statement on Form S-1.
	3.4	Text of Sections 2 and 3 of Article II of the Bylaws of the Company is hereby incorporated By reference to Exhibit 3.2.2 to our Quarterly report on Form 10-QSB for the period Ended December 31, 1996.
	3.5	Certificate of Amendment of Bylaws of the Company, is hereby incorporated by reference to Exhibit 3.2.3 to our Annual Report on Form 10-K for the year ended March 31, 2000.
	10.2*	1989 Incentive Stock Option Plan is hereby incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-8.
	10.2.1*	Form of Incentive Stock Option Agreement is hereby incorporated by reference to Exhibit 10.2 to our Registration Statement on Form S-1.
	10.2.2*	Form of Non-Qualified Stock Option Agreement is hereby incorporated by reference to Exhibit 10.3 to our Registration Statement on Form S-1.
	10.3*	Form of Incentive Stock Option Agreement is hereby incorporated by reference to Exhibit 10.2 to our Registration Statement on Form S-1.
	10.4*	1993 Deferred Compensation Plan is hereby incorporated by reference to Exhibit 10.5 to our Annual Report on Form 10-KSB for the year ended March 31, 1994.
	10.4.2*	Profit Sharing and Retirement Plan, as amended, is hereby incorporated by reference to Exhibit 10.4.2 to our Annual Report on Form 10-KSB for the year ended March 31, 1994.
	10.4.3*	Profit Sharing and Retirement Plan, as amended, amendments No. 2 and 3, are hereby incorporated by reference to Exhibit 10.4.3 to our Annual Report on Form 10-KSB for the year ended March 31, 1996.
	10.5	Series “A” Convertible Preferred Stock Purchase Agreement, as amended, dated April 21, 1995 between the Company and Clinitec International, Inc., is hereby incorporated by reference to Exhibit 10.11 to our Annual Report on Form 10-KSB for the year ended March 31, 1995.

52

10.6	Form of Indemnification Agreement is hereby incorporated by reference to Exhibit 10.10 to our Registration Statement on Form S-1.
10.6.1*	Form of Indemnification Agreement for directors and executive officers authorized January 27, 2005 is hereby incorporated by reference to Exhibit 10.6.1 of our Annual Report on Form 10-K for the year ended March 31, 2005.
10.7	Agreement and Plan of Merger, dated May 16, 1996, by and among Quality Systems, Inc., CII Acquisition Corporation, Clinitec International, Inc. and certain shareholders of Clinitec International, Inc. and certain exhibits are hereby incorporated by reference to Exhibit 2 to our Current Report on Form 8-K, dated May 17, 1996 and filed May 30, 1996.
10.8	Asset Purchase Agreement, dated May 15, 1997, by and among NextGen Healthcare Information Systems, Inc., MHIS Acquisition Corp., Quality Systems, Inc., and certain shareholders of NextGen Healthcare Information Systems, Inc. is hereby incorporated by reference to Exhibit 2 of Company’s Current Report on Form 8-K, dated May 15, 1997 and filed May 29, 1997.
10.9*	1998 Employee Stock Contribution Plan is hereby incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-8.
10.10*	1998 Stock Option Plan is hereby incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-8.
10.10.1*	Amended and Restated 1998 Stock Option Plan is hereby incorporated by reference to Exhibit 10.10.1 of our Annual Report on Form 10-K for the year ended March 31, 2005.
10.11*	Memorandum of Understanding regarding the April 3, 2000 resignation of Sheldon Razin between Sheldon Razin and Quality Systems, Inc., is hereby incorporated by reference to Exhibit 10.16 to our Annual Report on Form 10-K for the year ended March 31, 2000.
10.12*	Memorandum of Understanding Relating to Director Nominees is hereby incorporated by reference to Company’s Definitive Proxy Statement for our 1999 Shareholder’s Meeting.
10.13*	Employment Agreement dated July 20, 2000 between Quality Systems, Inc. and Lou Silverman is hereby incorporated by reference to Exhibit 10.18 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.
10.14	Lease Agreement between Company and Tower Place, L.P. dated November 15, 2000, commencing February 5, 2001 is hereby incorporated by reference to Exhibit 10.14 to our Annual Report on Form 10-K for the year ended March 31, 2001.
10.15	Lease Agreement between Company and Orangewood Business Center Inc. dated April 3, 2000, amended February 22, 2001, is hereby incorporated by reference to Exhibit 10.15 to our Annual Report on Form 10-K for the year ended March 31, 2001.
10.16	Lease Agreement between Company and Craig Development Corporation dated February 20, 2001 is hereby incorporated by reference to Exhibit 10.16 to our Annual Report on Form 10-K for the year ended March 31, 2001.
10.17	Sublease Agreement between Company and Infinium Software dated February 22, 2002 is hereby incorporated by reference to Exhibit 10.17 to our Annual Report on Form 10-K for the year ended March 31, 2003.

53

10.18	Lease Agreement between the Company and HUB Properties LLC dated May 8, 2002 is hereby incorporated by reference to Exhibit 10.18 to our Annual Report on Form 10-K for the year ended March 31, 2003.
10.19	Lease Agreement between the Company and LakeShore Towers Limited Partnership Phase IV, a California limited partnership, dated September 15, 2004 is hereby incorporated by reference to Exhibit 10.19 of our Annual Report on Form 10-K for the year ended March 31, 2005.
10.20*	Board Service Agreement between the Company and Lou Silverman is incorporated by reference to Exhibit 10.2.1 to our Current Report of Form 8-K, dated May 31, 2005.
10.21*	Board Service Agreement between the Company and Patrick Cline is incorporated by reference to Exhibit 10.2.1 to our Current Report of Form 8-K dated May 31, 2005.
10.22*	2005 Stock Option and Incentive Plan is incorporated by reference to Exhibit A to our Schedule 14A filed on August 17, 2005.
10.23	Lease agreement between the Company and Von Karman Michelson Corporation dated September 6, 2005. **
10.24	Fourth Amendment to lease agreement between the Company and Tower Place, L.P. dated September 22, 2005. **
10.25	Second Amendment to lease agreement between the Company and HUB Properties LLC dated February 14, 2006. **
21	List of Subsidiaries. **
23.1	Consent of Independent Certified Public Accountants – Grant Thornton LLP. **
31.1	Certifications Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. **
32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **

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

54

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, we have duly caused this Report to be signed on our behalf by the undersigned, thereunto duly authorized.

By: /s/ LOUIS E. SILVERMAN

Louis E. Silverman,

President and Chief Executive Officer

Date: June 8, 2006

KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose signature appears below hereby constitutes and appoints Louis E. Silverman and Paul Holt, each of them acting individually, as his attorney-in-fact, each with the full power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming our signatures as they may be signed by our said attorney-in-fact and any and all amendments to this Annual Report on Form 10-K.

Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed by the following persons on our behalf in the capacities and on the dates indicated.

Signature	Title	Date
/s/ SHELDON RAZIN	Chairman of the Board
Sheldon Razin		June 8, 2006
/s/ LOUIS E. SILVERMAN.	Director, President and Chief Executive
	Officer (Principal Executive
Louis E. Silverman	Officer)/Director	June 8, 2006
/s/ PATRICK CLINE	Director, President, NextGen Healthcare
	Information Systems Division	June 8, 2006
Patrick Cline
/s/ PAUL HOLT	Secretary and Chief Financial Officer
	(Principal Financial Officer)	June 8, 2006
Paul Holt
/s/ MAURICE DEWALD	Director	June 8, 2006
Maurice DeWald
	Director
Ibrahim Fawzy

55

Signature	Title	Date
	Director
Ahmed Hussein
/s/ VINCENT LOVE	Director	June 8, 2006
Vincent Love
/s/ STEVEN PLOCHOCKI	Director	June 8, 2006
Steven Plochocki

56

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Quality Systems, Inc.

We have audited the accompanying consolidated balance sheets of Quality Systems, Inc. as of March 31, 2006 and 2005, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 2006. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether 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, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Quality Systems, Inc. as of March 31, 2006 and 2005 and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended March 31, 2006 in conformity with accounting principles generally accepted in the United States of America.

Our audit was conducted for the purpose of forming an opinion on the basic financial statements take as a whole. Schedule II is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements take as a whole.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Quality Systems, Inc.’s internal control over financial reporting as of March 31, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 2, 2006, expressed an unqualified opinion thereon.

/s/ GRANT THORNTON LLP (typed)

Irvine, California

June 2, 2006

57

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Board of Directors and Shareholders

Quality Systems, Inc.

We have audited management’s assessment, included in the accompanying Quality Systems, Inc. Management’s Report on Internal Control Over Financial Reporting, that Quality Systems, Inc. maintained effective internal control over financial reporting as of March 31, 2006, based on criteria established in Internal Control – Integrated Framework issues by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Quality Systems, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

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

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

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

In our opinion, management’s assessment that Quality Systems, Inc. maintained effective internal control over financial reporting as of March 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, Quality Systems, Inc. maintained, in all material respects, effective internal control over financial reporting as of March 31, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Quality Systems, Inc. as of March 31, 2006 and 2005, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 2006, and our report dated June 2, 2006 expressed an unqualified opinion on those financial statements.

/s/ GRANT THORNTON LLP (typed)

Irvine, California

June 2, 2006

58

QUALITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

	MARCH 31, 2006			MARCH 31, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	57,225		$	51,157
Accounts receivable, net		44,665			33,362
Inventories, net		561			960
Income tax receivable		1,195			15
Net current deferred tax assets		1,824			1,796
Other current assets		2,912			1,677
Total current assets		108,382			88,967
Equipment and improvements, net		3,739			2,697
Capitalized software costs, net		5,171			4,334
Net deferred tax assets		1,157			—
Goodwill		1,840			1,840
Other		1,958			1,604
Total assets	$	122,247		$	99,442
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,934		$	2,284
Deferred revenue		34,422			24,115
Accrued compensation and related benefits		5,490			3,436
Other current liabilities		3,812			4,021
Total current liabilities		46,658			33,856
Deferred revenue, net of current		1,494			1,362
Net deferred tax liabilities		—			291
Deferred compensation		1,686			1,202
Total liabilities		49,838			36,711
Commitments and contingencies
Shareholders’ equity:
Common stock, $0.01 par value; authorized 50,000 shares; issued and outstanding 26,711 and 26,222 shares at March 31, 2006 and March 31, 2005, respectively		267			262
Additional paid-in capital		53,675			44,368
Retained earnings		19,151			19,213
Deferred compensation		(684	)		(1,112	)
Total shareholders’ equity		72,409			62,731
Total liabilities and shareholders’ equity	$	122,247		$	99,442

The accompanying notes to these consolidated financial statements are an integral part of these consolidated statements.

59

QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)

	MARCH 31, 2006		MARCH 31, 2005		MARCH 31, 2004
Revenues:
Software, hardware and supplies	$	54,938	$	39,672	$	32,632
Implementation and training services		11,293		8,856		6,893
System sales		66,231		48,528		39,525
Maintenance and other services		39,800		29,945		23,117
Electronic data interchange services		13,256		10,488		8,292
Maintenance, EDI and other services		53,056		40,433		31,409
Total revenue		119,287		88,961		70,934
Cost of revenue:
Software, hardware and supplies		8,148		7,525		8,141
Implementation and training services		8,088		6,300		5,197
Total cost of system sales		16,236		13,825		13,338
Maintenance and other services		15,023		12,120		10,313
Electronic data interchange services		8,569		6,724		5,022
Total cost of maintenance, EDI and other services		23,592		18,844		15,335
Total cost of revenue		39,828		32,669		28,673
Gross profit		79,459		56,292		42,261
Operating expenses:
Selling, general and administrative		35,554		24,776		19,482
Research and development costs		8,087		6,903		6,139
Total operating expenses		43,641		31,679		25,621
Income from operations		35,818		24,613		16,640
Interest income		2,108		876		386
Income before provision for income taxes		37,926		25,489		17,026
Provision for income taxes		14,604		9,380		6,626
Net income	$	23,322	$	16,109	$	10,400
Net income per share:
Basic	$	0.88	$	0.63	$	0.42
Diluted	$	0.85	$	0.61	$	0.40
Weighted average shares outstanding:
Basic		26,413		25,744		24,872
Diluted		27,356		26,406		25,932

The accompanying notes to these consolidated financial statements are an integral part of these consolidated statements.

60

QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(IN THOUSANDS)

	Common Stock				APIC		Retained Earnings			Deferred Compensation			Total Shareholders’ Equity
	Shares		Amount
Balance, March 31, 2003		24,608	$	246	$	34,937	$	12,350		$	—		$	47,533
Exercise of stock options		692		8		1,300		—			—			1,308
Tax benefit resulting from stock options		—		—		1,454		—			—			1,454
Stock based compensation		—		—		1,853		—			(1,543	)		310
Net income		—		—		—		10,400			—			10,400
Balance, March 31, 2004		25,300		254		39,544		22,750			(1,543	)		61,005
Exercise of stock options		922		8		2,144		—			—			2,152
Tax benefit resulting from stock options		—		—		2,680		—			—			2,680
Stock based compensation		—		—		—		—			431			431
Dividends paid		—		—		—		(19,646	)		—			(19,646	)
Net income		—		—		—		16,109			—			16,109
Balance, March 31, 2005		26,222		262		44,368		19,213			(1,112	)		62,731
Exercise of stock options		489		5		4,476		—			—			4,481
Tax benefit resulting from stock options		—		—		4,831		—			—			4,831
Stock based compensation		—		—		—		—			428			428
Dividends paid		—		—		—		(23,384	)		—			(23,384	)
Net income		—		—		—		23,322			—			23,322
Balance, March 31, 2006		26,711	$	267	$	53,675	$	19,151		$	(684	)	$	72,409

The accompanying notes to these consolidated financial statements are an integral part of these consolidated statements.

61

QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

	MARCH 31, 2006			MARCH 31, 2005			MARCH 31, 2004
Cash flows from operating activities:
Net income	$	23,322		$	16,109		$	10,400
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,368			1,012			836
Amortization of capitalized software costs		2,460			1,952			1,490
Provision for bad debts		1,181			797			647
Provision for inventory obsolescence		158			160			54
Non-cash compensation from stock option exercises		428			431			310
Tax benefit from exercise of stock options		4,831			2,680			1,454
Deferred income taxes, net		(1,476	)		2,578			(235	)
Change in assets and liabilities:
Accounts receivable		(12,484	)		(13,879	)		(3,400	)
Inventories		241			(395	)		(112	)
Income tax receivable		(1,180	)		(15	)		—
Other current assets		(1,235	)		(184	)		627
Other assets		(354	)		(362	)		(373	)
Accounts payable		650			629			(822	)
Deferred revenue		10,439			8,214			5,564
Accrued compensation and related benefits		2,054			826			248
Income taxes payable		—			(273	)		273
Other current liabilities		(209	)		1,162			8
Deferred compensation		484			189			334
Net cash provided by operating activities		30,678			21,631			17,303
Cash flow from investing activities:
Additions to capitalized software costs		(3,297	)		(2,678	)		(2,587	)
Additions to equipment and improvements		(2,410	)		(1,697	)		(1,072	)
Net cash used in investing activities		(5,707	)		(4,375	)		(3,659	)
Cash flows from financing activities:
Dividends paid		(23,384	)		(19,646	)		—
Proceeds from the exercise of stock options		4,481			2,152			1,308
Net cash (used in) provided by financing activities		(18,903	)		(17,494	)		1,308
Net increase (decrease) in cash and cash equivalents		6,068			(238	)		14,952
Cash and cash equivalents, beginning of year		51,157			51,395			36,443
Cash and cash equivalents, end of year	$	57,225		$	51,157		$	51,395
Supplemental disclosures of cash flow information
Cash paid during the period for income taxes, net of refunds	$	11,022		$	4,541		$	4,716

The accompanying notes to these consolidated financial statements are an integral part of these consolidated statements.

62

QUALITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006 and 2005
(dollars in thousands, except per share amounts)

1. Description of Business

Quality Systems, Inc., comprised of the QSI Division (QSI Division) and a wholly owned subsidiary, NextGen Healthcare Information Systems, Inc. (NextGen Division) (collectively, the Company), develops and markets proprietary healthcare information systems for a wide range of entities including medical and dental group practices, community health centers, physician hospital organizations, management service organizations, and dental schools. The Company’s software systems include general patient information, appointment scheduling, billing, insurance claims submission and processing, managed care plan implementation and referral management, treatment outcome studies, treatment planning, drug formularies, electronic patient records, dental charting and letter generation. In addition to providing fully integrated solutions, the Company offers its clients comprehensive hardware and software maintenance and support services, system training services and EDI services which provide a variety of connectivity services to and between patients, providers and payors. The Company’s principal administrative, accounting and QSI Division operations are located in Irvine, California. The principal office of the NextGen Division is located in Horsham, Pennsylvania.

On January 31, 2006, the Board of Directors declared a 2-for-1 stock split with respect to the Company’s outstanding shares of common stock. The stock split record date was March 3, 2006 and the stock began trading post split on March 27, 2006. References to share and per share data contained in the consolidated financial statements and notes to the consolidated financial statements have been retroactively adjusted to reflect the stock split.

2. Summary of Significant Accounting Policies

Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated.

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

References to dollar amounts in these financial statement sections are in thousands, except share and per share data, unless otherwise specified. Certain prior year amounts have been reclassified to conform with fiscal year 2006 presentation.

Revenue recognition. The Company currently recognizes revenue pursuant to Statement of Position No. 97-2, “Software Revenue Recognition” (SOP 97-2), as amended by Statement of Position No. 98-9 “Modification of SOP 97-2, Software Revenue Recognition” (SOP 98-9). The Company generates revenue from the sale of licensing rights to its software products directly to end-users and value-added resellers (VARs). The Company also generates revenue from sales of hardware and third party software, implementation, training, software customization, Electronic Data Interchange (EDI), post-contract support (maintenance) and other services performed for customers who license its products.

A typical system contract contains multiple elements of the above items. SOP 97-2. as amended by SOP 98-9 requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of those elements. The fair value of an element must be based on vendor specific objective evidence (VSOE). The Company limits its assessment of VSOE for each element to either the price charged when the same element is sold separately (using a rolling average of stand alone transactions) or the price established by management having the relevant authority to do so, for an element not yet sold separately. VSOE calculations are updated and reviewed at the end of each quarter.

When evidence of fair value exists for the delivered and undelivered elements of a transaction, then discounts for individual elements are aggregated and the total discount is allocated to the individual elements in proportion to the elements’ fair value relative to the total contract fair value.

When evidence of fair value exists for the undelivered elements only, the residual method, provided for under SOP 98-9, is used. Under the residual method, the Company defers revenue related to the undelivered elements in a system sale based on VSOE of fair value of each of the undelivered elements, and allocates the remainder of the contract price net of all discounts to revenue recognized from the delivered elements. Undelivered elements of a system sale may include implementation and training services, hardware and third party software, maintenance, future purchase discounts, or other services. If VSOE of fair value of any undelivered element does not

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exist, all revenue is deferred until VSOE of fair value of the undelivered element is established or the element has been delivered.

The Company bills for the entire contract amount upon contract execution. Amounts billed in excess of the amounts contractually due are recorded in accounts receivable as advance billings. Amounts are contractually due when services are performed or in accordance with contractually specified payment dates.

Provided the fees are fixed and determinable and collection is considered probable, revenue from licensing rights and sales of hardware and third party software is generally recognized upon shipment and transfer of title. In certain transactions where collection risk is high, the cash basis method is used to recognize revenue. Revenue from implementation and training services is recognized as the corresponding services are performed. Maintenance revenue is recognized ratably over the contractual maintenance period.

Contract accounting is applied where services include significant software modification, development or customization. In such instances, the arrangement fee is accounted for in accordance with Statement of Position No. 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (SOP 81-1). Pursuant to SOP 81-1, the Company uses the percentage of completion method provided all of the following conditions exist:

• contract includes provisions that clearly specify the enforceable rights regarding goods or services to be provided and received by the parties, the consideration to be exchanged, and the manner and terms of settlement;

• the customer can be expected to satisfy its obligations under the contract;

• the Company can be expected to perform its contractual obligations; and

• reliable estimates of progress towards completion can be made.

The Company measures completion using labor input hours. Costs of providing services, including services accounted for in accordance with SOP 81-1, are expensed as incurred.

If a situation occurs in which a contract is so short term that the financial statements would not vary materially from using the percentage-of-completion method or in which the Company is unable to make reliable estimates of progress of completion of the contract, the completed contract method is utilized.

From time to time, the Company offers future purchase discounts on its products and services as part of its sales arrangements. Pursuant to AICPA TPA 5100.51, such discounts which are incremental to the range of discounts reflected in the pricing of the other elements of the arrangement, which are incremental to the range of discounts typically given in comparable transactions, and which are significant, are treated as an additional element of the contract to be deferred. Amounts deferred related to future purchase options are not recognized until either the customer exercises the discount offer or the offer expires.

Cash and Cash Equivalents. Cash and cash equivalents consist of cash, money market funds and short term U.S. Treasuries with maturities of less than 90 days. The money market fund in which the Company holds a portion of its cash invests in only investment grade money market instruments from a variety of industries, and therefore bears minimal risk. The average maturity of the investments held by the money market fund is approximately two months.

Accounts Receivable. The Company provides credit terms which typically range from thirty days to less than twelve months for most system and maintenance contract sales and generally does not require collateral. The Company performs ongoing credit evaluations of its customers and maintains reserves for estimated credit losses. Reserves for potential credit losses are determined by establishing both specific and general reserves. Specific reserves are based on management’s estimate of the probability of collection for certain troubled accounts. General reserves are established based on our historical experience of bad debt expense and the aging of our accounts receivable balances, net of deferred revenue and specifically reserved accounts. Accounts are written off as uncollectible only after the Company has expended extensive collection efforts.

Included in accounts receivable are amounts related to maintenance and services which were billed, but which had not yet been rendered as of the end of the fiscal year. Undelivered maintenance and services are included on the balance sheet in deferred revenue.

Inventories. Inventories consist of hardware for specific customer orders and spare parts, and are valued at lower of cost (first-in, first-out) or market. Management provides a reserve to reduce inventory to its net realizable value.

Equipment and Improvements. Equipment and improvements are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of equipment and improvements are

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provided over the estimated useful lives of the assets, or the related lease terms if shorter, by the straight-line method. Useful lives range as follows:

Computers and electronic test equipment	3-5 years
Furniture and fixtures	5-7 years
Leasehold improvements	lesser of lease term or estimated useful life of asset

Software Development Costs. Development costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. After technological feasibility is established, any additional development costs are capitalized in accordance with Statement of Financial Accounting Standards No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed” (SFAS 86). Such capitalized costs are amortized on a straight line basis over the estimated economic life of the related product of three years. The Company provides support services on current and prior two versions of its software. Management performs an annual review of the estimated economic life and the recoverability of such capitalized software costs. At the time a determination is made that capitalized amounts are not recoverable based on the estimated cash flows to be generated from the applicable software, any remaining capitalized amounts are written off.

Goodwill and Intangible Assets. The Company follows Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). This statement applies to the amortization of goodwill and other intangible assets. The balance of goodwill is related to the NextGen Division. Under SFAS 142, management is required to perform an annual assessment of the implied fair value of goodwill and intangible assets with indefinite lives for impairment. The Company compared the fair value of the NextGen Division with the carrying amount of its assets and determined that none of the goodwill recorded was impaired as of June 30, 2005 (the date of the Company’s last annual impairment test). The fair value of the NextGen Division was determined using an estimate of future cash flows for the NextGen Division over ten years and risk adjusted discount rates of between 15 and 25 percent to compute a net present value of future cash flows.

Long Lived Assets. The Company follows Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). Management periodically reviews the carrying value of long-lived assets to determine whether or not impairment to such value has occurred and has determined that there was no impairment at March 31, 2006.

Income Taxes. Income taxes are provided for the tax effects of transactions reported in the financial statements and consists of taxes currently due plus deferred taxes related to temporary differences between the basis of assets and liabilities for financial and tax reporting. The deferred income tax assets and liabilities represent the future state and federal tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred income 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 income tax assets when management determines that it is more likely than not that the deferred assets will not be realized.

Advertising Costs. Advertising costs are charged to operations as incurred. The Company does not have any direct-response advertising. Advertising costs, which includes trade shows and conventions, were approximately $1,915, $1,251 and $1,262 for the years ended March 31, 2006, 2005 and 2004, respectively, and were included in selling, general and administrative expenses in the consolidated statements of income.

Marketing Assistance Agreements. The Company has entered into marketing assistance agreements with certain existing users of the Company’s products which provide the opportunity for those users to earn commissions if and only if they host specific site visits upon our request for prospective customers which directly result in a purchase of our software by the visiting prospects. Amounts earned by existing users under this program are treated as a selling expense in the period in which commissionable software has been recognized as revenue.

Earnings per Share. Pursuant to Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (SFAS 128), the Company provides dual presentation of “basic” and “diluted” earnings per share (EPS).

Basic EPS excludes dilution from common stock equivalents and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from common stock equivalents.

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

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(In thousands except per share amounts)	Year Ended March 31,
	2006		2005		2004
Basic net income per share:
Net income	$	23,322	$	16,109	$	10,400
Weighted average of common shares outstanding		26,413		25,744		24,872
Net income per share	$	0.88	$	0.63	$	0.42
Diluted net income per share:
Weighted average of common shares outstanding		26,413		25,744		24,872
Weighted average of common equivalents shares:
Weighted average options outstanding		943		662		1,060
Weighted average number of common and common equivalent shares		27,356		26,406		25,932
Net income per share	$	0.85	$	0.61	$	0.40

Stock-Based Compensation. The Company accounts for stock-based employee compensation as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25), and has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (SFAS 148) that supersedes Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). SFAS 148 requires pro forma disclosures of net income and net income per share as if the fair value based method of accounting for stock-based awards had been applied for employee grants. SFAS 148 also requires disclosure of option status on a more prominent and frequent basis. Such disclosure for the years ended March 31, 2006, 2005 and 2004 is presented immediately below. The Company accounts for stock options granted to employees and board members based on the intrinsic method as prescribed by APB No. 25. The Company accounts for stock options and warrants issued to non-employees based on the fair value method. Under the fair value based method, compensation cost is recorded based on the estimated fair value of the award at the grant date and is recognized over the service period.

The Company’s fair value calculations for options granted during fiscal year 2006 and the February 11, 2005 options were made using the Black-Scholes option pricing model with the following assumptions: expected life – approximately 48 months from the date of the grant; stock volatility – 47.7%, risk free interest rate of 3.7% and, no dividends during the expected term. Although the Company announced a one-time $0.75 per share dividend on January 31, 2005, no commitment to any future dividends was made at the time the dividend was announced and no commitment to any future dividends existed at the times the options were granted. The Company had not paid a dividend to its shareholders prior to the one-time dividend announced on January 31, 2005. On January 31, 2006, the Company announced a one-time dividend of $0.875 per share. This dividend was announced subsequent to the options granted in fiscal year 2006 and was not considered in the fair value calculations. Therefore, management believes that using a zero dividend rate in the valuation of the stock options granted during fiscal year 2006 is appropriate.

The Company’s fair value calculations for options granted in fiscal years ended 2005 and 2004, with the exception of the grant on February 11, 2005, were made using the Black-Scholes option pricing model with the following assumptions: expected life – approximately 48 months from the date of the grant; stock volatility – 55 to 57%, risk free interest rate of 3.0%; and, no dividends during the expected term.

The Company’s calculations are based on a single option valuation approach and forfeitures are recognized as they occur. If the computed fair values of awards had been amortized to expense over the vesting period of the awards, pro forma net income and net income per share would have been as follows:

	Year End March 31,
	2006			2005			2004
Net income, as reported	$	23,322		$	16,109		$	10,400
Add: Option compensation expense, net of tax		262			272			189
Deduct: Stock-based employee compensation expense determined under the fair value based method, net of related tax effects		(3,280	)		(1,483	)		(414	)
Pro forma net income	$	20,304		$	14,898		$	10,175
Net income per share:
Basic, as reported	$	0.88		$	0.63		$	0.42
Basic, pro forma	$	0.77		$	0.58		$	0.41
Diluted, as reported	$	0.85		$	0.61		$	0.40
Diluted, pro forma	$	0.74		$	0.56		$	0.39
Fair market value of option awards granted during period	$	2,178		$	12,707		$	2,078

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Had the Company used a different methodology to value its options, such as the binomial model, a different valuation may have been determined which may have changed the proforma expense.

Segment Disclosures. The Company presents reporting information regarding operating segments in accordance with Statement of Financial Accounting Standards No. 131, “Disclosures About Segments of an Enterprise and Related Information” (SFAS 131). Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions on how to allocate resources and assess performance.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 revenue and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates, including those related to uncollectible receivables, vendor specific objective evidence, and income taxes and related credits and deductions. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

New Accounting Pronouncements. In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements” (SFAS 154). SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of SFAS 154 will have a material effect on its consolidated financial position, consolidated results of operations, or liquidity.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS 123R) which is a revision of SFAS 123. Statement 123R supersedes APB 25 and amends Statement of Financial Accounting Standards No. 95, “Statement of Cash Flows” (SFAS 95). SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their estimated fair values and the pro forma disclosure alternative is no longer allowable under Statement 123R. Subsequently, in April 2005, the Securities and Exchange Commission (SEC) changed the effective date from the first interim or annual reporting period beginning after June 15, 2005 to the first annual reporting period beginning after June 15, 2005. SFAS 123R will be applicable to the Company beginning April 1, 2006, and the Company intends to adopt the standard using the “modified prospective” method. The “modified prospective” method requires compensation costs to be recognized, beginning with the effective date of adoption, for a) all share-based payments granted after the effective date and b) awards granted to employees prior to the effective date of the statement that remain unvested on the effective date. As permitted by SFAS 123 we have historically accounted for share-based payments to employees using the intrinsic value method prescribed in APB No. 25 “Accounting for Stock Issued to Employees”, and as such, generally have recognized no compensation cost for employee equity incentives. Accordingly, the adoption of SFAS 123R will have an impact on the Company’s results of operations, although it will have no impact on our overall liquidity. The impact of the adoption of SFAS 123R for currently outstanding but unvested options is approximately $7,867 based on the estimated fair values used to prepare the proforma information above. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current requirements. This requirement may reduce net operating cash flows and increase net financing cash flows in periods after adoption.

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3. Intangible Assets – Capitalized Software Costs

As of March 31, 2006 and 2005, the Company had the following amounts related to intangible assets with definite lives:

	As of March 31,
(in thousands)	2006			2005
Capitalized software development (3 yrs):
Gross carry amount	$	16,584		$	13,287
Accumulated amortization		(11,413	)		(8,953	)
Net capitalization software development	$	5,171		$	4,334
Aggregate amortization expense during year ended March 31	$	2,460		$	1,952

Information related to net capitalized software costs is as follows:

	As of March 31,
(in thousands)	2006			2005
Beginning of year	$	4,334		$	3,608
Capitalization		3,297			2,678
Amortization		(2,460	)		(1,952	)
End of year	$	5,171		$	4,334

The following table represents the remaining estimated amortization of intangible assets with determinable lives as of March 31, 2006 (in thousands):

For the year ending March 31,
2007	$	2,673
2008		1,803
2009		695
Total	$	5,171

4. Cash and Cash Equivalents

At March 31, 2006 and 2005, the Company had cash and cash equivalents of $57,225 and $51,157 respectively, invested in both a major national brokerage firm's institutional fund that specializes in U.S. government securities and commercial paper with high credit ratings, and short term U.S. treasury securities.

Interest income for each of the three years ended March 31 consists of the following:

(in thousands)	Year Ended
	March 31, 2006		March 31, 2005		March 31, 2004
Interest income	$	2,108	$	876	$	386

5. Composition of Certain Financial Statement Captions
(in thousands)

Accounts receivable are summarized as follows:

	March 31, 2006			March 31, 2005
Accounts receivable, excluding undelivered maintenance and services	$	29,832		$	22,162
Undelivered software, maintenance and services billed in advance, included in deferred revenue		17,389			13,037
Accounts receivable, gross		47,221			35,199
Reserve for bad debts		(2,556	)		(1,837	)
Accounts receivable, net	$	44,665		$	33,362

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Inventories are summarized as follows:

	March 31, 2006		March 31, 2005
Computer systems and components, net of reserve for obsolescence of $304 and $146, respectively	$	539	$	891
Miscellaneous parts and supplies		22		69
Inventories, net	$	561	$	960

Equipment and improvements are summarized as follows:

	March 31, 2006			March 31, 2005
Computer and electronic test equipment	$	7,501		$	5,788
Furniture and fixtures		2,237			1,950
Leasehold improvements		597			187
		10,335			7,925
Accumulated depreciation and amortization		(6,596	)		(5,228	)
Equipment and improvements, net	$	3,739		$	2,697

Short and long-term deferred revenue are summarized as follows:

	March 31, 2006		March 31, 2005
Maintenance	$	7,838	$	4,639
Implementation services		23,792		17,471
Undelivered software and other		4,286		3,367
Deferred revenue	$	35,916	$	25,477

Accrued compensation and related benefits are summarized as follows:

	March 31, 2006		March 31, 2005
Bonus	$	3,714	$	1,998
Vacation		1,776		1,438
Accrued compensation and related benefits	$	5,490	$	3,436

Other current liabilities are summarized as follows:

	March 31, 2006		March 31, 2005
Customer deposits	$	624	$	527
Sales tax payable		575		833
Commission payable		519		625
Professional services		224		417
Deferred rent		360		198
Accrued EDI expenses		470		419
Other accrued expenses		1,040		1,002
Other current liabilities	$	3,812	$	4,021

6. Income Taxes

During the year ended March 31, 2006 and 2005, the Company claimed research and development tax credits of $821 and $493, respectively. For the year ended March 31, 2006, we are claiming a deduction of $840 for the newly-created qualified production activities income deduction under Section 199 of the Internal Revenue Service Code. The Company is claiming these credits on its tax returns. Research and development credit and the qualified production activities income deduction taken by the Company involve certain assumptions and judgments regarding qualification of expenses under the relevant tax codes.

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

(in thousands)	Year Ended March 31,
	2006			2005		2004
Current:
Federal taxes	$	12,824		$	5,365	$	5,551
State taxes		3,256			1,438		1,310
Total		16,080			6,803		6,861
Deferred:
Federal taxes		(1,168	)		2,040		(179	)
State taxes		(308	)		537		(56	)
Total		(1,476	)		2,577		(235	)
Total	$	14,604		$	9,380	$	6,626

The provision for income taxes differs from the amount computed at the federal statutory rate as follows:

(in thousands)	Year Ended March 31,
	2006			2005			2004
Federal income tax statutory rate		35.0	%		35.0	%		35.0	%
Increase (decreases) resulting from:
State income taxes		5.0			4.6			4.9
Research & development tax credits		(2.3	)		(4.3	)		(1.0	)
Qualified production activities income deduction		(0.8	)		—			—
Other		1.6			1.5			—
Effective income tax rate		38.5	%		36.8	%		38.9	%

The net deferred tax assets in the accompanying consolidated balance sheets consist of the following at March 31, 2006 and 2005:

(in thousands)	As of March 31,
	2006			2005
Deferred tax assets:
Deferred revenue and bad debt allowance	$	3,336		$	1,081
Inventory valuation		198			195
Purchased in-process research and development		1,797			2,038
Intangible assets		126			118
Accrued compensation & benefits		606			903
Deferred compensation		745			517
State income taxes		176			—
Other		327			102
Total deferred tax assets		7,311			4,954
Deferred tax liabilities:
Accelerated depreciation		(916	)		(1,791	)
Capitalized software		(2,229	)		(1,469	)
Prepaid expense		(1,121	)		—
State income taxes		—			(189	)
Other		(64	)		—
Total deferred tax liabilities		(4,330	)		(3,449	)
Total deferred tax assets, net	$	2,981		$	1,505

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

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deferred amount. No valuation allowance has been made against the deferred tax assets as management expects to receive the full benefit of the assets recorded.

7. Employee Benefit Plans and Employment Agreements

The Company has a 401 (k) plan available to substantially all of its employees. Participating employees may defer up to the IRS limit based on the IRS Code per year. The annual contribution is determined by a formula set by the Company’s Board of Directors and may include matching and/or discretionary contributions. The retirement plans may be amended or discontinued at the discretion of the Board of Directors. Contributions of $202, $162 and $161 were made by the Company to the 401 (k) plan for the fiscal years ended March 31, 2006, 2005 and 2004, respectively.

The Company has a deferred compensation plan (the Deferral Plan) for the benefit of officers and employees who qualify for inclusion. Participating employees may defer between five and 50% 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 employee’s deferrals together with earnings thereon are accrued as part of the long-term liabilities of the Company. Investment decisions are made by each participating employee from a family of mutual funds. To offset this liability, the Company has purchased life insurance policies on most of the participants. The Company is the owner and beneficiary of the policies and the cash values are intended to produce cash needed to help make the benefit payments to employees when they retire or otherwise leave the Company. The net cash surrender value of the life insurance policies and an equal amount of related Company obligation for deferred compensation was $1,653 and $1,202 at March 31, 2006 and 2005, respectively. The values of the life insurance policies and the related Company obligation are included on the balance sheet in other long term assets and deferred compensation, respectively. The Company made contributions of $25, $13 and $12 to the Deferral Plan for each of the fiscal years ended March 31, 2006, 2005 and 2004, respectively.

The Company has a voluntary employee stock contribution plan for the benefit of full time employees. The plan is designed to allow employees to acquire shares of the Company’s common stock through automatic payroll deduction. Each eligible employee may authorize the withholding of up to 10% of his/her gross payroll each pay period to be used to purchase shares on the open market by a broker designated by the Company. In addition, the Company will match 5% of each employee’s contribution and will pay all brokerage commissions and fees in connection with each purchase. The amount of the Company match is discretionary and subject to change. The plan is not intended to be an employee benefit plan under the Employee Retirement Income Security Act of 1974, and is therefore not required to comply with that Act. Contributions of approximately $14, $6 and $3 were made by the Company for fiscal years ended March 31, 2006, 2005 and 2004, respectively.

The Company has an Employment Agreement (“Agreement”) with Mr. Louis E. Silverman dated July 20, 2000 which details the terms of his employment as its Chief Executive Officer. Under the terms of the Agreement, Mr. Silverman was eligible for a cash bonus of up to 50% of his annual base compensation based on performance goals established jointly between himself and the Board of Directors. The Board of Directors has subsequently approved a bonus program that contains a provision that makes Mr. Silverman eligible for a cash bonus that is greater than that set forth in the Agreement.

Mr. Silverman’s employment may be terminated for any reason by himself or the Company upon 60 days written notice. Should Mr. Silverman terminate his employment due to the Company’s breach of the Agreement he will be entitled to (i) a lump sum payment equal to six months base compensation; and (ii) immediate vesting of an additional 25% of all granted, but unvested stock options. Should Mr. Silverman’s employment be terminated without cause or by himself for good reason, he will be entitled to (i) unpaid base compensation and vacation earned and accrued through his date of termination plus a lump sum equal to six months base compensation, (ii) any other performance bonus earned and not paid, and (iii) 12 months worth of accelerated vesting of stock options granted pursuant to the agreement. Should Mr. Silverman’s employment be terminated due to a “change of control” he will be entitled to (i) unpaid base compensation and vacation earned plus a lump sum payment equal to six months base compensation; (ii) any performance bonus earned but not paid; and (iii) immediate vesting of all unvested options. A “change of control” is defined as the earliest occurrence of any of the following events: the direct or indirect sale, lease, exchange or other transfer of 35% or more of the total assets of the Company, the merger or consolidation of the Company with another company with the effect that the shareholders of the Company immediately prior to the merger hold less than 51% of the combined voting power of the then outstanding securities of the surviving company; the replacement of a majority of the Company’s Directors without the approval of the Board of Directors; the purchase of 25% or more of the combined voting power of the outstanding securities of the Company with the exception of the purchase of securities by Sheldon Razin or Ahmed Hussein of shares owned by either Sheldon Razin or Ahmed Hussein. The Agreement also grants immediate vesting of all unvested options should a change of control occur whether or not Mr. Silverman’s employment is terminated.

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8. Employee Stock Option Plans

In September 1998, the Company’s shareholders approved a stock option plan (the “1998 Plan”) under which 4,000,000 shares of Common Stock have been reserved for the issuance of options. The 1998 Plan provides that employees, directors and consultants of the Company, at the discretion of the Board of Directors or a duly designated compensation committee, be granted options to purchase shares of Common Stock. The exercise price of each option granted shall be determined by the Board of Directors at the date of grant. Upon an acquisition of the Company by merger or asset sale, each outstanding option may be subject to accelerated vesting under certain circumstances. The 1998 Plan terminates on December 31, 2007, unless sooner terminated by the Board. At March 31, 2006, 133,300 shares were available for future grant under the 1998 Plan. As of March 31, 2006, there were 1,798,372 outstanding options related to this Plan.

In October 2005, the Company’s shareholders approved a stock option and incentive plan (the “2005 Plan”) under which 2,400,000 shares of Common Stock have been reserved for the issuance of awards, including stock options, both incentive stock options and non-qualified stock options, stock appreciation rights, restricted stock, unrestricted stock, restricted stock units, performance shares, performance units (including performance options) and other stock based awards. The 2005 Plan provides that employees, directors and consultants of the Company, at the discretion of the Board of Directors or a duly designated compensation committee, be granted awards to purchase shares of Common Stock. The exercise price of each award granted shall be determined by the Board of Directors at the date of grant. Upon an acquisition of the Company by merger or asset sale, each outstanding award may be subject to accelerated vesting under certain circumstances. The 2005 Plan terminates on May 25, 2015, unless sooner terminated by the Board. At March 31, 2006, 2,400,000 shares were available for future grant under the 2005 Plan. As of March 31, 2006, there were no outstanding options related to this Plan.

On October 5, 2005, the Board of Directors granted a total of 124,000 stock options under the Company’s 1998 Stock Option Plan to non-management Directors pursuant to the Company’s previously announced compensation plan for non-management directors, at an exercise price equal to the market price of the Company’s common stock on the date of the grant ($34.065 per share). The options fully vested on January 5, 2006 and expire on October 5, 2012. No compensation expense has been recorded for these options.

On August 8, 2005, the Board of Directors granted 19,000 options under the Company’s 1998 Stock Option Plan to selected employees at an exercise price equal to the market price of the Company’s common stock on the date of the grant ($32.445 per share). The options vest in four equal annual installments beginning August 8, 2006 and expire on August 8, 2012. No compensation expense has been recorded for these options.

On February 11, 2005, the Board of Directors granted 1,044,900 options under the 1998 plan to selected employees and to Directors (14,000 for each Director) at an exercise price equal to the market price of the Company’s Common Stock on the date of grant ($19.34 per share). The options granted to employees vest in four annual installments beginning February 11, 2006 and expire on February 11, 2012. The options granted to Directors fully vested on May 11, 2005 and expire on February 11, 2012. No compensation expense has been recorded for these options.

On September 21, 2004, the Board of Directors granted 70,000 options under the 1998 plan to Directors (10,000 for each Director) at an exercise price equal to the market price of the Company’s Common Stock on the date of the grant ($12.75 per share). The options fully vested on March 21, 2005 and expire on September 21, 2009. No compensation expense has been recorded for these options.

On September 3, 2004, the Board of Directors granted 60,000 options under the 1998 plan to selected employees at an exercise price equal to the market price of the Company’s Common Stock on the date of the grant ($11.855 per share). The options vest in four equal annual installments beginning September 3, 2005 and expire on September 3, 2009. No compensation expense has been recorded for these options.

On June 10, 2004, the Board of Directors granted 600,000 options under the 1998 plan to selected employees at an exercise price equal to the market price of the Company’s Common Stock on the date of the grant ($11.67 per share). The options vest in four equal annual installments beginning June 10, 2005 and expire on June 10, 2009. No compensation expense has been recorded for these options.

On October 29, 2003, the Board of Directors granted 240,000 options under the 1998 plan to employees at an exercise price of $3.865 per share. The options vest in four equal annual installments beginning October 29, 2004 and expire on October 29, 2008. Based on the closing share price of the Company’s stock on October 29, 2003 ($11.04 per share), this option grant will result in compensation expense of up to $1,722 (assuming all employees granted options continue their employment at the Company throughout the entire four year vesting period) to be amortized evenly over the next four years ending October 2007. During the years ended March 31, 2006, 2005 and 2004, the Company recognized compensation expense of $428, $431 and $180 related to these options.

72

During the years ended March 31, 2006, 2005 and 2004, the Company received tax benefit from the exercise of stock options of $4,831, $2,680, and $1,454 respectively.

On October 29, 2003, the Board of Directors granted 14,000 options under the 1998 plan to Emad Zikry, a then Director of the Company, at an exercise price of $1.75 per share, as director fees solely for his service on the Board of Directors. The options vested immediately and expire on October 20, 2008. This option grant resulted in compensation expense of approximately $130 recorded in the quarter ended December 31, 2003 using the intrinsic value method.

A summary of option transactions under the 1998 Plan for the three years ended March 31, 2006 is as follows:

	2006						2005						2004
	Options			Weighted -Average Exercise Price			Options			Weighted -Average Exercise Price			Options			Weighted -Average Exercise Price
Outstanding, beginning of year		2,169,444			$	13.89		1,322,348			$	2.63		1,792,308			$	2.19
Granted		143,000				33.85		1,774,900				16.23		254,000				3.75
Exercised		(486,772	)			9.20		(920,556	)			2.29		(692,960	)			1.89
Canceled		(27,300	)			12.37		(7,248	)			2.03		(31,000	)			2.25
Outstanding, end of year		1,798,372			$	16.78		2,169,444			$	13.89		1,322,348			$	2.63
Available for future grants		133,300						276,300						2,051,200

The majority of the outstanding stock options vest ratably over a four-year period commencing from the respective option grant dates. Stock options outstanding at March 31, 2006 are summarized as follows:

	Options Outstanding							Options Exercisable
Range of Exercise Price	Number Outstanding		Weighted Average Remaining Life		Weighted Average Exercise Price			Number Exercisable		Weighted Average Exercise Price
$2.81 to $3.87		143,558		2.27		$	3.70		23,558		$	2.88
$11.67 to $12.75		585,910		3.24		$	11.77		99,910		$	12.21
$19.34 to $19.34		925,904		5.87		$	19.34		223,829		$	19.34
$32.45 to $34.07		143,000		6.50		$	33.85		124,000		$	34.07
		1,798,372							471,297

9. Commitments and Contingencies

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

Rental Commitments. The Company leases facilities and offices under irrevocable operating lease agreements expiring at various dates through October 2011. Rent expense for the years ended March 31, 2006, 2005, and 2004 was $1,634, $1,285 and $1,226, respectively. Rental commitments under these agreements are as follows:

Year Ending March 31,
2007	$	1,771
2008		2,137
2009		1,905
2010		1,903
2011 and beyond		2,688
	$	10,404

73

Commitments & Guarantees. Software license agreements in both our QSI and NextGen Divisions include a performance guarantee that our software products will substantially operate as described in the applicable program documentation for a period of 365 days after delivery. To date, we have not incurred any significant costs associated with these warranties and do not expect to incur significant warranty costs in the future. Therefore, no accrual has been made for potential costs associated with these warranties.

We have historically offered short-term rights of return of less than 20 days in certain of our sales arrangements. Based on our historical experience with similar types of sales transactions bearing these short-term rights of return, we have not recorded any accrual for returns in our financial statements.

Our standard sales agreements in the NextGen Division contain an indemnification provision pursuant to which we indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with any United States patent, any copyright or other intellectual property infringement claim by any third party with respect to our software. The QSI division arrangements occasionally utilize this type of language as well. As we have not incurred any significant costs to defend lawsuits or settle claims related to these indemnification agreements, we believe that our estimated exposure on these agreements is currently minimal. Accordingly, we have no liabilities recorded for these indemnification obligations.

10. Fair Value of Financial Instruments

The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, deferred revenue and accrued liabilities. Management believes that the fair value of cash and cash equivalents, accounts receivable, accounts payable, deferred revenue, and accrued liabilities approximate their carrying values due to the short-term nature of these instruments.

11. Operating Segment Information

The Company has prepared operating segment information in accordance with SFAS 131 “Disclosures About Segments of an Enterprise and Related Information” to report components that are evaluated regularly by its chief operating decision maker, or decision making group in deciding how to allocate resources and in assessing performance. Reportable operating segments include the NextGen Division and the QSI Division.

The accounting policies of the Company’s operating segments are the same as those described in Note 2 - Summary of Significant Accounting Policies, except that the disaggregated financial results of the segments reflect allocation of certain functional expense categories consistent with the basis and manner in which Company management internally disaggregates financial information for the purpose of assisting in making internal operating decisions. Certain corporate overhead costs, such as executive and accounting department personnel related expenses, are not allocated to the individual segments by management. Management evaluates performance based on stand-alone segment operating income. Because the Company does not evaluate performance based on return on assets at the operating segment level, assets are not tracked internally by segment. Therefore, segment asset information is not presented.

Operating segment data for the three years ended March 31 was as follows:

(in thousands) Year Ended March 31,		QSI Division		NextGen Division		Unallocated Corp. Expenses			Consolidated
2006
Revenue	$	15,544	$	103,743	$	—		$	119,287
Operating income (loss)		3,610		40,245		(8,037	)		35,818
2005
Revenue		15,367		73,594		—			88,961
Operating income (loss)		4,162		25,904		(5,453	)		24,613
2004
Revenue		16,491		54,443		—			70,934
Operating income (loss)	$	4,877	$	15,789	$	(4,026	)	$	16,640

74

12. Selected Quarterly Operating Results (unaudited)

The following table presents quarterly unaudited consolidated financial information for the eight quarters in the period ended March 31, 2006. Such information is presented on the same basis as the annual information presented in the accompanying consolidated financial statements. In management’s opinion, this information reflects all adjustments that are necessary for a fair presentation of the results for these periods.

COMPARISON BY QUARTER ^*

(in thousands)	Quarter Ended (Unaudited)
	6/30/04		9/30/04		12/31/04		3/31/05		6/30/05		9/30/05		12/31/05		3/31/06
Software, hardware and supplies	$	8,819	$	9,307	$	9,781	$	11,765	$	12,973	$	13,661	$	10,835	$	17,469
Implementation and training		2,265		2,300		1,889		2,402		2,490		3,031		2,615		3,157
Total system sales		11,084		11,607		11,670		14,167		15,463		16,692		13,450		20,626
Maintenance and other		6,759		7,022		7,681		8,483		8,863		9,676		9,992		11,269
Electronic data interchange		2,287		2,588		2,737		2,876		3,102		3,174		3,310		3,670
Total maintenance, EDI and Other		9,046		9,610		10,418		11,359		11,965		12,850		13,302		14,939
Total revenue		20,130		21,217		22,088		25,526		27,428		29,542		26,752		35,565
Cost of revenue:
Software, hardware and supplies		2,352		1,692		1,384		2,097		2,456		1,907		1,659		2,126
Implementation and training		1,392		1,579		1,575		1,754		1,824		1,942		1,975		2,347
Total cost of system sales		3,744		3,271		2,959		3,851		4,280		3,849		3,634		4,473
Maintenance and other		2,947		2,956		2,823		3,394		3,409		3,637		3,553		4,432
Electronic data interchange		1,410		1,710		1,733		1,871		2,062		2,125		2,216		2,158
Total cost of maintenance, EDI and other		4,357		4,666		4,556		5,265		5,471		5,762		5,769		6,590
Total cost of revenue		8,101		7,937		7,515		9,116		9,751		9,611		9,403		11,063
Gross profit		12,029		13,280		14,573		16,410		17,677		19,931		17,349		24,502
Selling, general, & administrative		4,953		5,414		6,420		7,989		8,032		8,920		8,016		10,586
Research and development		1,612		1,818		1,707		1,766		1,741		1,977		2,208		2,161
Income from operations		5,464		6,048		6,446		6,655		7,904		9,034		7,125		11,755
Interest income		120		170		263		323		341		460		594		713
Income before provision for income taxes		5,584		6,218		6,709		6,978		8,245		9,494		7,719		12,468
Provision for income taxes		2,202		2,503		2,488		2,187		3,170		3,700		2,904		4,830
Net income	$	3,382	$	3,715	$	4,221	$	4,791	$	5,075	$	5,794	$	4,815	$	7,638
Net income per share – basic *	$	0.13	$	0.15	$	0.16	$	0.18	$	0.19	$	0.22	$	0.18	$	0.29
Net income per share – diluted *	$	0.13	$	0.14	$	0.16	$	0.18	$	0.19	$	0.21	$	0.18	$	0.28
Weighted average shares outstanding – basic		25,332		25,560		25,904		26,178		26,224		26,298		26,490		26,642
Weighted average shares outstanding – diluted		26,308		26,392		26,564		26,740		26,950		27,128		27,372		27,432

* Will not add to annual EPS due to rounding

75

Schedule II
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(in thousands)

For the Year Ended	Balance at Beginning of Period			Additions Charged to Costs and Expenses			Deductions				Balance at End of Period
March 31, 2006		$	1,837		$	1,181		$	(462	)		$	2,556
March 31, 2005		$	1,293		$	797		$	(253	)		$	1,837
March 31, 2004		$	990		$	647		$	(344	)		$	1,293

ALLOWANCE FOR INVENTORY OBSOLESCENSE
(in thousands)

For the Year Ended	Balance at Beginning of Period			Additions Charged to Costs and Expenses			Deductions				Balance at End of Period
March 31, 2006		$	146		$	179		$	(21	)		$	304
March 31, 2005		$	207		$	160		$	(221	)		$	146
March 31, 2004		$	160		$	54		$	(7	)		$	207

76

INDEX TO EXHIBITS

10.23	Lease agreement between the Company and Von Karman Michelson Corporation dated September 6, 2005.
10.24	Fourth Amendment to lease agreement between the Company and Tower Place, L.P. dated September 22, 2005.
10.25	Second Amendment to lease agreement between the Company and HUB Properties LLC dated February 14, 2006.
21	List of Subsidiaries
23.1	Consent of Independent Registered Public Accounting Firm – Grant Thornton LLP.
31.1	Certification of Chief Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

77

EX-10.23

Exhibit 10.23

OFFICE LEASE

BETWEEN

VON KARMAN MICHELSON CORPORATION

AS LANDLORD

AND

QUALITY SYSTEMS, INC.

AS TENANT

FOR

18201 VON KARMAN

SUMMARY OF BASIC LEASE INFORMATION

This Summary (the “Summary”) is hereby incorporated into and made a part of the attached Lease (this Summary and the Lease to be known collectively as the “Lease”). Each reference in the Lease to any term of this Summary shall have the meaning as set forth in this Summary. In the event of a conflict between the terms of this Summary and the Lease, the terms of the Lease shall prevail. Any capitalized terms used herein and not otherwise defined herein shall have the meaning as set forth in the Lease.

1.	Date:	Sept 6 2005
2.	Landlord:	Von Karman Michelson Corporation, a Delaware Corporation
3.	Address of Landlord:	American Realty Advisors 801 North Brand Blvd., Suite 800 Glendale, California 91203 Attention: Stanley Iezman Phone: (818) 545-1152 Telecopy: (818) 545-8460
4.	Tenant:	Quality Systems, Inc.
5.	Address of Tenant:	18191 Von Karman Avenue, Suite 450 Irvine, California 92612 Attention:
		Phone:
		Telecopy:
		(Prior to Commencement Date)
		and
		18191 Von Karman Avenue, Suite 450 Irvine, California 92612 Attention:
		Phone:
		Telecopy:
		(After Commencement Date)
6.	Premises:	Suite No. 1050, in the Building which the parties agree contains 3,313 rentable square feet and 2,918 usable square feet. The Premises are outlined on the plan attached to the Lease as Exhibit A.
7.	Building:	The building of which the Premises are a part is located at 18201 Von Karman Avenue, Irvine, California as shown on Exhibit B (the “Building”) and located on the real property described on Exhibit C (the “Property”). The Building is known as “18201 Von Karman.” The parties agree that the Building contains 219,678 rentable square feet.
8.	Term.
	(a) Lease Term:	Sixty-one (61) months.

(1)

(b)	Commencement Date:	The earliest of (a) the date on which Tenant occupies any portion of the Premises and begins conducting business therein; (b) the Possession Date; (c) the date of Substantial Completion; or (d) the date on which Substantial Completion would have occurred but for the occurrence of any Tenant Delays. The anticipated Possession Date is November 15, 2005.
(c)	Expiration Date:	The last day of the month that is 61 months after the Commencement Date occurs.

9.       Base Rent:

Lease Month	Monthly Base Rent		Monthly Rental Rate per Rentable Square Foot
1-12	$	7,619.90	$	2.30
13-24	$	7,785.55	$	2.35
25-36	$	7,951.20	$	2.40
37-48	$	8,116.85	$	2.45
49-61	$	8,282.50	$	2.50

Provided that Tenant has faithfully performed all of the terms and conditions of this Lease, Landlord agrees to abate Tenant’s obligation to pay Base Rent for the first (1st) month of the Term (the “Conditional Rent”). Notwithstanding the foregoing, however, during such abatement period, Tenant shall still be responsible for the payment of all Additional Rent payable under this Lease. In the event of a Default at any time during the Term, in addition to any other remedies to which Landlord may be entitled, Landlord shall be entitled to recover the Conditional Rent (i.e. the amount of the Conditional Rent shall not be deemed to have been abated, but shall become immediately due and payable as unpaid Rent earned, but due at the time of such Default).

10.	Additional Rent.
	(a)		Base Year:	Calendar year 2006.
	(b)		Tenant’s Proportionate Share of Operating Costs:	1.51%.
11.	Construction:
	(a)	Landlord Supervision Fee:		Five percent (5)% of the Allowance.
12.	Security Deposit:			$8,381.89.
13.	Permitted Use:			General office use.
14.	Parking:			Non-Reserved Parking Spaces: Up to four (4) spaces for every 1,000 usable square feet of the Premises.
				Initial Monthly Non-Reserved Parking Rate: $50.00 per space.
15.	Brokers:

(2)

(a)	Tenant:	Kern Olsen Real Estate Services 4101 Birch Street, Suite 150 Newport Beach, CA 92660 Attention: James Kern
(b)	Landlord:	CB Richard Ellis 2030 Main Street, Suite 230 Irvine, CA 92614 Attention: John Weiner

16.	Addenda and Exhibits:	The addenda and exhibits listed below are incorporated by reference in this Lease.
		Addendum #1 – Cancellation Option
		Exhibit A	Floor Plan of Premises
		Exhibit B	Site Plan of Building
		Exhibit C	Legal Description
		Exhibit D	Term Certification
		Exhibit E	Construction
		Exhibit F	Building Services
		Exhibit G	Rules and Regulations
		Exhibit H	Parking Agreement

Landlord and Tenant hereby agree to the foregoing terms of this Lease Summary.

LANDLORD:	VON KARMAN MICHELSON CORPORATION, a Delaware corporation
	By:
	Printed Name: Signatory
	Title: Signatory
	Date: Signatory
TENANT:	QUALITY SYSTEMS, INC., a California corporation
	By:
	Printed Name: Paul Holt
	Title: CFO
	Date: 9/6/05

(3)

TABLE OF CONTENTS

		Page
ARTICLE 1	LEASE OF PREMISES	1
ARTICLE 2	DEFINITIONS	1
ARTICLE 3	PREMISES AND DELIVERY OF POSSESSION	6
ARTICLE 4	RENT	7
ARTICLE 5	SECURITY DEPOSIT	8
ARTICLE 6	USE	9
ARTICLE 7	HAZARDOUS MATERIALS	9
ARTICLE 8	SERVICES AND UTILITIES	10
ARTICLE 9	CONDITION OF THE PREMISES	12
ARTICLE 10	REPAIRS AND MAINTENANCE	12
ARTICLE 11	ALTERATIONS AND ADDITIONS	12
ARTICLE 12	CERTAIN RIGHTS RESERVED BY LANDLORD	13
ARTICLE 13	RULES AND REGULATIONS	14
ARTICLE 14	TRANSFERS	14
ARTICLE 15	DESTRUCTION OR DAMAGE	16
ARTICLE 16	EMINENT DOMAIN	17
ARTICLE 17	INDEMNIFICATION, WAIVER RELEASE AND LIMITATION OF LIABILITY	17
ARTICLE 18	TENANT’S INSURANCE	19
ARTICLE 19	DEFAULT	20
ARTICLE 20	LANDLORD REMEDIES AND DAMAGES	21
ARTICLE 21	BANKRUPTCY	23
ARTICLE 22	LIEN FOR RENT	23
ARTICLE 23	HOLDING OVER	24
ARTICLE 24	SURRENDER OF PREMISES	24
ARTICLE 25	BROKERAGE FEES	24
ARTICLE 26	NOTICES	24
ARTICLE 27	RELOCATION OF PREMISES	25
ARTICLE 28	SIGNAGE	25
ARTICLE 29	LENDER PROVISIONS	25
ARTICLE 30	MISCELLANEOUS	26

-i-

OFFICE LEASE

THIS OFFICE LEASE (the “Lease”) is made effective as of ___________________, 2005 by and between VON KARMAN MICHELSON CORPORATION, a Delaware corporation, (“Landlord”) and QUALITY SYSTEMS, INC., a California corporation (“Tenant”) with reference to the following facts and circumstances.

A.          Landlord is the owner of the Project, as defined herein.

B.          The Premises covered by this Lease are defined on the Lease Summary and are located in the Building, as defined on the Lease Summary.

C.          American Realty Advisors, Inc. (“Advisor”) is the real estate investment manager for Landlord.

D.          The parties desire to enter into this Lease, all on the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the foregoing facts and circumstances, the mutual covenants and promises contained herein and after good and valuable consideration, the receipt and sufficiency of which are acknowledged by each of the parties, the parties do hereby agree to the following:

ARTICLE 1
LEASE OF PREMISES

In consideration of the Rent and the provisions of this Lease, Landlord leases to Tenant and Tenant leases from Landlord the Premises. In addition, Tenant shall have the non-exclusive right (unless otherwise provided herein) in common with Landlord, other tenants, subtenants, and invitees to use the Common Areas.

ARTICLE 2
DEFINITIONS

As used in this Lease, the following terms shall have the following definitions:

2.1          Additional Rent. All costs and expenses that Tenant assumes or agrees to pay to Landlord under this Lease other than Base Rent.

2.2          Affiliate. An entity that is controlled by, controls, or is under common control with a party. “Control” shall mean the ownership, directly or indirectly, of at least fifty-one percent (51%) of the voting securities of, or possession of the right to vote, in the ordinary direction of its affairs, of at least fifty-one percent (51%) of the voting interest in any entity.

2.3          Bankruptcy Code. Title 11 of the United States Code, as amended from time to time.

2.4          Base Rent. As set forth on the Lease Summary.

2.5          Base Year. As set forth on the Lease Summary.

2.6          Building Services. As set forth in Exhibit F.

2.7          Building Systems. Any plant, machinery, transformers, duct work, cable, wires, and other equipment and facilities, and any systems designed to supply heat, ventilation, air conditioning and humidity or any other services or utilities, or comprising or serving as any component or portion of the electrical, gas, steam, plumbing, sprinkler, communications, alarm, security, or fire/life safety systems or equipment, any Telecommunications System serving the Building and any other mechanical, electrical, electronic, computer or other systems or equipment that serves the Building in whole or in part.

2.8          Business Days. Days other than Saturdays, Sundays and Holidays. If any item must be accomplished or delivered hereunder on a day that is not a Business Day, it shall be timely to accomplish or deliver the same on the next following Business Day.

2.9          Business Hours. As set forth in Exhibit F.

2.10       Commencement Date. As set forth on the Lease Summary.

- 1 -

2.11          Common Areas. The building lobbies, common corridors, restrooms, passageways, elevators, stairways, unrestricted parking areas, entrances, exits, driveways and walkways, loading facilities, freight elevators, terraces and landscaped areas in and around the Building, and other generally understood public or common areas in the Project.

2.12          Environmental Laws. All federal, state and local laws, ordinances, regulations, and standards regulating or controlling hazardous wastes or hazardous substances, including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. 9601, et seq.; the Hazardous Material Transportation Act, 49 U.S.C. 1801 et seq.; and the Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq.

2.13          Expiration Date. As set forth on the Lease Summary, unless otherwise sooner terminated in accordance with the provisions of this Lease.

2.14          Guarantor(s). The parties set forth on the Lease Summary and any other party liable for or required by Landlord to guaranty Tenant’s obligations under the Lease.

2.15          Hazardous Materials. Any hazardous waste or hazardous substance as defined in any federal, state, county, municipal, or local statute, ordinance, rule, or regulation applicable to the Project, including, without limitation, the Environmental Laws. “Hazardous Materials” shall also include asbestos or asbestos-containing materials, radon gas, petroleum, or petroleum fractions, urea formaldehyde foam insulation, transformers containing levels of polychlorinated biphenyls greater than 50 parts per million, medical waste, electromagnetic fields, mold and chemicals known to cause cancer or reproductive toxicity, whether or not defined as a hazardous waste or hazardous substance in any statute, ordinance, rule or regulation.

2.16          Holidays. All federally observed holidays, including New Year’s Day, President’s Day, Martin Luther King, Jr. Day, Memorial Day, Independence Day, Labor Day, Veteran’s Day, Thanksgiving Day and Christmas Day.

2.17          Insurance. All costs incurred by Landlord for insurance with respect to the Project, including but not limited to public liability, property damage, earthquake, flood, pollution, mold, terrorism and property insurance with such limits and in such amounts as may be determined from time to time by Landlord or its lenders.

2.18          Interest Rate. The average prime loan rate published by the board of governors of the Federal Reserve System of the United States, as the same may change from time to time, plus four percent (4%) per annum, but not in excess of the maximum rate, if any, allowed by Law for the transaction on which interest is being calculated.

2.19          Landlord Related Parties. Landlord, Landlord’s Affiliates, and the members, principals, beneficiaries, partners, trustees, shareholders, directors, officers, employees, mortgagees, investment managers, property managers, brokers, contractors, attorneys, and agents of Landlord and Landlord’s Affiliates, and the successors of such parties.

2.20          Landlord Work. The work to be performed by Landlord, if any, set forth in Exhibit E-l.

2.21          Law or Laws. All federal, state, county and local governmental and municipal laws, statutes, ordinances, rules, regulations, requirements, codes, decrees, orders, and decisions by courts and cases, when the decisions are considered binding precedent in the State, and decisions of federal courts applying the Law of the State; including but not limited to The Americans With Disabilities Act of 1990 (42 U.S.C. § 12101 et seq.) and any regulations and guidelines promulgated thereunder, as all of the same may be amended and supplemented from time to time.

2.22          Lease Year. Each twelve (12) month period or portion thereof during the Term, commencing with the Commencement Date, without regard to calendar years.

2.23          Mortgagee. The lessor under any present and future ground or underlying lease of the Property and the holder of any mortgage, deed to secure debt or trust deed now or hereafter in force against the Property or the Building.

2.24          Operating Costs. All costs incurred by Landlord in the ownership, management, maintenance, repair, replacement, improvement, alteration and operation of the Building and Project, including, without limitation, the following: (a) utilities; (b) supplies, tools, equipment and materials used in the operation, repair and maintenance of the Building or the Project; (c) landscaping; (d) parking area repair, restoration, and maintenance, including, but not limited to, resurfacing, repainting, re-striping, and cleaning; (e) reasonable reserves for operation, maintenance and repair of the Project and for covering uninsured damage and liability claims relating to the Project, including, without limitation, deductible amounts (provided that if Landlord incurs an expense for which a reserve is held, Landlord shall apply the applicable reserves to the expense prior to including the balance of the expense in Operating Costs); (f) fees, charges and other costs, including, without limitation,

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reasonable consulting fees, legal fees and accounting fees, of all contractors engaged by Landlord or otherwise reasonably incurred by Landlord in connection with the management, operation, maintenance and repair of the Building or the Project; (g) compensation (including, without limitation, employment taxes and fringe benefits) of all persons who perform duties in connection with the operation, maintenance, repair, or overhaul of the Building or the Project, and equipment, improvements, and facilities located within the Project; (h) operation and maintenance of a room for delivery and distribution of mail to tenants of the Building or the Project as required by the U. S. Postal Service (including, without limitation, an amount equal to the fair market rental value of the mail room premises); (i) payments under any easement, license, operating agreement, declaration, restrictive covenant, underlying or ground lease (excluding rent), or instrument pertaining to the sharing of costs by the Building or the Project; (j) operation, repair, maintenance and replacement of all Building Systems, including, without limitation, the cost to replace or retrofit as required by Laws enacted or applied to the Building after the date of this Lease; (k) janitorial service, alarm and security service, window cleaning, trash removal; (1) repair and replacement of building standard surfaces, including but not limited to wall and floor coverings, ceiling tiles. window coverings and fixtures; (m) maintenance and replacement of curbs and walkways; (n) repair to and replacement of the roof; (o) Building signage and directories; (p) management of the Building or the Project, whether by Landlord or an independent contractor (including, without limitation, an amount equal to the fair market value of any on-site manager’s office); (q) rental expenses for (or a reasonable depreciation allowance on) personal property used in maintenance, operation or repair of the Building or the Project; (r) licenses, certificates, permits and inspections and the cost of contesting the validity or applicability of any governmental enactments that may affect Operating Costs; (s) the costs incurred in connection with the implementation and operation of any governmentally mandated transportation system management program or similar program; (t) any costs, expenditures, or charges (whether capitalized or not) required by any governmental or quasi-governmental authority; and (u) amortization of capital expenses (including, without limitation, financing costs) that are (A) required, after the date of this Lease, by a governmental entity for energy conservation, handicapped requirements, or life safety purposes, or (B) made by Landlord to reduce Operating Costs; provided that such cost shall be amortized (including interest on the unamortized cost) over its useful life as Landlord shall reasonably determine. Notwithstanding the foregoing, for purposes of this Lease, Operating Costs shall not include:

          2.24.1          Costs (including, without limitation, permit, license and inspection costs) incurred in renovating or otherwise improving, decorating or redecorating rentable space for other tenants or vacant rentable space;

          2.24.2          Utilities or services sold to Tenant or others for which Landlord is entitled to and actually receives reimbursement (other than through any operating cost reimbursement provision similar to the provisions set forth in this Lease);

          2.24.3          Except as otherwise specifically provided in this Section, alterations to the Building that are considered capital improvements and replacements of such capital improvements under sound real estate management principles;

          2.24.4          Depreciation and amortization, except on materials, small tools and supplies purchased by Landlord to enable Landlord to supply services Landlord might otherwise contract for with a third party, where such depreciation and amortization would otherwise have been included in the charge for such third party services, all as determined in accordance with sound real estate management principles;

          2.24.5          Services or other benefits that are not available to Tenant, but which are provided to other tenants of the Building;

          2.24.6          Overhead or any profit increment paid to Landlord or to subsidiaries or affiliates of Landlord for services in or in connection with the Building to the extent the same exceeds the cost of such services that could be obtained from equally qualified third parties on a competitive basis or at market rates;

          2.24.7          Except as otherwise specifically provided in this Section, interest on debt or amortization on any mortgages, other charges, costs and expenses payable under any mortgage, if any, and costs for financing and refinancing the Project;

          2.24.8          Ground rents;

          2.24.9          Compensation and employee benefits paid to clerks, attendants or other persons in a commercial concession operated by Landlord, except the Building parking facility;

          2.24.10        Rentals and other related expenses incurred in leasing heat, ventilation, and air-conditioning, elevators or other equipment ordinarily considered to be of a capital nature, except equipment used (a) in providing janitorial or similar services and which is not affixed to the Building, and (b) in case of emergency;

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          2.24.11          Electrical power for which Tenant directly contracts with and pays a local public service company;

          2.24.12          Marketing costs, including, without limitation, leasing commissions, attorneys’ fees in connection with the negotiation and preparation of letters, deal memos, letters of intent, leases, subleases and/or assignments, space planning costs, and other costs and expenses incurred in connection with lease, sublease or assignment negotiations and transactions with present or prospective tenants or other occupants of the Building, including, without limitation, attorneys’ fees and other costs and expenditures incurred in connection with disputes with present or prospective tenants or other occupants of the Building;

          2.24.13          Costs covered by insurance, to the extent of the insurance proceeds actually received by Landlord;

          2.24.14          Costs covered by warranties, to the extent of the amount actually paid under the warranty;

          2.24.15          Any service provided directly to and paid directly by any tenant; and

          2.24.16          Wages and benefits of any employee who does not devote substantially all of his or her employed time to the Building unless such wages and benefits are prorated to reflect time spent on operating and managing the Building vis-a-vis time spent on matters unrelated to operating and managing the Building.

2.25          Permitted Use. As set forth on the Lease Summary.

2.26          Permitted Transfer. The transfer of ownership interests in a publicly traded entity, a transfer in connection with a sale of substantially all of the assets of Tenant as a going concern, a merger or consolidation of Tenant with another entity, and an assignment or subletting of all or a portion of the Premises to an Affiliate of Tenant.

2.27          Possession Date. The date on which Landlord tenders possession of the Premises to Tenant with the Landlord Work Substantially Completed.

2.28          Project. The Property, the Building and any other improvements on the Property.

2.29          Project Operating Costs. Operating Costs, Taxes and Insurance. If at any time during the Term the Project Operating Costs are not based on a completed and fully assessed Project having at least ninety-five percent (95%) of the Rentable Area occupied, then Project Operating Costs shall be adjusted by Landlord in order reasonably to approximate the variable components of Operating Expenses for such year or applicable portion thereof, employing sound accounting and management principles, that would have been payable if the Project were completed, fully assessed and at least ninety-five percent (95%) occupied.

2.30          Rent. Base Rent and Additional Rent.

2.31          Rentable Area.

          2.31.1          In the case of a floor leased to a single tenant, Rentable Area shall be the total square footage of all floor area measured from the inside surface of the exterior glass line of the Building to the inside surface of the opposite exterior glass line, excluding only Service Areas and General Common Areas (the “USF” for such single-tenant floor), plus an allocation of the square footage of the General Common Areas.

          2.31.2          In the case of a floor leased to more than one tenant, Rentable Area shall be the total square footage of all floor areas within the inside surface of the exterior glass line of the Building enclosing the Premises and measured to the mid-point of the demising walls, excluding only Service Areas (the “USF” for such multi-tenant floor), plus an allocation of the square footage of the General Common Areas and an allocation of the square footage of the On-Floor Common Areas.

          2.31.3          “Service Areas” shall mean the areas within (and measured from the exterior surface of the interior walls enclosing, or from the inside surface of the exterior glass or wall enclosing, as the case may be) Building stairs, elevator shafts, flues, vents, stacks, pipe shafts and vertical ducts. Areas for the specific use of Tenant or other tenants of the Building or installed at the request of Tenant, such as special stairs or elevators, are not included within the definition of Service Areas.

          2.31.4          “General Common Areas” shall mean those areas within (and measured from the midpoint of the walls or from the inside surface of the exterior glass enclosing) the Building’s elevator machine rooms, main mechanical rooms, electrical rooms, and public lobbies, engineering and cleaning staging areas, and other areas not leased or held for lease

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within the Building, but which are reasonably necessary for the proper utilization of the Building or to provide customary services to the Building, plus an allocation of any On-Floor Common Areas to the General Common Areas on the floor for floors that contain General Common Areas. The allocation of the square footage of the General Common Areas shall be equal to the total square footage of the General Common Areas multiplied by a fraction, the numerator of which is the USF of the Premises and the denominator of which is the total of all USF contained in the Building.

          2.31.5          “On-Floor Common Areas” shall mean the total square footage of all areas within (and measured from the midpoint of the walls enclosing) public corridors, elevator foyers, rest rooms, mechanical rooms, janitor closets, telephone and equipment rooms, and other similar facilities for the use of all tenants on the floor on which the Premises are located. The allocation of the square footage of the On-Floor Common Areas shall be equal to the total On-Floor Common Areas on said floor multiplied by a fraction, the numerator of which is the USF of the portion of the Premises located on said floor and the denominator of which is the total of all USF on said floor.

          2.31.6          Except as provided expressly to the contrary herein, Landlord reserves the right to alter the Project, and in such event, the Rentable Area of the Premises and the Project could likewise be revised. The Rentable Area of the Project may from time to time be subject to recalculation, as determined by Landlord and applied on a consistent basis throughout the Project.

2.32          Rules and Regulations. As set forth in Exhibit G.

2.33          State. The state in which the Project is located.

2.34          Substantial Completion or Substantially Completed. As defined in the Exhibit E.

2.35          Taxes. All taxes, assessments, whether special or general, water and sewer charges, and other similar government charges levied on or attributable to the Building or Project or their operation, including, without limitation (a) real property taxes or assessments levied or assessed against the Building or Project; (b) assessments or charges levied or assessed against the Building or Project by any redevelopment agency, municipality or governmental or quasi-governmental agency, including but not limited to any assessments or the Project’s contribution towards a governmental or private cost-sharing agreement for the purpose of augmenting or improving the quality of services and amenities normally provided by governmental agencies; (c) any tax, assessment, levy, license fee or charge measured by or based, in whole or in part, by Rent received from the leasing of the Premises, the Building, or the Project, or any portions thereof; (d) general or special, ad valorem or specific, excise, capital levy, or other tax, assessment, levy, or charge directly on the Rent received under this Lease or on the rent received under any other leases of space in the Building or Project; (e) any transfer, transaction, or similar tax, assessment, levy, or charge based directly or indirectly upon the transaction represented by this Lease or other leases in the Project; (f) any occupancy, use, per capita, or other tax, assessment, levy, or charge based directly or indirectly upon the use or occupancy of the Premises or other premises within the Building or the Project; (g) interest on installments as charged by the taxing authority; and (h) the reasonable costs and expenses of any contest or protest of Taxes prosecuted by Landlord, including, without limitation, any appraisal fees and attorneys’ fees. Taxes shall not include (i) any net income, franchise, capital stock, estate of inheritance taxes imposed by the State or Federal Government or their agencies, branches, or departments, and (ii) tax penalties, interest or late charges incurred as a result of Landlord’s failure to make timely payment of Taxes. Tenant hereby waives, and assigns, transfers and conveys to Landlord, any and all rights to contest or protest any Taxes. Taxes for any calendar year shall only include those taxes or installments of assessments that become due and payable during said year. Landlord shall pay assessments in installments over the longest period of time permitted by the taxing authority.

2.36          Telecommunications Systems. All telecommunications systems including but not limited to voice, video, data, and any other telecommunications services provided over wire, fiber optic, microwave, wireless and any other transmission systems, for part or all of any telecommunications within the Building or from the Building to any other location.

2.37          Tenant Delays. As defined in Exhibit E.

2.38          Tenant Related Parties. Tenant, its agents, contractors, subcontractors, employees, invitees, subtenants, transferees, and any other party claiming by, through or under Tenant.

2.39          Tenant’s Cost Allocation. The sum of the following: (a) Tenant’s Proportionate Share of Operating Costs for the year in question in excess of Operating Costs incurred during the Base Year; (b) Tenant’s Proportionate Share of Taxes for the year in question in excess of Taxes incurred during the Base Year; and (c) Tenant’s Proportionate Share of Insurance for the year in question in excess of Insurance incurred during the Base Year.

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2.40          Tenant’s Property. All movable partitions, business and trade fixtures, machinery and equipment, communications equipment, and office equipment located in the Premises and acquired by or for the account of Tenant, without expense to Landlord, that can be removed without damage to the Building, and all furniture, furnishings, and other articles of movable personal property owned by Tenant and located in the Premises.

2.41          Tenant’s Proportionate Share. As set forth on the Lease Summary. Such share is a fraction, the numerator of which is the Rentable Area of the Premises, and the denominator of which is the Rentable Area of the Project. Tenant’s Proportionate Share is subject to recalculation in accordance with changes in the Rentable Area of the Premises or the Project. Landlord reserves the right to create pools of similarly situated tenants for the purpose of allocating certain Operating Costs that benefit only the tenants in such pool (“Specialized Operating Costs”). For the purpose of allocating Specialized Operating Costs for any pool of which Tenant is a member, Tenant’s Proportionate Share shall be a fraction, the numerator of which shall be the Rentable Area of the Premises, and the denominator of which shall be the Rentable Area of the premises of all tenants in such pool.

2.42          Term. As set forth on the Lease Summary, as the same may be extended from time to time.

2.43          Transfer. An assignment, mortgage, pledge, hypothecation, encumbrance, lien or other transfer of this Lease or any interest hereunder, a transfer by operation of law, a sublease of the Premises or any part thereof, or the use of the Premises by any party other than Tenant and its employees. “Transfer” shall also include (a) if Tenant is a partnership or limited liability company, the withdrawal or change, voluntary, involuntary or by operation of law, of twenty-five percent (25%) or more of the partners or members, or transfer of twenty-five percent (25%) or more of partnership or membership interests, within a twelve (12)-month period, or the dissolution of the partnership or company without immediate reconstitution thereof, (b) if Tenant is a closely held corporation (i.e., whose stock is not publicly held and not traded through an exchange or over the counter), the dissolution, merger, consolidation or other reorganization of Tenant, the sale or other transfer of more than an aggregate of twenty-five percent (25%) of the voting shares of Tenant (other than to immediate family members by reason of gift or death), within a twelve (12)-month period; and (c) the sale, mortgage, hypothecation or pledge of more than an aggregate of twenty-five percent (25%) of the value of the unencumbered assets of Tenant within a twelve (12) month period. Notwithstanding the foregoing a “Transfer” shall not include a “Permitted Transfer” provided that (A) the transferee assumes, in full, the obligations of Tenant under this Lease; (B) Tenant remains fully liable under this Lease; (C) the use of the Premises remains unchanged; (D) Landlord shall have received an executed copy of all documentation effecting such transfer on or before its effective date; and (E) the same is not a subterfuge by Tenant to avoid its obligations under this Lease.

2.44          Transferee. Any person to whom any Transfer is made.

ARTICLE 3
PREMISES AND DELIVERY OF POSSESSION

3.1          Delivery of Possession. Except as otherwise provided herein, Landlord shall use commercially reasonable efforts to deliver possession of Premises on or before the anticipated Possession Date set forth on the Lease Summary. If for any reason, Landlord is delayed in delivering possession of the Premises to Tenant, Landlord shall not be subject to any liability for such failure, and the validity of this Lease shall not be impaired, but (except in the case of Tenant Delays) the Commencement Date shall be extended for the period of such delay. Notwithstanding the foregoing, provided no Default has occurred, if Landlord does not cause the Possession Date to occur within one hundred eighty (180) days following the anticipated Possession Date as set forth on the Lease Summary (the “Outside Date”), then the sole remedy of Tenant for such failure shall be the right to deliver a notice to Landlord (a “Termination Notice”) electing to terminate this Lease effective upon the date occurring fifteen (15) Business Days following receipt by Landlord of the Termination Notice (the “Effective Date”). The Termination Notice must be delivered by Tenant to Landlord, if at all, not earlier than the Outside Date nor later than fifteen (15) Business Days after the Outside Date. Provided however, if the Possession Date occurs prior to the Effective Date, the termination shall be nullified and this Lease shall remain in full force and effect. Upon any termination as set forth in this Section, Landlord and Tenant shall be relieved from any and all liability to each other resulting hereunder. Tenant’s right to terminate this Lease, as set forth in this Section, shall be Tenant’s sole and exclusive remedy at law or in equity for the failure of the Possession Date to occur by the Outside Date. The Outside Date shall be extended to the extent of any delays beyond the reasonable control of Landlord, including force majeure delays, and Tenant Delays.

3.2          Commencement Date. If the Commencement Date is not fixed on the Lease Summary, once the Commencement Date is fixed, within ten (10) days following request by Landlord, Tenant will execute and deliver to Landlord a certificate substantially in the form of Exhibit D attached hereto and made a part hereof, indicating thereon any exceptions thereto that may exist at that time. Failure of Tenant to execute and deliver such certificate shall constitute binding and conclusive

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acceptance of the Premises and acknowledgment by Tenant that the statements included in Exhibit D, as prepared by Landlord, are true and correct.

3.3          Size of Premises. The Rentable Area of the Premises will be deemed for all purposes to be as set forth on the Lease Summary.

ARTICLE 4
RENT

Tenant agrees to pay to Landlord all Rent payable hereunder, without set-off or deduction, in lawful money of the United States of America. Tenant shall pay the Rent as follows:

4.1          Base Rent. Tenant shall pay to Landlord the Base Rent without notice or demand, in installments due and payable in advance on the first day of each calendar month during the Term. Along with and in addition to each monthly Base Rent payment under the Lease, Tenant shall pay to Landlord the sales or privilege tax required under applicable Law. In the event of any fractional calendar month, Tenant shall pay for each day in such partial month a rental equal to 1/30 of the Base Rent. Concurrent with the execution of this Lease, Tenant will deliver to Landlord the first month’s Base Rent.

4.2          Tenant’s Cost Allocation. For each calendar year after the Base Year, in addition to the Base Rent and all other payments due under this Lease, Tenant shall pay Tenant’s Cost Allocation, as follows:

          4.2.1          Estimated Payments. Tenant shall pay Landlord’s reasonable estimate of Tenant’s Cost Allocation for each year (the “Estimated Payment”) in advance, in monthly installments, commencing on the first (1st) day of the month following the month in which Landlord notifies Tenant of the amount it is to pay hereunder and continuing until the first (1st) day of the month following the month in which Landlord notifies Tenant of any revised Estimated Payment. Landlord shall estimate from time to time the amount of the Tenant’s Cost Allocation for each year and then make an adjustment in the following year based on the actual Tenant’s Cost Allocation incurred for the prior year. In the event of any fractional calendar month, Tenant shall pay for each day in such partial month a rental equal to 1/30 of the Estimated Payment.

          4.2.2          Reconciliation. Within a reasonable period after the end of each calendar year, Landlord shall deliver to Tenant a statement (the “Statement”) setting forth Tenant’s Cost Allocation for such year. If Tenant’s Cost Allocation for such year exceeds the total of the Estimated Payment made by Tenant for each year, Tenant shall pay Landlord the amount of the deficiency within ten (10) days of the receipt of the Statement. If the Estimated Payment made by Tenant exceeds Tenant’s Cost Allocation for such year, then Landlord shall credit against Tenant’s next ensuing monthly installment(s) of Project Operating Costs an amount equal to the difference until the credit is exhausted. If a credit is due from Landlord after the Expiration Date, Landlord shall pay Tenant the amount of the credit. The obligations of Tenant and Landlord to make payments required under this Section shall survive the expiration or termination of this Lease, and Landlord’s failure to deliver the Statement shall not be deemed a waiver of Landlord’s right to make the adjustments set forth herein.

          4.2.3          Landlord’s Records. Landlord shall maintain records respecting Project Operating Costs and determine the same in accordance with sound accounting and management practices, consistently applied. Tenant or its representative shall have the right to examine such records upon reasonable prior notice specifying which records Tenant desires to examine, during normal business hours at the place or places where such records are normally kept, by sending such notice no later than sixty (60) days following the furnishing of the Statement. Tenant may take exception to matters included in Project Operating Costs or Landlord’s computation of Tenant’s Proportionate Share by sending notice specifying such exception and the reasons therefor to Landlord no later than thirty (30) days after Landlord makes such records available for examination. If Tenant takes exception to any matter contained in the Statement as provided herein, Landlord shall refer the matter to an independent certified public accountant of Landlord’s choice, subject to Tenant’s reasonable approval, whose certification as to the proper amount shall be final and conclusive as between Landlord and Tenant. Tenant shall promptly pay the cost of such certification, including, without limitation, any reasonable attorneys’ fees incurred by Landlord in connection therewith, unless such certification determines that Tenant was overbilled by more than four percent (4%) in the aggregate for the applicable year. Pending resolution of any such exceptions in the foregoing manner, Tenant shall continue paying Project Operating Costs in the amounts determined by Landlord, subject to adjustment after any such exceptions are so resolved. Tenant acknowledges that any information gathered through an audit is strictly confidential and shall not disclose such confidential information to any person or entity other than Tenant’s financial and legal consultants. The Statement shall be considered final, except as to matters to which exception is taken in the manner and within the times specified herein.

4.3          Other Taxes Payable by Tenant. In addition to the Base Rent and any other charges to be paid by Tenant hereunder, Tenant shall, as an element of Rent, reimburse Landlord upon demand for any and all taxes payable by Landlord (other than

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net income taxes) that are not otherwise reimbursable under this Lease, whether or not now customary or within the contemplation of the parties, where such taxes are upon, measured by, or reasonably attributable to (a) the cost or value of Tenant’s equipment, furniture, fixtures, and other personal property located at the Premises, or the cost or value of any leasehold improvements made in or to the Premises by or for Tenant, regardless of whether title to such improvements is held by Tenant or Landlord; or (b) this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises, including but not limited to any sales tax on the Rent paid hereunder. If it becomes unlawful for Tenant to reimburse Landlord for any costs as required under this Lease, the Base Rent shall be revised to net Landlord the same net Rent after imposition of any tax or other charge upon Landlord as would have been payable to Landlord but for the reimbursement being unlawful.

4.4          Place of Payment. All Rent shall be paid at the office of Landlord set forth on the Lease Summary or at such other place as Landlord may designate.

4.5          Interest and Late Charges. If Tenant fails to pay any Rent when due, after giving effect to any applicable grace periods, the unpaid amounts shall bear interest at the Interest Rate. Tenant acknowledges that the late payment of any Rent will cause Landlord to incur costs and expenses not contemplated under this Lease, including, without limitation, administrative and collection costs and processing and accounting expenses, the exact amount of which is extremely difficult to ascertain. Therefore, in addition to interest, if any such payment is not received by Landlord within five (5) Business Days from when due, Tenant shall pay Landlord a late charge equal to five percent (5%) of such payment, plus any reasonable attorneys’ fees incurred by Landlord by reason of Tenant’s failure to pay Rent when due. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for loss resulting from Tenant’s nonpayment. The late charge shall be deemed Additional Rent and the right to require it shall be in addition to all of Landlord’s other rights and remedies hereunder or at law and shall not be construed as liquidated damages or as limiting Landlord’s remedies in any manner. In addition, any check returned by the bank for any reason will be considered late and will be subject to all late charges, plus a Fifty Dollar ($50.00) fee. After two (2) returned checks in any twelve (12) month period, Landlord will have the right to receive payment by a cashier’s check or money order. Nothing contained herein shall be construed as to compel Landlord to accept any payment of Rent in arrears or late charges should Landlord elect to apply its rights and remedies available under this Lease or at law or in equity in the event of a Default.

ARTICLE 5
SECURITY DEPOSIT

Upon Tenant’s execution of this Lease, Tenant shall deposit with Landlord the Security Deposit, as shown on the Lease Summary. The Security Deposit shall serve as security for the prompt, full, and faithful performance by Tenant of the terms and provisions of this Lease. In the event that Tenant is in Default hereunder, or in the event that Tenant owes any amounts to Landlord upon the expiration of this Lease, Landlord may use or apply the whole or any part of the Security Deposit for the payment of Tenant’s obligations hereunder. The use or application of the Security Deposit or any portion thereof shall not prevent Landlord from exercising any other right or remedy provided hereunder or under any Law and shall not be construed as liquidated damages. In the event the Security Deposit is reduced by such use or application, Tenant shall deposit with Landlord, within ten (10) days after notice, an amount sufficient to restore the full amount of the Security Deposit. Landlord shall not be required to keep the Security Deposit separate from Landlord’s general funds or pay interest on the Security Deposit. Provided Tenant has performed all of its obligations under this Lease, any remaining portion of the Security Deposit shall be returned to Tenant within thirty (30) days subsequent to the Expiration Date or such earlier period as may be required under California Civil Code Section 1950.7 or any successor statute. If the Premises shall be expanded at any time, or if the Term shall be extended at any increased rate of Rent, the Security Deposit shall thereupon be proportionately increased. No trust or fiduciary relationship is created herein between Landlord and Tenant with respect to the Security Deposit. If Landlord transfers the Premises during the Term of this Lease, Landlord may pay the Security Deposit to Landlord’s successor-in-interest in accordance with California Civil Code Section 1950.7 or any successor statute, in which event the transferring Landlord shall be released from all liability for the return of the Security Deposit. Tenant waives the provisions of California Civil Code Section 1950.7, and all other provisions of Law now in force or that become in force after the date of execution of this Lease, that provide that Landlord may claim from a security deposit only those sums reasonably necessary to remedy defaults in the payment of Rent, to repair damage caused by Tenant, or to clean the Premises. Landlord and Tenant agree that Landlord may, in addition, claim those sums reasonably necessary to compensate Landlord for any other foreseeable or unforeseeable loss or damage caused by the act or omission of Tenant or Tenant’s officers, agents, employees, independent contractors or invitees.

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ARTICLE 6
USE

6.1          Permitted Use. Tenant shall use the Premises solely for the Permitted Use as shown on the Lease Summary, and for no other purpose without Landlord’s consent. Tenant shall comply with all recorded covenants, conditions, and restrictions, and the provisions of all ground or underlying leases, now or hereafter affecting the Project. Tenant shall not (a) do or permit anything to be done in or about the Premises that would in any way obstruct or interfere with the rights of other tenants or occupants of the Building or Project or violate any restrictions or exclusive uses set forth in any other tenants’ leases; (b) injure, annoy or interfere with the business of any other tenants or occupants of the Project or any of their invitees; (c) cause, maintain or permit any nuisance arising out of Tenant’s use or occupancy of the Premises; or (d) commit or suffer to be committed any waste in or upon the Premises, the Building or the Project.

6.2          Compliance with Law. Tenant has been provided an opportunity to inspect the Premises, the Building and the Project to a degree sufficient to determine whether or not the same, in their condition as of the date hereof, violate any applicable Law. Tenant further acknowledges and agrees that, except as may otherwise be specifically provided in this Lease, Landlord has made no representation or warranty as to whether the Premises, the Building or the Project conforms to the requirements of Law. After completion of Landlord Work, Tenant shall be responsible for compliance of the Premises with applicable Law and shall bear all costs necessary to maintain the Premises in compliance with Law, including, without limitation, structural work, if any. Tenant shall also be responsible for the cost of any alterations to other portions of the Building or the Project necessitated by any alterations to the Premises or any change in use of the Premises after completion of the Landlord Work. Tenant shall not use or occupy the Premises in violation of any Law or the certificate of occupancy issued for the Building or the Project and shall, upon notice from Landlord, immediately discontinue any use of the Premises that is declared by any governmental authority having jurisdiction to be a violation of Law or the certificate of occupancy. A judgment of any court of competent jurisdiction or the admission by Tenant in any action or proceeding against Tenant that Tenant has violated any such Laws in the use of the Premises shall be deemed to be a conclusive determination of that fact as between Landlord and Tenant. Should any obligation be imposed by Law, then Tenant agrees, at its sole cost and expense, to comply promptly with such obligations to the extent the same relate to the Premises or Tenant’s use of the Premises, the Building or the Project.

6.3          Effect on Landlord’s Insurance. Tenant shall not do or permit to be done anything that will invalidate or increase the cost of any property coverage, or other insurance policy covering the Building, the Project or any property located therein. Tenant shall promptly, upon demand, reimburse Landlord for any additional premium charged for such policy by reason of Tenant’s failure to comply with the provisions of this Section.

6.4          Transportation Management. Tenant shall comply with all present or future programs intended to manage parking, transportation or traffic in and around the Building, and in connection therewith, Tenant shall take responsible action for the transportation planning and management of all employees located at the Premises by working directly with Landlord, any governmental transportation management organization or any other transportation-related committees or entities. Such programs may include, without limitation: (a) restrictions on the number of peak-hour vehicle trips generated by Tenant; (b) increased vehicle occupancy; (c) implementation of an in-house ridesharing program and an employee transportation coordinator; (d) working with employees and any Building or area-wide ridesharing program manager; (e) instituting employer-sponsored incentives (financial or in-kind) to encourage employees to rideshare; and (f) utilizing flexible work shifts for employees. Unless required by law, Tenant shall not be required to participate in such programs if the same would materially interfere with the operation of Tenant’s business, or would result in a material expense to Tenant.

6.5          Use of Common Areas. Use of all Common Areas by any Tenant Related Parties shall at all times be subject to the Rules and Regulations and the exclusive control and management of Landlord.

ARTICLE 7
HAZARDOUS MATERIALS

7.1          Indemnity. Tenant shall indemnify, defend and hold harmless all Landlord Related Parties from and against all claims, suits, demands, response costs, contribution costs, liabilities, losses, or damages (including, without limitation, reasonable attorneys’ fees), directly or indirectly arising out of the existence, use generation, migration, storage, transportation, release, threatened release, or disposal of Hazardous Materials in, on, or under the Premises, the Building or the Project or in the groundwater under the Project and the migration or transportation of Hazardous Materials to or from the Premises, the Building or the Project or the groundwater underlying the Project, to the extent that any of the foregoing is caused by any Tenant Related Parties. This indemnity extends to the costs incurred by any Landlord Related Party to repair, clean-up, dispose of, or remove such Hazardous Materials in order to comply with the Environmental Laws; provided that if

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Tenant is not otherwise in Default, Landlord shall give Tenant not less than thirty (30) days’ advance notice of Landlord’s intention to incur such costs.

7.2          Restriction on Hazardous Materials. Tenant shall not permit any Tenant Related Parties to use, generate, manufacture, store, transport, release, threaten release, or dispose of Hazardous Materials in, on, or about the Premises, the Building or the Project or transport Hazardous Materials from the Premises, the Building or the Project unless Tenant shall have received Landlord’s prior consent therefor, which Landlord may revoke at any time, and shall not cause or permit the release or disposal of Hazardous Materials from the Premises, the Building or the Project except in compliance with applicable Environmental Laws. Tenant shall promptly deliver notice to Landlord if Tenant obtains knowledge sufficient to infer that Hazardous Materials are located on the Premises, the Building or the Project that are not in compliance with applicable Environmental Laws or if any third party, including without limitation, any governmental agency, claims a significant disposal of Hazardous Materials occurred on the Premises, the Building or the Project or is being or has been released from the Premises, the Building or the Project.

7.3          Investigation of Contamination. Upon reasonable written request of Landlord, Tenant, through its appropriately qualified and licensed professional engineers, and at Tenant’s cost, shall thoroughly investigate suspected Hazardous Materials contamination of the Premises, the Building or the Project that would arguably come within the scope of Tenant’s indemnification and hold harmless obligations as set forth above. Tenant, using duly licensed and insured contractors approved by Landlord, shall promptly commence and diligently complete the removal, repair, clean-up, and detoxification of any Hazardous Materials from the Premises, the Building and the Project as may be required by applicable Environmental Laws that comes within the scope of Tenant’s indemnification and hold harmless obligations as set forth above.

7.4          Landlord Consent. If during the Term of this Lease, Tenant contemplates utilizing Hazardous Materials (or subleasing or assigning this Lease to a subtenant or assignee who utilizes Hazardous Materials), Tenant shall obtain the prior written consent of Landlord. As a condition of granting such consent, Landlord may require, among other things, that (a) such substances be of the type customarily used in offices and be used and maintained only in such quantities as are reasonably necessary for the Permitted Use and in strict accordance with applicable Environmental Laws and manufacturer instructions therefor; (b) such substances shall not be disposed of, released or discharged on the Project and shall be transported to and from the Premises in compliance with all applicable Environmental Laws and as Landlord shall reasonably require; (c) any remaining such substances shall be completely, properly and lawfully removed from the Premises, the Building and the Project upon expiration or earlier termination of this Lease; (d) such use shall not constitute a nuisance, danger or health risk to or disrupt the business of any other occupant of the Building or the Project; and (e) Tenant carry environmental insurance acceptable to Landlord, meeting the requirements of Sections 18.2 and 18.3, and naming Landlord as an additional insured. If any applicable Environmental Law or other ordinance or Landlord’s trash removal contractor requires that any such substances be disposed of separately from ordinary trash, Tenant shall make arrangements, at Tenant’s expense, for such disposal directly with a qualified and licensed disposal company at a lawful disposal site and shall ensure that such disposal occurs frequently enough to prevent unnecessary storage of such substances on the Premises. At such times as Landlord may reasonably request, Tenant shall provide Landlord with a written list identifying any Hazardous Materials then used, stored or maintained upon the Premises, the use and approximate quantity of each such material, a copy of any Material Safety Data Sheet (“MSDS”) issued by the manufacturer thereof, written information concerning the removal, transportation, and disposal of the same, and such other information as Landlord may reasonably require or as may be required by Environmental Laws. Landlord, at its option, and at Tenant’s expense, may cause an engineer selected by Landlord, to review (1) Tenant’s operations including, without limitation, materials used, generated, stored, disposed, and manufactured in Tenant’s business; and (2) Tenant’s compliance with terms of this Section. Tenant shall provide the engineer with such information reasonably requested by the engineer to complete the review. The first such review may occur prior to or shortly following the commencement of the Term of this Lease. Thereafter, such review shall not occur more frequently than once each year unless cause exists for some other review schedule.

ARTICLE 8
SERVICES AND UTILITIES

8.1          Furnishing of Building Services. Provided that Tenant is not in Default, Landlord agrees to furnish the Building Services as set forth on Exhibit F.

8.2          Interruption in Services. Unless caused by the gross negligence or willful misconduct of Landlord, Landlord shall not be in default hereunder nor be liable for any damages directly or indirectly resulting from, nor shall the Rent be abated, for any interruption of or diminution in the quality or quantity of Building Services, when the same is occasioned, in whole or in part, by (a) repairs, replacements, or improvements; (b) by any strike, lockout or other labor trouble; (c) by inability to secure or limitation, curtailment, or rationing of, or restrictions on, use of electricity, gas, water, or other form of energy

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serving the Premises, the Building or the Project; (d) by any accident or casualty; (e) by act or Default by Tenant or other parties; or (f) by any other cause beyond Landlord’s reasonable control. Landlord shall not be liable under any circumstances for a loss of or injury to property or business, however occurring, through or in connection with or incidental to failure to furnish any Building Services. No failure, delay or diminution in Building Services shall ever be deemed to constitute an eviction or disturbance of Tenant’s use and possession of the Premises or relieve Tenant from paying Rent or performing any of its obligations under this Lease. Furthermore, Landlord shall not be liable under any circumstances for loss of, or injury to, property or for injury to, or interference with, Tenant’s business, including, without limitation, loss of profits, however occurring, through or in connection with or incidental to a failure to furnish any of the Building Services.

8.3          Extraordinary Demand. If Tenant uses heat generating machines or equipment in the Premises that affect the temperature otherwise maintained by the heating, ventilation and air-conditioning system, Landlord reserves the right to install supplementary air-conditioning units in the Premises; and the cost thereof, including, without limitation, the cost of installation, operation, and maintenance thereof, shall be paid by Tenant upon demand by Landlord.

8.4          Customary Quantities. Tenant shall not consume water or electric current in excess of that usually furnished or supplied for the use of the Premises as general office space (as determined by Landlord) without first procuring the consent of Landlord, and in the event of consent, Landlord may install a water meter or electrical meter in the Premises to measure the amount of water or electric current consumed. Tenant shall bear the cost of any such meter and of its installation, maintenance, and repair, and Tenant agrees to pay to Landlord promptly, upon demand, for all water and electric current consumed as shown by said meters at the rates charged for such services by the local public utility plus any additional reasonable expense incurred in keeping account of the water and electric current so consumed. If a separate meter is not installed, the excess cost for water and electric current shall be established by an estimate made by a utility company or electrical engineer hired by Landlord at Tenant’s expense. Tenant shall not, without the consent of Landlord, use any apparatus or device in the Premises that uses in excess of 120 volts. Tenant shall not connect any apparatus with electric current except through existing electrical outlets in the Premises.

8.5          Separate Metering. Nothing in this Article shall restrict Landlord’s right to require at any time separate metering of utilities furnished to the Premises. In the event utilities are separately metered, Tenant shall be responsible for the maintenance and repair of any such meters at its sole cost.

8.6          Safety and Security Devices, Services, and Programs. The parties acknowledge that safety and security devices, services, and programs provided by Landlord, if any, while intended to deter crime and ensure safety, may not in given instances prevent theft or other criminal acts or ensure safety of persons or property. The risk that any safety or security device, service, or program may not be effective, or may malfunction, or be circumvented by a criminal, is assumed by Tenant with respect to Tenant’s property and interests; and Tenant shall obtain insurance coverage to the extent Tenant desires protection against such criminal acts and other losses. Tenant agrees to cooperate in any reasonable safety or security program developed by Landlord or required by Law.

8.7          Utility Deregulation. If permitted by applicable Law at any time in the future, Landlord shall have the right at any time and from time to time during the Term to either contract for electricity service from different companies providing electricity service (each such company shall hereinafter be referred to as an “Alternate Service Provider”), and the costs, charges or expenses reasonably incurred by Landlord to change such service shall be an Operating Cost hereunder. Tenant agrees to cooperate with Landlord and any Alternate Service Provider at all times and, as reasonably necessary, to provide reasonable access to any electric facilities within the Premises. Tenant may not elect to use any electricity service provider other than the one designated by Landlord for the Building without the prior consent of Landlord.

8.8          Government Energy or Utility Controls. In the event of imposition of any government controls, rules, regulations, or restrictions on the use or consumption of energy or other utilities during the Term, both Landlord and Tenant shall be bound thereby. In the event of a difference in interpretation by Landlord and Tenant of any such controls, Landlord’s interpretation shall prevail, and Landlord shall have the right to enforce compliance therewith, including, without limitation, the right of entry into the Premises to effect compliance.

8.9          Telecommunications. Tenant and Tenant’s telecommunications companies, including but not limited to local exchange telecommunications companies and alternative access vendor services companies (“Telecommunications Companies”), shall have no right of access to or within the Project for the installation and operation of Tenant’s Telecommunications System without Landlord’s prior consent. All work with respect to Tenant’s Telecommunications System shall be subject to the terms of this Lease governing alterations and improvements by Tenant. Without in any way limiting Landlord’s right to withhold its consent to a proposed request for access, Landlord shall have the right to consider

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whether a Telecommunications Company is willing to pay reasonable monetary compensation for the use and occupation of the Building for the Telecommunications System.

ARTICLE 9
CONDITION OF THE PREMISES

Prior to the Possession Date, Landlord shall perform the Landlord Work, if any, as described in Exhibit E-l. Except as expressly provided in Exhibit E-1, Tenant acknowledges that Tenant is leasing the Premises on an “as is, where is” basis. Tenant’s taking possession of the Premises shall be deemed conclusive evidence that, as of the date of taking possession, the Premises were in good order and satisfactory condition, except for reasonable Punchlist Items delivered in accordance with Exhibit E-l. No promise of Landlord to alter, remodel, repair, or improve the Premises, the Building or the Project, and no representation, express or implied, respecting any matter or thing relating to the Premises, the Building, the Project or this Lease (including, without limitation, the condition thereof) have been made to Tenant by Landlord or its broker or sales agent, other than as may be expressly contained in this Lease. Promptly following the Possession Date, Tenant shall perform Tenant’s Work to the Premises, if any, as described in Exhibit E-1.

ARTICLE 10
REPAIRS AND MAINTENANCE.

10.1          Landlord’s Obligations. Landlord shall maintain in good order, condition, and repair the portions of the Building, the Project and the Premises that are not the obligation of Tenant or any other tenant in the Building. Tenant shall give Landlord prompt notice of any damage to or defective condition in any part or appurtenance of the Building Systems serving, located in, or passing through the Premises or any other damage that Landlord is obligated to repair.

10.2          Tenant’s Obligations. Tenant, at Tenant’s sole expense, shall maintain, repair and replace the Premises as needed to keep all interior, non-structural portions of the Premises in good order, condition, and repair, including, without limitation, the following: (a) all plumbing and sewage facilities, including but not limited to all plumbing fixtures, pipes, fittings, or other parts of the plumbing system that exclusively serve the Premises; (b) all fixtures, interior walls, floors, carpets, draperies, window coverings, and ceilings; (c) all interior windows, doors, entrances, and plate glass; (d) all electrical wiring, facilities and equipment, including, without limitation, any non-standard light fixtures, lamps, bulbs, tubes, fans, vents, exhaust equipment, and systems; and (e) any fire detection or extinguisher equipment that Landlord does not maintain.

10.3          Damage by Tenant. Except for ordinary wear and tear, Tenant shall promptly reimburse Landlord for any costs that Landlord may incur in making repairs and alterations in and to the Premises, the Building, Building Systems, the Project or facilities, systems or equipment of the Project, where the need for such repairs or alterations is caused by any of the following: (a) Tenant’s use or occupancy of the Premises in a fashion that contravenes any provision of this Lease; (b) the installation, removal, use, or operation of Tenant’s Property; (c) the moving of Tenant’s Property into or out of the Building; or (d) any tortious act, omission, misuse, or negligence of any Tenant Related Parties.

10.4          Load and Equipment Limits. Tenant shall not without Landlord’s consent place a load upon the Premises that exceeds the load per square foot, that the structural portions of the Premises were designed to carry, as determined by Landlord or Landlord’s structural engineer. Upon demand Tenant shall pay the cost of any such determination for items other than the equipment, library, files, and furniture originally approved by Landlord or by Landlord’s structural engineer.

ARTICLE 11
ALTERATIONS AND ADDITIONS

11.1          Tenant’s Alterations. Tenant shall not make any additions, alterations, or improvements to the Premises without the prior consent of Landlord (which consent shall not be unreasonably withheld or delayed), which consent shall be requested by Tenant at least thirty (30) days prior to the commencement of any work. Landlord’s consent may be conditioned, among other things, on Tenant’s removing any such additions, alterations, or improvements at the Expiration Date and restoring the Premises to the same condition as on the Possession Date. All additions, alterations, and improvements shall be (a) made in a good and workmanlike manner using only good grades of materials; (b) performed by properly qualified and licensed personnel approved by Landlord; (c) performed so as not to cause or create any jurisdictional or other labor disputes, including, without limitation, use of union labor if needed; (d) performed in such manner as not to obstruct access to the Building or the Common Areas, and as not to obstruct the business of Landlord or other tenants in the Building; and (e) diligently prosecuted to completion. Notwithstanding the foregoing, Tenant shall have the right during the Term to make additions, alterations, or improvements as Tenant may reasonably deem desirable or necessary, following ten (10) days’ notice to Landlord, but without Landlord’s consent, provided that such work (i) is of a non-structural nature; (ii) is not visible

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from outside of the Premises; (iii) does not affect any Building System; and (iv) does not, in the aggregate, exceed $5,000 for alterations other than floor and wall covering in any twelve (12) month period.

11.2          Payment and Indemnification. Tenant shall pay the costs of any work done on the Premises by or on behalf of Tenant and shall keep the Premises, the Building, and the Project free and clear of liens of any kind. Tenant shall indemnify, defend against, and keep Landlord free and harmless from all claims, demands, liability, loss, damage, costs, reasonable attorneys’ fees, and any other expense incurred on account of claims by any person performing work or furnishing materials or supplies for Tenant or any person claiming under Tenant, including but not limited to resolution of any jurisdictional or other labor disputes.

11.3          Notices and Liens. Tenant agrees not to suffer or permit any lien of any mechanic or materialman to be placed or filed against the Premises, the Building or the Project. In case any such lien shall be filed, Tenant shall satisfy and release such lien of record within twenty (20) days (or such shorter period as may be required by any Mortgagee) after the earlier to occur of (a) receipt of notice thereof from Landlord; or (b) Tenant’s actual knowledge or notice of such lien filing. If Tenant shall fail to have such lien satisfied and released of record as provided herein, Landlord may, on behalf of Tenant, without being responsible for making any investigation as to the validity of such lien and without limiting or affecting any other remedies Landlord may have, pay the same and Tenant shall reimburse Landlord on demand for such amount together with any other reasonable costs of Landlord, including, without limitation, reasonable attorneys’ fees. Notwithstanding the foregoing, Tenant shall have the right to contest any such lien claim diligently and in good faith, and during such contest shall not be obligated to pay such lien claim, provided that Tenant is not in breach of any of its obligations under this Lease and provided, Tenant, at its sole cost and expense, transfers the lien from the Property to a bond, thereby freeing the Property from any claim of lien. Notwithstanding any such contest or title insurance, Tenant shall pay any such claim in full within five (5) days following the entry of an unstayed judgment or order of sale. All materialmen, contractors, artisans, mechanics, laborers and any other person now or thereafter furnishing any labor, services, materials, supplies or equipment to Tenant with respect to Premises or any portion thereof, are hereby charged with notice that they must look exclusively to Tenant to obtain payment for the same. Notice is hereby given that Landlord shall not be liable for any labor, services, materials, supplies, skill, machinery, fixtures or equipment furnished to or to be furnished to Tenant upon credit and that no mechanic’s lien or any other lien for any such labor, services, materials, supplies, machinery, fixtures or equipment shall attach to or effect the state or interest of Landlord in and to the Premises or the Project, or any portion thereof. Before the actual commencement of any work for which a claim or lien may be filed, Tenant shall give Landlord notice of the intended commencement date a sufficient time before that date to enable Landlord to post notices of nonresponsibility or any other notices that Landlord deems necessary for the protection of Landlord’s interest in the Premises, Building or the Project, and Landlord shall have the right to enter the Premises and post such notices at any reasonable time.

11.4          Construction Requirements. Any work performed at the Building or on the Premises by Tenant or Tenant’s contractor in connection with improvements shall be subject to the General Conditions set forth in Exhibit E.

ARTICLE 12
CERTAIN RIGHTS RESERVED BY LANDLORD

Landlord reserves the following rights, exercisable without liability to Tenant for (a) damage or injury to property, person, or business; (b) causing an actual or constructive eviction from the Premises; or (c) disturbing Tenant’s use, possession, or beneficial and quiet enjoyment of the Premises:

12.1          Name. To change the name or street address of the Building or the Project.

12.2          Signage. To install and maintain signs on the exterior and interior of the Building and the Project.

12.3          Keys. To have passkeys to the Premises and all doors within the Premises, excluding Tenant’s vaults and safes.

12.4          Inspection and Entry. Landlord may enter the Premises on reasonable prior notice to Tenant (except in the event of an emergency, in which case no notice shall be required) (a) to inspect the Premises; (b) to show the Premises to any prospective purchaser or Mortgagee of the Project, or to others having an interest in the Project or Landlord; (c) during the last six (6) months of the Term, to show the Premises to prospective tenants; (d) to make inspections, repairs, alterations, additions, or improvements to the Premises or the Building (including, without limitation, checking, calibrating, adjusting, or balancing controls and other parts of the heating, ventilation and air-conditioning system); and (e) to take all steps as may be necessary or desirable for the safety, protection, maintenance, or preservation of the Premises or the Building or Landlord’s interest therein, or as may be necessary or desirable for the operation or improvement of the Building or in order to comply with Laws.

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12.5          Renovations. Landlord may during the Term renovate, improve, alter, or modify (collectively, the “Renovations”) the Building, the Premises, or the Project, including without limitation, Common Areas, Building Systems, roof, and structural portions of the Building. Renovations may include, without limitation, (a) modifying the Common Areas and tenant spaces to comply with applicable Laws, including, without limitation, regulations relating to the physically disabled, seismic conditions, and building safety and security; and (b) installing new carpeting, lighting, and wall coverings in the Common Areas. In connection with such Renovations, Landlord may, among other things, erect scaffolding or other necessary structures in the Building, limit or eliminate access to portions of the Building or Project, including, without limitation, portions of the Common Areas, or perform work in the Building that may create noise, dust or leave debris. Tenant hereby agrees that such Renovations and Landlord’s actions in connection with such Renovations shall in no way constitute a constructive eviction of Tenant nor entitle Tenant to any abatement of Rent. Landlord shall have no responsibility or for any reason be liable to Tenant for any direct or indirect injury to or interference with Tenant’s business arising from the Renovations, nor shall Tenant be entitled to any compensation or damages from Landlord for inconvenience, annoyance or loss of the use of any part of the Premises or of Tenant’s Property resulting from the Renovations.

12.6          Common Areas. Landlord shall have the right to eliminate or change the size, location and arrangement of the Common Areas; to enter into, modify and terminate easements and other agreements pertaining to the use and maintenance of the Common Areas; to close all or any portion of the Common Areas as may be necessary to prevent a dedication thereof or the accrual of any rights to any person or to the public therein; to close temporarily any or all portions of the Common Areas; and to do and perform such other acts in and to the Common Areas as Landlord shall determine to be advisable for the convenience and use thereof by owners, occupants, tenants and invitees of the Building.

In the exercise of the foregoing rights, Landlord shall (except in an emergency) take reasonable steps to minimize any interference with Tenant’s business.

ARTICLE 13
RULES AND REGULATIONS

Tenant shall comply with (and cause all Tenant Related Parties to comply with) the Rules and Regulations. Landlord shall not be responsible for any violation of the Rules and Regulations by other tenants or occupants of the Building or Project. All Rules and Regulations, whether now existing or hereafter adopted by Landlord, shall be non-discriminatory in nature.

ARTICLE 14
TRANSFERS

Except as provided in this Article, Tenant shall not, without the prior consent of Landlord, make any Transfer.

14.1          Notice. Tenant shall notify Landlord of any proposed Transfer (a “Transfer Notice”). The date of the proposed Transfer must be not less than forty-five (45) days or more than one hundred eighty (180) days after the date of the Transfer Notice. The Transfer Notice shall include (a) the proposed effective date of the Transfer; (b) a description of the portion of the Premises to be transferred (the “Subject Space”); (c) all of the terms of the proposed Transfer and the consideration therefor, including a calculation of the Transfer Premium (as defined below); (d) the name and address of the Transferee; (e) current financial statements of the Transferee certified by an officer, partner or owner thereof; (f) any other information that will enable Landlord to determine the financial responsibility, character, and reputation of the Transferee and the nature of such Transferee’s business; and (g) the proposed use of the Subject Space. Landlord shall respond to any properly delivered Transfer Notice within thirty (30) days.

14.2          Fees. Whether or not Landlord shall grant consent, Tenant shall pay Landlord’s reasonable review and processing fees, as well as any reasonable legal fees incurred by Landlord, within thirty (30) days after written request by Landlord.

14.3          Consent. Landlord shall not unreasonably withhold or delay its consent to any proposed Transfer. It shall be reasonable under this Lease and under any applicable Law for Landlord to withhold consent to any proposed Transfer where one or more of the following apply, without limitation as to other reasonable grounds for withholding consent:

          14.3.1          The Transferee is of a character or reputation or engaged in a business that is not consistent with the quality of the Building.

          14.3.2          The Transferee intends to use the Subject Space for purposes that are not permitted under this Lease.

          14.3.3          The Transferee is either a governmental agency or instrumentality thereof.

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          14.3.4          The Transfer will result in more than a reasonable and safe number of occupants per floor within the Subject Space.

          14.3.5          The Transferee is not a party of reasonable financial worth or financial stability in light of the responsibilities involved under the Lease on the date consent is requested, as determined by Landlord.

          14.3.6          The Transfer would cause a violation of another lease or any agreement to which Landlord is a party, or would give an occupant of the Building a right to cancel its lease.

          14.3.7          Either the Transferee or an Affiliate of the Transferee (a) occupies space in the Building at the time of the request for consent; (b) is negotiating with Landlord to lease space in the Building at such time; or (c) has negotiated with Landlord during the six (6)-month period immediately preceding the Transfer Notice. Notwithstanding the foregoing, Landlord shall have no right to refuse consent to a proposed Transfer under this Section 14.3.7 if, in the Landlord’s sole determination, Landlord does not have the available space to lease to the proposed Transferee.

14.4          Completion of Transfer. If Landlord consents to any Transfer (and does not exercise any recapture rights Landlord may have under this Lease), Tenant may within six (6) months after Landlord’s consent, enter into the approved Transfer, upon substantially the same terms and conditions as are set forth in the Transfer Notice. If there are any material changes in the terms and conditions from those specified in the Transfer Notice (a) such that Landlord would initially have been entitled to refuse its consent to such Transfer; or (b) that would cause the proposed Transfer to be more favorable to the Transferee than the terms set forth in the Transfer Notice, Tenant shall again submit the Transfer to Landlord for its approval and other action under this Article (including, without limitation, exercise any of recapture rights Landlord may have under this Lease).

14.5          Transfer Premium. If Landlord consents to a Transfer, Tenant shall pay to Landlord fifty percent (50%) of any Transfer Premium received by Tenant. “Transfer Premium” shall mean (a) all rent, additional rent or other consideration payable by such Transferee in excess of the Rent payable by Tenant under this Lease on a per rentable square foot basis; (b) all key money and bonus money paid by Transferee; and (c) any payment in excess of fair market value for services rendered by Tenant to Transferee. The “Transfer Premium” shall (i) be reduced by all out-of-pocket expenses incurred by Tenant in connection with the Transfer, such as brokerage commissions and reasonable attorneys’ fees; and (ii) shall not include any compensation for the fair market value of Tenant’s Property nor reasonable compensation for the sale of Tenant’s business that is not attributable to the value of Tenant’s leasehold interest hereunder. Tenant shall pay the Transfer Premium to Landlord within five (5) days following receipt by Tenant. Tenant shall furnish upon Landlord’s request a complete statement, certified by an independent certified public accountant, or Tenant’s chief financial officer, setting forth in detail the computation of any Transfer Premium. Within one (1) year following the date of the Transfer, Landlord shall have the right at all reasonable times to audit the books, records and papers of Tenant relating to any Transfer as necessary to confirm the calculation of the Transfer Premium. If the Transfer Premium shall be found understated, Tenant shall, within thirty (30) days after demand, pay the deficiency, together with interest thereon at the Interest Rate and Landlord’s costs of such audit. If the Transfer Premium has been understated by more than ten percent (10%), Landlord shall have the right to cancel this Lease upon thirty (30) days’ notice to Tenant and Tenant shall indemnify Landlord from and against any and all liability associated with such termination, including but not limited to any claims by the Transferee.

14.6          Recapture. Notwithstanding anything to the contrary contained in this Article, Landlord shall have the option, by giving notice to Tenant within twenty (20) days after receipt of any Transfer Notice, to recapture the Subject Space. Such recapture notice shall cancel and terminate this Lease with respect to the Subject Space as of the effective date of the proposed Transfer. In the event of a recapture by Landlord, if this Lease shall be canceled with respect to less than the entire Premises, the Rent reserved herein shall be prorated on the basis of the Rentable Area retained by Tenant in proportion to the Rentable Area of the Premises, and this Lease as so amended shall continue thereafter in full force and effect. Upon request of either party, the parties shall execute written confirmation of the foregoing.

14.7          Effect of Transfer. If Landlord consents to a Transfer, (a) no terms or conditions of this Lease shall be deemed to have been waived or modified; (b) such consent shall not be deemed consent to any further Transfer; (c) no Transfer shall be valid, and no Transferee shall take possession of the Premises, until an executed counterpart of all documentation pertaining to the Transfer has been delivered to Landlord; and (d) no Transfer shall relieve Tenant or any Guarantor from primary liability under this Lease. The acceptance of Rent by Landlord from any party shall not be deemed to be a waiver of Landlord of any provision hereof. In the event of Default by a Transferee in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such Transferee. Landlord may consent to subsequent assignments of the Lease or sublettings or amendments or modifications to the Lease by Transferees without notifying Tenant, and without obtaining its consent thereto, and any such actions shall not relieve Tenant of liability under this Lease.

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14.8          Tenant Remedy for Landlord Refusal to Consent. Notwithstanding any provision of this Lease or any applicable Laws to the contrary, Landlord and Tenant hereby expressly agree that if a court of competent jurisdiction determines that Landlord unreasonably withheld consent to a proposed Transfer, then Tenant’s sole and exclusive remedy for such breach by Landlord shall be limited to termination of this Lease as of the date of such court determination. Tenant hereby expressly waives the right to recover monetary damages of any kind whatsoever and attorney’s fees incurred on account of any such breach.

ARTICLE I5
DESTRUCTION OR DAMAGE

15.1          Landlord Termination Rights. If the Premises or the portion of the Building or the Project necessary for Tenant’s occupancy is damaged by fire, earthquake, terrorism, act of war, act of God, the elements or other casualty, then Landlord may terminate this Lease upon notice given to Tenant within sixty (60) days after the date of such casualty, effective as of the date of the casualty if (a) in Landlord’s opinion, repairs necessary for Tenant’s occupancy cannot be completed within ninety (90) days; (b) any other portion of the Building or the Project is damaged to the extent that, in Landlord’s opinion, repair thereof cannot be completed within ninety (90) days; (c) the Premises or the portion of the Building or the Project necessary for Tenant’s occupancy is damaged during the final twelve (12) months of the Term, unless Tenant shall exercise its next available renewal option (if any) within ten (10) days following receipt of Landlord’s termination notice, or unless both parties agree on an extension of this Lease within such ten (10) day period; (d) the insurance proceeds available to Landlord are not sufficient to complete repair or restoration; (e) Landlord’s lender does not elect to make insurance proceeds available to Landlord for repair and restoration; or (f) Tenant has vacated the Premises or is in Default under this Lease.

15.2          Repairs. If this Lease is not terminated as provided above, it shall continue in full force and effect, and Landlord shall promptly and diligently, subject to reasonable delays for insurance adjustment, and subject to all other terms of this Article, restore the base, shell, and core of the Premises, the Common Areas and the portions of the Project serving the Premises. Such restoration shall be to substantially the same condition of such items as prior to the casualty, except for modifications (a) required by Law; (b) required by the holder of a mortgage on the Building, or the lessor of a ground or underlying lease with respect to the Property; or (c) to the Common Areas reasonably deemed desirable by Landlord, and which are consistent with the character of the Project. No such modifications shall materially impair access to the Premises and any Common Areas serving the Premises. Tenant shall be responsible, at its sole cost and expense, for the repair, restoration, and replacement of any leasehold improvements installed by Tenant (unless Landlord has elected to insure the same, in which case such repair shall be Landlord’s responsibility) and Tenant’s Property. Landlord shall not be liable for any loss of business, inconvenience, or annoyance arising from any repair or restoration of any portion of the Premises, the Building, or the Project as a result of any damage from any casualty. Following Landlord’s repair of the Premises, Tenant shall repair and restore any improvements installed by Tenant to substantially the same condition as prior to the casualty, except for modifications required by Law. All work by Tenant shall be subject to the conditions set forth in this Lease governing alterations and additions.

15.3          Tenant’s Termination Rights. If Landlord does not elect to terminate this Lease pursuant to Landlord’s termination right as provided above, and the repairs cannot be completed within one hundred eighty (180) days after being commenced (the “Repair Period”), Tenant may elect, no earlier than sixty (60) days after the date of the casualty and not later than ninety (90) days after the date of such casualty, to terminate this Lease by notice to Landlord, effective as of the date specified in the notice, which date shall not be less than thirty (30) days nor more than sixty(60) days after such notice. In addition, in the event that the Premises or the Building is destroyed or damaged to any substantial extent during the last twelve (12) months of the Term, then Tenant shall have the option to terminate this Lease by giving notice to Landlord within thirty (30) days after such casualty, in which event this Lease shall cease and terminate as of the date of such notice. Tenant shall also have the right to terminate this Lease if Landlord does not complete repairs within the Repair Period by thirty (30) days’ notice to Landlord after the expiration of the Repair Period; provided however, if Landlord completes repair within such thirty (30) day period, such termination shall be nullified and this Lease shall continue in full force and effect.

15.4          Apportionment of Rent. Upon any termination of this Lease pursuant to this Article, Tenant shall pay the Rent, properly apportioned up to such date of termination, and both parties hereto shall thereafter be freed and discharged of all further obligations hereunder, except as provided for in provisions of this Lease that by their terms survive the expiration or earlier termination of this Lease.

15.5          Abatement. The Rent shall abate on an equitable basis to the extent Tenant’s use of the Premises is impaired, commencing with the date of the casualty and continuing until completion of the repairs required of Landlord; provided that if the damage is due to the negligence or willful misconduct of any Tenant Related Party, Rent shall only abate to the extent the same is covered by rent loss insurance, if any, carried by Landlord.

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15.6          Express Agreement. This Lease shall be considered an express agreement governing any case of damage to or destruction of the Premises, the Building, or the Project by fire or other casualty; and any present or future law that purports to govern the rights of Landlord and Tenant in such circumstances in the absence of express agreement shall have no application. As a material inducement to Landlord’s entering into this Lease, Tenant irrevocably waives and releases the provisions of California Civil Code Section 1932 or 1933 and any other Law that would permit termination or automatically terminate this Lease or otherwise be contrary to the provisions of this Article in the event of any damage or destruction.

ARTICLE 16
EMINENT DOMAIN

16.1          Entire Premises. If the whole of the Building or the Premises is lawfully taken by condemnation or in any other manner for any public or quasi-public purpose, this Lease shall terminate as of the earlier of the date of the date title vests or the date possession is given, and Rent shall be prorated to such date.

16.2          Partial Condemnation. If less than the whole of the Building or the Premises is so taken, this Lease shall be unaffected by such taking, except that (a) Tenant shall have the right to terminate this Lease by notice to Landlord given within ninety (90) days after the date of such taking if twenty-five percent (25%) or more of the Premises is taken and the remaining area of the Premises is not reasonably sufficient for Tenant to continue operation of its business; and (b) Landlord shall have the right to terminate this Lease by notice to Tenant given within ninety (90) days after the date of such taking. If either Landlord or Tenant so elects to terminate this Lease, this Lease shall terminate on the thirtieth (30th) day after either such notice. Rent shall be prorated to the date of such termination. If this Lease continues in force upon such partial taking, the Base Rent and Tenant’s Proportionate Share shall be equitably adjusted according to the remaining Rentable Area of the Premises and the Project.

16.3          Proceeds of Award. In the event of any taking, partial or whole, all of the proceeds of any award, judgment, or settlement payable by the condemning authority shall be the exclusive property of Landlord, whether awarded as compensation for the damages to Landlord’s or Tenant’s interest in the Premises and whether or not awarded as compensation for diminution in value of the leasehold or to the fee of the Premises, and Tenant hereby assigns to Landlord all of its right, title, and interest in any award, judgment, or settlement from the condemning authority. Tenant, however, shall have the right, to the extent that Landlord’s award is not reduced or prejudiced, to claim from the condemning authority (but not from Landlord) such compensation as may be recoverable by Tenant in its own right for relocation expenses and damage to Tenant’s Property.

16.4          Repairs. In the event of a partial taking of the Premises that does not result in a termination of this Lease, Landlord shall restore the remaining portion of the Premises as nearly as practicable to its condition prior to the condemnation or taking. Tenant shall be responsible at its sole cost and expense for the repair, restoration, and replacement of Tenant’s Property.

ARTICLE 17
INDEMNIFICATION, WAIVER, RELEASE AND LIMITATION OF LIABILITY

17.1          Tenant’s Indemnity. Except for any injury or damage to persons or property on the Premises that is proximately caused by or results proximately from the gross negligence or willful misconduct of Landlord, no Landlord Related Parties shall be liable for, and Tenant will and does hereby indemnify, defend and hold harmless the Landlord Related Parties against and from all liabilities, obligations, suits, damages, penalties, claims, costs, charges and expenses, including, without limitation, reasonable attorneys’ fees and other professional fees (if and to the extent permitted by law), that may be imposed upon, incurred by, or asserted against Landlord or any of the Landlord Related Parties and arising, directly or indirectly, out of or in connection with Tenant’s use, occupancy or maintenance of the Premises, the Building or the Project, including, without limitation, any of the following: (a) any work or thing done in, on or about the Premises, the Building or the Project or any part thereof by any Tenant Related Party; (b) any injury or damage to any person or property; (c) any failure on the part of Tenant to perform or comply with any of the covenants, agreements, terms or conditions contained in this Lease; and (d) any negligent or otherwise tortious act or omission of any Tenant Related Party. At Landlord’s request, Tenant shall, at Tenant’s expense and by counsel selected by Landlord, defend Landlord in any action or proceeding arising from any such claim or liability and shall indemnify Landlord against all costs, reasonable attorneys’ fees, expert witness fees, and any other expenses incurred in such action or proceeding.

17.2          Assumption of Risk. Tenant hereby assumes all risk of damage or injury to any person or property in, on, or about the Premises from any cause other than the gross negligence or willful misconduct of Landlord. Tenant, to the fullest extent permitted by law and as a material part of the consideration to Landlord for this Lease, hereby waives and releases all claims

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against any Landlord Related Parties with respect to all matters for which Landlord has disclaimed liability pursuant to the provisions of this Lease. Tenant agrees that, unless expressly provided herein, no Landlord Related Parties will be liable for any loss, injury, death, or damage to persons, property, or Tenant’s business resulting from any of the following, regardless of whether the same is due to the active or passive negligence of any Landlord Related Party: (a) theft; (b) act of God, public enemy, injunction, riot, strike, insurrection, war, terrorism, court order, requisition, order of governmental body or authority, fire, explosion or falling objects; (c) any accident or occurrence in the Premises or any other portion of the Building or the Project caused by the Premises or any other portion of the Building or the Project becoming out of repair or by the obstruction, breakage or defect in or failure of equipment, pipes, sprinklers, wiring, plumbing, heating, ventilation and air-conditioning or lighting fixtures of the Building or the Project or by broken glass or by the backing up of drains, or by gas, water, steam, electricity or oil leaking, escaping or flowing into or out of the Premises; (d) construction, repair or alteration of any other premises in the Building or the Premises, unless due to solely to the gross negligence or willful misconduct of Landlord; (e) business interruption or loss of use of the Premises; (f) any diminution or shutting off of light, air or view by any structure erected on the Land or any land adjacent to the Project, even if Landlord is the adjacent land owner; (g) mold or indoor air quality; (h) any acts or omissions of any other tenant, occupant or visitor of the Building or the Project; or (i) any cause beyond Landlord’s control. In no event shall Landlord be liable for indirect, consequential, or punitive damages or for damages based on lost profits. None of the foregoing shall be considered a constructive eviction of Tenant, nor shall the same entitle Tenant to an abatement of Rent. Tenant acknowledges that it is familiar with and understands California Civil Code Section 1542, which provides as follows:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. TENANT ACKNOWLEDGES AND AGREES THAT IT HAS BEEN REPRESENTED BY LEGAL COUNSEL OF ITS CHOICE IN CONNECTION WITH THIS LEASE, AND THAT SUCH COUNSEL HAS EXPLAINED TO TENANT THE PROVISIONS OF THIS SECTION. BY INITIALING BELOW, TENANT CONFIRMS IT HAS AGREED TO THE PROVISIONS OF THIS SECTION.

Tenant’s initials: ___________

Tenant hereby waives and relinquishes every right or benefit which it has or may have under California Civil Code Section 1542 to the full extent that it may lawfully waive such right or benefit. In connection with such waiver and relinquishment, Tenant acknowledges that it may discover facts in addition to or different from those that it knows or believes to be true with respect to the subject matter of this Lease and/or the waiver(s) set forth herein, but that it is Tenant’s intention hereby to fully, finally and forever waive and release all claims, demands, losses, liabilities, costs, expenses and damages, known or unknown, suspected or unsuspected, that may exist or heretofore have existed or that may come into existence hereinafter with respect to the claims, as well as any and all other claims and/or matters covered herein or contemplated hereby. The releases given in this Section, as well as well elsewhere in this Lease, shall be and remain in effect as full and complete releases notwithstanding the discovery or existence of any such additional or different facts.

17.3          Waiver of Subrogation. Anything in this Lease to the contrary notwithstanding, Landlord and Tenant each hereby waives any and all rights of recovery, claim, action or cause of action against the other for any loss or damage to any property of Landlord or Tenant, arising from any cause that (a) would be insured against under the terms of any property insurance required to be carried hereunder; or (b) is insured against under the terms of any property insurance actually carried, regardless of whether the same is required hereunder. The foregoing waiver shall apply regardless of the cause or origin of such claim, including but not limited to the negligence of a party, or such party’s agents, officers, employees or contractors. The foregoing waiver shall not apply if it would have the effect, but only to the extent of such effect, of invalidating any insurance coverage of Landlord or Tenant. The foregoing waiver shall also apply to any deductible, as if the same were a part of the insurance recovery.

17.4          Limitation of Landlord Liability. Neither Landlord nor any Landlord Related Party shall have any personal liability with respect to any of the provisions of the Lease, or the Premises. If Landlord is in breach or default with respect to Landlord’s obligations under the Lease, Tenant shall look solely to the equity interest of Landlord in the Building for the satisfaction of Tenant’s remedies or judgments. No other real, personal, or mixed property of any Landlord Related Parties, wherever situated, shall be subject to levy to satisfy such judgment. Upon any Transfer of Landlord’s interest in this Lease or in the Project, the transferring Landlord shall have no liability or obligation for matters arising under this Lease from and after the date of such Transfer.

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ARTICLE 18
TENANT’S INSURANCE

18.1          Required Coverage. Tenant shall maintain the following coverages in the following amounts.

          18.1.1          Commercial General Liability Insurance (or its equivalent) covering the insured against claims of bodily injury, personal injury and property damage arising out of Tenant’s operations, assumed liabilities or use of the Premises, for limits of liability not less than Two Million and No/100 Dollars ($2,000,000.00) combined single limit per occurrence and Five Million and No/100 Dollars ($5,000,000.00) combined single limit annual aggregate.

          18.1.2          Property Insurance covering (a) Tenant’s Property, (b) any improvements and alterations other than the Landlord Work, made by Tenant or at Tenant’s request. Such insurance shall be written on a “Causes of Loss – Special Form” basis (or its equivalent), for the full replacement cost without deduction for depreciation, and shall include coverage for vandalism, malicious mischief and sprinkler leakage. The proceeds of such insurance shall be used for the repair or replacement of the property so insured. Upon termination of this Lease following a casualty as set forth herein the proceeds under (a) shall be paid to Tenant and the proceeds under (b) in excess of Tenant’s unamortized cost associated therewith shall be paid to Landlord. Notwithstanding the foregoing, Landlord shall have the option at any time, upon three (3) months’ notice to Tenant, to procure property insurance covering leasehold improvements on all the premises throughout the Building, and Tenant shall thereafter pay Tenant’s Proportionate Share of the premium of such policy as an element of Project Operating Costs.

          18.1.3          INTENTIONALLY OMITTED

          18.1.4          Statutory worker’s compensation, together with employers liability coverage at limits of:

$500,000 Each Accident

$500,000 Each Employee by Disease

$500,000 Policy Limit by Disease

18.2          Form of Policies. The minimum limits of policies of insurance required of Tenant under this Lease shall in no event limit the liability of Tenant under this Lease. All liability insurance shall (a) name Landlord, Landlord’s asset manager, Landlord’s property management agent, and at Landlord’s request, any Mortgagee, each as an additional insured, as their respective interests may appear; (b) specifically cover the liability assumed by Tenant under this Lease, including, but not limited to, Tenant’s indemnity obligations under this Lease; (c) be issued by an insurance company having a rating of not less than A- IX in Best’s Insurance Guide or that is otherwise acceptable to Landlord and licensed to do business in the State; (d) be primary insurance as to all claims thereunder and provide that any insurance carried by Landlord shall be excess and non-contributing with any insurance requirement of Tenant; (e) provide that said insurance shall not be canceled, expire or coverage reduced unless thirty (30) days’ prior notice shall have been given to Landlord; and (f) if Tenant has a net worth of less than Ten Million and No/100 Dollars ($10,000,000.00), have a deductible not greater than Five Thousand and No/100 Dollars ($5,000.00).

18.3          Evidence of Insurance. Tenant shall deliver a copy of each paid-up policy (authenticated by the insurer) or other evidence of insurance reasonably satisfactory to Landlord, evidencing the existence and amount of each insurance policy required hereunder on or before the Possession Date and at least thirty (30) days before the expiration dates of the applicable policies. Landlord may, at any time and from time to time, inspect or copy any insurance policies that this Lease requires Tenant to maintain. Tenant shall furnish Landlord with renewals or “binders” of each policy at least ten (10) days prior to the expiration thereof. Tenant agrees that, if Tenant does not obtain and maintain such insurance, Landlord may (but shall not be required to) after five (5) days’ notice to Tenant during which time Tenant does not supply Landlord evidence of the required insurance, procure said insurance on Tenant’s behalf and charge Tenant the premiums therefor, payable upon demand. Tenant shall have the right to provide the insurance required hereunder pursuant to blanket policies obtained by Tenant, provided such blanket policies afford coverage as required by this Lease.

18.4          Additional Insurance Obligations. Landlord may require (a) that Tenant obtain additional types of insurance, including but not limited to earthquake, sprinkler leakage by earthquake, environmental insurance and terrorism; the extent such coverages are either (i) standard for similar properties in the same geographic area as the Property and are available at commercially reasonable rates, or (ii) are otherwise reasonably required by Landlord; and (b) from time to time, but not more frequently than every three (3) years during the Term, increases in the policy limits for all insurance to be carried by Tenant as set forth herein, in order to reflect standard limits for similar properties.

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18.5          Independent Obligations. Tenant acknowledges and agrees that Tenant’s insurance obligations under this Lease are independent of Tenant’s indemnity obligations, liabilities and duties under this Lease.

ARTICLE 19
DEFAULT

19.1          Tenant’s Default. A “Default” shall mean the occurrence of any one or more of the following events:

          19.1.1          Tenant’s failure to pay any Rent when due, where such failure shall continue for a period of three (3) days after notice thereof from Landlord to Tenant. In the event that Landlord serves Tenant with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes, such Notice to Pay Rent or Quit shall also constitute the notice required by this subsection.

          19.1.2          If any representation or warranty made by Tenant or any Guarantor to Landlord is false in any material respect when made.

          19.1.3          Tenant fails to deliver any estoppel certificates or subordination agreements within the periods set forth in this Lease.

          19.1.4          The levy of a writ of attachment or execution on this Lease or on any of Tenant’s property or that of any Guarantor.

          19.1.5          Tenant’s or any Guarantor’s general assignment for the benefit of creditors or arrangement, composition, extension, or adjustment with its creditors.

          19.1.6          Tenant or any Guarantor becomes insolvent or bankrupt or admits in writing its inability to pay its debts as they mature.

          19.1.7          Proceedings for the appointment of a trustee, custodian or receiver of Tenant or any Guarantor or for all or a part of Tenant’s or such Guarantor’s property are filed by or against Tenant or any Guarantor, and, if filed against Tenant or such Guarantor involuntarily, are not dismissed within sixty (60) days of filing.

          19.1.8          Proceedings in bankruptcy, or other proceedings for relief under any law for the relief of debtors, are instituted by or against Tenant or any Guarantor, and, if instituted, against Tenant or such Guarantor involuntarily, are not dismissed within sixty (60) days of filing.

          19.1.9          If the Premises is located on the first floor of the Building, failure to open and operate Tenant’s business in the Premises in the ordinary course of business.

          19.1.10          Tenant makes an anticipatory breach of this Lease. “Anticipatory breach” shall mean either (a) Tenant’s repudiation of this Lease in writing; or (b) the combination of (i) Tenant’s desertion or vacation of the Premises or removal of all or a substantial amount of Tenant’s equipment, furniture and fixtures from the Premises; and (ii) Tenant’s failure to pay any Rent under this Lease when due.

          19.1.11          Tenant fails to perform any other covenant, condition or agreement contained in this Lease not covered by the preceding subsections, where such failure continues for thirty (30) days after notice thereof from Landlord to Tenant, or such additional period as is reasonably necessary to effect cure, provided Tenant commences cure within such thirty (30) day period and diligently pursues the same to completion within ninety (90) days following Landlord’s notice.

          19.1.12          Tenant shall repeatedly fail to pay Rent when due or any other charges required to be paid, or shall repeatedly default in keeping, observing or performing any other covenant, agreement, condition or provision of this Lease, whether or not Tenant shall timely cure any such payment or other default. For the purposes of this subsection, the occurrence of similar defaults two (2) times during any twelve (12) month period shall constitute a repeated default.

Any notice periods provided for under this Section shall run concurrently with any statutory notice periods and any notice given hereunder may be given simultaneously with or incorporated into any such statutory notice.

19.2          Landlord’s Default. Tenant shall promptly notify Landlord of the need for any repairs or action with respect to other matters that are Landlord’s obligation under this Lease. If Landlord fails to perform any covenant, condition, or agreement contained in this Lease within thirty (30) days after receipt of notice from Tenant, or if such default cannot reasonably be

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cured within thirty (30) days, and if Landlord fails to commence to cure within such thirty (30) day period or to diligently prosecute the same to completion, then subject to the other provisions of this Lease, then, subject to the other limitations set forth elsewhere in this Lease, Landlord shall be liable to Tenant for any damages sustained by Tenant as a result of Landlord’s breach; provided that in no event shall (a) Landlord be liable for indirect, consequential or punitive damages; or (b) Tenant have the right to terminate this Lease on account of a Landlord default. Tenant shall not have the right to withhold, reduce or offset any amount against any payments of Rent or any other charges due and payable under this Lease unless Tenant has obtained a final, non-appealable judgment against Landlord for the amount due.

ARTICLE 20
LANDLORD REMEDIES AND DAMAGES

20.1          Remedies. In the event of a Default, then in addition to any other rights or remedies Landlord may have at law or in equity, Landlord shall have the right, at Landlord’s option, without further notice or demand of any kind, to do any or all of the following without prejudice to any other remedy that Landlord may have:

          20.1.1          Terminate this Lease and Tenant’s right to possession of the Premises by giving notice to Tenant. Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may re-enter the Premises and take possession thereof, whereupon Tenant shall have no further claim to the Premises or under this Lease.

          20.1.2          Continue this Lease in full force and effect, whether or not Tenant has vacated or abandoned the Premises, and collect any unpaid Rent or other charges, that have or thereafter become due and payable.

          20.1.3          Continue this Lease in effect, but terminate Tenant’s right to possession of the Premises and re-enter the Premises and take possession thereof, whereupon Tenant shall have no further claim to the Premises without the same constituting an acceptance of surrender.

          20.1.4          In the event of any re-entry or retaking of possession by Landlord, Landlord shall have the right, but not the obligation, (a) to expel or remove Tenant and any other party who may be occupying the Premises, or any part thereof; and (b) to remove all or any part of Tenant’s or any other occupant’s property on the Premises and to place such property in storage at a public warehouse at the expense and risk of Tenant.

          20.1.5          Landlord shall have the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in effect after lessee’s breach and abandonment and recover rent as it becomes due, if lessee has the right to sublet or assign, subject only to reasonable limitations). Accordingly, if Landlord does not elect to terminate this Lease on account of any Default, Landlord may, from time to time, without terminating this Lease, enforce all of its rights and remedies under this Lease, including the right to recover all Rent as it becomes due.

          20.1.6          Without any further notice or demand, Landlord may enter upon the Premises, if necessary, without being liable for prosecution or claim for damages therefor, and do whatever Tenant is obligated to do under the terms of the Lease Tenant agrees to reimburse Landlord on demand for any reasonable expenses which Landlord may incur in effecting compliance with Tenant’s obligations under the Lease. Tenant further agrees that Landlord shall not be liable for any damages resulting to Tenant from such action, unless caused by the gross negligence or willful misconduct of Landlord (but subject to the other limitations on Landlord’s liability set forth in this Lease). Notwithstanding anything herein to the contrary, Landlord will have no obligation to cure any Default of Tenant.

          20.1.7          Landlord shall at all times have the right, without prior demand or notice except as required by Law, to seek any declaratory, injunctive or other equitable relief, and specifically enforce this Lease, or restrain or enjoin a violation or breach of any provision hereof, without the necessity of proving the inadequacy of any legal remedy or irreparable harm.

          20.1.8          To the extent permitted by applicable Law, Landlord shall have the right, without notice to Tenant, to change or re-key all locks to entrances to the Premises, and Landlord shall have no obligation to give Tenant notice thereof or to provide Tenant with a key to the Premises.

          20.1.9          The rights given to Landlord in this Article are cumulative and shall be in addition and supplemental to all other rights or remedies that Landlord may have under this Lease and under applicable Laws or in equity.

20.2          Damages. Should Landlord elect to terminate this Lease or Tenant’s right to possession under the provisions above, Landlord may recover the following damages from Tenant:

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          20.2.1          Past Rent. The worth at the time of the award of any unpaid Rent that had been earned at the time of termination; plus

          20.2.2          Rent Prior to Award. The worth at the time of the award of the unpaid Rent that would have been earned after termination, until the time of award; plus

          20.2.3          Rent After Award. The worth at the time of the award of the amount by which the unpaid Rent for the balance of the term after the time of award exceeds the amount of the rental loss that Tenant proves could have been reasonably avoided, if any; plus

          20.2.4          Proximately Caused Damages. Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant’s failure to perform its obligations under this Lease or that in the ordinary course of things would be likely to result therefrom, including, but not limited to, any costs or expenses (including, without limitation, reasonable attorneys’ fees), incurred by Landlord in (a) retaking possession of the Premises; (b) maintaining the Premises after Default; (c) preparing the Premises or any portion thereof for reletting to a new tenant, including, without limitation, any repairs or alterations, whether for the same or a different use; (d) reletting the Premises, including but not limited to, advertising expenses, brokers’ commissions and fees; and (e) any special concessions made to obtain a new tenant.

          20.2.5          Other Damages. At Landlord’s election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by Law.

          As used in subsections 20.2.1 and 20.2.2, the phrase “worth at the time of the award” shall be computed by adding interest on all such sums from the date when originally due at the Interest Rate. As used in subsection 20.2.3, the phrase “worth at the time of the award” shall be computed by discounting the sum in question at the Federal Reserve rate promulgated by the Federal Reserve office for the district in which the Project is located, plus one percent (1%).

20.3          No Termination. A termination of this Lease by Landlord or the recovery of possession of the Premises by Landlord or any voluntary or other surrender of this Lease by Tenant or a mutual cancellation thereof, shall not work a merger and shall at the option of Landlord, terminate all or any existing franchises or concessions, licenses, permits, subleases, subtenancies or the like between Tenant and any third party with respect to the Premises, or may, at the option of Landlord, operate as an assignment to Landlord of Tenant’s interest in same. Following a Default, Landlord shall have the right to require any subtenants to pay all sums due under their subleases directly to Landlord.

20.4          Waiver of Demand. All demands for Rent and all other demands, notices and entries, whether provided for under common law or otherwise, that are not expressly required by the terms hereof, are hereby waived by Tenant.

20.5          Waiver of Redemption. Tenant hereby waives for Tenant and for all those claiming under Tenant all right now or hereafter existing to redeem by order or judgment of any court or by any legal process or writ, Tenant’s right of occupancy of the Premises after any termination of this Lease.

20.6          Deficiency. If it is necessary for Landlord to bring suit in order to collect any deficiency, Landlord shall have the right to allow such deficiencies to accumulate and to bring an action on several or all of the accrued deficiencies at one time. Any such suit shall not prejudice in any way the right of Landlord to bring a similar action for any subsequent deficiency or deficiencies.

20.7          Counterclaim. Tenant hereby waives any right to plead any counterclaim, offset or affirmative defense in any action or proceedings brought by Landlord against Tenant for possession of the Premises or otherwise, for the recovery of possession based upon the non-payment of Rent or any other Default. This shall not, however, be construed as a waiver of Tenant’s right to assert any claim in a separate action brought by Tenant against Landlord. In the event Tenant must, because of applicable court rules or statutes, interpose any counterclaim or other claim against Landlord in such proceedings, Landlord and Tenant agree that, in addition to any other lawful remedy of Landlord, upon motion of Landlord, such counterclaim or other claim asserted by Tenant shall be severed from the proceedings instituted by Landlord (and, if necessary, transferred to a court of different jurisdiction), and the proceedings instituted by Landlord may proceed to final judgment separately and apart from and without consolidation with or reference to the status of any such counterclaim or any other claim asserted by Tenant.

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ARTICLE 21
BANKRUPTCY

21.1          In the event a petition is filed by or against Tenant under the Bankruptcy Code, Tenant, as debtor and debtor in possession, and any trustee who may be appointed agree to adequately protect Landlord as follows:

          21.1.1          to pay monthly in advance on the first day of each month as reasonable compensation for use and occupancy of the Premises an amount equal to all Rent due pursuant to this Lease;

          21.1.2          to perform each and every obligation of Tenant under this Lease until such time as this Lease is either rejected or assumed by order of a court of competent jurisdiction;

          21.1.3          to determine within sixty (60) days after the filing of such petition whether to assume or reject this Lease;

          21.1.4          to give Landlord at least thirty (30) days’ prior notice, unless a shorter period is agreed to in writing by the parties, of any proceeding relating to any assumption of this Lease;

          21.1.5          to give at least thirty (30) days’ prior notice of any vacation or abandonment of the Premises, any such vacation or abandonment to be deemed a rejection of this Lease; and

          21.1.6          to do all other things to benefit Landlord otherwise required under the Bankruptcy Code.

This Lease shall be deemed rejected in the event of the failure to comply with any of the above.

21.2          In order to provide Landlord with the assurance contemplated by the Bankruptcy Code, the following obligations must be fulfilled, in addition to any other reasonable obligations that Landlord may require, before any assumption of this Lease is effective: (a) all monetary Defaults under this Lease must be cured within ten (10) days after the date of assumption; (b) all other Defaults (other than those arising solely on account of the bankruptcy filing) must be cured within fifteen (15) days after the date of assumption; (c) all actual monetary losses incurred by Landlord (including, but not limited to, reasonable attorneys’ fees) must be paid to Landlord within ten (10) days after the date of assumption; and (d) Landlord must receive within ten (10) days after the date of assumption a security deposit in the amount of six (6) months’ Base Rent and an advance prepayment of three (3) months’ Base Rent.

21.3          In the event this Lease is assumed in accordance with the requirements of the Bankruptcy Code and this Lease, and is subsequently assigned, then, in addition to any other reasonable obligations that Landlord may require and in order to provide Landlord with the assurances contemplated by the Bankruptcy Code, Landlord must be provided with (a) a financial statement of the proposed assignee prepared in accordance with generally accepted accounting principles consistently applied, though on a cash basis, which reveals a net worth in an amount sufficient, in Landlord’s reasonable judgment, to assure the future performance by the proposed assignee of Tenant’s obligations under this Lease; or (b) a written guaranty by one or more guarantors with financial ability sufficient to assure the future performance of Tenant’s obligations under this Lease, such guaranty to be in form and content satisfactory to Landlord and to cover the performance of all of Tenant’s obligations under the Lease.

21.4          Neither Tenant nor any trustee who may be appointed in the event of the filing of a petition under the Bankruptcy Code shall conduct or permit the conduct of any “fire,” “bankruptcy,” “going out of business” or auction sale in or from the Premises.

ARTICLE 22
LIEN FOR RENT

In consideration of the mutual benefits arising under this Lease, Tenant hereby grants to Landlord a lien and security interest on all property of Tenant now or hereafter placed in or upon the Premises, and such property shall be and remain subject to such lien and security interest of Landlord for payment of all Rent. The provisions of this Article relating to such lien and security interest shall constitute a security agreement under the Uniform Commercial Code in force in the State (the “UCC”) so that Landlord shall have and may enforce a security interest on all property of Tenant now or hereafter placed in or on the Premises, including, but not limited to, all fixtures, machinery, equipment, furnishings and other articles of personal property now or hereafter placed in or upon the Premises by Tenant. Landlord, as secured party, shall be entitled to all of the rights and remedies afforded a secured party under the UCC in addition to and cumulative of Landlord’s liens and rights provided by law or by the other terms and provisions of this Lease, and Landlord shall have the right to file a Financing Statement reflecting such lien.

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ARTICLE 23
HOLDING OVER

If after expiration of the Term, Tenant remains in possession of the Premises, Landlord may, at its option, serve notice upon Tenant that such hold over constitutes either: (a) a month-to-month tenancy upon all the provisions of this Lease (except as to Term and Base Rent); or (b) a tenancy at sufferance. If Landlord does not give said notice, Tenant’s hold over shall create a tenancy at sufferance, subjecting Tenant to all the covenants and obligations of this Lease. In either event, the monthly installments of Base Rent shall be increased to one hundred fifty percent (150%) of the monthly installments of Base Rent in effect at the expiration of the Term. If a month-to-month tenancy is created, either party may terminate such tenancy by giving the other party at least thirty (30) days advance notice of the date of termination. In the case of a month to month tenancy or tenancy at sufferance, Tenant shall also pay to Landlord all damages sustained by Landlord resulting from retention of possession by Tenant. The provisions of this Article shall not constitute a waiver by Landlord of any right of re­entry as otherwise available to Landlord, nor shall receipt of any rent or any other act appearing to affirm the tenancy operate as a waiver of the right to terminate this Lease for a breach by Tenant hereof.

ARTICLE 24
SURRENDER OF PREMISES

Upon the expiration or earlier termination of this Lease, Tenant shall peaceably surrender the Premises to Landlord broom-clean and in the same condition as on the date Tenant took possession, except for (a) reasonable wear and tear; (b) loss by fire or other casualty; and (c) loss by condemnation. All fixtures, equipment, improvements, and appurtenances attached to or built into the Premises at the commencement of or during the Term, whether or not by or at the expense of Tenant, other than Tenant’s Property, shall be and remain a part of the Premises, shall be the property of Landlord, and shall not be removed by Tenant, except as directed by Landlord. Tenant shall not be required to remove any leasehold improvements unless (i) such removal is necessary to ensure that the Premises and Building comply with applicable code at the time of surrender, including but not limited to removal of wires located in risers and plenums without raceways or conduits; (ii) they were made without the consent of Landlord; or (iii) Landlord notified Tenant that removal would be required at the time Landlord approved Tenant’s plans therefor. Tenant’s Property shall be and shall remain the property of Tenant and may be removed by Tenant at any time during the Term; provided that, if any of Tenant’s Property is removed, Tenant shall promptly repair any damage to the Premises or to the Building resulting from such removal. If Tenant abandons or surrenders the Premises or is dispossessed by process of law or otherwise, any of Tenant’s Property left on the Premises shall be deemed abandoned, and, at Landlord’s option, title shall pass to Landlord under this Lease as by a bill of sale. If Landlord elects to remove all or any part of such Tenant’s Property, the reasonable cost of removal, including, without limitation, repairing any damage to the Premises or Building caused by such removal, shall be paid by Tenant. On the Expiration Date, Tenant shall surrender all keys, parking cards and other means of entry to the Premises, the Building and the Project, and shall inform Landlord of the combinations and access codes for any locks and safes located in the Premises. It is specifically agreed that any and all telephonic, coaxial, ethernet, or other computer, word processing, facsimile, or electronic wiring (“Telecom Wiring”) and any other components of Tenant’s Telecommunications System shall be removed at Tenant’s cost at the expiration of the Term, unless Landlord has specifically requested in writing that the Telecom Wiring shall remain, whereupon the Telecom Wiring shall be surrendered with the Premises as Landlord’s property.

ARTICLE 25
BROKERAGE FEES

Tenant warrants and represents that it has not dealt with any real estate broker or agent in connection with this Lease or its negotiation except as set forth on the Lease Summary. Tenant shall indemnify, defend and hold Landlord harmless from any cost, expense, or liability, (including, without limitation, costs of suits and reasonable attorneys’ fees) for any compensation, commission, or fees claimed by any other real estate broker or agent in connection with this Lease (including but not limited to any expansions of the Premises and renewals) or its negotiation by reason of any act of Tenant.

ARTICLE 26
NOTICES

Any notice, demand, request, consent, covenant, approval or other communication to be given by one party to the other must be in writing and (a) delivered personally; (b) mailed by certified United States mail, postage prepaid, return receipt requested (except for statements and invoices to be given in the ordinary course hereunder, which may be sent by regular U.S. Mail); (c) sent by nationally recognized overnight courier; or (d) sent by telecopy and confirmed by one of the other methods set forth herein. The effective date of notice shall be (i) for any notice delivered in person, the date of delivery; (ii) for any notice by U.S. mail, three (3) days after the date of certification thereof; (iii) for any notice by overnight courier, the

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next Business Day after deposit with the courier; and (iv) for any notice by telecopy, the date of confirmation of receipt, if before 5:00 p.m. at the location delivered, or the next day if after 5:00 p.m. All notices shall be delivered or addressed to the parties at their respective addresses set forth on the Lease Summary. Either party may change the address at which it desires to receive notice upon giving notice of such request to the other party in the manner provided herein. Landlord and Tenant, and their respective counsel, hereby agree that notice may be given hereunder by the parties’ respective counsel, and that if any communication is to be given hereunder by Landlord’s or Tenant’s counsel, such counsel may communicate directly with all principals, as required to comply with the foregoing provisions.

ARTICLE 27
RELOCATION OF PREMISES

If the Premises contain less than 10,000 square feet, Landlord shall have the right to relocate the Premises to another part of the Building in accordance with the following: (a) Landlord shall give Tenant at least thirty (30) days’ notice of Landlord’s intention to relocate the Premises; (b) the new premises shall be substantially the same in size, dimensions, configuration, and decor as the Premises and, if the relocation occurs after the Commencement Date, shall be placed in that condition by Landlord at its cost; (c) as nearly as practicable, the physical relocation of the Premises shall take place on a weekend and shall be completed before the following Monday and if the physical relocation has not been completed in that time, Rent shall abate from the time the physical relocation commences to the time it is completed, but not to exceed three (3) Business Days from the time that Landlord makes the new premises available to Tenant with all work to be performed by Landlord thereon substantially complete; (d) upon completion of such relocation, the new premises shall become the “Premises” under this Lease; (e) all reasonable out of pocket costs incurred by Tenant as a result of the relocation shall be paid by Landlord; (f) if the new premises are smaller than the Premises as they existed before the relocation, the Base Rent and Tenant’s Proportionate Share shall be reduced proportionately; and (g) the parties hereto shall immediately execute an amendment to this Lease setting forth the relocation of the Premises and the reduction of the Base Rent and Tenant’s Proportionate Share, if any. Tenant hereby waives any claim against Landlord for loss of business on account of any relocation.

ARTICLE 28
SIGNAGE

28.1          Tenant shall be entitled, at its sole cost and expense, to identification signage outside of the Premises on the floor on which the Premises are located. The location, quality, design, style, lighting and size of such signage shall be consistent with the Landlord’s Building standard signage program and shall be subject to Landlord’s prior written approval.

28.2          Landlord shall pay all costs of fabrication and installation of Building standard letters with Tenant name and suite number at the main entrance to the Premises and one (1) line on the Building directory to display Tenant’s name and location in the Building. Any changes to the signage initially provided by Landlord shall be at Tenant’s expense.

28.3          No other signage shall be permitted without the prior consent of Landlord. If Landlord grants such consent, the signage will be at Tenant’s expense. Tenant shall not affix, paint, erect, or inscribe any sign, projection, awning, signal, or advertisement of any kind to any part of the Premises, the Building or the Project, including, without limitation, the inside or outside of windows or doors, without the consent of Landlord. Landlord shall have the right to remove any signs or other matter installed without Landlord’s permission without being liable to Tenant by reason of such removal and to charge the reasonable cost of removal to Tenant, payable within ten (10) days of written demand by Landlord.

28.4          Any damage to any portion of the Project upon installation, maintenance, or removal of Tenant signage shall be Tenant’s sole responsibility. Upon removal of Tenant’s signage, the area affected thereby shall be repaired and restored to Landlord’s specifications, at Tenant’s sole expense. Upon the expiration or earlier termination of this Lease, Tenant will remove all of its signage. Upon removal of its signage, Tenant shall repair all areas affected by such signage to a condition acceptable to Landlord.

ARTICLE 29
LENDER PROVISIONS

29.1          Subordination. This Lease is subject and subordinate to all present and future ground or underlying leases of the Property and to the lien of any mortgages, deeds to secure debt or trust deeds, now or hereafter in force against the Property or the Building, if any, and to all renewals, extensions, modifications, consolidations and replacements thereof (collectively, “Mortgages”), and to all advances made or hereafter to be made upon the security of such Mortgages. Tenant covenants and agrees in the event any proceedings are brought for the foreclosure of any mortgage, deed to secure debt or trust deed or if any ground or underlying lease is terminated, to attorn, without any deductions or set-offs whatsoever, to the purchaser upon

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any such foreclosure sale, or to the lessor of such ground or underlying lease, as the case may be (the “Purchaser”), if so requested to do so by the Purchaser, and to recognize the Purchaser as the lessor under this Lease. In no event shall the Tenant have a right of offset against amounts due any Purchaser on account of any defaults by Landlord under this Lease that pre-date the time the Purchaser becomes the lessor hereunder, nor shall any Purchaser be liable for any such defaults by Landlord. Tenant shall, within ten (10) Business Days of request by Landlord, execute such further instruments or assurances as Landlord may reasonably deem necessary to evidence or confirm the subordination or superiority of this Lease to any Mortgages. Tenant waives the provisions of any current or future statute, rule or law that may give or purport to give Tenant any right or election to terminate or otherwise adversely affect this Lease and the obligations of the Tenant hereunder in the event of any foreclosure proceeding or sale. Notwithstanding the provisions hereof, should any Mortgagee require that this Lease be prior rather than subordinate to its Mortgage, or require that Tenant attorn to any Purchaser, then in such event, this Lease shall become prior and superior to such Mortgage, or Tenant shall so attorn, upon notice to that effect to Tenant from such Mortgagee. The aforesaid superiority of this Lease to any Mortgage shall be self-operative upon the giving of such notice and no further documentation other than such notice shall be required to effectuate such superiority or attornment. In the event Landlord or such Mortgagee desires confirmation of such superiority or attornment, Tenant shall, promptly upon request therefor by Landlord or such Mortgagee, and without charge therefor, execute a document acknowledging such priority or attornment obligation to the Mortgagee as Landlord in the event of foreclosure or deed in lieu thereof or termination of a ground lease.

29.2          Estoppel Certificates. Within ten (10) Business Days after written request from Landlord, Tenant shall execute and deliver to Landlord, or Landlord’s designee, a written statement certifying (a) that this Lease is unmodified and in full force and effect or is in full force and effect as modified and stating the modifications; (b) the amount of Base Rent and the date to which Base Rent and Additional Rent have been paid in advance; (c) the amount of any security deposit with Landlord; (d) that Landlord is not in default hereunder or, if Landlord is claimed to be in default, stating the nature of any claimed default; and (e) such other matters as may be requested. Landlord and, any purchaser, assignee or Mortgagee may rely upon any such statement. Tenant’s failure to execute and deliver such statement within the time required shall be conclusive against Tenant (1) that this Lease is in full force and effect and has not been modified except as represented by Landlord; (2) that there are no uncured defaults in Landlord’s performance and that Tenant has no right of offset, counterclaim, or deduction against Rent; (3) not more than one (1) month’s Rent has been paid in advance; and (4) as to the truth and accuracy of any other matters set forth in the statement as submitted to Tenant.

29.3          Notice and Cure Rights. Tenant agrees to notify any Mortgagee whose address has been furnished to Tenant, of any notice of default served by Tenant on Landlord. If Landlord fails to cure such default within the time provided for in this Lease, such Mortgagee shall have an additional thirty (30) days to cure such default; provided that, if such default cannot reasonably be cured within that thirty (30) day period, then such Mortgagee shall have such additional time to cure the default as is reasonably necessary under the circumstances.

29.4          Changes Requested by Mortgagee. Tenant shall not unreasonably withhold its consent to changes or amendments to this Lease requested by a Mortgagee, so long as such changes do not alter the basic business terms of this Lease or otherwise materially diminish any rights or materially increase any obligations of Tenant.

ARTICLE 30
MISCELLANEOUS

30.1          Parking. Tenant shall be permitted to park automobiles as set forth in Exhibit H.

30.2          Quiet Enjoyment. Tenant, upon paying the Rent and performing all of its obligations under this Lease, shall peaceably and quietly enjoy the Premises, subject to the terms of this Lease and to any mortgage, deed of trust, lease, or other agreement to which this Lease may be subordinated.

30.3          No Air Rights. This Lease does not grant Tenant any rights to any view or to light or air over any property, whether belonging to Landlord or any other person. If at any time any windows of the Premises are temporarily darkened or the light or view therefrom is obstructed by reason of any repairs, improvements, maintenance or cleaning in or about the Building, the same shall be without liability to Landlord and without any reduction or diminution of Tenant’s obligations under this Lease.

30.4          Force Majeure. Any prevention, delay, or stoppage of work to be performed by Landlord or Tenant that is due to strikes, labor disputes, inability to obtain labor, materials, equipment, or reasonable substitutes therefor, acts of God, governmental restrictions, regulations, or controls, judicial orders, enemy or hostile government actions, civil commotion, war, terrorism, fire, or other casualty, or other causes beyond the reasonable control of the party obligated to perform

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hereunder, shall excuse performance of the work by that party for a period equal to the duration of that prevention, delay, or stoppage. Nothing in this Section shall excuse or delay Tenant’s obligation to pay Rent or other charges under this Lease.

30.5          Accord and Satisfaction; Allocation of Payment. No payment by Tenant or receipt by Landlord of a lesser amount than the Rent provided for in this Lease shall be deemed to be other than on account of the earliest due Rent; nor shall any endorsement or statement on any check or letter accompanying any check or payment as Rent be deemed an accord and satisfaction. Landlord may accept such check or payment without prejudice to Landlord’s right to recover the balance of the Rent or pursue any other remedy provided for in this Lease. In connection with the foregoing, Landlord shall have the absolute right in its sole discretion to apply any payment received from Tenant to any account or other payment of Tenant then not current and due or delinquent. Pursuant to the requirements of California Civil Code Section 1161.1(c), or any successor statute, Tenant is hereby placed on actual notice that Landlord’s acceptance of rent shall not constitute a waiver by Landlord of (a) any preceding breach by Tenant of any provision of this Lease, other than the failure of Tenant to pay the particular rent so accepted; or (b) any of Landlord’s rights, including but not limited to any rights Landlord may have to recover possession of the Premises or to sue for any remaining rent owed by Tenant.

30.6          Attorneys’ and Other Fees. Should either party institute any action or proceeding to enforce or interpret this Lease or any provision hereof, for damages by reason of any alleged breach of this Lease or of any provision hereof, or for a declaration of rights hereunder, the prevailing party in any such action or proceeding shall be awarded from the other party all costs and expenses, including, without limitation, attorneys’ and other fees, reasonably incurred in good faith by the prevailing party in connection with such action or proceeding. The term “attorneys’ and other fees” shall mean and include reasonable attorneys’ fees, accountants fees, expert witness fees and any and all consultants and other similar fees incurred in connection with the action or proceeding and preparations therefor. The term “action or proceeding” shall mean and include actions, proceedings, suits, arbitrations, appeals and other similar proceedings.

30.7          Construction. Headings at the beginning of each Article, Section and subsection are solely for the convenience of the parties only and in no way define, limit, or enlarge the scope or meaning of this Lease. Except as otherwise provided in this Lease, all exhibits referred to herein are attached hereto and are incorporated herein by this reference. This Lease shall not be construed as if either Landlord or Tenant had prepared it, but rather as if both Landlord and Tenant had prepared it.

30.8          Confidentiality. Tenant acknowledges that the content of this Lease and any related documents are confidential information. Tenant shall keep such confidential information strictly confidential and shall not disclose such confidential information to any person or entity other than Tenant’s financial, legal, and space planning consultants. In addition to any other remedies to which Landlord may be entitled if Tenant breaches the foregoing covenant, Landlord shall have the right to increase the Rent to then current market rent for the Building.

30.9          Governing Law. This Lease shall be governed by, interpreted under, and construed and enforced in accordance with the Laws of the State applicable to agreements made and to be performed wholly within the State.

30.10          Consent. Unless otherwise expressly set forth herein, all consents and decisions required or permitted of Landlord hereunder shall be granted, withheld and made in Landlord’s sole discretion. Tenant shall have no claim and hereby waives the right to any claim against Landlord for money damages by reason of any refusal, withholding, or delaying by Landlord of any consent, approval, statement, or satisfaction that Landlord has agreed shall be subject to a standard of reasonableness. In such event, Tenant’s only remedy therefor shall be an action for specific performance, injunction, or declaratory judgment to enforce any right to such consent, approval, statement, or satisfaction.

30.11          Authority. Tenant shall, at Landlord’s request, deliver a certified copy of a resolution of its board of directors, if Tenant is a corporation, or other satisfactory documentation, if Tenant is another type of entity, authorizing execution of this Lease.

30.12          Duplicate Originals; Counterparts. This Lease may be executed in any number of duplicate originals, all of which shall be of equal legal force and effect. Additionally, this Lease may be executed in counterparts, but shall become effective only after each party has executed a counterpart hereof; all said counterparts, when taken together, shall constitute the entire single agreement between the parties.

30.13          Offer. The submission and negotiation of this Lease shall not be deemed an offer to enter the same by Landlord but the solicitation of such an offer by Tenant. Tenant agrees that its execution of this Lease constitutes a firm offer to enter the same which may not be withdrawn for a period of thirty (30) days after delivery to Landlord (or such other period as may be expressly provided in any other agreement signed by the parties). During such period and in reliance on the foregoing, Landlord may, at Landlord’s option, proceed with any plans, specifications, alterations, or improvements, and permit Tenant

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to enter the Premises; but such acts shall not be deemed an acceptance of Tenant’s offer to enter this Lease, and such acceptance shall be evidenced only by Landlord’s signing and delivering this Lease to Tenant.

30.14          Further Assurances. Landlord and Tenant each agree to execute any and all other documents and to take any further actions reasonably necessary to consummate the transactions contemplated hereby.

30.15          Financial Statements. In order to induce Landlord to enter into this Lease, Tenant agrees that it shall promptly furnish Landlord, from time to time, upon Landlord’s written request, with financial statements reflecting Tenant’s current financial condition. Tenant represents and warrants that all financial statements, records, and information furnished by Tenant to Landlord in connection with this Lease are true, correct, and complete in all material respects.

30.16          Recording. Tenant shall not record this Lease without the prior consent of Landlord.

30.17          Right to Lease. Landlord reserves the absolute right to create such other tenancies in the Building as Landlord shall determine to best promote the interests of the Building and the Project. Tenant does not rely on the fact, nor does Landlord represent, that any specific tenant or type or number of tenants shall, during the Term, occupy any space in the Building or the Project.

30.18          Severability. In the event any portion of this Lease shall be declared by any court of competent jurisdiction to be invalid, illegal or unenforceable, such portion shall be deemed severed from this Lease, and the remaining parts hereof shall remain in full force and effect, as fully as though such invalid, illegal or unenforceable portion had never been part of this Lease.

30.19          Survival. All indemnity and other unsatisfied obligations set forth in this Lease shall survive the termination or expiration hereof.

30.20          WAIVER OF TRIAL BY JURY. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE PARTIES HEREBY IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS LEASE, OR THE TRANSACTIONS OR MATTERS RELATED HERETO OR CONTEMPLATED HEREBY.

30.21          Successors and Assigns. This Lease shall apply to and bind the heirs, personal representatives, and permitted successors and assigns of the parties.

30.22          Integration of Other Agreements; Amendments. This Lease sets forth the entire agreement and understanding of the parties with respect to the matters set forth herein and supersedes all previous written or oral understandings, agreements, contracts, correspondence and documentation with respect thereto. Any oral representations or modifications concerning this Lease shall be of no force or effect. No provisions of this Lease may be amended or added to except by an agreement in writing signed by the parties or their respective successors in interest.

30.23          TIME OF THE ESSENCE. TIME IS OF THE ESSENCE OF THIS LEASE AND EACH AND EVERY TERM AND PROVISION HEREOF.

30.24          Waiver. The waiver by a party of any breach of any term, covenant, or condition of this Lease shall not be deemed a waiver of such term, covenant, or condition or of any subsequent breach of the same or any other term, covenant, or condition. No delay or omission in the exercise of any right or remedy of a party shall impair such right or remedy or be construed as a waiver of any default of the other party. Consent to or approval of any act by a party requiring consent or approval of the other party shall not be deemed to waive or render unnecessary such consent to or approval of any subsequent act. Any waiver must be in writing and shall not be a waiver of any other matter concerning the same or any other provision of this Lease.

30.25          No Surrender. No act or conduct of Landlord, including, without limitation, the acceptance of keys to the Premises, shall constitute an acceptance of the surrender of the Premises by Tenant before the expiration of the Term. Only a written notice from Landlord to Tenant shall constitute acceptance of the surrender of the Premises and accomplish a termination of the Lease.

30.26          Number and Gender. As used in this Lease, the neuter includes masculine and feminine, and the singular includes the plural.

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30.27          Days. The term “days,” as used herein, shall mean actual days occurring, including Saturdays, Sundays and Holidays.

30.28          Joint and Several Liability. If Tenant consists of two (2) or more parties, each of such parties shall be liable for Tenant’s obligations under this Lease, and all documents executed in connection herewith, and the liability of such parties shall be joint and several.

30.29          No Third Party Beneficiaries. Except as otherwise provided herein, no person or entity shall be deemed to be a third party beneficiary hereof, including but not limited to any brokers, and nothing in this Lease, (either expressed or implied) is intended to confer upon any person or entity, other than Landlord and Tenant (and their respective nominees, successors and assigns), any rights, remedies, obligations or liabilities under or by reason of this Lease.

30.30          No Other Inducements. It is expressly warranted by each of the undersigned parties that no promise or inducement has been offered except as herein set forth and that this Lease is executed without reliance upon any statement or representation of any person or party or its representatives concerning the nature and extent of damages, costs and/or legal liability therefor.

30.31          Rule Against Perpetuities. Notwithstanding any provision hereof to the contrary, in the event that the Commencement Date has not occurred within five (5) years of the date of the execution of this Lease by all parties hereto, then this Lease shall automatically terminate and be without further force and effect. The parties acknowledge that the terms of the foregoing sentence are included herein for the purposes of ensuring that this Lease comply with the common law Rule Against Perpetuities, and in no way is said five (5) year period intended as an estimate of the expected timing of the Commencement Date.

30.32          Independent Covenants. This Lease shall be construed as though the covenants herein between Landlord and Tenant are independent and not dependent. Tenant hereby expressly waives the benefit of any Laws to the contrary and agrees that if Landlord fails to perform any of its obligations set forth herein, Tenant shall not be entitled to make any repairs or perform any acts hereunder at Landlord’s expense or to any setoff of Rent.

30.33          Arbitration. If this Lease contains options where rental rates are expressly subject to arbitration, and the parties do not agree upon the rental rate within the stipulated time, no later than five (5) Business Days following the expiration of the stipulated time, each party shall select an arbitrator having not less than ten (10) years’ actual experience in the commercial real estate brokerage business, and the arbitrators so selected shall immediately meet for the purpose of hearing and deciding the dispute and fixing the relevant rate of rent. If the two arbitrators selected agree on the rental rate, their decision shall be binding on both parties. If the two arbitrators selected cannot agree on the rental rate within ten (10) Business Days after appointment (the “Initial Review Period”), but the rental rates differ by less than five percent (5%), the rental rate shall be the average of the two rates. If the rental rates differ by more than five percent (5%), no later than five (5) Business Days following the expiration of the Initial Review Period, the two arbitrators shall select a third arbitrator with qualifications similar to their own. Within ten (10) Business Days following appointment, the third arbitrator shall select one of the two rental rates promulgated by the first two arbitrators as the rental rate for this Lease. If the arbitrators cannot agree on the third arbitrator, they shall petition the presiding judge of the local State court having jurisdiction to appoint such arbitrator to act as an umpire between the arbitrators selected by Landlord and Tenant. The decision of the third arbitrator or presiding judge, as the case may be, shall be binding on both parties. Landlord and Tenant shall each be responsible to pay their respective arbitrators and will share equally the cost of the third arbitrator.

30.34          No Discrimination. Tenant covenants by and for itself, its heirs, executors, administrators and assigns, and all persons claiming under or through Tenant, and this Lease is made and accepted upon and subject to the condition that there shall be no discrimination against or segregation of any person or group of persons, on account of race, color, creed, sex, religion, marital status, ancestry or national origin in the leasing, subleasing, transferring, use, or enjoyment of the Premises, nor shall Tenant itself, or any person claiming under or through Tenant, establish or permit such practice or practices of discrimination or segregation with reference to the selection, location, number, use or occupancy, of tenants, lessees, sublessees, subtenants or vendees in the Premises.

30.35   OFAC Compliance.

          30.35.1 As used herein “Blocked Party” shall mean any party or nation that (a) is listed on the Specially Designated Nationals and Blocked Persons List maintained by the Office of Foreign Asset Control, Department of the U.S. Treasury (“OFAC”) pursuant to Executive Order No. 13224, 66 Fed. Reg. 49079 (Sept. 25, 2001) or other similar requirements contained in the rules and regulations of OFAC (the “Order”) or in any enabling legislation or other Executive Orders in

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respect thereof (the Order and such other rules, regulations, legislation, or orders are collectively called the “Orders”) or on any other list of terrorists or terrorist organizations maintained pursuant to any of the rules and regulations of OFAC or pursuant to any other applicable Orders (such lists are collectively referred to as the “Lists”); or (b) has been determined by competent authority to be subject to the prohibitions contained in the Orders.

          30.35.2 As a material inducement for Landlord entering into this Lease, Tenant warrants and represents that none of Tenant, any Affiliate of Tenant, any partner, member or stockholder in Tenant or any Affiliate of Tenant, or any beneficial owner of Tenant, any Affiliate of Tenant or any such partner, member or stockholder of Tenant (collectively, a “Tenant Owner”): (a) is a Blocked Party; (b) is owned or controlled by, or is acting, directly or indirectly, for or on behalf of, any Blocked Party; or (c) has instigated, negotiated, facilitated, executed or otherwise engaged in this Lease, directly or indirectly, on behalf of any Blocked Party. Tenant shall immediately notify Landlord if any of the foregoing warranties and representations becomes untrue during the Term.

          30.35.3 Tenant shall not: (a) transfer or permit the transfer of any interest in Tenant or any Tenant Owner to any Blocked Party; or (b) make a Transfer to any Blocked Party or party who is engaged in illegal activities.

          30.35.4 If at any time during the Term (a) Tenant or any Tenant Owner becomes a Blocked Party or is convicted, pleads nolo contendere, or is indicted, arraigned, or custodially detained on charges involving money laundering or predicate crimes to money laundering; (b) any of the representations or warranties set forth in this Section become untrue; or (c) Tenant breaches any of the covenants set forth in this Section, the same shall constitute a Default. In addition to any other remedies to which Landlord may be entitled on account of such Default, Landlord may immediately terminate this Lease and refuse to pay any Allowance or other disbursements due to Tenant under this Lease.

30.36          ERISA. Tenant has been informed that a specified pension plan has an interest in the Project. Tenant hereby represents and warrants that it is not a party in interest to such plan, within the meaning of Section 3(14) of the Employee Retirement Income Security Act of 1974, as amended.

30.37          Waiver of Certain California Code Sections. The parties understand and agree that the provisions of this Lease shall govern the parties’ rights and obligations with respect to the matters addressed herein. Accordingly, and without limitation to the generality of the provisions of this Lease concerning the waiver of certain statutory provisions, Tenant hereby specifically waives its rights under the following provisions of California Law (as each may be amended or recodified from time to time): (a) Civil Code Sections 1932 and 1933(4), concerning the termination of a lease (whether prior to or after the commencement of this Lease term) on account of the condition of the premises; (b) Civil Code Sections 1941 and 1942, concerning the making of repairs at a landlord’s expense; (c) Code of Civil Procedure Section 1265.130, concerning the right to petition the Superior Court to terminate a lease in the event of a partial taking of the premises by condemnation; and (d) Code of Civil Procedure Sections 473 and 1179 and Civil Code Section 3275, concerning rights and redemption or reinstatement of a tenant after it is dispossessed of its premises.

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IN WITNESS WHEREOF the parties have executed this Lease, under seal, as of the date first-above written.

	VON KARMAN MICHELSON CORPORATION, a Delaware corporation
Witness:	By:
	Printed Name: Signatory
Date:
	Title: Signatory
	Date: Signatory
		(SEAL)
	TENANT:
Witness:	QUALITY SYSTEMS, INC., a California corporation By:
Date: 9/6/05	Printed Name: Paul Holt
	Title: CFO
	Date: 9/6/05
		(SEAL)

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ADDENDUM #1

Cancellation Option

Provided no Default has occurred and Tenant has given at least nine (9) months’ prior written notice (the “Notice Deadline”), Tenant shall have the option to cancel its obligations under this Lease effective at the end of the thirty-sixth (36th) month of the Term by making a payment to Landlord no later than the end of the thirty-third (33^rd) month of the Term equal to the sum of Landlord’s unamortized deal costs (i.e. leasehold improvements, commissions, etc.) associated with this Lease based upon an interest rate of eight percent (8%) per annum, with such amortization commencing after (i) the date any Conditional Rent has ceased (with respect to the initial costs incurred by Landlord); and (ii) the date any such costs are incurred by Landlord (if Tenant has expanded the Premises prior to such termination) (collectively, the “Termination Fee”). At least ninety (90) days prior to the Notice Deadline, Tenant shall send Landlord notice requesting the amount of the Termination Fee, such that Tenant will know the correct Termination Fee to be tendered to Landlord as provided above. If Tenant does not request the amount of the Termination Fee as provided herein, Tenant’s failure to tender the correct Termination Fee as provided above shall render the exercise of such option null and void.

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EXHIBIT A–FLOOR PLAN OF THE PREMISES

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EXHIBIT B–SITE PLAN OF BUILDING

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EXHIBIT C - LEGAL DESCRIPTION

Land situated in the State of California, County of Orange, City of Irvine described as follows:

PARCEL A:

PARCEL 2, AND AN UNDIVIDED 31.17 PERCENT INTEREST IN PARCEL 5 AS SHOWN ON PARCEL MAP NO. 84-601 RECORDED IN BOOK 191, PAGES 18 THROUGH 21 INCLUSIVE OF PARCEL MAPS, OFFICE RECORDS OF ORANGE COUNTY, CALIFORNIA.

EXCEPT ANY AND ALL OIL, OIL RIGHTS, MINERALS, MINERAL RIGHTS, NATURAL GAS RIGHTS AND OTHER HYDROCARBONS BY WHATSOEVER NAME KNOWN, GEOTHERMAL STEAM, AND ALL PRODUCTS DERIVED FROM ANY OF THE FOREGOING, THAT MAY BE WITHIN OR UNDER THE LAND, TOGETHER WITH THE PERPETUAL RIGHT OF DRILLING, MINING, EXPLORING AND OPERATING THEREFOR AND STORING IN AND REMOVING THE SAME FROM THE LAND OR ANY OTHER LAND, INCLUDING THE RIGHT TO WHIPSTOCK OR DIRECTIONALLY DRILL AND MINE FROM LANDS OTHER THAN THOSE CONVEYED HEREBY, OIL OR GAS WELLS, TUNNELS AND SHAFTS INTO, THROUGH OR ACROSS THE SUBSURFACE OF THE LAND, AND TO BOTTOM SUCH WHIPSTOCKED OR DIRECTIONALLY DRILLED WELLS, TUNNELS AND SHAFTS UNDER AND BENEATH OR BEYOND THE EXTERIOR LIMITS THEREOF, AND TO REDRILL, RETUNNEL, EQUIP, MAINTAIN, REPAIR, DEEPEN AND OPERATE ANY SUCH WELLS OR MINES, WITHOUT, HOWEVER, THE RIGHT TO DRILL, MINE, STORE, EXPLORE AND OPERATE THROUGH THE SURFACE OR THE UPPER 500 FEET OF THE SUBSURFACE OF THE LAND, AS RESERVED IN DEED FROM BERTEA CORPORATION, RECORDED NOVEMBER 29, 1978 IN BOOK 12941, PAGE 977 OF OFFICIAL RECORDS.

PARCEL B:

A NON-EXCLUSIVE EASEMENT APPURTENANT TO PARCEL A, ABOVE DESCRIBED, FOR THE MAINTENANCE OF TREES, SHRUBS AND OTHER LANDSCAPING OVER AND ACROSS THE SOUTHWESTERLY 3.00 FEET OF PARCEL A AS SHOWN ON PARCEL MAP NO. 81-602, RECORDED IN BOOK 165, PAGES 18 THROUGH 21, INCLUSIVE OF PARCEL MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.

PARCEL C:

AN UNDIVIDED 36.78 PERCENT OWNERSHIP INTEREST IN AND TO CERTAIN IMPROVEMENTS DESIGNATED AS “CENTRAL PLANT FACILITIES” AS SUCH

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TERM AND INTEREST IS DEFINED IN THAT CERTAIN TENANCY IN COMMON AGREEMENT AND AMENDED AND RESTATED AGREEMENT OF ESTABLISHMENT OF COVENANTS, CONDITIONS AND RESTRICTIONS AND GRANT OF EASEMENTS FOR KOLL CENTER IRVINE DATED AS OF MAY 10, 1989 AND RECORDED ON MAY 18, 1989 AS INSTRUMENT NO. 89-265502, AND AS AMENDED BY AN INSTRUMENT RECORDED JULY 11, 1989 AS INSTRUMENT NO. 89-365834, BOTH OF OFFICIAL RECORDS OF ORANGE COUNTY, CALIFORNIA (COLLECTIVELY THE “AGREEMENT”).

PARCEL D:

A NON-EXCLUSIVE EASEMENT APPURTENANT TO PARCEL A, ABOVE DESCRIBED, OVER, UNDER AND ACROSS THE COMMON AREAS (AS DEFINED IN THE AGREEMENT) FOR THE CONSTRUCTION, MAINTENANCE AND USE OF UTILITIES AS MORE FULLY DESCRIBED IN SECTION 8.01(a) OF THE AGREEMENT.

PARCEL E:

A NON-EXCLUSIVE EASEMENT APPURTENANT TO PARCEL A, ABOVE DESCRIBED, OVER, UNDER AND ACROSS THE COMMON AREAS FOR ACCESS, INGRESS AND EGREES OVER AND ACROSS ALL ACCESS WAYS SUFFICIENT TO GUARANTEE ACCESS TO AND FROM ALL PARKING FACILITIES (AS DEFINED IN THE AGREEMENT) AND FROM ADJACENT PUBLIC STREETS AS MORE FULLY DESCRIBED IN SECTION 8.01(b) OF THE AGREEMENT.

PARCEL F:

A NON-EXCLUSIVE EASEMENT APPURTENANT TO PARCEL A, ABOVE DESCRIBED, FOR ACCESS, INGRESS AND EGRESS OVER AND THROUGH AN UNDERGROUND TUNNEL AS MORE FULLY DESCRIBED IN SECTION 8.01(c) OF THE AGREEMENT.

PARCEL G:

A NON-EXCLUSIVE EASEMENT APPURTENANT TO PARCEL A, ABOVE DESCRIBED, OVER, UNDER AND ACROSS THE COMMON AREAS FOR PARKING OF VEHICLES AS MORE FULLY DESCRIBED IN SECTION 8.01(d) OF THE AGREEMENT, SUBJECT TO THE TERMS AND CONDITIONS SET FORTH IN SUCH SECTION 8.01(d).

          Together with all of Grantor’s right, title and interest in and to all appurtenances thereto and all improvements thereon.

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EXHIBIT D - TERM CERTIFICATION

              The undersigned, as Tenant, under that certain lease dated ______________________ (the “Lease”) with Von Karman Michelson Corporation, as Landlord, hereby certifies as follows:

1.           That the undersigned has entered into occupancy of the Premises described in the Lease.

2.           That the Lease is in full force and effect and has not been assigned, modified, supplemented or amended in any way, except as follows:

3.           That the Lease represents the entire agreement between the parties as to said leasing.

4.           That the Commencement Date of the Lease is: __________________________. The Lease expires on _________________________.

5.           That all conditions of the Lease to be performed by Landlord and necessary to the enforceability of the Lease have been satisfied.

6.           That there are no defaults by either Tenant or Landlord under the Lease.

7.           That no rents have been prepaid, other than as provided in the Lease.

8.           That on this date there are no existing defenses or offsets, which the undersigned has against the enforcement of the Lease by Landlord.

9.           That the undersigned has received ________ set(s) of keys to the Premises on this date.

              EXECUTED this ________ day of___________________________, 20___.

TENANT:

QUALITY SYSTEMS, INC.

By:

Printed Name:

Title:

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EXHIBIT E – CONSTRUCTION

          This Exhibit sets forth the terms and conditions relating to construction work in the Premises. All references in this Exhibit to capitalized terms or “this Lease” shall mean the relevant portion of the lease to which this Exhibit is attached and of which this Exhibit forms a part.

          A.             GENERAL CONDITIONS FOR CONSTRUCTION BY TENANT.

          1.             Inspection by Landlord. Landlord shall have the right to inspect work at all times; provided however, Landlord’s failure to inspect any work shall in no event constitute a waiver of any of Landlord’s rights hereunder, nor shall Landlord’s inspection of the work constitute Landlord’s approval thereof. Should Landlord disapprove any work, Landlord shall notify Tenant in writing of such disapproval and shall specify the items disapproved. In the event Landlord disapproves of any matter that might adversely affect any Building System, the structure or exterior appearance of the Building or any other tenant, Landlord may, take such action as Landlord deems necessary, at Tenant’s expense and without incurring any liability on Landlord’s part, to correct any such matter, including, without limitation, causing the cessation of the applicable work.

          2.             Insurance. In addition to any insurance that may be required under this Lease, Tenant shall secure, pay for and maintain or cause Tenant’s contractors to secure, pay for and maintain during the continuance of any work, the following insurance:

          (a)           Worker’s Compensation and Employer’s Liability Insurance with limits of not less than $500,000, or such higher amounts as may be required from time to time by applicable Laws.

          (b)           Commercial General Liability Insurance (including Contractor’s Protective Liability) in an amount not less than $1,000,000 per occurrence, whether involving bodily injury liability (or death resulting therefrom) or property damage liability or a combination thereof with a minimum aggregate limit of $2,000,000, and with umbrella coverage with limits not less than $5,000,000. Such insurance shall provide for explosion and collapse, completed operations coverage and broad form blanket contractual liability coverage and shall insure against any and all claims for bodily injury, including death resulting therefrom, and damage to the property of others and arising from its operations under the contracts whether such operations are performed by Tenant’s contractors or by anyone directly or indirectly employed by any of them.

          (c)           Automobile Liability Insurance, including the ownership, maintenance and operation of any automotive equipment, owned, hired, or non-owned in an amount not less than $500,000 for each person in one accident, and $1,000,000.00 for injuries sustained by two or more persons in any one accident and property damage liability in an amount not less than $1,000,000.00 for each accident. Such insurance shall insure against any and all claims for bodily injury, including death resulting therefrom, and damage to the property of others arising from its operations under the contracts, whether such operations are performed by Tenant’s contractors, or by anyone directly or indirectly employed by any of them.

          (d)            “All-risk” builder’s risk insurance for the full insurable value of the work. This insurance shall include the interests of Landlord and Tenant (and their respective contractors and subcontractors of any tier to the extent of any insurable interest therein) in the work and shall insure against physical loss or damage including, without duplication of coverage, theft vandalism and malicious mischief. If any materials will be stored offsite or will be in transit to the job site and are not covered under said “all-risk” builder’s risk insurance, then Tenant shall effect and maintain similar property insurance on such materials. Any loss insured under said “all-risk” builder’s risk insurance shall be adjusted with Landlord and Tenant and made payable to Landlord, as trustee for the insureds, as their interests may appear.

          (e)           All policies (except the worker’s compensation policy) shall be endorsed to include the Landlord Related Parties as additional insureds. The waiver of subrogation provisions contained in the Lease shall apply to all property insurance policies to be obtained by Tenant pursuant to this section. All insurance policies shall provide that all additional insureds shall be given thirty (30) days’ prior written notice of any reduction, cancellation or non-renewal of coverage (except that ten (10) days’ notice shall be sufficient in the case of cancellation for non-payment of premium) and shall provide that the insurance coverage afforded to the additional insureds shall be primary to any insurance carried independently by said additional insureds. Certificates for all insurance required hereunder shall be delivered to Landlord before the commencement of construction and before any contractor’s equipment is moved onto the Property.

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          3.             Lien Free Completion.

          (a)           Landlord may require, at Landlord’s sole option, that Tenant provide to Landlord such security as reasonably determined by Landlord to protect Landlord against any liability in connection with the work, including but not limited to a lien and completion bond naming Landlord as a co-obligee.

          (b)           Tenant shall use its best efforts to obtain or cause to be obtained a “no-lien” contract from each of Tenant’s contractors. All subcontractors under each of the contracts shall be given a notice of such no-lien contract before such subcontractor furnishes any labor or materials. If Tenant is unable to obtain or cause to be obtained a no-lien contract from any proposed contractor, Tenant shall give written notice of such fact to Landlord, and Landlord shall have the right to disapprove such contactor. Upon completion of the work, Tenant shall furnish Landlord with full and final waivers of liens and contractors’ affidavits and statements, in such form as may be required by Landlord, Landlord’s title insurance company and any Mortgagee, from all parties performing labor or supplying materials or services in connection with the work showing that all of said parties have been compensated in full.

          (c)           If Tenant fails to make any payment relating to the work, Landlord, as its option, may complete the work, make such payment and hold Tenant liable for the costs thereof.

          4.             Plan Approval. Landlord’s approval of Tenant’s plans will not be unreasonably withheld, provided that (a) they comply with all Laws; (b) the improvements do not adversely affect (as determined by Landlord) the Building’s structure or the Building’s Systems (including, without limitation, the Building’s restrooms or mechanical rooms), the exterior appearance of the Building, or the appearance of the Common Areas; (c) the plans are sufficiently detailed to allow construction of the improvements in a good and workmanlike manner; and (d) construction of the improvements conforms to the requirements set forth in this Exhibit. Notwithstanding that any plans prepared by Tenant or its space planner, architect or engineer are reviewed by Landlord and notwithstanding any advice or assistance that Landlord may render to Tenant, Landlord shall have no liability whatsoever for the completeness, design or sufficiency of such plans, or the compliance of such plans with Laws.

          5.             Change Orders. Tenant shall make no changes or modifications to the plans approved by Landlord without Landlord’s prior written consent. Such approval shall not be unreasonably withheld or delayed, as long as such requested change meets (a) through (d) in Section 4 above and the same would not delay the completion of the work. If any change order would increase the cost of construction, as a condition of such approval Landlord may require that Tenant deposit any increased cost with Landlord, or provide Landlord with other security therefor acceptable to Landlord.

          6.             Pre-Construction Activity. At least thirty (30) days prior to commencement of any work, Tenant shall submit the following information and items to Landlord for Landlord’s review and approval:

          (a)           The proposed plans.

          (b)           A detailed critical path construction schedule containing the major components of the work and the time required for each, including the scheduled commencement date of construction of the work, milestone dates and the estimated date of completion of construction.

          (c)           An itemized statement of estimated construction cost, including fees for permits and architectural and engineering fees.

          (d)           Evidence satisfactory to Landlord in all respects of Tenant’s ability to pay the cost of the work as and when payments became due.

          (e)           The names and addresses of Tenant’s contractors (and said contractor’s subcontractors) and materialmen to be engaged by Tenant for the work (individually, a “Tenant Contractor,” and collectively, “Tenant’s Contractors”). Landlord may designate a list of approved contractors for performance of those portions of work involving electrical, mechanical, plumbing, heating, air conditioning or life safety systems, from which Tenant must select its contractors for such, designated portions of work (“Approved Contractors”). Landlord has the right to disapprove any of Tenant’s Contractors that are not Approved Contractors.

          (f)           Certificates of insurance as required herein.

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No work by Tenant shall proceed until Landlord has approved all of the foregoing items.

          7.           Performance of Work.

          (a)           All work by Tenant shall be performed under a valid permit when required, a copy of which shall be furnished to Landlord before commencement of such work.

          (b)           All work shall comply in all respects with (i) all applicable Laws; (ii) applicable standards of the American Insurance Association (formerly, the National Board of Fire Underwriters) and the National Electrical Code; and (iii) building material manufacturer’s specifications.

          (c)           Tenant’s contractors shall be licensed contractors, possessing good labor relations, capable of performing quality workmanship and working in harmony with Landlord’s contractors and subcontractors in the Building. All work shall be coordinated with any other construction or other work in the Building in order not to adversely affect construction work being performed by or for Landlord or its tenants.

          (d)           Tenant shall use only new, first-class materials, except where explicitly shown in the plans approved by Landlord. All work shall be done in a good and workmanlike manner. Tenant shall obtain contractors’ warranties of at least one (1) year duration from the completion of the work against defects in materials and workmanship.

          (e)           At Tenant’s expense, Tenant shall engage the services of an on-site project manager approved in advance by and reasonably acceptable to Landlord, who will be charged with the task of performing daily supervision of the work. Such on-site manager shall be familiar with the Rules and Regulations and the construction procedures for the Building and all personnel of the Building engaged directly or indirectly in the management, operation and construction of the Building. Such on-site project manager shall be accountable and responsible to Tenant and to Landlord and, where necessary, shall serve as a liaison between Landlord and Tenant with respect to the work.

          (f)           Tenant shall pay to Landlord a percentage of the cost of any tenant work (such percentage, which shall vary depending upon whether or not Tenant orders the work directly from Landlord, to be established by Landlord on a uniform basis for the Building) sufficient to compensate Landlord for all overhead, general conditions, fees and other costs and expenses arising from Landlord’s supervision of or involvement with such work.

          8.             As-Built Plans and Specifications. Immediately after completion of any work on the Premises by Tenant, Tenant shall deliver to Landlord “as-built” plans and specifications (including all working drawings) for the work.

          9.             Miscellaneous.

          (a)           Landlord shall, consistent with its obligations to other tenants of the Building, make the freight elevator reasonably available to Tenant in connection with its work, subject to scheduling by Landlord and the Rules and Regulations.

          (b)           All construction work shall be performed in conformity with the Contractor Rules and Regulations set forth in Exhibit E-2. Landlord shall have the right to order Tenant or any of Tenant’s contractors who violate the requirements imposed on Tenant or Tenant’s contractors in performing work to cease work and remove its equipment and employees from the Building.

          B.             INITIAL BUILD-OUT

          1.             Definitions.

          (a)           “Substantial Completion” of the Premises shall occur upon the completion of construction of the Tenant Improvements in the Premises, with the exception of any Punchlist Items and any tenant fixtures, work-stations, built-in furniture, or equipment to be installed by Tenant. Substantial Completion shall have occurred even though minor details of construction, decoration, landscaping or mechanical adjustments remain to be completed.

          (b)           “Tenant Delay” shall mean each day of delay in the performance of the work that occurs because of (i) Tenant’s failure to timely deliver or approve any required documentation; (ii) any change by Tenant to the construction plans; (iii) any specification by Tenant of materials or installations in addition to or other than Landlord’s standard finish-out materials or Tenant’s requirement for materials, components, finishes or improvements that are not available in a

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commercially reasonable time given the anticipated Possession Date; (iv) postponement of any work at the request of Tenant; (v) the failure by Tenant’s architect, space planner or other agent or contractor, to timely prepare plans, pull permits, provide approvals or perform any other act required hereunder; (vi) the failure of Tenant to pay, when due, any amounts required to be paid by Tenant; (vii) Tenant’s failure to attend any meeting with Landlord, any architect, design professional, or any contractor, or their respective employees or representatives, as may be required or scheduled hereunder or otherwise necessary in connection with the preparation or completion of any construction documents; (viii) a breach by any Tenant Related Parties of the terms of this Exhibit or this Lease; (ix) changes in any of the construction plans because the same do not comply with Laws (if the same were prepared by Tenant); and (x) any other acts or omissions of any Tenant Related Parties.

          (c)           “Tenant Improvements” shall mean the improvements to the Premises set forth in Exhibit E-l.

          (d)           “Total Construction Costs” shall mean the entire cost of constructing the Tenant Improvements, including space planning and preparation of the construction plans, labor and materials, electrical and other utility usage during construction, additional janitorial services, trash removal, general tenant signage, related taxes and insurance costs, the fees of any construction managers and any administrative fee to Landlord.

          2.             Punchlist. If Landlord constructs the Tenant Improvements, Landlord will notify Tenant when Landlord considers Substantial Completion to have occurred. Within three (3) Business Days thereafter, Landlord’s representative and Tenant’s representative shall conduct a walk-through of the Premises and identify any necessary touch-up work, repairs and minor completion items that are necessary for final completion of the Tenant Improvements (the “Punchlist Items”). Neither Landlord’s representative nor Tenant’s representative shall unreasonably withhold his or her agreement on Punchlist Items. Landlord shall use reasonable efforts to complete all Punchlist Items within thirty (30) days after agreement thereon; however, Landlord shall not be obligated to engage overtime labor in order to complete such items.

          3.             Warranties. If Landlord constructs the Tenant Improvements, Landlord shall use reasonable efforts to obtain a warranty from Landlord’s contractor against defects in materials and workmanship for one (1) year following Substantial Completion. Landlord hereby assigns to Tenant all warranties and guaranties by the contractor, and Tenant hereby waives all claims against Landlord relating to, or arising out of the construction of, the Tenant Improvements.

          4.             Miscellaneous.

          (a)           Provided the same will not interfere with the Landlord Work, Landlord shall allow Tenant access to the Premises prior to the Substantial Completion of the Landlord Work for the purpose of installing Tenant’s equipment or fixtures (including Tenant’s data and telephone equipment) in the Premises. Prior to Tenant’s entry into the Premises as permitted by the terms of this section, Tenant shall submit a schedule detailing the timing and purpose of Tenant’s entry to Landlord for its approval. Any such early occupancy shall be on all the terms and conditions contained in this Lease, except for the payment of Base Rent and Tenant’s Cost Allocation.

          (b)           Unless otherwise indicated, all references herein to a “number of days” shall mean and refer to calendar days. If any item requiring approval is timely disapproved by Landlord, the procedure for preparation of the document and approval thereof shall be repeated until Landlord approves the document.

          (c)           Notwithstanding any provision to the contrary contained in this Lease, if a Default has occurred at any time prior to Substantial Completion, then (i) in addition to all other rights and remedies granted to Landlord pursuant to this Lease, Landlord shall have the right to cause the contractor to cease the construction of the Premises (in which case, Tenant shall be responsible for any delay in Substantial Completion caused by such work stoppage); and (ii) all other obligations of Landlord under the terms of this Exhibit shall be forgiven until such time, if any, as such Default may be cured.

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EXHIBIT E-1 – TENANT IMPROVEMENT WORK

          Landlord shall construct the Tenant Improvements in substantial accordance with a mutually agreed upon final plan, provided, however, the Total Construction Costs that result from any changes to the initial space and pricing plan attached hereto as Schedule 1 or any shall be at Tenant’s sole cost and expense. Additionally, notwithstanding anything in the Lease to the contrary, Tenant shall be solely responsible for the Total Construction Costs for any and all moveable sound doors located in the Premises and for any “Bid Alternates” as shown on page 8 of Schedule 1. Tenant hereby agrees to pay all Total Construction Costs owed by Tenant to Landlord, upon demand, prior to Substantial Completion of the Tenant Improvements.

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Schedu1e 1

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- 3 -

- 4 -

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LEAVE SPRINKLERS INTACT AS-IS. ALL FIRE LIFE SAFETY EQUIPMENT SHALL BE
LEFT IN PLACE. IF STRUCTURE IS HOLDING THE ITEM IS REMOVED, THE
CONTRACTOR SHALL SUPPORT THE FIRE LIFE SAFETY DEVICE IN A MANNER THAT
DOES NOT IMPAIR IT’S FUNCTION AT ANY TIME.

DEMO ALL DATA/TELE CABLING IN CEILING BACK TO ORIGINAL DEMARK.

GENERAL NOTES

ABANDON PLUMBING LINES AND DRAINS TO BE REMOVED BACK TO POINT OF
ORIGINATION AS REQUIRED FOR NEW TENANTS BUILD-OUT.

SPACE SHOULD BE LEFT IN A CLEAN AND BROOM SWEPT CONDITION.

INTENT OF THE DRAWINGS IS TO SHOW EXISTING SITE AND BUILDING CONDITIONS
WITH INFORMATION DEVELOPED FROM THE ORIGINAL CONSTRUCTION DOCUMENTS,
FIELD AND OWNERS RECORDS, AND TO GENERALLY SHOW THE AMOUNT AND TYPE OF
DEMOLITION AND REMOVALS REQUIRED TO PREPARE EXISTING AREAS FOR WORK.
CONTRACTOR SHALL MAKE A DETAILED SURVEY OF EXISTING CONDITIONS PERTAINING
TO THE WORK BEFORE COMMENCING DEMOLITION. REPORT DISCREPANCIES BETWEEN
DRAWINGS AND ACTUAL CONDITIONS TO THE ARCHITECT FOR INSTRUCTIONS.

MAINTAIN FULLY CHARGED FIRE EXTINGUISHER READILY AVAILABLE DURING ALL
DEMOLITION OPERATIONS.

ALL REMOVED MATERIAL OTHER THAN ITEMS TO BE SALVAGED OR REUSED SHALL
BECOME CONTRACTORS PROPERTY U.N.O., AND SHALL BE REMOVED FROM OWNER’S
PROPERTY. CLEAN UP AND DISPOSE OF DEBRIS PROMPTLY AND CONTINUOUSLY AS
THE WORK PROGRESSES. SECURE AND PAY FOR REQUIRED HAULING PERMITS, PAY
DUMPING FEES AND CHARGES.

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PRICING KEYNOTES

GO TO VERIFY IF EXISTING FOLDING PARTITION AT GROUND FLOOR CAN BE REUSED.
IF NOT, PROVIDE PRICE FOR NEW FOLDING PARTITION BY MODERNFOLD.

NEW CARPET THROUGHOUT U.N.O., DESIGNWEAVE TEMPEST ESQUIRE W/ 4" BURKE
BASE, COLORS TBS.

NEW VCT FLOORING, ARMSTRONG STANDARD EXCELON WITH 4" BURKE BASE, COLORS
TBS. PROVIDE TRANSITIONS STRIPS WHERE NEEDED.

PROVIDE AND INSTALL BUILDING STANDARD LOCKSET AT ALL OFFICES DOORS.

PAINT ENTIRE SUITE. ICI EGGSHELL FINISH 2 COATS MIN. COLOR TBS.

EXISTING RELOCATED SINGLE INTERIOR DOOR AND ASSEMBLY. VERIFY DOOR IS IN
PROPER WORKING ORDER, REPAIR AS REQUIRED. CLEAN AS REQUIRED FOR LIKE NEW
APPEARANCE.

NEW PLASTIC LAMINATE UPPER AND LOWER CABINETS WITH BUILDING STANDARD SINK
PER ADA, OPENING FOR UNDERCOUNTER REFRIGERATOR, OPENING FOR TENANT
SUPPLIED AND INSTALLED MICROWAVE, COFFEE MAKER AND WATER COOLER.

PROVIDE AND INSTALL TWO (2) SEPERATE T-STATS AT TRAINING ROOM.

LIGHTS AT TRAINING ROOMS TO BE SWITCHED SEPERATELY. SEE BID ALTERNATES
‘B’ AND ‘C’.

NEW 20 MINUTE RATED SINGLE CORRIDOR DOOR. MATCH EXISTING IN CORRIDOR.

NEW 3/4" FIRE TREATED PLYWOOD TELEPHONE BACKBOARD WITH 2" CONDUIT TO BASE
BUILDING TELEPHONE ROOM. PAINT TO MATCH WALL.

1

2

3

4

5

6

7

8

9

10

11

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BID ALTERNATE

PROVIDE ALTERNATE PRICE FOR BLACK OUT BLINDS BY MECHO SHADE AT ALL

EXTERIOR GLAZING, TYPICAL.

PROVIDE ALTERNATE PRICE TO REWORK 2Î4 LIGHT FIXTURES AT TRAINING ROOM TO
HAVE THE CAPABILITY OF HALF ON AND HALF OFF.

PROVIDE ALTERNATE PRICE FOR SIX (6) NEW BUILDING STANDARD DOWNLIGHTS AT
TRAINING ROOMS ON DIMMER SWITCHES – EACH ROOM SWITCHED SEPARATE. EXIT
2Î4’S WILL BE RELOCATED AS REQUIRED, PROVIDE SEPARATE SWITCH FOR 2Î4.

A

B

C

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PRICING SYMBOLS

PRICING KEYNOTE.

DEMOLITION KEYNOTE.

EXISTING DOOR TO REMAIN.

EXISTING DOOR TO BE REMOVED.

REMOVE ALL HVAC/ELECTRICAL TIES BETWEEN SUITES.

EXISTING PARTITION TO BE REMOVED.

EXISTING PARTITION TO REMAIN

NEW PARTITION, TO SUSPENDED CEILING ABOVE

A

UNO.

NEW PARTITION, FLOOR TO SUSPENDED CEILING GRIP, 2-1/2"Î25GA. MTL. STUDS
@24" O.C. W/ 5/8" TYP. “X” GYP. BD.,

A

#

#

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DEMOLITION NOTES

REMOVE INTERIOR TENANT NON LOAD BEARING WALL AND ASSOCIATED
ELECTRICAL, DATA AND TELEPHONE. PULL ALL WIRING BACK TO APPROPRIATE
SUB PANELS.

CONTRACTOR TO REMOVE EXISTING DOOR AND FRAMES. WHERE POSSIBLE, REUSE/
RELOCATE ALL EXISTING DOOR ASSEMBLIES IN NEW BUILD OUT.

REMOVE ALL FLOOR COVERING THROUGHOUT TENANT SPACE. SCRAPE ALL FLOORS
CLEAN OF ALL ADHESIVE, PAD ETC. TO SMOOTH FINISH AND BROOM CLEAN.
REMOVE EXISTING WALL FINISHES, SKIM COAT TENANT WALLS TO PREPARE FOR
APPROVED FINISH.

LEAVE SPRINKLERS INTACT AS-IS DURING DEMO ONLY. ALL FIRE LIFE SAFETY
EQUIPMENT SHALL BE LEFT IN PLACE. IF STRUCTURE IS HOLDING THE ITEM IS
REMOVED, THE CONTRACTOR SHALL SUPPORT THE FIRE LIFE SAFETY DEVICE IN A
MANNER THAT DOES NOT IMPAIR IT’S FUNCTION AT ANY TIME.

CUT IN NEW 3' -0" DOORWAY, HEIGHT TO MATCH EXISTING AT CORRIDOR.

REMOVE EXISTING GLASS AND STORE IN BUILDING STORAGE OR AS DIRECTED
BY BUILDING OWNER.

1

2

3

4

5

6

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PRICING GENERAL NOTES

PROVIDE BACKING IN WALLS FOR WALL HUNG FIXTURES AND CABINETS

FE

PROVIDE FIRE EXTINGUISHER IN SEMI-RECESSED CABINET- WHITE J.L

INDUSTRIES OR EQ. 75' -0" APART.

ALL FURNITURE IS SUPPLIED BY TENANT- NOT IN CONTRACT.

NEW ELECTRICAL PER PLAN.

CONTRACTOR TO REPLACE ALL DISCOLORED OR DAMAGED CEILING TILES WITH NEW
TO MATCH EXISTING.

CONTRACTOR TO ALLOW FOR NEW BUILDING STANDARD EXIT SIGNS AND NEW
FLUORESCENT FIXTURES AS REQUIRED AT NEW OFFICE LAYOUT.

STANDARD COLOR FOR OUTLETS IS TO MATCH EXISTING, CHANGE OUT ALL OUT NOT
MATCHING BUILDING STANDARD.

TOTAL ENERGY CONSUMPTION FOR POWER IS 6.0 WATTS PER SQUARE FOOT OR AS
REQUIRED BY C.A.C. TITLE 24.

ELECTRICAL CONTRACTOR TO VERIFY THAT ALL CIRCUITS ARE ADEQUATE FOR NEW
REQUIREMENTS, INSTALL NEW CONDUIT IF REQUIRED.

CONTRACTOR SHALL PROVIDE ELECTRICAL AND MECHANICAL DRAWINGS STAMPED
AND SIGNED BY LICENSED ENGINEERS. - ALL HVAC, MECHANICAL, FIRE LIFE SAFETY,
SPRINKLERS AND ELECTRICAL WORK TO BE DESIGN-BUILD.

HEIGHT OF EXISTING ELECTRICAL OUTLETS MAY REQUIRE RELOCATION.

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POWER & TELEPHONE SYMBOLS

EXISTING DUPLEX ELECTRICAL OUTLET.

EXISTING DATA OUTLET.

EXISTING QUADRAPLEX ELECTRICAL OUTLET.

NEW SINGLE GANG TELEPHONE BOX/DATA. PROVIDE 3/4" CONDUIT AND STUB-UP
AT +6" ABOVE THE CEILING MOUNT BOX AT THE SAME HEIGHT AS THE
ELECTRICAL OUTLET BOX(V/D CABLES).

NEW DEDICATED DUPLEX ELECTRICAL OUTLET. OUTLET IS WALL MOUNTED 15"
AFF UNLESS NOTED OTHERWISE, PROVIDE 120V, SINGLE PHASE, 15 AMP., THREE
WIRE (GROUNDED), WITH 1/2" CONDUIT.

NEW DUPLEX ELECTRICAL OUTLET. OUTLET IS WALL MOUNTED 15" AFF UNLESS
NOTED OTHERWISE, PROVIDE 120 V, SINGLE PHASE, 15 AMP, THREE WIRE
(GROUNDED) WITH 1/2" CONDUIT.

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EXHIBIT E-2
CONTRACTOR RULES AND REGULATIONS

          1.      All contractors, subcontractors, and materialmen (“Contractor Parties”) will check in and out with Building management.

          2.       All Contractor Parties will be appropriately dressed to work in an office environment: shirts with sleeves (T-shirts with company name are acceptable), pants (no shorts), work shoes with socks, and whatever other clothing as may be appropriate. No torn or worn-out clothing is permitted. Contractor Parties will display a courteous demeanor towards tenants, customers, visitors and general public. No Contractor Parties shall remain in the Building after work hours.

           3.      All Contractor Parties shall clean the job site after meals are eaten. Alcoholic beverages and drugs are not to be brought into, or consumed in the Building. Personnel appearing to be under the influence of either alcoholic beverages or drugs will not be allowed into the Building.

          4.       Parking for all personnel must be arranged prior to commencement of work, and will be provided in designated areas only. Vehicles in unapproved areas will be subject to citation and towing without notice. Any parking charges are the sole responsibility of the Contractor Parties.

          5.      Access to the Building shall be by freight elevator only.

          6.      Delivery of materials, use of loading dock, freight and passenger elevators must be scheduled with Landlord prior to receipt of materials.

          Delivery Dock Hours:           Monday – Friday 7:00 A.M. to 5:00 P.M.

          Freight Elevator Hours:        Monday – Friday 7:00 A.M. to 5:00 P.M.

          Other hours of access are available with prior arrangement.

          7.      All Contractor Parties shall maintain the condition of docks, elevators and corridors used.

          8.      All materials are to be stored at the job site or in designated storage areas. No materials are to be stored in corridors or in public areas. Landlord may provide minimum secured storage for materials with prior arrangement.

          9.      Contractor Parties must arrange access to areas other than job site at least 24 hours in advance.

          10.     All work areas are to be visually and materially protected from the tenants and general public. If required by Landlord, the job site shall be sealed off from the balance of the adjoining space so as to minimize the disbursement of dirt, debris and noise.

          11.     Radios or other excessive noise are not permitted.

          12.     The use of toxic materials or odor-causing liquids must be scheduled with Landlord in advance and prior notice must be given to the tenants adjacent to the job site.

          13.     All non-job site areas are to be kept clean and dust free. No material residue shall be tracked through corridors or public areas.

          14.     Contractor Parties shall ensure the job site is left clean and secure at the completion of each work day. Trash and excess materials shall (a) not remain on, in, or at the job site; (b) be disposed of in bins or by truck promptly; (c) not be staged in storage at the job site in any public or adjacent areas; and (d) shall not be disposed of the building’s trash receptacles.

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EXHIBIT F - BUILDING SERVICES

          Subject to all Laws applicable thereto and the Rules and Regulations, Landlord agrees to furnish the following services in a manner that such services are customarily furnished to comparable projects in the area:

          1.     Electrical power for normal general office use, as determined by Landlord.

          2.     Heating, ventilation, and air-conditioning (“HVAC”), when necessary for normal comfort for normal office use of the Premises during Business Hours. If Tenant desires HVAC at any other time, Landlord shall use reasonable efforts to furnish such service upon reasonable notice from Tenant, and Tenant shall pay Landlord’s standard charges therefor on demand.

          3.     City water from the regular Building outlets for drinking, lavatory and toilet purposes.

          4.     Maintenance of the Common Areas.

          5.     Non-exclusive automatic passenger elevator service, provided that the number of elevators available after Business Hours may be limited as Landlord deems reasonably necessary.

          6.     Replacement for building standard lights bulbs. Tenant shall bear the cost of replacement of non standard bulbs, and all fixtures, starters and ballasts within the Premises.

          7.     Restroom supplies.

          8.     Janitorial services five (5) days per week, except for Holidays, in and about the Premises and window washing services in a manner consistent with other comparable buildings in the vicinity of the Building.

          9.     Landlord may, from time to time, provide such on-premises courtesy personnel (who will not necessarily have any responsibilities for any security), the cost of which shall be an Operating Cost hereunder; but Landlord makes no representation or warranty, written or oral, express or implied, that any security will be provided to the Project, or if provided, what the level of that security may be. Landlord does not guarantee any level of security and is released from any responsibility for any claims based upon assertions that Landlord failed to provide adequate security to the Project, the Premises, or otherwise.

“Business Hours” shall mean Monday through Friday, from 8:00 a.m. to 6:00 p.m. and Saturdays from 8:00 a.m. to 12:00 p.m., excluding Holidays.

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EXHIBIT G - RULES AND REGULATIONS

          1.      The Common Areas shall not be obstructed by any of the tenants or used by them for any purpose other than for ingress to and egress from their respective premises. The Common Areas are not for the general public, and Landlord shall in all cases retain the right to control and prevent access thereto of all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation, and interest of the Building and its tenants; provided that nothing herein contained shall be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal activities. If the responsibility for the HVAC system is not a tenant’s, no tenant and no employee or invitee of any tenant shall go upon the roof of the Building except in the case of maintenance of the HVAC system.

          2.     The Premises shall not be used for the storage of merchandise held for sale to the general public or for lodging. No cooking shall be done or permitted on the Premises except that private use by Tenant of approved microwave ovens, equipment for brewing coffee, tea, hot chocolate, and similar beverages shall be permitted, provided that such use is in accordance with all Laws.

          3.     No tenant shall employ any person or persons other than the janitor of Landlord for the purpose of cleaning its Premises unless otherwise agreed to by Landlord in writing. Except with the consent of Landlord, no person or persons other than those approved by Landlord shall be permitted to enter the Building for the purpose of cleaning the same. No tenant shall cause any unnecessary labor by reason of such tenant’s carelessness or indifference in the preservation of good order and cleanliness. Tenant shall promptly notify Landlord of any carpet or wall stains requiring attention. Janitor service will not be furnished on nights when rooms are occupied after 6:00 p.m. unless, by agreement in writing, service is extended to a later hour for specifically designated rooms.

          4.      Landlord, will furnish each tenant free of charge with two (2) keys to each door provided in the premises by Landlord. Landlord may make a reasonable charge for additional keys. No tenant shall have any such keys copied. No tenant shall alter any lock or install a new or additional lock or any bolt on any door of its premises. Each tenant upon the termination of its lease shall deliver to Landlord all keys to doors in the Building. Should Tenant install a locking system that requires a code, such code shall be provided to Landlord in writing, and all subsequent changes to the code will be provided in writing twenty-four (24) hours prior to such change taking place.

          5.      Landlord shall designate appropriate entrances for deliveries or other movement to or from the premises of equipment, materials, supplies, furniture, or other property, and Tenant shall not use any other entrances for such purposes. Landlord must have approved all means or methods used to move equipment, materials, supplies, furniture, or other property in or out of the Building prior to any such movement. Landlord will not be responsible for loss of or damage to any such property from any cause, and all damage done to the Building by moving or maintaining such property shall be repaired at the expense of Tenant. Tenant shall move all freight, supplies, furniture, fixtures, and other personal property only at such times as Landlord may designate. Unattended vehicles will be towed at the vehicle owner’s expense.

          6.      No tenant shall use any method of heating or ventilation or air conditioning other than that supplied by Landlord.

          7.     No animals (except for seeing eye dogs) shall be brought or kept in the Premises or the Building.

          8.      Landlord shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Building of any person in the case of invasion, mob, riot, public excitement, or other circumstances rendering such action advisable in Landlord’s opinion. Landlord reserves the right to prevent access to the Building during the continuance of the same by such action as Landlord may deem appropriate, including closing doors.

          9.     No curtains, draperies, blinds, shutters, shades, screens, or other coverings, hangings, or decorations shall be attached to, hung, or placed in, or used in connection with, any window of the Building without the prior consent of Landlord. Such items shall be installed on the office side of Landlord’s standard window covering and shall in no way be visible from the exterior of the Building. Tenant shall keep window coverings closed when the effect of sunlight (or the lack thereof) would impose unnecessary loads on the Building’s heating or air condition systems.

          10.      Tenant shall ensure that the doors of the Premises are closed and locked and that all water faucets, water apparatus, and utilities are shut off before Tenant or Tenant’s employees leave the Premises so as to prevent waste or damage; and for any default or carelessness in this regard, Tenant shall make good all injuries sustained by other tenants or

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occupants of the Building or Landlord. On multiple-tenancy floors, all tenants shall keep the doors to the Building corridors closed at all times except for ingress and egress.

          11.     The toilet rooms, toilets, urinals, wash bowls, and other apparatus shall not be used for any purpose other than that for which they are constructed, no foreign substance of any kind whatsoever shall be thrown therein, and the expense of any breakage, stoppage, or damage resulting from the violation of this rule shall be borne by the tenants who, or whose employees or invitee, shall have caused it.

          12.      Except with the prior consent of Landlord, no tenant shall sell at retail newspapers, magazines, periodicals, theater or travel tickets, or any other goods or merchandise to the general public in or on the Premises, nor shall any tenant carry on or permit any employee or other person to carry on the business of stenography, typewriting, printing, or photocopying or any similar business in or from the Premises for the service or accommodation of occupants of any other portion of the Building; nor shall the premises of any tenant be used for manufacturing of any kind, or any business or activity other than that specifically provided for in such tenant’s lease.

          13.      No tenant shall install any radio or television antenna, loudspeaker, or other device on the roof or exterior walls of the Building without prior consent of Landlord. No TV or radio or recorder shall be played in such a manner as to cause a nuisance to any other tenant.

          14.      There shall not be used in any space, or in the public halls of the Building, either by any tenant or others, any hand trucks except those equipped with rubber tires and side guards or such other material handling equipment as Landlord may approve. No other vehicles of any kind shall be brought by any tenant into the Building or kept in or about its premises.

          15.      Each tenant shall store all its trash and garbage within its premises. No material shall be placed in the hallways or in the trash boxes or receptacles if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of office building trash and garbage in the locale without being in violation of any law or ordinance governing such disposal. All garbage and refuse disposal shall be made only through entryways provided for such purposes and at such times as Landlord shall designate.

          16.      Canvassing, soliciting, distribution of handbills, or any other written material and peddling in the Building are prohibited, and each tenant shall cooperate to prevent the same.

          17.      Except in a case of emergency, the requirements of tenants will be attended to only upon application in writing at the office of the Building or by facsimile transmitted to the office of the Building manager. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord.

          18.      Tenant shall not occupy the Building or permit any portion of the Building to be occupied for the manufacture, distribution, or direct sale of liquor, narcotics, or tobacco in any form, or as a medical office, barber shop, manicure shop, music or dance studio, or employment agency. Tenant shall not conduct in or about the Building any auction, public or private, without the prior written approval Landlord.

          19.      Tenant shall not use in the Building any machines, other than standard office machines, such as typewriters, calculators, desktop computers, copying machines, and similar machines, without the prior written approval of Landlord. All office equipment and any other device of any electrical or mechanical nature shall be placed by Tenant in the Premises in settings approved by Landlord, so as to absorb or prevent any vibration, noise, or annoyance. Tenant shall not cause improper noises, vibrations, or odors within the Building.

          20.      Tenant shall not enter the mechanical rooms, air conditioning rooms, electrical closets, janitorial closets, or similar areas or go upon the roof of the Building without the prior consent of Landlord.

          21.      Tenant shall not mark, paint, drill into, cut, string wires within, or in any way deface any part of the Building, without the prior consent of Landlord, and as Landlord may direct.

          22.      Tenant will not place objects on window sills or otherwise obstruct the exterior wall window covering.

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          23.      Tenant will keep all doors opening to the exterior of the Building, all fire doors, and all smoke doors closed at all times.

          24.      Tenant shall not obstruct, alter, or in any way impair the efficient operation of Landlord’s heating, ventilating, electrical, fire, safety, or lighting systems, nor shall Tenant tamper with or change the setting of any thermostat or temperature control valves in the Building.

          25.      If Tenant uses the Premises after regular business hours or on non-business days Tenant shall lock any entrance doors to the Building or to the Premises used by Tenant immediately after using such doors.

          26.      Tenant shall not use any portion of the Premises for lodging.

          27.      Landlord reserves the right to exclude or expel from the Building any person who, in the judgment of Landlord is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of these rules and regulations.

          28.      Tenant shall not park or attach any bicycle or motor driven cycle on or to any part of the Premises or Building.

          29.      Tenant shall not install any artwork that could give an artist or any other party a right under applicable Law to prevent removal of the same.

          30.      This is a non-smoking facility. Smoking is prohibited within the confines of the building in all public areas, which includes interior common area hallways and restrooms.

          31.      Provided Landlord acts in good faith pursuant to sound operating procedures, Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenant or tenants, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other tenant or tenants, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Building.

          32.      These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the agreements, covenants, conditions, and provisions of any lease of premises in the Building.

          33.      Landlord reserves the right to modify the foregoing and promulgate such other rules and regulations as Landlord may from time to time decide are needed for the safety, care, or cleanliness of the Building, for the preservation of good order therein, or as changed conditions or particular circumstances may require.

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EXHIBIT H – PARKING AGREEMENT

          Tenant shall be provided the number of non-exclusive parking spaces as set forth on the Lease Summary, in such areas or spaces Landlord shall determine from time to time (the “Non-exclusive Parking”). The Non-exclusive Parking shall be available for use by Tenant on a “non-reserved” and “space available” basis during Business Hours.

          During the initial Term, the monthly rate per vehicle for any parking spaces granted Tenant shall be as set out on the Lease Summary, but subject to adjustment as of January 1 of each calendar year of the Term to the then prevailing rate generally charged for such parking.

          The parking rates charged by Landlord for Tenant’s parking passes shall be exclusive of any parking tax or other charges imposed by governmental authorities in connection with the use of such parking, which taxes and/or charges shall be paid directly by Tenant or the parking users, or, if directly imposed against Landlord, Tenant shall reimburse Landlord for all such taxes and/or charges concurrent with its payment of the parking rates described herein.

          Tenant’s use of the parking areas serving the Building shall be subject to the following:

          1.      Parking shall not be permitted for Tenant or its employees in the Project over and above the number of spaces designated on the Lease Summary.

          2.      All parking areas shall be under the control of Landlord, and Tenant agrees that all Tenant Related Parties shall conform to such reasonable written parking regulations, conditions and provisions as may from time to time be prescribed by Landlord, provided the same do not increase Tenant’s obligations or decrease Tenant’s rights.

          3.      If Tenant is not permitted to utilize any parking space in the parking areas at any time through no direct intentional act of Landlord, such facts shall never be deemed to be a default by Landlord so as to permit Tenant to terminate this Lease (either in whole or in part) or pursue other remedies. Provided, however, so long as Tenant is not able to utilize any such parking space (for reasons other than as a result of the negligence of any Tenant Related Party), Tenant’s obligation to pay rental for any such parking space that is not provided shall be abated for so long as Tenant does not have the use of such parking space. Such abatement shall constitute full settlement of all claims that Tenant might otherwise have against Landlord by reason of such failure or inability to provide Tenant with such parking space. Landlord agrees to use reasonable efforts to provide alternate parking for use by Tenant in reasonable proximity to the Building. Landlord shall not be responsible for enforcing Tenant’s parking rights against any third parties.

          4.      Restricted and unrestricted parking areas shall include only those areas designated by Landlord as such.

          5.      Landlord will be entitled to utilize whatever access device Landlord deems necessary (including but not limited to the issuance of parking stickers or access cards) to assure that only those persons contracting for the use of spaces in the parking areas are using the parking spaces therein. In the event any Tenant Related Parties wrongfully park in any parking spaces, Landlord will be entitled and is hereby authorized to impose upon Tenant a penalty of $25.00 for each such occurrence. Tenant hereby agrees to pay all amounts becoming due hereunder as Additional Rent upon demand therefor, and the failure to pay any such amount will additionally be deemed a Default.

          6.      All vehicles are to be currently licensed, in good operating condition, parked for business purposes having to do with Tenant’s business operated in the Premises, parked within designated parking spaces, one (1) vehicle to each space. No vehicle shall be parked as a “billboard” vehicle in the parking lot. Any vehicle parked improperly may be towed away. Any Tenant Related Parties who do not operate or park their vehicles as required shall subject the vehicle to being towed at the expense of the owner or driver. Landlord may place a “boot” on the vehicle to immobilize it and may levy a charge of $50.00 to remove the “boot.” Tenant shall indemnify, hold and save harmless Landlord of any liability arising from the towing or booting of any unauthorized vehicles.

          7.      Tenant acknowledges and agrees that Landlord may, without incurring any liability to Tenant and without any abatement of Rent under this Lease, from time to time, close-off or restrict access to the parking area, or relocate Tenant’s parking spaces to other parking areas within a reasonable distance of the Premises, for purposes of permitting or facilitating any such construction, alteration or improvements with respect to the parking area or to accommodate or facilitate renovation, alteration, construction or other modification of other improvements or structures located on the Property.

- 1 -

          8.      Landlord may delegate its responsibilities hereunder to a parking operator in which case such parking operator shall have all the rights of control attributed hereby to the Landlord.

- 2 -

EX-21

EXHIBIT 21

QUALITY SYSTEMS, INC.
LIST OF SUBSIDIARIES

1. NextGen Healthcare Information Systems, Inc, Inc., a California corporation, is a wholly-owned subsidiary of Quality Systems, Inc.

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EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued reports dated June 2, 2006, accompanying the consolidated financial statements and schedule and management’s assessment of the effectiveness of internal control over financial reporting included in the Annual Report of Quality Systems, Inc. on Form 10-K for the year ended March 31, 2006. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Quality Systems, Inc. on Forms S-8 (File No. 33-31949, effective November 6, 1989, File No. 333-63131, effective September 10, 1998, File No. 333-67115, effective November 12, 1998) and File No. 333-129752, effective November 16, 2005.

/s/ Grant Thornton LLP

Irvine, California
June 2, 2006

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EX-31.1

Exhibit 31.1

CERTIFICATION OF CEO PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14 AND
15D-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Louis Silverman, certify that:
1.	I have reviewed this Form 10-K of Quality Systems, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	By:   /s/   LOUIS E. SILVERMAN
Date: June 8, 2006	Louis E. Silverman,
	President and Chief Executive Officer

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EX-31.2

Exhibit 31.2

CERTIFICATION OF CFO PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14 AND
15D-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Paul A. Holt, certify that:
1.	I have reviewed this Form 10-K of Quality Systems, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	By:   /s/   PAUL HOLT
Date: June 8, 2006	Paul A. Holt,
	Secretary and Chief Financial Officer

81

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

          In connection with the annual report on Form 10-K of Quality Systems, Inc. (the “Company”) for the period ended March 31, 2006 (the “Report”), the undersigned hereby certify in their capacities as Chief Executive Officer and Chief Financial Officer of the Company, respectively, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

          1.     the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

          2.     the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: June 8, 2006	By:	/s/   LOUIS SILVERMAN
		Louis Silverman
		Chief Executive Officer (principal executive officer)

Dated: June 8, 2006	By:	/s/   PAUL HOLT
		Paul Holt
		Chief Financial Officer (principal financial officer)

          A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signatures that appear in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

82