UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934


(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, 2007
	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 92612

(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:


Common Stock, par value $.01 per share		Nasdaq Global Select Market
(Title of each class)		(Name of each exchange on which registered)

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

None

(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 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 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

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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. x

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. (Check one):

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

The aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 30, 2006: $660,124,000 (based on the closing sales price of the Registrant’s common stock as reported in the NASDAQ National Market System on that date, $38.78 per share).* (1)

The Registrant has no non-voting common equity.

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		27,122,955

(Class)		(Outstanding at June 7, 2007)

* 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 31, 2006, the registrant 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 February 2, 2005, the registrant 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.

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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 (“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.

Forward-looking statements 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, the risk factors discussed in Item 1A of this report as well as factors discussed elsewhere in this and other reports and documents we file with the 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 unless required by law. 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 Commission.

PART I


ITEM 1.	BUSINESS

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, “our 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.

Quality Systems, Inc., 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 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 that 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 rates for this software, commonly referred to as clinical software, are relatively low. 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.

Inclusive of divisional EDI revenue, the NextGen Division accounted for approximately 89.4% of our revenue for fiscal 2007 compared to 87.0% in fiscal 2006. Inclusive of divisional EDI revenue, the QSI Division accounted for 10.6% and 13.0% of revenue in fiscal 2007 and 2006, respectively. The NextGen Division’s revenue grew at 35.5% and 41.0% in fiscal 2007 and 2006, respectively, while the QSI Division’s revenue increased by 6.7% and 1.2% in fiscal 2007 and 2006, 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. We believe 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.

Our Strategy

Our strategy is, at present, to focus on our 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.

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 RS6000^[5^] central processing unit and IBM’S AIX^[6] 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. 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

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

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


•	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 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 Pentium^[7]-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 Server^[8] or Oracle^[9]. The system is scalable from one to thousands of workstations.

NextGen EMR stores and maintains clinical data including:


•	Data captured using user-customizable 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 2006, the NextGen Division launched a new health information network technology product named NextGen® Community Health Solution (NextGen CHS). 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,

⁷Pentium 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.

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.

Also in fiscal year 2006, we introduced a new service named Practice Solutions. This service provides billing services to solo and group practices.

Connectivity Services. We make available 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 patient health portal, NextMD^®. NextMD is a vertical portal for the healthcare industry, linking patients with their physicians, 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, integrating a number of these features with physicians’ existing systems.

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, 2007, 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 can be performed on the prospective clients’ premises, or 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 normally receive up-front licensing fees. Clients have the option to purchase maintenance services which, if purchased, are invoiced on a monthly, quarterly or annual 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.

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 adversely affect us. No client accounted for ten percent or more of net revenue during the fiscal years ended March 31, 2007, 2006, or 2005. However, one client did represent approximately 12.5% of gross accounts receivable as of March 31, 2007.

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, quarterly or annual 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.

In addition, NextGen E-learning is 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.

In fiscal year 2007, we opened a new NextGen training facility in Dallas, Texas. This new training facility adds to our existing training facilities located in Horsham, Pennsylvania, Atlanta, Georgia and adjacent to our corporate offices in Irvine, California.

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.

Product 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 2007, 2006, and 2005, we expended approximately $15.2 million, $11.4 million, and $9.6 million, respectively, on research and development activities, including capitalized software amounts of $5.0 million, $3.3 million, and $2.7 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, 2007, we employed 661 persons, of which 647 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 which, if we fail to properly address, could adversely affect our business, results of operations, financial condition and price of our stock. 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 adversely affect 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 adversely affect 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 adversely affect our business, results of operations and financial condition. If new systems sales do not materialize, our near term and longer term revenue will be adversely affected.

The unpredictability of our quarterly operating results may cause the price of our common stock to fluctuate or decline. 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;

•	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 adversely affect 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 after 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 adversely affect our 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 adversely affected.

Our common stock price has been volatile, which could result in substantial losses for investors purchasing shares of our common stock and in litigation against us. 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;

•	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.

Moreover, in the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources.

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 36% of the outstanding shares of our common stock at March 31, 2007. Our Bylaws permit our shareholders to cumulate their votes, the effect of which is to provide shareholders with sufficiently large concentrations of our shares the opportunity to assure themselves one or more seats on our 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 36% of the outstanding shares of our common stock at March 31, 2007 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.

If our principal products and our new product development fail to meet the needs of our clients, we may fail to realize future growth. 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 new products or product enhancements do not achieve market acceptance, our business, results of operations and financial condition could be 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 or continue to maintain 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, which may force us to adjust our sales, marketing and pricing strategies. 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, the majority of our 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 adversely affect 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.

Many of our competitors have greater resources than we do. In order to compete successfully, we must keep pace with our competitors in anticipating and responding to the rapid changes involving the industry in which we operate, or our business, results of operations and financial condition may be adversely affected. 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 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 website, which may cause us expense and management distraction. We could be subject to third party claims based on the nature and content of information supplied on our website 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 website or third party websites linked from our website or through content and information that may be posted by users in chat rooms, bulletin boards or on websites 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 risk and/or the possibility of claims from activities related to strategic partners, which 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 rely on third parties to provide services that affect 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. These third parties could raise their prices and/or be acquired by competitors of our which could potentially create short and long-term disuptions to our business negatively impacting our revenue, profit and/or stock price. 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 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 affect interest or investment income, thereby potentially adversely 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 effect 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 us 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 an adverse effect on our results of operations.

We face the risks and uncertainties that are associated with litigation against us, which may adversely impact our marketing, distract management and have a negative impact upon our business, results of operations and financial condition. We face the risks associated with litigation concerning the operation of our business. The uncertainty associated with substantial unresolved litigation may have an adverse effect 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 an 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.

Because we believe that proprietary rights are material to our success, misappropriation of these rights could adversely affect our financial condition. 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.

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 our management and adversely affect 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 and other services from third parties, which may cause us to discontinue, delay or reduce product shipments. We depend upon licenses for some of the technology used in our products as well as other services from third-party vendors. Most of these arrangements can be continued/renewed only by mutual consent and may be terminated for any number of reasons. We may not be able to continue using the products or services made available to us under these arrangements on commercially reasonable terms or at all. As a result, we may have to discontinue, delay or reduce product shipments or services provided until we can obtain equivalent technology or services. Most of our third-party licenses are non-exclusive. Our competitors may obtain the right to use any of the business elements covered by these arrangements and use these elements to compete directly with us. In addition, if our vendors choose to discontinue providing their technology or services 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, and which may diminish Internet usage and availability as well as access to our website. 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 service providers, online service providers and other website operators may obstruct or diminish access to our website by our customers resulting in a loss of potential or existing users of our services.

Our failure to manage growth could harm our business, results of operations and financial condition. 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 an 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 an 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 an 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, which could have an adverse effect on our business, results of operations and financial condition. 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 an 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.

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 adversely affect our business, results of operations and financial condition.

We are subject to the effect of payor and provider conduct which we cannot control and accordingly, there is no assurance that revenues for our services will continue at historic levels. 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. As a result of this, or other market factors, we are unable to ensure 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 payors could adversely affect our transaction volume and financial results. In addition, we cannot provide assurance that we will be able to maintain our existing 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, which may adversely impact our business, financial condition and results of operations. 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 effect, if any, such proposals or healthcare reforms might have on our business, financial condition and results of operations.

As existing 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 effect at this time. We have taken steps to modify our products, services and internal practices as necessary to facilitate our compliance with the 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, developments of additional federal and state regulations and policies 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 adversely affect our business, financial condition and results of operations.

If our products fail to comply with evolving government and industry standards and regulations, we may have difficulty selling our products. 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, one or more of which could adversely affect our business, financial condition, cash flows, revenue and results of operations. 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 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 changes in our revenue recognition and/or other accounting policies and practices that could adversely affect our business, financial condition, cash flows, revenue and results of operations.

If material weaknesses in our internal controls are identified by ourselves or our independent auditors, our per share price may be adversely affected. 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 our 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, through 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.

Continuing worldwide political and economic uncertainties may adversely affect 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 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 adversely affect the price of our stock.

Our future policy concerning the payment of dividends is uncertain, which could adversely affect the price of our stock. We have announced our intention to pay a quarterly dividend commencing with the conclusion of our first fiscal quarter of 2008 (June 30, 2007) and pursuant to this policy the Board has declared a quarterly cash dividend of $0.25 per share on our outstanding shares of common stock, payable to shareholders of record as of June 15, 2007 with an anticipated distribution date of July 5, 2007. We anticipate that future quarterly dividends, if and when declared by the Board pursuant to this policy, would likely be distributable on or about the fifth day of each of the months of October, January, April and July. There can be no guarantees that we will have the financial wherewithal to fund this dividend in perpetuity. Further, the Board may decide not to pay further the dividend at some future time for financial or non-financial reasons. Unfulfilled expectations regarding future dividends could adversely affect 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 78,000 square feet of space for the principal office of our NextGen Division in Horsham, Pennsylvania. This lease expires in March 2011. In January 2007, we executed a new lease for approximately 35,000 square feet of space for the NextGen Division in Atlanta, Georgia. This lease expires in October 2011. In May 2006, we executed a lease for approximately 3,000 square feet of space in Dallas, Texas for NextGen staff and a new NextGen training facility. 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 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 may be required to lease additional space. We believe that suitable additional or substitute space is available, if needed, at market 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 currently pending matters has yet to be determined, we do not presently believe that their outcome will adversely affect 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 2007.

PART II


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

Market Price and Holders

Our common stock is traded on the Nasdaq Global Select Market under the symbol “QSII.” The following table sets forth for the quarters indicated the high and low sales prices for each period indicated as reported on the Nasdaq Global Select Market and reflects all stock splits effected.


Quarter Ended	High		Low

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

June 30, 2006	$	38.270	$	28.300

September 30, 2006	$	42.000	$	30.430

December 31, 2006	$	43.680	$	34.750

March 31, 2007	$	45.440	$	36.850

At June 1, 2007, there were approximately 97 holders of record of our common stock. We estimate the number of beneficial holders of our common stock to be in excess of 13,000.

Dividends and Splits

In February 2005, we announced that our Board of Directors declared a 2-for-1 stock split with respect to our outstanding shares of common stock. The stock split record date was March 4, 2005 and the stock began trading post split on March 28, 2005.

In March 2005, we paid a one-time dividend on shares of our common stock equal to $0.75 per share. The record date for the dividend was February 24, 2005. The dividend per share amount has been adjusted to reflect the stock split noted above.

In January 2006, we announced that our 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 March 2006, we paid a $0.875 per share dividend on shares of our common stock. The record date for the dividend was February 24, 2006. The dividend per share amount has been adjusted to reflect the stock split noted above.

In January 2007, our Board of Directors adopted a policy whereby we intend to pay a regular quarterly dividend of $0.25 per share on our outstanding common stock commencing with conclusion of our first fiscal quarter of 2008 (June 30, 2007) and continuing each fiscal quarter thereafter, subject to further Board review and approval and establishment of record and distribution dates by our Board of Directors prior to the declaration of each such quarterly dividend. On May 31, 2007, the Board declared a quarterly cash dividend of $0.25 per share on our outstanding shares of common stock, payable to shareholders of record as of June 15, 2007 with an anticipated distribution date of July 5, 2007. We anticipate that future quarterly dividends, if and when declared by the Board

pursuant to this policy, would likely be distributable on or about the fifth day of each of the months of October, January, April and July.

In February 2007, we paid a $1.00 per share dividend on shares of our common stock. The record date for the dividend was February 13, 2007.

Payment of future dividends, if any, will be at the discretion of our Board after taking into account various factors, including without limitation, our financial condition, operating results, current and anticipated cash needs and plans for expansion.

Performance Graph

The following graph compares the cumulative total returns of our common stock, the Total Return Index for The Nasdaq Stock Market, and the Nasdaq Computer & Data Processing Services Stock Index over the five-year period ended March 31, 2007 assuming $100 was invested on April 1, 2002 with all dividends, if any, reinvested. This performance graph shall not be deemed to be “soliciting material” or “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended or the Exchange Act.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Quality Systems, Inc., The NASDAQ Composite Index
And The NASDAQ Computer & Data Processing Index¹

(LINE GRAPH)


	*	$100 invested on 4/1/02 in stock or index-including reinvestment of dividends. Fiscal year ending March 31.

The last trade price of our common stock on each of March 31, 2003, 2004, 2005, 2006 and 2007 was published by Nasdaq and, accordingly for the periods ended March 31, 2003, 2004, 2005, 2006 and 2007 the reported last trade price was utilized to compute the total cumulative return for our common stock for the respective periods then ended. Shareholder returns over the indicated periods should not be considered indicative of future stock prices or shareholder returns.

Recent Sales of Unregistered Securities

We did not make any unregistered sales of our common stock during the fourth quarter of 2007.


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, 2007 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.

Consolidated Financial Data
(In Thousands, Except Per Share Data)


	Year ended March 31,

Statements of Income Data	2007		2006		2005		2004		2003

Statements of Income Data:
Revenue	$	157,165	$	119,287	$	88,961	$	70,934	$	54,769
Cost of revenue		50,784		39,828		32,669		28,673		23,755

Gross profit		106,381		79,459		56,292		42,261		31,014
Selling, general and administrative expenses		45,337		35,554		24,776		19,482		15,293
Research and development costs		10,166		8,087		6,903		6,139		5,062

Income from operations		50,878		35,818		24,613		16,640		10,659
Interest income		3,306		2,108		876		386		434

Income before provision for income taxes		54,184		37,926		25,489		17,026		11,093
Provision for income taxes		20,952		14,604		9,380		6,626		4,058

Net income	$	33,232	$	23,322	$	16,109	$	10,400	$	7,035


Basic net income per share	$	1.24	$	0.88	$	0.63	$	0.42	$	0.29
Diluted net income per share	$	1.21	$	0.85	$	0.61	$	0.40	$	0.28
Basic weighted average shares outstanding		26,882		26,413		25,744		24,872		24,508
Diluted weighted average shares outstanding		27,550		27,356		26,406		25,932		25,556

Balance Sheet Data (at end of period):
Cash and cash equivalents	$	60,028	$	57,255	$	51,157	$	51,395	$	36,443
Working capital	$	76,616	$	61,724	$	55,111	$	53,415	$	38,717
Total assets	$	150,681	$	122,247	$	99,442	$	86,678	$	67,602
Total liabilities	$	59,435	$	49,838	$	36,711	$	25,673	$	20,069
Total shareholders’ equity	$	91,246	$	72,409	$	62,731	$	61,005	$	47,533


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

Except for the historical information contained herein, the matters discussed in this Annual Report on Form 10-K, including discussions of 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 affect 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 Commission.

The following discussion should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and related notes thereto included elsewhere 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 consolidated financial statements 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 consolidated 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 but not limited to those related to revenue recognition, uncollectible accounts receivable, and income taxes 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.

We believe revenue recognition, the allowance for doubtful accounts, capitalized software costs, share-based compensation and income taxes are among the most critical accounting policies that affect 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 or annually depending on the nature of the product or service.

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, we defer revenue related to the undelivered elements in a system sale based on VSOE of fair value of each of the undelivered elements, and allocate 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. In certain transactions whose collections risk is high, the cash basis method is used to recognize revenue. If the fee is not fixed or determinable, then the revenue recognized in each period (subject to application of other revenue recognition criteria) will be the lesser of the aggregate of amounts due and payable or the amount of the arrangement fee that would have been recognized if the fees were being recognized using the residual method. Fees which are considered fixed or determinable at the inception of our arrangements must include the following characteristics:


§	The fee must be negotiated at the outset of an arrangement, and generally be based on the specific volume of products to be delivered without being subject to change based on variable pricing mechanisms such as the number of units copied or distributed or the expected number of users.

§	Payment terms must not be considered extended. If a significant portion of the fee is due more than 12 months after delivery or after the expiration of the license, the fee is presumed not fixed and determinable.

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, we use 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;

•	We can be expected to perform our contractual obligations; and

•	Reliable estimates of progress towards completion can be made.

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.

Product returns are estimated in accordance with Statement of Financial Accounting Standards No. 48, “Revenue Recognition When Right of Return Exists” (SFAS 48). The Company also ensures that the other criteria in SFAS 48 have been met prior to recognition of revenue:


§	The price is fixed or determinable;

§	The customer is obligated to pay and there are no contingencies surrounding the obligation or the payment;

§	The customer’s obligation would not change in the event of theft or damage to the product;

§	The customer has economic substance;

§	The amount of returns can be reasonably estimated; and

§	We do not have significant obligations for future performance in order to bring about resale of the product by the customer.

We have historically offered short-term rights of return of less than 30 days in certain sales arrangements. If we are able to estimate returns for these types of arrangements, revenue is recognized and these arrangements are recorded in the consolidated financial statements. If we are unable to estimate returns for these types of arrangements, revenue is not recognized in our consolidated financial statements until the rights of return expire.

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.

Revenue is divided 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. The majority of the revenue in the system sales category is related to the sale of software. Revenue in the maintenance, EDI and other services category includes, maintenance, EDI, follow on training and implementation services, annual third party license fees and other revenue.

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.

Share-Based Compensation. On April 1, 2006, we adopted Statement of Financial Accounting Standard No. 123R, “Share-Based Payment” (SFAS 123R) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. SFAS 123R supersedes our previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). SFAS 123R requires us to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is expected to vest is recognized as expense over the requisite service period in our consolidated statement of income. We use the simplified method for estimating expected term equal to the midpoint between the vesting period and the contractual term. Prior to using the simplified method, we estimated the expected term of an option. We estimate volatility by using the weighted average historical volatility of our common stock, which we believe approximates expected volatility. The risk free rate is the implied yield available on the U.S Treasury zero-coupon issues with remaining terms equal to the expected term. Those inputs are then entered into the Black Scholes model.

Research and Development Tax Credits. During each of the years ended March 31, 2007 and 2006, we 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 that affected the effective income tax rate for us in the years ending March 31, 2007 and 2006. Research and development credits taken by us involve certain assumptions and judgments regarding qualification of expenses under the relevant tax codes.

Qualified Production Activities Deduction. During the years ended March 31, 2007 and 2006, we recognized approximately $1.5 million and $0.8 million, respectively, 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 us in the years ended March 31, 2007 and 2006. The deduction taken by us involved certain assumptions and judgments regarding the allocation of indirect expenses as prescribed under the Code and Regulations.

Overview of Our Results


•	We have experienced significant growth in our total revenue mainly as a result of revenue growth in our NextGen Division. Our total company revenue grew 31.8% on a consolidated basis during the year ended March 31, 2007 versus 2006 and 34.1% in the year ended March 31, 2006 versus 2005.

•	Consolidated income from operations grew 42.1% in the year ended March 31, 2007 versus 2006 and 45.5% in the year ended March 31, 2006 versus 2005. This performance was driven primarily 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 35.5% in the year ended March 31, 2007 versus 2006 and 41.0% in the year ended March 31, 2006 versus 2005 while divisional operating income (excluding unallocated corporate expenses) grew 39.9% in the year end March 31, 2007 and 55.4% in the year ended March 31, 2006.


•	During the year ended March 31, 2007, we added staffing resources to departments including sales, marketing, support, software development, and administration and intend to continue to do so in fiscal year 2008, as business conditions and the hiring environment allow.

•	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 6.7% in the year ended March 31, 2007 versus 2006 and an increase of 1.2% in the year ended March 31, 2006 versus 2005. The Division experienced a 21.6% increase in operating income (excluding unallocated corporate expenses) in the year ended March 31, 2007 and 13.3% decrease in the year ended March 31, 2006.

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

The following table sets forth for the periods indicated the percentage of net revenue represented by each item in our consolidated statements of income.


	Year Ended March 31,
	2007			2006			2005

Revenue:
Software, hardware and supplies		43.8	%		46.0	%		44.6	%
Implementation and training		7.8			9.5			9.9

System sales		51.6			55.5			54.5
Maintenance		26.7			26.1			28.3
EDI services		10.8			11.1			11.8
Other services		10.9			7.3			5.4

Maintenance, EDI and other services		48.4			44.5			45.5

Total revenue		100.0			100.0			100.0
Cost of revenue:
Software, hardware and supplies		5.4			6.8			8.4
Implementation and training		5.5			6.8			7.1

Total cost of system sales		10.9			13.6			15.5
Maintenance		7.5			9.2			7.8
EDI services		7.7			7.2			7.6
Other services		6.2			3.4			5.8

Total cost of maintenance, EDI and other services		21.4			19.8			21.2

Total cost of revenue		32.3			33.4			36.7


Gross profit		67.7			66.6			63.3
Selling, general and administrative expenses		28.8			29.8			27.9
Research and development costs		6.5			6.8			7.8

Income from operations		32.4			30.0			27.6
Interest income		2.1			1.8			1.0

Income before provision for income taxes		34.5			31.8			28.6
Provision for income taxes		13.3			12.2			10.5

Net income		21.1	%*		19.6	%		18.1	%


*	does not add due to rounding

Comparison of Fiscal Years Ended March 31, 2007 and March 31, 2006

For the year ended March 31, 2007, our net income was $33.2 million or $1.24 per share on a basic and $1.21 per share on a fully diluted basis. In comparison, we earned $23.3 million or $0.88 per share on a basic and $0.85 on a fully diluted basis in the year ended March 31, 2006. The increase in net income for the year ended March 31, 2007 was achieved primarily through the following:


•	a 31.8% increase in consolidated revenue;

•	a 35.5% increase in NextGen Division revenue which accounted for 89.4% of consolidated revenue; and

•	an increase in our consolidated gross profit margin from 66.6% to 67.7%.

Revenue. Revenue for the year ended March 31, 2007 increased 31.8% to $157.2 million from $119.3 million for the year ended March 31, 2006. NextGen Division revenue increased 35.5% from $103.7 million to approximately $140.6 million in the period, while QSI Division revenue increased by 6.7% during the period from $15.5 million to $16.6 million.

System Sales. Company-wide sales of systems for the year ended March 31, 2007 increased 22.4% to $81.0 million from $66.2 million in the prior year.

Our increase in revenue from sales of systems was principally the result of a 21.7% increase in category revenue at our NextGen Division whose sales in this category grew from $63.8 million during the year ended March 31, 2006 to $77.7 million during the year ended March 31, 2007. 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 $3.4 million in the year ended March 31, 2007 from $2.4 million in the year ended March 31, 2006.

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

Year ended March 31, 2007
QSI Division	$	355		$	2,356		$	655	$	3,366
NextGen Division		62,957			3,203			11,522		77,682

Consolidated	$	63,312		$	5,559		$	12,177	$	81,048


Year 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

NextGen Division software revenue increased 28.9% between the year ended March 31, 2006 and the year ended March 31, 2007. The Division’s software revenue accounted for 81.0% of divisional system sales revenue during the year ended March 31, 2007, an increase from 76.5% in the prior year period.

Sales of additional licenses to existing customers grew to $23.3 million during the year ended March 31, 2007 compared to $9.7 million during the prior year as a result of both an increasing number of customers who are expanding their use of our software in their practices and are purchasing additional licenses. Software revenue from VARs totaled approximately $13.6 million during the year ended March 31, 2007 compared to $7.0 million in the prior year. The increase in VAR revenue was affected 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 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 NextGen Division’s performance in this area.

During the year ended March 31, 2007, 4.1% of the NextGen Division’s system sales revenue was represented by hardware and third party software compared to 6.4% in the prior year. 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 years. 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 NextGen 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 5.9% in the year ended March 31, 2007 compared to the year ended March 31, 2006. The growth in implementation and training revenue is the result of increases in the amount of implementation and training services rendered to our new customers. Implementation and training revenue at the NextGen Division decreased its share of divisional system sales revenue to 14.8% in the twelve months ended March 31, 2007 from 17.0% in the twelve months ended March 31, 2006. 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. 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^emrand NextGen^epm software products in fiscal years 2007 and 2006, 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 $1.0 million in the year ended March 31, 2007 compared to the year ended March 31, 2006 due primarily to increases in hardware, third party software and implementation revenue. We do not presently foresee any material changes in the business environment for the QSI Division with respect to the constrained environment that has been in place for the past several years.

Maintenance, EDI and Other. Company-wide revenue from maintenance, EDI, and other services grew 43.5% to $76.1 million for the year ended March 31, 2007 from $53.1 million for the year ended March 31, 2006. 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, 2007 grew 44.2% to $34.9 million from $24.2 million in the prior year, while EDI revenue grew 45.9% to $12.5 million for the year ended March 31, 2007 compared to $8.6 million in the prior year. Other revenue for the NextGen Division, which consists primarily of third party license renewals, time and materials billings, travel reimbursements, and other revenue grew 116.8% to $15.5 million for the year ended March 31, 2007 compared to $7.2 million a year ago. The increase was due primarily to purchases of additional training and other services by existing NextGen customers. QSI Division maintenance revenue increased 2.0% to $7.1 million for the year ended March 31, 2007 compared to $6.9 million in the prior year while divisional EDI revenue declined by approximately 3.1% to $4.5 million for the year ended March 31, 2007 compared to $4.7 million in the prior year. Other revenue for the QSI Division grew 6.0% to $1.6 million for the year ended March 31, 2007 compared to $1.5 million a year ago.

The following table details maintenance, EDI and other revenue by category for the years ended March 31, 2007 and 2006:



*(in thousands)*	Maintenance			EDI		Other		Total

Year ended March 31, 2007
QSI Division		$	7,081	$	4,529	$	1,615	$	13,225
NextGen Division			34,867		12,520		15,505		62,892

Consolidated		$	41,948	$	17,049	$	17,120	$	76,117


Year 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

The following table provides the number of billing sites which were receiving maintenance services as of the last business day of the year ended March 31, 2007 and 2006 respectively, as well as the number of billing sites receiving EDI services during the last month of each respective period at each division of our 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, 2006		831		567			275		189			1,106		756
Billing sites added		178		232			4		11			182		243
Billing sites removed		(27	)	(30	)		(22	)	(27	)		(49	)	(57	)

March 31, 2007		982		769			257		173			1,239		942

Cost of revenue. Cost of revenue for the year ended March 31, 2007 increased 27.5% to $50.8 million from $39.8 million for the year ended March 31, 2006, while the cost of revenue as a percentage of net revenue declined to 32.3% from 33.4%. Our consolidated gross profit is affected 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 affected by the higher margin revenues of the NextGen Division, which increased its share of total company revenue to 89.4% from 87.0% in the prior year.

The following table details revenue and cost of revenue on a consolidated and divisional basis for the years ended March 31, 2007 and 2006:


	Year ended March 31,

(in thousands)	2007		%			2006		%

QSI Division
Revenue	$	16,589		100.0	%	$	15,544		100.0	%
Cost of revenue		7,847		47.3			7,765		50.0

Gross profit	$	8,742		52.7	%	$	7,779		50.0	%


NextGen Division
Revenue	$	140,576		100.0	%	$	103,743		100.0	%
Cost of revenue		42,937		30.5			32,063		30.9

Gross profit	$	97,639		69.5	%	$	71,680		69.1	%


Consolidated
Revenue	$	157,165		100.0	%	$	119,287		100.0	%
Cost of revenue		50,784		32.3			39,828		33.4

Gross profit	$	106,381		67.7	%	$	79,459		66.6	%

Gross profit margins at the NextGen Division for the year ended March 31, 2007 increased to 69.5% from 69.1% primarily due to a decrease in the proportionate level of hardware and third party software content included in revenue. The QSI Division’s gross profit margin increased to 52.7% from 50.0% between the years ended March 31, 2007 and 2006 primarily due to 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

Year ended March 31, 2007
QSI Division		10.0	%		17.3	%		20.0	%		47.3	%		52.7	%
NextGen Division		3.1			11.9			15.5			30.5			69.5

Consolidated		3.8	%		12.4	%		16.1	%		32.3	%		67.7	%


Year 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	%

During the year ended March 31, 2007, 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 continued a previously identified trend and did not result from 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 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 12.4% of consolidated revenue for the year ended March 31, 2007 compared to 12.7% during the prior year ended March 31, 2006. The absolute level of consolidated

payroll and benefit expenses grew from $15.2 million in the twelve months ended March 31, 2006 to $19.6 million in the twelve months ended March 31, 2007, an increase of 29% or $4.4 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. The adoption of SFAS 123R in fiscal year 2007 added approximately $0.5 million in compensation to consolidated cost of revenue.

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.

“Other”, which consists of outside service costs, amortization of software development costs and other costs, increased to 16.1% of revenue during the year ended March 31, 2007 from 15.4% during the year ended March 31, 2006.

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 match more closely those of the NextGen Division.

As a result of the foregoing events and activities, our gross profit increased for the year period ending March 31, 2007 versus the prior year.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended March 31, 2007 increased 27.5% to $45.3 million as compared to $35.6 million for the year ended March 31, 2006. The increase resulted primarily from increases of $5.1 million in compensation expense and benefit expense in the NextGen Division, $0.9 million in commission expense in the NextGen Division, $1.9 million in other general and administrative expenses primarily in the NextGen Division and $1.8 million in increased corporate expenses. Approximately $1.4 million of the increase in year over year corporate expenses was salaries and related benefits.

The adoption of SFAS 123R in fiscal year 2007 added approximately $2.5 million in compensation expense to consolidated selling, general and administrative expenses and is included in the aforementioned amounts.

Selling, general and administrative expenses as a percentage of revenue decreased to 28.9% in the fiscal year ended March 31, 2007 from 29.8% in the fiscal period ended March 31, 2006 due to revenue growing at a faster rate than selling, general and administrative expenses.

As previously disclosed in our Form 10-Q for the quarter ended December 31, 2006, we received written notification from the Commission stating that the Commission initiated an investigation of trading activity in our securities. While making clear that the investigation did not mean the Commission had concluded there has been a violation of law, the Commission sought documents and records concerning our Chief Financial Officer. To the best of our knowledge, the Commission’s investigation is ongoing and is not an investigation of our company. We intend to continue to fully cooperate with the Commission.

After we received the Commission’s notification, our Audit Committee, assisted by independent outside legal counsel, conducted an investigation of certain trading activity in our securities with particular focus on trading in advance of our third quarter 2006 earnings release. Based on the information available to the investigators and the results of the investigation, the Audit Committee has concluded that it does not appear that our Chief Financial Officer engaged in improper insider trading or tipping in connection with that trading activity. The legal and professional service expenses

associated with the investigation was in excess of $0.01 per share for the March quarter. The Audit Committee’s investigation was concluded during the quarter ended June 30, 2007.

We anticipate increased expenditures for trade shows, advertising and staff additions 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 effect 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 years ended March 31, 2007 and 2006 were $10.2 million and $8.1 million, respectively. The increase in research and development costs was primarily due to increased investment in the NextGen product line. Additionally, the adoption of SFAS 123R in fiscal year 2007 added approximately $0.8 million in compensation expense to research and development costs net of amounts capitalized as software development. Additions to capitalized software costs offset research and development costs. For the year ended March 31, 2007, $5.0 million was added to capitalized software costs while $3.3 million was capitalized during the year ended March 31, 2006. Research and development costs as a percentage of net revenue decreased to 6.5% from 6.8% primarily due to revenue growing at a faster rate than the increase in research and development costs. Research and development costs are expected to continue at or above current levels.

Interest Income. Interest income for the year ended March 31, 2007 increased 56.8% to approximately $3.3 million compared with $2.1 million in the year ended March 31, 2006. 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 year ended March 31, 2007. During the fourth quarter of fiscal year 2007, we paid a dividend of $27.1 million, which reduced the amount of funds available for investment during this period. During the fourth quarter of fiscal year 2006, we paid a dividend of approximately $23.4 million, which reduced the amount of funds available for investment during such period.

Provision for Income Taxes. The provision for income taxes for the year ended March 31, 2007 was approximately $21.0 million as compared to approximately $14.6 million for the prior year. The effective tax rates for fiscal 2007 and 2006 were 38.7% and 38.5%, respectively. The provision for income taxes for the years ended March 31, 2007 and 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. The effective rate for the year ended March 31, 2007 also includes an increase in benefit from the qualified production activities deduction, which was mostly offset by non-deductible option expense related to incentive stock options.

During the year ended March 31, 2007 and 2006, we claimed research and development tax credits of approximately $0.8 million in both years. The Company also claimed the qualified production activities deduction under Section 199 of the Internal Revenue Code, of approximately $1.5 million and $0.8 million during the years ended March 31, 2007 and 2006, respectively. Research and development credits and the qualified production activities income deduction taken by us involve certain assumptions and judgments regarding qualification of expenses under the relevant tax code provision.

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:


•	34.1% increase in consolidated revenue;

•	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.

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.

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

Year 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


Year 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 NextGen Division’s software revenue accounted for 76.5% of divisional system sales revenue during the year ended March 31, 2006, an increase from 71.3% in the prior year.

Software revenue from VARs totaled approximately $7.0 million during the year ended March 31, 2006 compared to $2.7 million in the prior year. 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 NextGen Division’s performance in this area.

During the year 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 prior year. 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 years. 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 NextGen 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 year ended March 31, 2006 compared to the year 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 year ended March 31, 2006 from 18.3% in the year 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 year 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^emrand 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 year ended March 31, 2006 compared to the year ended March 31, 2005 due primarily to increases in all three categories.

Maintenance, EDI and Other. Company-wide revenue from maintenance, EDI, and other services grew 31.2% to $53.1 million for the year ended March 31, 2006 from $40.4 million for the year ended March 31, 2005. 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 prior year, while EDI revenue grew 53.0% to $8.6 million for the year ended March 31, 2006 compared to $5.6 million in the prior year. 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 for the year ended March 31, 2006 compared to $3.5 million a year ago. QSI Division maintenance revenue declined 4.7% to $6.9 million for the year ended March 31, 2006 compared to $7.3 million in the prior year while divisional EDI revenue declined by approximately 4.2% to $4.7 million for the year ended March 31, 2006 compared to $4.9 million in the prior year. Other revenue for the QSI Division grew 19.7% to $1.5 million in the year ended March 31, 2006 compared to $1.3 million in the prior year.

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



*(in thousands)*	Maintenance			EDI		Other		Total

Year 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


Year 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 our 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 prior year. 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.

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


	Year ended March 31,

(in thousands)	2006		%			2005		%

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	%


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	%


Consolidated
Revenue	$	119,287		100.0	%	$	88,961		100.0	%
Cost of revenue		39,828		33.4			33,669		36.7

Gross profit	$	79,459		66.6	%	$	56,292		63.3	%

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

Year 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	%


Year 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 year ended March 31, 2006, hardware and third party software constituted a smaller portion of consolidated revenue compared to the prior year, 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.

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 year 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.

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

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.

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.

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, we paid a dividend of approximately $23.4 million, which reduced the amount of funds available for investment during such 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 prior year. 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, 2005 differed 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 differed 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, we 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 our 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.

Liquidity and Capital Resources

The following table presents selected financial statistics and information for each of the years ended March 31, 2007, 2006 and 2005:


	Year ended March 31,

(in thousands)	2007		2006		2005


Cash and cash equivalents	$	60,028	$	57,225	$	51,157

Net increase (decrease) in cash and cash equivalents	$	2,803	$	6,068	$	(238	)

Net income	$	33,232	$	23,322	$	16,109

Net cash provided by operating activities	$	29,570	$	30,678	$	21,631

Number of days of sales outstanding		129		115		119

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 years ended March 31, 2007, 2006 and 2005:


	Year ended March 31,

(in thousands)	2007			2006			2005


Net income	$	33,232		$	23,322		$	16,109
Non-cash expenses		8,977			4,140			6,930
Tax benefit from exercise of stock options, net		167			4,831			2,680
Change in deferred revenue		3,532			10,439			8,214
Change in accounts receivable		(20,760	)		(12,484	)		(13,879	)
Change in assets and liabilities		4,422			430			1,577

Net cash provided by operating activities	$	29,570		$	30,678		$	21,631

Net Income. As referenced in the above table, net income makes up the majority of our cash generated from operations for the years ended March 31, 2007, 2006 and 2005. Our NextGen Division’s contribution to net income has increased each year due to that division’s operating income increasing more quickly than our 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 increased by approximately $3.4 million between the years ended March 31, 2007 and March 31, 2006. The change is primarily related to a $3.9 million increase in stock option expenses related to our adoption of SFAS 123R and increases in depreciation, amortization of capitalized software costs and provision for bad debts offset by a $1.6 million deferred income tax benefit.

Tax Benefits From Stock Options. Although the value of stock options exercised by employees grew in the year ended March 31, 2007, our adoption of SFAS 123R required excess tax benefits of $2.5 million be reclassed to financing activities, resulting in a net decrease of approximately $4.7 million of tax benefit in the year ended March 31, 2007.

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 $3.5 million for the year ended March 31, 2007 versus growth of $10.4 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 $20.8 million, $12.5 million and $13.9 million for the years ended March 31, 2007, 2006 and 2005, respectively. The increase in accounts receivable in the periods is due to the following factors:


•	NextGen Division revenue grew 35.5%, 41.0% and 35.2% for the years ended March 31, 2007, 2006 and 2005, respectively;
•	As of March 31, 2007, one customer represented approximately 12.5% of total gross accounts receivable, which customer has longer than average contractual payment terms;
•	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 $6.4 million and $4.4 million for the years ended March 31, 2007 and 2006, respectively; and
•	The NextGen Division constituted a larger percentage of our receivables at March 31, 2007 compared to March 31, 2006. 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.

The turnover of accounts receivable measured in terms of days sales outstanding (DSO) fluctuated during the year and increased from 115 days to 129 days during the year ended March 31, 2007 primarily due to the above mentioned factors.

If amounts included in both accounts receivable and deferred revenue were netted, our turnover of accounts receivable expressed as DSO would be 81 days as of March 31, 2007 and 70 days as of March 31, 2006. Provided turnover of accounts receivable, deferred revenue, and profitability remain consistent with the year ended March 31, 2007, we anticipate being able to continue to generate cash from operations during fiscal 2008 primarily from our net income.

Net cash used in investing activities for the year ended March 31, 2007 was $8.3 million and consisted of additions to equipment and improvements and capitalized software.

Net cash used in financing activities for the year ended March 31, 2007 was $18.5 million and consisted of a dividend paid to shareholders of $27.1 million offset by $6.1 million of proceeds from the exercise of stock options. We recorded a reduction in income tax liability of $2.5 million related to excess tax deductions received from employee stock option exercises. The benefit was recorded as additional paid in capital.

At March 31, 2007, we had cash and cash equivalents of $60.0 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.

In January 2007, our Board of Directors adopted a policy whereby we intend to pay a regular quarterly dividend of $0.25 per share on our outstanding common stock commencing with conclusion of our first fiscal quarter of 2008 (June 30, 2007) and continuing each fiscal quarter thereafter, subject to further review and approval as well as establishment of record and distribution dates by our Board of Directors prior to the declaration of each such quarterly dividend. On May 31, 2007, the Board declared a quarterly cash dividend of $0.25 per share on our outstanding shares of common stock,

payable to shareholders of record as of June 15, 2007 with an anticipated distribution date of July 5, 2007. We anticipate that future quarterly dividends, if and when declared by the Board pursuant to this policy, would likely be distributable on or about the fifth day of each of the months of October, January, April and July.

Contractual Obligations. The following table summarizes our significant contractual obligations at March 31, 2007, and the effect that such obligations are expected to have on our liquidity and cash in future periods:


Contractual Obligations – Non-cancelable lease obligations	(in thousands)

Year Ending March 31,
2008	$	2,701
2009		2,413
2010		2,417
2011		2,469
2012 and beyond		927

	$	10,927

New Accounting Pronouncements

In February 2007, the Financial Standards Accounting Board (FASB) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of SFAS No. 115”, which applies to all entities with available-for-sale and trading securities. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, “Fair Value Measurements”. We plan to adopt SFAS No. 159 effective April 1, 2008 and are in the process of determining the effect, if any, the adoption of SFAS No. 159 will have on our consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157), which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact, if any, that adoption of this standard will have on our consolidated financials statements.

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (SAB 108) to clarify consideration of the effects of prior year errors when quantifying misstatements in current year financial statements for the purpose of quantifying materiality. SAB 108 requires issuers to quantify misstatements using both the “rollover” and “iron curtain” approaches and requires an adjustment to the current year financial statements in the event that after the application of either approach and consideration of all relevant quantitative and qualitative factors, a misstatement is determined to be material. SAB 108 is effective for fiscal years ended after November 15, 2006. The adoption of SAB 108 did not have a material effect on our consolidated financial statements.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (FIN 48) which defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. A tax position that meets the “more-likely-than-not” criterion

shall be measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement. FIN 48 applies to all tax positions accounted for under SFAS No. 109, “Accounting for Income Taxes.” FIN 48 is effective for fiscal years beginning after December 15, 2006. Upon adoption, the financial statements will be adjusted to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any adjustment will be recorded directly to our beginning retained earnings balance in the period of adoption and reported as a change in accounting principle. We are currently analyzing the effects of adopting FIN 48 on April 1, 2007 but do not currently believe the adoption will have a material impact on our consolidated financial statements.

In June 2006, the FASB ratified a consensus opinion reached by the Emerging Issues Task Force (EITF) on EITF Issue 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” The guidance in EITF Issue 06-3 requires disclosure in interim and annual financial statements of the amount of taxes on a gross basis, if significant, that are assessed by a governmental authority that are imposed on and concurrent with a specific revenue producing transaction between a seller and customer such as sales, use, value added, and some excise taxes. Additionally, the income statement presentation (gross or net) of such taxes is an accounting policy decision that must be disclosed. The consensus in EITF Issue 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006. The adoption of EITF Issue 06-3 did not have a material effect on our consolidated financial statements as we have historically presented sales excluding all taxes.


ITEM 7A.	QUANTITATIVE AND QUALITATIVE 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.


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

Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of March 31, 2007, that the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act) are effective to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding whether or not disclosure is required.

Changes in Internal Control over Financial Reporting

During the quarter ended March 31, 2007, there were no changes in our “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our 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, our management concluded that our internal control over financial reporting was effective as of March 31, 2007.

Our 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 our 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 our company are being made only in accordance with authorizations of our management and directors; and

(3)	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our 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.

Our independent registered public accounting firm has audited management’s assessment of the effectiveness of our internal control over financial reporting as of March 31, 2007 as stated in their report that is included herein.


ITEM 9B.	OTHER INFORMATION

None.

Part III


ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by Item 10 is incorporated herein by reference from our definitive proxy statement for our 2007 annual shareholders’ meeting to be filed with the Commission.


ITEM 11.	EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated herein by reference from our definitive proxy statement for our 2007 annual shareholders’ meeting to be filed with the Commission.


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

The information required by Item 12 is incorporated herein by reference from our definitive proxy statement for our 2007 annual shareholders’ meeting to be filed with the Commission.


ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Item 13 is incorporated herein by reference from our definitive proxy statement for our 2007 annual shareholders’ meeting to be filed with the Commission.


ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 is incorporated herein by reference from our definitive proxy statement for our 2007 annual shareholders’ meeting to be filed with the Commission.

PART IV


ITEM 15.		EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)	(1)	Index to Financial Statements:


			Page

	•	Report of Independent Registered Public Accounting Firm	54

	•	Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting	55

	•	Consolidated Balance Sheets March 31, 2007 and March 31, 2006	56

	•	Consolidated Statements of Income – Years Ended March 31, 2007, March 31, 2006 and March 31, 2005	57

	•	Consolidated Statements of Shareholders’ Equity – Years Ended March 31, 2007, March 31, 2006 and March 31, 2005	58

	•	Consolidated Statements of Cash Flows – Years Ended March 31, 2007, March 31, 2006 and March 31, 2005	59

	•	Notes to Consolidated Financial Statements	60

(2)	The following financial statement schedule for the years ended March 31, 2007, March 31, 2006 and 2005, 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.

INDEX TO EXHIBITS


Exhibit Number		Description


3.1		Restated Articles of Incorporation of Quality Systems, Inc. filed with the Secretary of State of California on September 8, 1989, are hereby incorporated by reference to Exhibit 3.1 to the registrant’s Registration Statement on Form S-1 (Registration No. 333-00161) filed January 11, 1996.

3.2		Certificate of Amendment to Articles of Incorporation of Quality Systems, Inc. filed with the Secretary of State of California effective March 4, 2005, is hereby incorporated by reference to Exhibit 3.1.1 of the registrant’s Annual Report on Form 10-K for the year ended March 31, 2005.

3.3		Certificate of Amendment to Articles of Incorporation of Quality Systems, Inc. filed with the Secretary of State of California effective October 6, 2005 is hereby incorporated by reference to Exhibit 3.01 of the registrant’s Current Report on Form 8-K filed October 11, 2005.

3.4		Certificate of Amendment to Articles of Incorporation of Quality Systems, Inc. filed with the Secretary of State of California effective March 3, 2006 is hereby incorporated by reference to Exhibit 3.1 of the registrant’s Current Report on Form 8-K filed March 6, 2006.

3.5		Amended and Restated Bylaws of Quality Systems, Inc., as amended and restated effective May 25, 2005, are hereby incorporated by reference to Exhibit 3.6 of the registrant’s Annual Report on Form 10-K for the year ended March 31, 2005.

3.6		Certificate of Amendment of Bylaws of the Company effective September 20, 2006 is hereby incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed September 25, 2006.

3.7		Amended Exhibit A to Amended and Restated Bylaws, adopted by the registrant’s Board of Directors on May 31, 2007, is hereby incorporated by reference to Exhibit 3.1 of the registrant’s Current Report on Form 8-K filed June 5, 2007.

10.1	*	Amended and Restated 1998 Stock Option Plan is hereby incorporated by reference to Exhibit 10.10.1 of the registrant’s Annual Report on Form 10-K for the year ended March 31, 2005.

10.2	*	Form of Incentive Stock Option Agreement for Amended and Restated 1998 Stock Option Plan is hereby incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.


Exhibit Number		Description


10.3	*	Form of Non-Qualified Stock Option Agreement for Amended and Restated 1998 Stock Option Plan is hereby incorporated by reference to Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.

10.4	*	2005 Stock Option and Incentive Plan is incorporated by reference to Exhibit 10.01 to the registrant’s Current Report on Form 8-K filed October 5, 2005.

10.5	*	Form of Nonqualified Stock Option Agreement for 2005 Stock Incentive Plan is incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed June 5, 2007.

10.6	*	Form of Incentive Stock Option Agreement for 2005 Stock Incentive Plan is incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed June 5, 2007.

10.7	*	1993 Deferred Compensation Plan is hereby incorporated by reference to Exhibit 10.5 to the registrant’s Annual Report on Form 10-KSB for the year ended March 31, 1994.

10.8	*	1998 Employee Stock Contribution Plan is hereby incorporated by reference to Exhibit 4.1 to the registrant’s Registration Statement on Form S-8 (Registration No. 333-63131).

10.9	*	Employment Agreement dated July 20, 2000 between Quality Systems, Inc. and Lou Silverman is hereby incorporated by reference to Exhibit 10.18 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.

10.10	*	Form of Indemnification Agreement for directors and executive officers authorized January 27, 2005 is hereby incorporated by reference to Exhibit 10.6.1 of the registrant’s Annual Report on Form 10-K for the year ended March 31, 2005.

10.11		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 the registrant’s Annual Report on Form 10-K for the year ended March 31, 2001.

10.12		Fourth Amendment to lease agreement between the Company and Tower Place, L.P. dated September 22, 2005 is incorporated by reference to Exhibit 10.24 to the registrant’s Annual Report on Form 10-K for the year ended March 31, 2006.

10.13		Fifth Amendment to lease agreement between the Company and Tower Place, L.P. dated January 31, 2007.**


Exhibit Number			Description


10.14			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 the registrant’s Annual Report on Form 10-K for the year ended March 31, 2001.

10.15			Lease Agreement between the Company and HUB Properties LLC dated May 8, 2002 is hereby incorporated by reference to Exhibit 10.18 to the registrant’s Annual Report on Form 10-K for the year ended March 31, 2003.

10.16			Second Amendment to Office Lease agreement between the Company and HUB Properties LLC dated February 14, 2006 is incorporated by reference to Exhibit 10.25 to the registrant’s Annual Report on Form 10-K for the year ended March 31, 2006.

10.17			Amended and Restated Second Amendment to Office Lease agreement between the Company and HUB Properties LLC dated May 31, 2006.**

10.18			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 the registrant’s Annual Report on Form 10-K for the year ended March 31, 2005.

10.19			Lease agreement between the Company and Von Karman Michelson Corporation dated September 6, 2005 is incorporated by reference to Exhibit 10.23 to the registrant’s Annual Report on Form 10-K for the year ended March 31, 2006.

10.20			Office lease between the Company and SLTS Grand Avenue, L.P. dated May 3, 2006.**

10.21*			Board Service Agreement between the Company and Lou Silverman is incorporated by reference to Exhibit 10.2.1 to the registrant’s Current Report of Form 8-K, dated May 31, 2005.

10.22*			Board Service Agreement between the Company and Patrick Cline is incorporated by reference to Exhibit 10.2.1 to the registrant’s Current Report of Form 8-K dated May 31, 2005.

10.23*			Director Compensation Program approved May 25, 2006 is incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed May 30, 2006.

10.24			Settlement Agreement dated as of August 8, 2006 between the registrant and Ahmed Hussein is incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed August 9, 2006.


Exhibit Number		Description


10.25	*	Description of Compensation Program for Named Executive Officers for Fiscal Year Ended March 31, 2008.**

10.26	*	Description of Compensation Program for Named Executive Officers for Fiscal Year Ended March 31, 2007. **

21		List of subsidiaries is incorporated by reference to Exhibit 21 to the registrant’s Annual Report on Form 10-K for the year ended March 31, 2006 filed June 13, 2006.

23		Consent of Independent Registered Public Accounting Firm – Grant Thornton LLP **

31.1		Certification of Principal 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 Principal 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. **


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

**	Filed herewith.

SIGNATURES

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


	By: /s/ LOUIS E. SILVERMAN

	Louis E. Silverman,
	President and Chief Executive Officer

Date: June 8, 2007

KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose signature appears below hereby constitutes and appoints Louis E. Silverman and Paul A. 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

Sheldon Razin	Chairman of the Board and Director	May 31, 2007

/s/ Louis E. Silverman	President and Chief Executive Officer (Principal Executive Officer) and Director

Louis E. Silverman		May 31, 2007

/s/ Paul A. Holt	Chief Financial Officer (Principal Financial Officer) and Secretary

Paul A. Holt		May 31, 2007

/s/ Patrick B. Cline	President, NextGen Healthcare Information Systems Division, and Director

Patrick B. Cline		May 31, 2007

/s/ Ibrahim Fawzy

Ibrahim Fawzy	Director	May 31, 2007

/s/ Edwin Hoffman

Edwin Hoffman	Director	May 31, 2007


Ahmed Hussein	Director


Signature	Title	Date


/s/ Vincent J. Love

Vincent J. Love	Director	May 31, 2007

/s/ Russell Pflueger

Russell Pflueger	Director	May 31, 2007

/s/ Steven T. Plochocki

Steven T. Plochocki	Director	May 31, 2007

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, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 2007. 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 financial position of Quality Systems, Inc. as of March 31, 2007 and 2006 and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the Consolidated Financial Statements, the Company changed its method of accounting for share-based compensation as a result of adopting Statement of Financial Accounting Standards No. 123R, “Share-Based Payment”, effective April 1, 2006.

Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken 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 taken 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, 2007, 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 7, 2007, expressed an unqualified opinion thereon.

/s/ GRANT THORNTON LLP

Irvine, California
June 7, 2007

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, 2007, based on criteria established in Internal Control – Integrated Framework issued 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, 2007, is fairly stated, in all material respects, based on criteria established in Internal Control – Integrated Framework issued by COSO. Also, in our opinion, Quality Systems, Inc. maintained, in all material respects, effective internal control over financial reporting as of March 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by COSO.

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, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 2007, and our report dated June 7, 2007 expressed an unqualified opinion on those financial statements.

/s/ GRANT THORNTON LLP

Irvine, California
June 7, 2007

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


	March 31, 2007			March 31, 2006

ASSETS
Current assets:
Cash and cash equivalents		$	60,028		$	57,225
Accounts receivable, net			63,945			44,665
Inventories, net			1,175			561
Income tax receivable			—			1,195
Net current deferred tax assets			3,443			1,824
Other current assets			4,507			2,912

Total current assets			133,098			108,382

Equipment and improvements, net			5,029			3,739
Capitalized software costs, net			6,982			5,171
Net deferred tax assets			1,180			1,157
Goodwill			1,840			1,840
Other			2,552			1,958

Total assets		$	150,681		$	122,247


LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable		$	5,246		$	2,934
Deferred revenue			38,774			34,422
Accrued compensation and related benefits			6,521			5,490
Income taxes payable			315			—
Other current liabilities			5,626			3,812

Total current liabilities			56,482			46,658

Deferred revenue, net of current			674			1,494
Deferred compensation			2,279			1,686

Total liabilities			59,435			49,838


Commitments and contingencies

Shareholders’ equity:
Common stock, $0.01 par value; authorized 50,000 shares; issued and outstanding 27,123 and 26,711 shares at March 31, 2007 and March 31, 2006, respectively			271			267
Additional paid-in capital			65,666			53,675
Retained earnings			25,309			19,151
Deferred compensation			—			(684	)

Total shareholders’ equity			91,246			72,409

Total liabilities and shareholders’ equity		$	150,681		$	122,247

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

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


	Fiscal Year Ended

	March 31, 2007			March 31, 2006			March 31, 2005

Revenues:
Software, hardware and supplies		$	68,871		$	54,938		$	39,672
Implementation and training services			12,177			11,293			8,856

System sales			81,048			66,231			48,528


Maintenance			41,948			31,124			25,160
Electronic data interchange services (EDI)			17,049			13,256			10,488
Other services			17,120			8,676			4,785

Maintenance, EDI and other services			76,117			53,056			40,433


Total revenue			157,165			119,287			88,961


Cost of revenue:
Software, hardware and supplies			8,453			8,148			7,525
Implementation and training services			8,535			8,088			6,300

Total cost of system sales			16,988			16,236			13,825


Maintenance			11,834			9,330			6,931
Electronic data interchange services			12,181			8,569			6,724
Other services			9,781			5,693			5,189

Total cost of maintenance, EDI and other services			33,796			23,592			18,844

Total cost of revenue			50,784			39,828			32,669


Gross profit			106,381			79,459			56,292


Operating expenses:
Selling, general and administrative			45,337			35,554			24,776
Research and development costs			10,166			8,087			6,903

Total operating expenses			55,503			43,641			31,679


Income from operations			50,878			35,818			24,613

Interest income			3,306			2,108			876


Income before provision for income taxes			54,184			37,926			25,489
Provision for income taxes			20,952			14,604			9,380


Net income		$	33,232		$	23,322		$	16,109


Net income per share:
Basic		$	1.24		$	0.88		$	0.63

Diluted		$	1.21		$	0.85		$	0.61


Weighted average shares outstanding:
Basic			26,882			26,413			25,744

Diluted			27,550			27,356			26,406


Dividends declared per common share		$	1.00		$	0.875		$	0.75

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

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


	Common Stock
				APIC			Retained Earnings			Deferred Compensation			Total Shareholders’ Equity
	Shares	Amount		APIC			Retained Earnings			Deferred Compensation			Total Shareholders’ Equity

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 exercise of 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 exercise of 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
Reclass of deferred compensation upon adoption of SFAS 123R	—		—		(684	)		—			684			—
Exercise of stock options	412		4		6,058			—			—			6,062
Tax benefit resulting from exercise of stock options	—		—		2,694			—			—			2,694
Stock based compensation	—		—		3,923			—			—			3,923
Dividends paid	—		—		—			(27,074	)		—			(27,074	)
Net income	—		—		—			33,232			—			33,232

Balance, March 31, 2007	27,123	$	271	$	65,666		$	25,309		$	—		$	91,246

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

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


	Fiscal Year Ended

	March 31, 2007				March 31, 2006				March 31, 2005


Cash flows from operating activities:
Net income		$	33,232			$	23,322			$	16,109
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			1,950				1,368				1,012
Amortization of capitalized software costs			3,231				2,460				1,952
Provision for bad debts			1,480				1,181				797
Provision for inventory obsolescence			35				179				160
Non-cash share-based compensation			3,923				428				431
Tax benefit from exercise of stock options			2,694				4,831				2,680
Excess tax benefit from share-based compensation			(2,527	)			—				—
Deferred income taxes, net			(1,642	)			(1,476	)			2,578
Changes in assets and liabilities:
Accounts receivable			(20,760	)			(12,484	)			(13,879	)
Inventories			(649	)			220				(395	)
Income tax receivable			1,195				(1,180	)			(15	)
Other current assets			(1,595	)			(1,235	)			(184	)
Other assets			(594	)			(354	)			(362	)
Accounts payable			2,312				650				629
Deferred revenue			3,532				10,439				8,214
Accrued compensation and related benefits			1,031				2,054				826
Income taxes payable			315				—				(273	)
Other current liabilities			1,814				(209	)			1,162
Deferred compensation			593				484				189

Net cash provided by operating activities			29,570				30,678				21,631


Cash flows from investing activities:
Additions to capitalized software costs			(5,042	)			(3,297	)			(2,678	)
Additions to equipment and improvements			(3,240	)			(2,410	)			(1,697	)

Net cash used in investing activities			(8,282	)			(5,707	)			(4,375	)


Cash flows from financing activities:
Dividends paid			(27,074	)			(23,384	)			(19,646	)
Excess tax benefit from share-based compensation			2,527				—				—
Proceeds from the exercise of stock options			6,062				4,481				2,152

Net cash used in financing activities			(18,485	)			(18,903	)			(17,494	)


Net increase (decrease) in cash and cash equivalents			2,803				6,068				(238	)

Cash and cash equivalents, beginning of year			57,225				51,157				51,395


Cash and cash equivalents, end of year		$	60,028			$	57,225			$	51,157


Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes, net of refunds		$	18,360			$	11,022			$	4,541

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

QUALITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007 and 2006
(IN THOUSANDS, EXCEPT PER SHARE DATA)


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 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 Electronic Data Interchange (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. On February 2, 2005, 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 4, 2005 and the stock began trading post split on March 28, 2005.

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 splits.


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 the consolidated financial statement sections are in thousands, except share and per share data, unless otherwise specified.

Revenue recognition. The Company 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, 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 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 quarterly or annually depending on the nature of the product or service.

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, among

other things, 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.

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 collections risk is high, the cash basis method is used to recognize revenue. If the fee is not fixed or determinable, then the revenue recognized in each period (subject to application of other revenue recognition criteria) will be the lesser of the aggregate of amounts due and payable or the amount of the arrangement fee that would have been recognized if the fees were being recognized using the residual method. Fees which are considered fixed or determinable at the inception of the Company’s arrangements must include the following characteristics:


•	The fee must be negotiated at the outset of an arrangement, and generally be based on the specific volume of products to be delivered without being subject to change based on variable pricing mechanisms such as the number of units copied or distributed or the expected number of users.

•	Payment terms must not be considered extended. If a significant portion of the fee is due more than 12 months after delivery or after the expiration of the license, the fee is presumed not fixed and determinable.

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 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.

Individual product returns are estimated in accordance with Statement of Financial Accounting Standards No. 48, “Revenue Recognition When Right of Return Exists” (SFAS 48). The Company also ensures that the other criteria in SFAS 48 have been met prior to recognition of revenue:


•	the price is fixed or determinable;

•	the customer is obligated to pay and there are no contingencies surrounding the obligation or the payment;

•	the customer’s obligation would not change in the event of theft or damage to the product;

•	the customer has economic substance;

•	the amount of returns can be reasonably estimated; and

•	the Company does not have significant obligations for future performance in order to bring about resale of the product by the customer.

The Company has historically offered short-term rights of return in certain sales arrangements. If the Company is able to estimate returns for these types of arrangements, revenue is recognized and these arrangements are recorded in the consolidated financial statements. If the Company is unable to estimate returns for these types of arrangements, revenue is not recognized in the consolidated financial statements until the rights of return expire.

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 5100.50, 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.

Revenue is divided 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. The majority of the revenue in the system sales category is related to the sale of software. Revenue in the maintenance, EDI and other services category includes maintenance, EDI, follow on training and implementation services, annual third party license fees and other revenue.

Cash and cash equivalents. Cash and cash equivalents generally consist of cash, money market funds and short-term U.S. Treasury securities with original 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 relatively low market risk. The average maturity of the investments owned by the money market fund is approximately two months.

Allowance for doubtful accounts. The Company provides credit terms typically ranging from thirty days to less than twelve months for most system and maintenance contract sales and generally does not require collateral. The Company performs 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 the Company’s historical experience of bad debt expense and the aging of the Company’s accounts receivable balances net of deferred revenues 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 period. Undelivered maintenance and services are included on the accompanying Consolidated Balance Sheets in deferred revenue (see also Note 5).

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 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 the 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. If 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, 2006 (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, 2007.

Income Taxes. Income taxes are provided for the tax effects of transactions reported in the consolidated 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 if 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 $2,159, $1,915 and $1,251 for the years ended March 31, 2007, 2006 and 2005, 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 when earned.

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.


(in thousands except per share data)	Year Ended March 31,

	2007		2006		2005


Net income	$	33,232	$	23,322	$	16,109
Basic net income per common share:
Weighted average of common shares outstanding		26,882		26,413		25,744

Basic net income per common share	$	1.24	$	0.88	$	0.63


Net income	$	33,232	$	23,322	$	16,109
Diluted net income per common share:
Weighted average of common shares outstanding		26,882		26,413		25,744
Effect of potentially dilutive securities (options)		668		943		662

Weighted average of common shares outstanding-diluted		27,550		27,356		26,406

Diluted net income per common share	$	1.21	$	0.85	$	0.61

The computation of diluted net income per share does not include 92,500 and 124,000 options for the years ended March 31, 2007 and 2006, respectively, because their inclusion would have an anti-dilutive effect on earnings per share. No options were omitted from the computation of diluted net income per share for the year ended March 31, 2005.

Share-Based Compensation

On April 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS 123R) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. SFAS 123R supersedes the Company’s previous accounting under Accounting Principles Board Opinion

No. 25, “Accounting for Stock Issued to Employees” (APB 25). In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123R. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R.

The Company adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of April 1, 2006, the first day of the Company’s fiscal year 2007. The Company’s Consolidated Statement of Income for the year ended March 31, 2007 reflects the impact of SFAS 123R. In accordance with the modified prospective transition method, the Company’s Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R. Share-based compensation expense recognized under SFAS 123R for the year ended March 31, 2007 was $3,923, which consisted of stock-based compensation expense related to employee and director stock options. The $3,923 includes $430 expensed under APB 25 for “in the money” options issued prior to the adoption of SFAS 123R. Excess tax benefits from share based compensation are presented as cash outflows from operating activities and cash inflows from financing activities. The Company has elected to adopt the alternative transition method provided in FASB Staff Position No. SFAS 123R-3 (FSP 123(R)-3) for calculating the tax effects of share-based compensation pursuant to SFAS 123R. The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital (APIC pool) related to the tax effects of employee and director stock-based compensation, and to determine the subsequent impact on the APIC pool and the consolidated statement of cash flows of the tax effects of employee and director share-based awards that are outstanding upon adoption of SFAS 123R.

The impact of adopting SFAS 123R had the following cumulative effects:


(in thousands)	Year Ended March 31, 2007


Change in income before income taxes		$	3,493
Change in net income		$	2,752
Change in cash flow from operations		$	(2,527	)
Change in cash flow from financing		$	2,527
Change in basic earnings per share		$	0.10
Change in diluted earnings per share		$	0.10

SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized ratably as expense over the requisite service period in the Company’s Consolidated Statement of Income. Prior to the adoption of SFAS 123R, the Company applied the intrinsic-value-based method of accounting prescribed by APB 25 to account for its fixed-plan stock options. Under this method, compensation expense was recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. As previously allowed under SFAS 123, the Company only adopted the disclosure requirements of SFAS 123, which established a fair-value-based method of accounting for share-based employee compensation plans. The following is a reconciliation of reported net earnings to adjusted net earnings had the Company recorded compensation expense based on the fair value at the grant date for its stock options under SFAS 123 for the years ended March 31, 2006 and 2005.


(in thousands except per share data)	Year Ended March 31, 2006				Year Ended March 31, 2005


Reported net earnings		$	23,322			$	16,109
Add: Option compensation expense, net of tax			262				272
Less: Share-based compensation expense determined under fair value-based method for all awards			(3,280	)			(1,483	)

Pro forma net earnings		$	20,304			$	14,898


Basic earnings per share:
Reported		$	0.88			$	0.63

Pro forma		$	0.77			$	0.58


Diluted earnings per share:
Reported		$	0.85			$	0.61

Pro forma		$	0.74			$	0.56

In arriving at the stock-based compensation expense reported in the table above, the Company utilized the Black-Scholes valuation model for estimating fair value with the following assumptions: expected life - 48 - 57 months from the date of the grant; stock volatility - 47.7 - 57.0%, risk free interest rate of 3.0 - 3.7% and no dividends during the expected term. For stock

options issued subsequent to March 31, 2006, the Company used the simplified method for estimating expected term, which derives a term equal to the midpoint between the vesting period and the contractual term as allowed by SAB 107. Prior to using the simplified method, the Company estimated the expected life of an option. The Company estimates volatility by using the weighted average historical volatility of the Company’s common stock which the Company believes approximates expected volatility. The risk free rate is the implied yield available on the U.S Treasury zero-coupon issues with remaining terms equal to the expected life input to the Black Scholes model. 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 time when the February 11, 2005 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 of such options. Therefore, management believes that using a zero dividend rate in the valuation of the stock options granted during fiscal years 2006 and 2005 was appropriate. The above pro forma disclosure was not presented for the year ended March 31, 2007 because stock-based compensation has been accounted under SFAS 123R for this period.

The historical pro forma impact of applying the fair value method prescribed by SFAS 123 may not be representative of the impact that may be expected in the future due to changes resulting from additional grants in future years and changes in assumptions such as volatility, interest rates and expected life used to estimate fair value of the grants in future years.

The following table shows total stock-based employee compensation expense included in the Consolidated Statement of Income for year ended March 31, 2007.


(in thousands)	Year Ended March 31, 2007

Costs and expenses:
Cost of revenue		$	524
Research and development			870
Selling, general and administrative			2,529

Total stock based compensation		$	3,923

Amounts capitalized in software development costs		$	(38	)

Amounts charged against earnings, before income tax benefit		$	3,885

Amount of related income tax benefit recognized in earnings		$	910

Use of Estimates. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) 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 February 2007, the Financial Standards Accounting Board (FASB) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of SFAS No. 115”, which applies to all entities with available-for-sale and trading securities. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, “Fair Value Measurements”. The Company plans to adopt SFAS 159 effective April 1, 2008 and is in the process of determining the effect, if any, the adoption of SFAS 159 will have on its consolidated financial statements.

for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact, if any, the adoption of this standard will have on its consolidated financial statements.

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin no. 108 (SAB 108) to clarify consideration of the effects of prior year errors when quantifying misstatements in current year financial statements for the purpose of quantifying materiality. SAB 108 requires issuers to quantify misstatements using both the “rollover” and “iron curtain” approaches and requires an adjustment to the current year financial statements in the event that after the application of either approach and consideration of all relevant quantitative and qualitative factors, a misstatement is determined to be material. SAB 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have a material effect on the Company’s consolidated financial statements.

In June 2006, the FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (FIN 48) which defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. A tax position that meets the “more-likely-than-not” criterion shall be measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement. FIN 48 applies to all tax positions accounted for under SFAS No. 109, “Accounting for Income Taxes.” FIN 48 is effective for fiscal years beginning after December 15, 2006. Upon adoption, the consolidated financial statements will be adjusted to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any adjustment will be recorded directly to the Company’s beginning retained earnings balance in the period of adoption and reported as a change in accounting principle. The Company is currently analyzing the effects of adopting FIN 48 on April 1, 2007, but does not currently believe the adoption will have a material impact on the Company’s consolidated financial statements when adopted.

In June 2006, the FASB ratified a consensus opinion reached by the Emerging Issues Task Force (EITF) on EITF Issue 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” The guidance in EITF Issue 06-3 requires disclosure in interim and annual financial statements of the amount of taxes on a gross basis, if significant, that are assessed by a governmental authority that are imposed on and concurrent with a specific revenue producing transaction between a seller and customer such as sales, use, value added, and some excise taxes. Additionally, the income statement presentation (gross or net) of such taxes is an accounting policy decision that must be disclosed. The consensus in EITF Issue 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006. The adoption of EITF Issue 06-3 did not have a significant effect on the Company’s consolidated financial statements as the Company has historically presented sales excluding all taxes.


3. Intangible Assets – Capitalized Software Costs

As of March 31, 2007 and 2006, the Company had the following amounts related to intangible assets with definite lives (in thousands):


	March 31, 2007				March 31, 2006


Gross carrying amount		$	21,626			$	16,584
Accumulated amortization			(14,644	)			(11,413	)


Net capitalized software development		$	6,982			$	5,171


Aggregate amortization expense during the year		$	3,231			$	2,460

Activity related to net capitalized software costs for the year ended March 31, 2007 and 2006 is as follows:


	March 31, 2007				March 31, 2006


Beginning of the period		$	5,171			$	4,334
Capitalization			5,042				3,297
Amortization			(3,231	)			(2,460	)

End of the period		$	6,982			$	5,171

The following table represents the remaining estimated amortization of intangible assets with determinable lives as of March 31, 2007:


For the year ended March 31,

2008	$	3,484
2009		2,376
2010		1,122

Total	$	6,982


4.	Cash and Cash Equivalents

At March 31, 2007 and 2006, the Company had cash and cash equivalents of $60,028 and $57,225, 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:


	Year Ended March 31,

(in thousands)	2007			2006			2005


Interest income		$	3,306		$	2,108		$876


5.	Composition of Certain Financial Statement Captions

(in thousands)

Accounts receivable include amounts related to maintenance and services which were billed but not yet rendered as of the end of the year. Undelivered maintenance and services are included on the accompanying Consolidated Balance Sheets as part of the deferred revenue balance.


	March 31, 2007				March 31, 2006


Accounts receivable, excluding undelivered software, maintenance and services		$	42,574			$	29,832
Undelivered software, maintenance and implementation services billed in advance, included in deferred revenue			23,809				17,389

Accounts receivable, gross			66,383				47,221

Allowance for doubtful accounts			(2,438	)			(2,556	)


Accounts receivable, net		$	63,945			$	44,665

Inventories are summarized as follows:


	March 31, 2007			March 31, 2006


Computer systems and components, net of reserve for obsolescence of $324 and $304, respectively		$	1,147		$	539
Miscellaneous parts and supplies			28			22


Inventories, net		$	1,175		$	561

Equipment and improvements are summarized as follows:


	March 31, 2007				March 31, 2006


Computer and electronic test equipment		$	9,801			$	7,501
Fixtures and furniture			2,845				2,237
Leasehold improvements			929				597

			13,575				10,335
Accumulated depreciation and amortization			(8,546	)			(6,596	)

Equipment and improvements, net		$	5,029			$	3,739

Accrued compensation and related benefits are summarized as follows:


	March 31, 2007			March 31, 2006


Bonus		$	4,158		$	3,714
Vacation			2,363			1,776


Accrued compensation and related benefits		$	6,521		$	5,490

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


	March 31, 2007			March 31, 2006

Maintenance		$	10,241		$	7,838
Implementation services			26,465			23,792
Undelivered software and other			2,742			4,286


Deferred Revenue		$	39,448		$	35,916

Other current liabilities are summarized as follows:


	March 31, 2007			March 31, 2006


Sales tax payable		$	805		$	575
Commission payable			767			519
Customer deposits			703			624
Deferred rent			652			360
Accrued EDI expenses			613			470
Accrued royalties			463			—
Professional fees			425			224
Other accrued expenses			1,198			1,040


Other current liabilities		$	5,626		$	3,812


6.	Income Taxes

During the years ended March 31, 2007 and 2006, the Company claimed research and development tax credits of $787 and $821, respectively. The Company also claimed the qualified production activities deduction under Section 199 of the Internal Revenue Code, for $1,457 and $840 during the years ended March 31, 2007 and 2006, respectively. The research and development credits and the qualified production activities income deduction taken by the Company involve certain assumptions and judgments regarding qualification of expenses under the relevant tax code provisions.

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


	Year Ended March 31,

(in thousands)	2007			2006			2005

Current:
Federal taxes	$	18,106		$	12,824		$	5,365
State taxes		4,488			3,256			1,438

Total		22,594			16,080			6,803

Deferred:
Federal taxes		(1,347	)		(1,168	)		2,040
State taxes		(295	)		(308	)		537

Total		(1,642	)		(1,476	)		2,577


Total	$	20,952		$	14,604		$	9,380

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


	Year Ended March 31,

(in thousands)	2007			2006			2005


Federal income tax statutory rate		35.0	%		35.0	%		35.0	%

Increase (decrease) resulting from:
State income taxes		5.0			5.0			4.6
Research & development tax credits		(1.7	)		(2.3	)		(4.3	)
Qualified production activities income deduction		(0.9	)		(0.8	)		—
Other		1.3			1.6			1.5


Effective income tax rate		38.7	%		38.5	%		36.8	%

The net deferred tax assets in the accompanying Consolidated Balance Sheets consist of the following:


	March 31, 2007				March 31, 2006


Deferred tax assets:
Deferred revenue and allowance for doubtful accounts		$	4,528			$	3,336
Inventory valuation			206				198
Purchased in-process research and development			1,490				1,797
Intangible assets			100				126
Accrued compensation and benefits			917				606
Deferred compensation			975				745
State income taxes			55				176
Compensatory stock option expense			707				134
Other			387				193

Total deferred tax assets			9,365				7,311


Deferred tax liabilities:
Accelerated depreciation			(387	)			(916	)
Capitalized software			(2,955	)			(2,229	)
Prepaid expense			(1,400	)			(1,121	)
Other			—				(64	)

Total deferred tax liabilities			(4,742	)			(4,330	)

Deferred tax assets, net		$	4,623			$	2,981

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 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

The Company has a 401(k) plan available to substantially all of its employees. Participating employees may defer up to the Internal Revenue Service limit based on the Internal Revenue 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 amount of the Company match is discretionary and subject to change. The retirement plans may be amended or discontinued at the discretion of the Board of Directors. Contributions of $250, $202 and $162 were made by the Company to the 401(k) plan for the fiscal years ended March 31, 2007, 2006 and 2005, respectively.

The Company has a deferred compensation plan (the Deferral Plan) for the benefit of those officers and employees who qualify for inclusion. Participating employees may defer between 5% 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, and the amount of the Company match is discretionary and subject to change. 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. Deferred compensation liability was $2,279 and $1,686 at March 31, 2007 and 2006, respectively. To offset this liability, the Company has purchased life insurance policies on some 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 Company intends to hold the life insurance policy until the death of the plan participant. The net cash surrender value of the life insurance policies for deferred compensation was $2,276 and $1,653 at March 31, 2007 and 2006, respectively. The values of the life insurance policies and the related Company obligation are included on the accompanying Consolidated Balance Sheets in long-term other assets and long-term deferred compensation, respectively. The Company made contributions of $29, $25 and $13 to the Deferral Plan for each of the fiscal years ended March 31, 2007, 2006 and 2005, respectively.

The Company has a voluntary employee stock contribution plan for the benefit of full-time employees. The plan is designed to allow certain 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 $10, $14 and $6 were made by the Company for the fiscal years ended March 31, 2007, 2006 and 2005, respectively.


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 were 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, and options under the 1998 Plan expire no later than ten years from the grant date. Options granted will generally become exercisable in accordance with the terms of the agreement pursuant to which they were granted. Certain other option grants to directors became exercisable three months from 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, 2007, 58,300 shares were available for future grant under the 1998 Plan. As of March 31, 2007, there were 1,461,950 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, 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 share-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, and expire awards under the 2005 Plan no later than ten years from the grant date. Options granted will generally become exercisable in accordance with the terms of the agreement, pursuant to which they were granted. 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, 2007, 2,400,000 shares were available for future grant under the 2005 Plan. As of March 31, 2007, there were no outstanding options related to this Plan.

On September 20, 2006, the Board of Directors granted a total of 35,000 options under the Company’s 1998 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 grant ($39.81 per share). The options vest in four equal annual installments beginning September 20, 2007 and expire on September 20, 2013.

On August 11, 2006, the Board of Directors granted a total of 40,000 options under the Company’s 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 ($37.09 per share). The options vest in four equal annual installments beginning August 11, 2007 and expire on August 11, 2011.

On July 25, 2006, the Board of Directors approved a performance-based equity incentive program for employees to be awarded options to purchase the Company’s common stock based on meeting certain target increases in earnings per share performance and revenue growth during fiscal year 2007. The options shall be issued pursuant to one of the Company’s shareholder approved option plans, have an exercise price equal to the closing price of the Company’s shares on the date of grant, a term of five years, vest in four equal installments commencing one year following the date of grant. The maximum number of options originally available under the performancebased equity incentive program plan was 115,000. On January 29, 2007, a committee comprised of all the independent directors of the Board of Directors modified the Company’s previously approved performance based equity incentive program for employees. Modifications to the program included an increase in the maximum number of options available under the program from 115,000 to 290,000 and revisions to certain revenue targets. Compensation expense of $425 for these options was recorded in the year ended March 31, 2007. A total of 159,500 options will be granted during the quarter ended June 30, 2007 based on the achievement of certain fiscal 2007 revenue and earnings per share performance targets included in the fiscal year 2007 equity incentive program.

On October 5, 2005, the Board of Directors granted a total of 124,000 stock options under the Company’s 1998 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.

On August 8, 2005, the Board of Directors granted 19,000 options under the Company’s 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 ($32.445 per share). The options vest in four equal annual installments beginning August 8, 2006 and expire on August 8, 2012.

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.

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.

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.

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.

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 to be amortized evenly over the next four years ending October 2007. Compensation expense of approximately $430, $428 and $421 was recognized in the fiscal years ended March 31, 2007, 2006 and 2005 relative to this option grant.

A summary of stock option transactions during the years ended March 31, 2007, 2006 and 2005 is as follows:



	Number of Shares		Weighted -Average Exercise Price		Weighted Average Remaining Contractual Life	(in thousands) Aggregate Intrinsic Value

Outstanding, April 1, 2004	1,322,348		$	2.63
Granted	1,774,900		$	16.23
Exercised	(920,556	)	$	2.29		$	16,447
Forfeited/Canceled	(7,248	)	$	2.03

Outstanding, March 31, 2005	2,169,444		$	13.89

Granted	143,000		$	33.85
Exercised	(486,772	)	$	9.20		$	11,169
Forfeited/Canceled	(27,300	)	$	12.37

Outstanding, March 31, 2006	1,798,372		$	16.78

Granted	75,000		$	38.36	5.35
Exercised	(411,414	)	$	14.74	3.27	$	10,393
Forfeited/Canceled	(8	)	$	3.25	—

Outstanding, March 31, 2007	1,461,950		$	18.46	4.00	$	31,489

Exercisable, March 31, 2007	520,650		$	20.32	4.39	$	10,245

Vested and expected to vest, March 31, 2007	1,450,466		$	18.47	4.01	$	31,230

The Company continues to utilize the Black-Scholes valuation model for estimating the fair value of share-based compensation after the adoption of SFAS 123R with the following assumptions:


		Year Ended March 31, 2007

Expected life		3.75-4.75 years
Expected volatility		47.0%-48.50%
Expected dividends		2.05%-2.36%
Risk-free rate		4.53%-5.09%

During the year ended March 31, 2007, 75,000 options were granted under the 1998 Plan. The Company issues new shares to satisfy option exercises. Based on historical experience of option cancellations, the Company has estimated an annualized forfeiture rate of 1.2% for employee options and 0.0% for director options. The weighted average grant date fair value of stock options granted during the years ended March 31, 2007, 2006 and 2005 was $14.33, $15.23 and $7.16 per share, respectively. The expected dividend yield is the average dividend rate during a period equal to the expected life of the option.

Non-vested stock award activity including awards for the twelve month period ended March 31, 2007 is summarized as follows:



	Non-vested Number of Shares		Weighted -Average Grant Date Fair Value per Share

Non-vested, April 1, 2006	1,327,075		$	7.34
Granted	75,000		$	14.33
Vested	(460,775	)	$	7.34
Forfeited/Canceled	—			—

Non-vested, March 31, 2007	941,300		$	7.89

As of March 31, 2007, $5,889 of total unrecognized compensation costs related to stock options is expected to be recognized over a weighted average period of 3.79 years. This amount does not include the cost of new options that may be granted in future periods nor any changes in the Company’s forfeiture percentage. The total fair value of shares vested during the year ended March 31, 2007 was $2,309.


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 with rent escalation clauses. Rent expense related to these leases is recognized on a straight-line basis over the lease terms. Rent expense for the years ended March 31, 2007, 2006, and 2005 was $2,329, $1,634 and $1,285, respectively. Rental commitments under these agreements are as follows:


Year Ending March 31,

2008	$	2,701
2009		2,413
2010		2,417
2011		2,469
2012		927

	$	10,927

Commitments & Guarantees. Software license agreements in both the QSI and NextGen Divisions include a performance guarantee that the Company’s software products will substantially operate as described in the applicable program documentation for a period of 365 days after delivery. To date, the Company has not incurred any significant costs associated with these warranties and does not expect to incur significant warranty costs in the future. Therefore, no accrual has been made for potential costs associated with these warranties. Certain arrangements also include performance guarantees related to response time, availability for operational use, and other performance-related guarantees. Certain arrangements also include penalties in the form of maintenance credits should the performance of the software fail to meet the performance guarantees. To date, the Company has 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.

The Company’s standard sales agreements in the NextGen Division contain an indemnification provision pursuant to which it shall indemnify, hold harmless, and 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 its software. The QSI Division arrangements occasionally utilize this type of language as well. As the Company has not incurred any significant costs to defend lawsuits or settle claims related to these indemnification agreements, the Company believes that its estimated exposure on these agreements is currently minimal. Accordingly, the Company has no liabilities recorded for these indemnification obligations.

From time to time, the Company offers future purchase discounts on its products and services as part of its sales arrangements. 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.

The Company has entered into marketing assistance agreements with 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 the Company’s request for prospective customers which directly result in a purchase of the Company’s software by the visiting prospects. Amounts earned by existing users under this program are treated as a selling expense in the period when earned.


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 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 divisions share the resources of the Company’s “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 the Company’s two divisions.

The QSI Division, co-located with the Company’s 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 UNIX ^a 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.

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:



	QSI Division		NextGen Division		Unallocated Corporate Expenses			Consolidated

2007
Revenue	$	16,589	$	140,576	$	—		$	157,165
Operating income (loss)		4,391		56,317		(9,830	)		50,878
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


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


12.	Customer Concentration

One customer represented approximately 12.5% of total gross accounts receivable as of March 31, 2007. No customer represented more than 10% of gross accounts receivable as of March 31, 2006.


13.	Subsequent Events

On May 31, 2007, the Board of Directors approved a performance-based equity incentive program for employees to be awarded options to purchase the Company’s common stock based on meeting certain target increases in earnings per share performance and revenue growth during fiscal year 2008. If earned, the options shall be issued pursuant to one of the Company’s shareholder approved option plans, have an exercise price equal to the closing price of the Company’s shares on the date of grant, a term of five years, vest in four equal installments commencing one year following the date of grant. The maximum number of options available under the performance-based equity incentive program plan is 310,000.

On May 31, 2007, the Board declared a quarterly cash dividend of $0.25 per share on the Company’s outstanding shares of common stock, payable to shareholders of record as of June 15, 2007 with an anticipated distribution date of July 5, 2007. The Company anticipates that future quarterly dividends, if and when declared by the Board pursuant to this policy, would likely be distributable on or about the fifth day of each of the months of October, January, April and July.


14.	Selected Quarterly Operating Results (unaudited)

The following table presents quarterly unaudited consolidated financial information for the eight quarters in the period ended March 31, 2007. 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)

	6/30/05		9/30/05		12/31/05		3/31/06		6/30/06		9/30/06		12/31/06		3/31/07

Revenue:
Software, hardware and supplies	$	12,973	$	13,661	$	10,835	$	17,469	$	15,029	$	16,737	$	16,088	$	21,017
Implementation and training		2,490		3,031		2,615		3,157		2,954		2,848		2,885		3,490

Total System sales		15,463		16,692		13,450		20,626		17,983		19,585		18,973		24,507
Maintenance		7,311		7,360		7,733		8,720		9,399		9,639		11,069		11,841
EDI		3,102		3,174		3,310		3,670		3,977		4,066		4,290		4,716
Other services		1,552		2,316		2,259		2,549		4,715		4,169		4,164		4,072

Total Maintenance, EDI and Other services		11,965		12,850		13,302		14,939		18,091		17,874		19,523		20,629

Total revenue		27,428		29,542		26,752		35,565		36,074		37,459		38,496		45,136
Cost of revenue:
Software, hardware and supplies		2,456		1,907		1,659		2,126		1,689		1,723		1,798		3,243
Implementation and training		1,824		1,942		1,975		2,347		1,963		2,154		2,169		2,249

Total cost of system sales		4,280		3,849		3,634		4,473		3,652		3,877		3,967		5,492
Maintenance		2,257		2,236		2,024		2,812		3,137		2,792		3,058		2,847
EDI		2,062		2,125		2,216		2,158		2,780		2,926		3,144		3,331
Other services		1,152		1,401		1,529		1,620		1,888		2,238		2,528		3,127

Total cost of maintenance, EDI and other services		5,471		5,762		5,769		6,590		7,805		7,956		8,730		9,305

Total cost of revenue		9,751		9,611		9,403		11,063		11,457		11,833		12,697		14,797

Gross profit		17,677		19,931		17,349		24,502		24,617		25,626		25,799		30,339

Selling, general and administrative		8,032		8,920		8,016		10,586		10,200		9,994		10,593		14,550
Research and development		1,741		1,977		2,208		2,161		2,318		2,591		2,601		2,656

Income from operations		7,904		9,034		7,125		11,755		12,099		13,041		12,605		13,133
Interest income		341		460		594		713		667		819		935		885

Income before provision for income taxes		8,245		9,494		7,719		12,468		12,766		13,860		13,540		14,018
Provision for income taxes		3,170		3,700		2,904		4,830		5,097		5,523		4,819		5,513

Net income	$	5,075	$	5,794	$	4,815	$	7,638	$	7,669	$	8,337	$	8,721	$	8,505

Net income per share – basic*	$	0.19	$	0.22	$	0.18	$	0.29	$	0.29	$	0.31	$	0.32	$	0.31
Net income per share – diluted*	$	0.19	$	0.21	$	0.18	$	0.28	$	0.28	$	0.30	$	0.32	$	0.31
Weighted average shares outstanding – basic		26,224		26,298		26,490		26,642		26,714		26,802		26,966		27,049
Weighted average shares outstanding – diluted		26,950		27,128		27,372		27,432		27,232		27,380		27,507		27,600

* Will not add to annual EPS due to rounding.

Schedule II

ALLOWANCE FOR DOUBTFUL ACCOUNTS
(in thousands)


For the Year Ended	Balance at Beginning of Year		Additions Charged to Costs and Expenses		Deductions			Balance at End of Year

March 31, 2007	$	2,556	$	1,480	$	(1,598	)	$	2,438
March 31, 2006	$	1,837	$	1,181	$	(462	)	$	2,556
March 31, 2005	$	1,293	$	797	$	(253	)	$	1,837

ALLOWANCE FOR INVENTORY OBSOLESCENSE
(in thousands)


For the Year Ended	Balance at Beginning of Year		Additions Charged to Costs and Expenses		Deductions			Balance at End of Year

March 31, 2007	$	304	$	35	$	(15	)	$	324
March 31, 2006	$	146	$	179	$	(21	)	$	304
March 31, 2005	$	207	$	160	$	(221	)	$	146

INDEX TO EXHIBITS ATTACHED TO THIS REPORT


EXHIBIT NUMBER		DESCRIPTION


	10.13	Fifth Amendment to lease agreement between the Company and Tower Place, L.P. dated January 31, 2007.

	10.17	Amended and Restated Second Amendment to Office Lease agreement between the Company and HUB Properties LLC dated May 31, 2006.

	10.20	Office lease between the Company and SLTS Grand Avenue, L.P. dated May 3, 2006.

	10.25	Description of Compensation Program for Named Executive Officers for Fiscal Year Ended March 31, 2008.

	10.26	Description of Compensation Program for Named Executive Officers for Fiscal Year Ended March 31, 2007.

	23	Consent of Independent Registered Public Accounting Firm – Grant Thornton LLP

	31.1	Certification of Principal 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 Principal 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.

EXHIBIT 10.20

OFFICE LEASE

ARTICLE 1
DEFINITIONS AND CERTAIN BASIC PROVISIONS

1.1 The following list sets out certain defined terms and certain financial and other information pertaining to this lease and such defined terms shall, as used in this lease, have the meanings set forth below:


	(a) “Landlord”: SLTS GRAND AVENUE, L.P., a Texas limited partnership

	(b) Landlord’s address: c/o Cooper & Stebbins, L.P., 1256 Main Street, Suite 240, Southlake, Texas 76092.

	(c) “Tenant”: QUALITY SYSTEMS INC., a California corporation, d/b/a QSI, Inc.

	(d) Tenant’s address: 18191 Von Karman Ave., #450, Irvine, CA 92612

	(e) Tenant’s trade name: “Nextgen” Healthcare Information Systems

	(f) Tenant’s Guarantor(s): None

	(g) “Agent”: Jennifer Gray, Integrity Commercial Real Estate

	(h) “Cooperating Agent”: Jim Kerns, Kern Olsen Real Estate Services


	(i) “Project”: Grand Avenue District in Southlake Town Square, located in the City of Southlake, Tarrant County, Texas, such term includes the Office Building and all Common Areas shown on Exhibit “A”. The adjacent Town Square development presently consists of approximately 50 acres of land and approximately 560,000 square feet of mixed use improvements thereon. The planned Grand Avenue District is shown on Exhibit “A” attached to this lease. Exhibit “A-l” indicates the current plans for the first stage of development of the Grand Avenue District, which will include the buildings shown. Subsequent stages are projected to include additional buildings, including, but not limited to, those additional buildings shown on Exhibit “A”. The larger Southlake Town Square development (current and projected are as noted thereon) is shown on Exhibit “A-2”. Exhibits “A”, “A-l” and “A-2” indicate the current plans for development of the Project and for the larger Southlake Town Square development (which plans may change from time to time). Subsequent stages and phases are projected to include additional buildings and additional land area within the Project boundary shown on Exhibits “A” and “A-2,” including, but not limited to, those additional buildings shown on Exhibits “A” and “A-2”. With regard to Exhibits “A”, “A-l”, and “A-2”, the parties agree that the exhibits are attached solely for the purpose of locating the Project and the Demised Premises within the Project and that no representation, warranty, or covenant is to be implied by any other information shown on the exhibit (e.g., any information as to buildings, tenants or prospective tenants, etc. is subject to change at any time). Tenant acknowledges that the Project is a mixed use project combining retail and office space and that the building in which the Demised Premises is located contains both retail and office uses. For the purposes of this lease, the second and, if applicable, third floor of the building in which the Demised Premises is located, together with the lobby on the first floor serving such floor(s) and the elevators, mechanical, electrical and plumbing systems serving such floor(s) are referred to as the “Office Building.” The lobbies and common corridors and restrooms located within the Office Building (other than corridors and restrooms located entirely within or serving only one tenant’s space) are referred to in this lease as the “Office Building Common Area.” The common corridor on the first floor (as opposed to the lobby on the first floor) is part of the Common Area of the Project and is not part of the Office Building Common Area.

	(j) “Demised Premises”: an office unit in the Project containing approximately 2,556 square feet in usable area (measured by calculating lengths and widths to the exterior of outside walls and to the center of interior walls) and being conclusively deemed to contain 2,939 square feet of rentable area, being located on the second floor of Building GA2 of the Project at 286 Grand Avenue, Suites 201 and 215, Southlake, Tarrant County, Texas, and being described or shown on Exhibit “B” attached to this lease. Landlord and Tenant are each entitled, within five (5) days after the Commencement Date to re-measure the Demised Premises. If the Demised Premises does not contain 2,556 usable square feet, the re-measuring party is entitled, within such five (5) day period, to notify the other party of such fact, which notice must show the results of


	such re-measurement and must include the name of the architect who re-measured the space and copies of such architect’s worksheets and computations. If either Landlord or Tenant does not send such notification within such five (5) day period, then the party that does not send such notification will be deemed to have waived the right of re-measurement. If they both fail to send the notice, then they both will be deemed to have waived the right of re-measurement and the Demised Premises will be deemed for all purposes to contain 2,556 usable square feet. If one party sends the notification of measurement discrepancy within such five (5)-day period, then the party so notified will have five (5) days after the receipt of such notice in which to re-measure the Demised Premises and provide a written response to the first party indicating that it either accepts or rejects that party’s re-measurement figures, which response must show the results of such re-measurement and must include the name of the architect who re-measured the space for the responding party and copies of such architect’s worksheets and computations. Should the party to whom such notice was sent fail to respond as set forth in the immediately-preceding sentence, then it will be deemed to have accepted the other party’s measurement for all purposes under this lease. If, on the other hand, such party notifies the other party in accordance with the requirements of this paragraph that it does not accept such other party’s calculations, then Tenant and Landlord must select another, independent architect to re-measure the Demised Premises and such architect’s measurement will be binding unless it varies from either of the other two (2) measurements by more than two percent (2%), in which event the average of the two measurements that are numerically closest will be deemed to be the total square footage of the Demised Premises for all purposes under this lease. In the event that the final determination of the total usable square footage of the Demised Premises is not the same as the approximate total usable square footage of the Demised Premises set forth in the first sentence of this Section 1.1(j), then the number of rentable square feet in the Demised Premises will be calculated by multiplying the number of usable square feet in the Demised Premises by 115% and all terms and provisions of this lease will automatically be altered in proportion to the change in such square footage without the need for any further documentation, although each party agrees to execute an amendment to this lease (in form and content mutually and reasonably satisfactory to Landlord and Tenant) reflecting such changes within ten (10) days after the other party delivers to it a written lease amendment reflecting such changes, with a request for execution.

	(k) “Commencement Date”: the earlier of (i) the date upon which Landlord substantially completes Landlord’s Work as described in Exhibit “C” or (ii) the date upon which Tenant opens for business at the Demised Premises. Landlord estimates that it will substantially complete Landlord’s Work on or about sixty (60) days after the date of this lease.

	(1) Lease Term: Commencing on the Commencement Date and ending on the last day of the month in which the fifth (5^th) anniversary of the Commencement Date occurs (“Expiration Date”).

	(m) Guaranteed rental: Tenant must pay to Landlord monthly an amount determined by multiplying the total number of square feet of rentable area within the Demised Premises by the applicable rental rate set forth below and then dividing such product by twelve (12):


Period	Annual Rental Rate per Square Foot


Commencement Date through (and including) the 12^th full month of the term		$	27.00

13^th full month of the term through (and including) the 24^th full month of the term		$	27.00

25^th full month of the term through (and including) the 36^th full month of the term		$	27.50

37^th full month of the term through (and including) the 48^th full month of the term		$	28.00

49^th full month of the term through (and including) the Expiration Date		$	28.50


	This is a full service lease. Tenant’s payment of rent as provided above includes Tenant’s proportionate share of Common Area expenses, taxes and other real estate charges, insurance, building standard janitorial services (Section 5.1(a)), building standard utilities (including a standard allowance for electricity to the Demised Premises (Section 5.1(c) and (d)), and building repairs and maintenance for each month of the Lease term, but excluding telephone, telecommunication, and data transmission installation and service.

	(n) Prepaid rental: $6,612.75, such prepaid rental being due and payable upon execution of this lease by Tenant.

	(o) Security deposit: $6,612.75, such security deposit being due and payable upon execution of this lease by Tenant.

	(p) Permitted use: Tenant and Tenant’s permitted sublessees and assignees shall use and occupy the Demised Premises solely for the following purpose(s): professional offices with training room; provided, however, in no event may Tenant or any occupant use the Demised Premises for any purpose that violates any of the prohibited or restricted uses listed on Exhibit “D” of this lease. Tenant acknowledges and agrees that Tenant’s use of the Demised Premises is subject to the terms and provisions of that certain Amended and Restated Declaration of Covenants, Restrictions and Easements for Southlake Town Square dated August 23, 2001 and recorded in Volume 15097, Page 457 of the Deed Records of Tarrant County, Texas (as amended and restated from time to time, the “CREs”) which among other things, requires Development Control Committee approval for any use of the Demised Premises, in accordance with the procedures and standards more particularly described in the CREs, and Tenant covenants and agrees with Landlord that Tenant will not use the Demised Premises for any purpose which is not so approved by the Development Control Committee.

	Tenant acknowledges that the above specification of a “permitted use” means only that Landlord has no objection to the specified use and does not include any representation or warranty by Landlord as to whether or not such specified use complies with applicable laws and/or requires particular governmental permits. In this regard Tenant acknowledges that this Section 1.1(p) is subject to Article 3 and Section 9.7 of this lease.

	(q) Tenant’s Proportionate Share: Tenant’s Proportionate Share: A percentage, the numerator of which is the number of usable square feet in the Demised Premises and the denominator of which is the number of usable square feet in the gross leasable area of the Project to which the applicable cost or expense applies (it being understood and agreed that for tenants on the first floor, the number of rentable square feet is the same as the number of square feet in their premises (all of which are deemed usable)). Notwithstanding the above, as to charges for which such percentage, when applied uniformly, would have an inequitable result, Landlord will determine the percentage that Landlord reasonably deems to be equitable. Tenant’s proportionate share of Project costs and expenses are included in the rent as provided in Section 1.1(m) above.

	(r) Lease Year: The first “Lease Year” shall begin on the Commencement Date and end on the succeeding December 31. The next “Lease Year” shall be the twelve (12) calendar month period following the first Lease Year. Each succeeding “Lease Year” during the lease term shall be each successive 12 calendar month period. If this lease terminates or expires on a date other than December 31, the final Lease Year shall be the time period beginning on January 1 of the year of expiration or termination and ending on the date of termination or expiration.

ARTICLE 2
GRANTING CLAUSE

Landlord leases the Demised Premises to Tenant, and Tenant hereby leases the Demised Premises from Landlord, subject to and upon the terms and conditions set forth in this lease and subject to the rights and interests of third parties under existing liens, ground leases, easements and encumbrances affecting the Project or any part thereof, public right-of-ways, all zoning regulations, rules, ordinances, building restrictions and other laws and regulations now in effect or hereafter adopted by any governmental authority having jurisdiction over the Project or any part thereof.

ARTICLE 3
DELIVERY OF PREMISES

Landlord hereby represents and warrants that the foundation, structural portion of exterior walls, and roof of the Demised Premises as well as Landlord’s Work, if any, described in an exhibit attached to this lease were (or if not yet constructed, will be) constructed in a good and workmanlike manner and in accordance with all applicable laws, statutes, and ordinances. Except as set forth in the immediately

preceding sentence, the Demised Premises is being leased “AS IS,” with Tenant accepting all defects, if any; and Landlord makes no warranty of any kind, express or implied, with respect to the Demised Premises (without limitation, Landlord makes no warranty as to the habitability, fitness or suitability of the Demised Premises for a particular purpose nor as to the absence of any toxic or otherwise hazardous substances). This Article 3 is subject to any contrary requirements under applicable law; however, in this regard Tenant acknowledges that it has been given the opportunity to inspect the Demised Premises and to have qualified experts inspect the Demised Premises prior to the execution of this lease.

ARTICLE 4
RENT

4.1 Rental accrues from the Commencement Date, and is payable to Landlord, at Landlord’s address as provided herein or at such other address as Landlord may designate in writing to Tenant from time to time.

4.2 Tenant must pay to Landlord minimum guaranteed rental in monthly installments in the amounts specified in Section 1.1(m) of this lease. The first such monthly installment is due and payable on or before the Commencement Date, and subsequent installments are due and payable on or before the first day of each succeeding calendar month during the lease term; provided that if the Commencement Date is a date other than the first day of a calendar month, Tenant must pay on or before such date as minimum guaranteed rental for the balance of such calendar month a sum equal to that proportion of the rent specified for the first full calendar month as herein provided, which the number of days from the Commencement Date to the end of the calendar month during which the Commencement Date falls bears to the total number of days in such month.

4.3 It is understood that the minimum guaranteed rental is payable on or before the first day of each calendar month (in accordance with Section 4.1 and Section 4.2 above), without offset or deduction of any nature. In the event any rental or other amount owed to Landlord (including, without limitation, any amounts owed under the terms of this Article 4, or under Article 6, Article 7, or Article 8 below) is not received by Landlord before the date which is ten (10) days after such amount’s due date, for any reason whatsoever, or if any payment for such an amount is by check which is returned for insufficient funds, then in addition to the past due amount, Tenant must pay to Landlord one of the following (the choice to be at the sole option of the Landlord unless one of the choices is improper under applicable law, in which event the other alternative will automatically be deemed to have been selected): (a) a late charge in an amount equal to ten percent (10%) of the rental or other amount then due, in order to compensate Landlord for its administrative and other overhead expenses; or (b) interest on the rental or other amount then due at the maximum contractual rate which could legally be charged in the event of a loan of such amount to Tenant (but in no event to exceed 1½% per month), such interest to accrue continuously on any unpaid balance during the period commencing with the due date of such rental or other amount and terminating with the date on which Tenant makes full payment of all amounts owing to Landlord at the time of such payment. Any such late charge or interest payment is payable as additional rental under this lease and is payable immediately on demand. If any payment for rental or other amount owed to Landlord (including, without limitation, any amounts owed under the terms of this Article 4, or under Article 6, Article 7, or Article 8 below) is by check which is returned for insufficient funds, Tenant must immediately make the required payment to Landlord in good funds; moreover, Tenant must also pay to Landlord all other amounts specified by the terms of this lease (including, without limitation, interest or other charges required under the terms of this Article 4, or under Article 6, Article 7, or Article 8 below), plus an additional fee of $50.00 to compensate Landlord for its expense and effort in connection with the dishonored check.

4.4 Tenant must, within ten (10) days after a request from Landlord (but not more than once per calendar year), deliver to Landlord such financial statements as are reasonably required by Landlord to verify the net worth of Tenant and any guarantor of Tenant’s obligations under this lease (including, without limitation, a balance sheet showing the then-current net worth of Tenant together with a profit and loss statement for the most current fiscal year of Tenant). In the event that Tenant is a subsidiary comprising only the operations conducted at the Demised Premises, Tenant must also provide such statements from the parent company or larger business of which Tenant is a part. In the event that Tenant is an individual, the financial statement must include the operations conducted at the Demised Premises as well as all other business activities of Tenant.

4.5 If Tenant fails in two consecutive months to make rental payments within ten days after due, Landlord, in order to reduce its administrative costs, may require, by giving written notice to Tenant (and in addition to any late charge or interest accruing pursuant to Section 4.3 above, as well as any other rights and remedies accruing pursuant to Article 22 below, or any other provision of this lease or at law), that minimum guaranteed rentals are to be paid quarterly in advance instead of monthly and that all future rental payments are to be made on or before the due date by cash, cashier’s check or money order and that

the delivery of Tenant’s personal or corporate check will no longer constitute a payment of rental as provided in this lease. Any acceptance of a monthly rental payment or of a personal or corporate check thereafter by Landlord cannot be construed as a subsequent waiver of such rights.

4.7 Landlord and Tenant agree that each provision contained in this Lease for determining any rent payments is commercially reasonable and, as to each such charge or amount, constitutes a “method by which the charge is to be computed” for purposes of Tex. Prop. Code Ann. §93.012, as enacted by House Bill 2186, 77th Legislature.

ARTICLE 5
OFFICE BUILDING SERVICES AND EXPENSES

5.1 Landlord agrees to furnish to Tenant while Tenant is occupying the Demised Premises in accordance with the terms of this lease, all of the following services:


	(a) Janitorial cleaning services and garbage and trash removal and, if Landlord deems it appropriate, removal of recycled items, for the Demised Premises and the Office Building Common Area on a standard five (5) day week basis; provided, however, that if Tenant’s floor coverings or other improvements are other than building standard, Tenant must pay, as additional rent, the additional cleaning cost incurred in cleaning such carpets and other improvements. Tenant must pay such additional rent within thirty (30) days after Landlord delivers a statement of such cost to Tenant.

	(b) Elevator service (without an operator) in common with other tenants of the Office Building; provided, however, that Landlord may reasonably limit the number of elevators in operation on Saturdays, Sundays, and State and Federal holidays.

	(c) Hot and cold potable water, sewer, and electricity to the Office Building and electricity to the Demised Premises. The electrical facilities will not exceed one watt per square foot of usable area per month and if Tenant’s electrical usage requires more than such total wattage, includes any single machine that consumes more than 0.5 kilowatts at rated capacity per month, or requires a voltage other than 120 volts or if such equipment requires additional air conditioning above that required by the building standard system, then Tenant must pay for the additional electric power source and usage, the different wiring, and the additional air conditioning usage. Landlord may, in such event, require that Tenant install additional air conditioning equipment serving only the Demised Premises and an additional meter to measure its electrical consumption.

	(d) Heated and refrigerated air conditioning in season, to temperatures, and during hours established by Landlord for the Demised Premises and the Office Building Common Area (but not less than 6:30 a.m. through 7:00 p.m. Monday through Friday (excepting State and Federal holidays) and 6:30 a.m. through 2:00 p.m. on Saturdays (again, excepting State and Federal holidays)); provided, however, that Tenant will be entitled to receive heated or refrigerated air conditioning, during their respective seasons, at hours in which Landlord does not customarily provide such heated or refrigerated air conditioning if, and only if, Tenant pays to Landlord Landlord’s customary charge per hour of use for such heated or refrigerated air conditioning service (which charge may include a required minimum number of hours and may be based on the area of the Demised Premises or the area served by the same heating, air conditioning, and ventilating units as the Demised Premises). The term “State and Federal holidays” means New Year’s Eve, New Year’s Day, Memorial Day, Fourth of July, Labor Day, Thanksgiving Day, Christmas Eve, Christmas Day and, if any of the foregoing days is followed or preceded by a Monday, or followed or preceded by a Friday, such Monday or Friday.

	(e) Routine maintenance and repair of the Office Building Common Area.

	(f) Routine maintenance and repair of the heating, air conditioning, and ventilating system and the lighting, water, and electrical systems serving the Demised Premises and replacement of building standard fluorescent bulbs in all areas and incandescent bulbs in the Office Building Common Area.

5.2 Landlord does not warrant that any of the above-described services will be free from interruption or stoppage. Except as otherwise provided herein, no partial or complete failure to furnish such services nor any stoppage or interruption of such services will render Landlord liable in any respect for damages to person, property or business. Except as otherwise provided herein, no interruption, stoppage or failure of such services will be deemed or construed as an eviction, actual or constructive, of Tenant nor work an abatement of rent nor relieve Tenant from the obligation to fulfill any covenant or agreements contained in this lease, including, without limitation, the obligation to pay rent; provided,

however, if such interruption, stoppage or failure is caused by Landlord’s negligence or intentional act and if such interruption, stoppage, or failure materially, adversely interferes with the conduct of Tenant’s business within the Demised Premises for more than four (4) days, excluding Sundays or holidays, after Landlord’s receipt of notice of such interruption, then, commencing on the first business day after such four (4) day period, excluding Sundays or holidays, Tenant shall be entitled to an abatement of guaranteed rent until such service is restored reflecting the extent such interruption, stoppage or failure interferes with Tenant’s use of the Demised Premises.

5.3 Tenant’s Office Building Proportionate Share of the cost of operation and maintenance of the Office Building is included in the rent as set forth in Section 1.1(m) herein. “Tenant’s Office Building Proportionate Share” is the ratio that the total usable floor area of the Demised Premises bears to the total usable floor area of the Office Building. If this lease should commence on a date other than the first day of a calendar year or terminate or expire on a date other than the last day of a calendar year, Tenant’s allocated share of such expenses under this Section 5.3 will be prorated based upon Landlord’s expenses for the entire calendar year.

ARTICLE 6
TENANT’S RESPONSIBILITY FOR TAXES, OTHER REAL
ESTATE CHARGES AND INSURANCE EXPENSES

6.1 Tenant is liable for, and agrees to pay prior to delinquency, all taxes levied against personal property and trade fixtures placed by Tenant in the Demised Premises. If any such taxes are levied against Landlord or Landlord’s property and if Landlord elects to pay the same or if the assessed value of Landlord’s property is increased by inclusion of personal property and trade fixtures placed by Tenant in the Demised Premises and Landlord elects to pay the taxes based on such increase, Tenant must pay Landlord upon demand that part of such taxes for which Tenant is primarily liable hereunder.

6.2 Tenant’s Proportionate Share (as defined in Section 1.1(q) above) of all “real estate charges” (as defined below) and “insurance expenses” (as defined below) related to the Project or the Landlord’s ownership of the Project is included in the rent set forth in Section 1.1(m). Tenant’s proportionate share of costs under this Section 6.2 will be prorated during any partial Lease Year (i.e., the first Lease Year and the last Lease Year of the lease term). “Real estate charges” includes ad valorem taxes, general and special assessments, costs incurred in monitoring and disputing taxes, whether paid to an outside consultant or otherwise, parking surcharges, any tax or excise on rents, any tax or charge for governmental services (such as street maintenance or fire protection); and any tax or charge which replaces any of such above described “real estate charges”; provided, however, that “real estate charges” does not include any franchise, estate, inheritance or general income tax. “Insurance expenses” includes all premiums and other expenses incurred by Landlord for commercial liability insurance and Special Form or similar property insurance (plus whatever endorsements or special coverages which Landlord, in Landlord’s sole discretion, may consider appropriate).

6.3 Intentionally deleted.

6.4 Tenant agrees that, as between Tenant and Landlord, Landlord has the sole and absolute right to contest taxes levied against the Demised Premises and the Project (other than taxes levied directly against Tenant’s personal property within, or sales made from, the Demised Premises). Therefore, Tenant, to the fullest extent permitted by law, irrevocably waives any and all rights that Tenant may have to receive from Landlord a copy of notices received by Landlord regarding the appraisal or reappraisal, for tax purposes, of all or any portion of the Demised Premises or the Project (including, without limitation, any rights set forth in §41.413 of the Texas Property Tax Code, as such may be amended from time to time). Additionally, Tenant, to the fullest extent permitted by law, hereby irrevocably assigns to Landlord any and all rights of Tenant to protest or appeal any governmental appraisal or reappraisal of the value of all or any portion of the Demised Premises or the Project (including, without limitation, any rights set forth in §41.413 and §42.015 of the Texas Property Tax Code, as such may be amended from time to time). Tenant agrees without reservation that it will not protest or appeal any such appraisal or reappraisal before a governmental taxing authority without the express written authorization of Landlord.

ARTICLE 7
COMMON AREA

7.1 The term “Common Area” is defined for all purposes of this lease as that part of the Project intended for the common use of all tenants and the public which is maintained by Landlord or the expense of which is borne in whole or in part by Landlord, including among other facilities (as such may be applicable to the Project), parking areass, streets and alleys, common open spaces, landscaping, curbs, loading areas, sidewalks and streetscapes, malls and promenades (enclosed or otherwise), lighting facilities, drinking fountains, meeting rooms, public toilets, and the like but excluding (i) space in buildings (now or hereafter existing) designated for rental for commercial purposes, as the same may exist

from time to time, (ii) areas within the Project which may from time to time not be owned by Landlord (unless subject to a cross-access or similar agreement benefitting the area which includes the Demised Premises), (iii) areas leased to a single-purpose user (such as a bank or a fast-food restaurant) where access is restricted, (iv) the roof(s) of the building(s) in the Project, and (v) decorative awnings; provided, however, that if Landlord bears all or any portion of the cost of maintaining, repairing, or replacing any of the areas described in clauses (ii) through (v) of the immediately-preceding sentence, such areas, while not technically constituting part of the Common Area, will be deemed included within the Common Area for the purposes of (1) Landlord’s ability to prescribe rules and regulations regarding same, and (2) their inclusion for purposes of common area maintenance cost reimbursements. Landlord reserves the right to change from time to time the dimensions and location of the Common Area, as well as the dimensions, identities, locations and types of any buildings, signs or other improvements in the Project. For example, and without limiting the generality of the immediately preceding sentence, Landlord may from time to time decrease the size of any parking area or substitute for any parking area other areas reasonably accessible to the tenants of the Project, which areas may be elevated, surface or underground.

7.2 Tenant, and its employees and customers, and when duly authorized pursuant to the provisions of this lease, its subtenants, licensees and concessionaires, have the nonexclusive right to use the Common Area as constituted from time to time, such use to be in common with Landlord, other tenants in the Project and other persons permitted by Landlord to use the same, and subject to such reasonable rules and regulations governing use as Landlord may from time to time prescribe. For example, and without limiting the generality of Landlord’s ability to establish rules and regulations governing all aspects of the Common Area, Tenant agrees as follows:


	(a) Tenant is not permitted to solicit business, or distribute leaflets or other materials in the Common Area nor take any action which in the sole and exclusive judgment of Landlord would constitute a nuisance or would disturb, endanger, or interfere with the rights of other persons to use the Common Area or would tend to injure the reputation of the Project.

	(b) Landlord may temporarily close any part of the Common Area for such periods of time as may be necessary to make repairs, alterations, or improvements, or to prevent the public from obtaining prescriptive rights.

	(c) With regard to the roof(s) of the building(s) in the Project, use of the roof(s) is reserved to Landlord or, with regard to any tenant demonstrating to Landlord’s satisfaction a need to use same, to such tenant after receiving prior written consent from Landlord. Subject to Landlord’s approval, Tenant shall be allowed access to the roof in order to install, replace, repair, and maintain any heating and air conditioning rooftop unit which exclusively serves the Demised Premises (“Rooftop Equipment”). Tenant shall be allowed to place one (1) satellite dish (“Antenna”), as more particularly described on Exhibit “J” attached hereto, on the roof above Tenant’s Demised Premises provided that the installation and operation thereof and all maintenance and repair is performed in accordance with all applicable laws, rules and regulations and the terms and provisions for Communication Antenna set forth on Exhibit “J” attached hereto. With respect to Rooftop Equipment, Landlord shall provide reasonable access thereto to Tenant and Tenant’s contractors, subject to Landlord’s rules and regulations regarding controlled access to the roof. Tenant’s access to the Rooftop Equipment must be coordinated through Landlord and Landlord’s representative may accompany any of Tenant’s contractors or Tenant during such access. Any penetrations of the building roof must be performed by a contractor designated by Landlord so as to maintain the building roof warranties. Landlord may elect to perform any of such work which affects building systems with its own personnel or contractors, and Tenant shall promptly reimburse Landlord therefor, as additional rent. Tenant shall maintain the Rooftop Equipment in accordance with the requirements of the insurers of the building and with reasonable rules, regulations and technical standards of Landlord relating to use of the building roof as Landlord may establish from time to time. Tenant shall maintain the Rooftop Equipment in good working order and repair, and shall keep the area immediately surrounding the Rooftop Equipment neat and clean. Tenant’s use and maintenance of the Rooftop Equipment may not create any nuisance or interfere with any other licensee or tenant of the Building. Landlord has no obligation to maintain, operate or safeguard the Rooftop Equipment. IN ADDITION TO THE INDEMNIFICATION OBLIGATIONS OF THE PARTIES UNDER ARTICLE 16 BELOW, TENANT SHALL INDEMNIFY, DEFEND AND HOLD HARMLESS LANDLORD FROM ANY AND ALL CLAIMS, DEMANDS, LIABILITIES, CAUSES OF ACTIONS, SUITS, JUDGMENTS, AND EXPENSES (INCLUDING REASONABLE ATTORNEYS’ FEES, COURT COSTS AND COSTS OF INVESTIGATION) ARISING FROM OR IN CONNECTION WITH THE INSTALLATION, CONDITION, OPERATION, REPAIR AND MAINTENANCE OF THE ANTENNA AND ROOFTOP EQUIPMENT, EVEN IF SUCH CLAIMS, DEMANDS, LIABILITIES, CAUSES OF ACTION, SUITS, JUDGMENTS AND


	EXPENSES ARE ATTRIBUTABLE TO THE CONCURRENT NEGLIGENCE OF LANDLORD.

	(d) Landlord may seasonally place kiosks or allow the placement of vending carts in and around the Common Area in accordance with applicable governmental laws, rules and regulations.

7.3 Landlord is responsible for the operation, management and maintenance of the Common Area, the manner of maintenance and the expenditures therefor to be in the sole discretion of Landlord, but to be generally in keeping with similar projects within the same geographical area as the Project.

7.4 Tenant’s Proportionate Share of the cost of operation and maintenance of the Common Area which may be incurred by Landlord in its discretion is included in the rent set forth in Section 1.1 (m) herein. Such costs shall include, among other costs, those for lighting, painting, cleaning, landscaping (including landscaping of any common open spaces maintained by Landlord or for whose maintenance Landlord pays), parking (including valet parking), policing (to the extent that security is provided by or otherwise arranged for by Landlord, although Landlord has no obligation to do so), seasonal decoration, inspecting, repairing, replacing, of any portion of the Common Area, operation of the central portion and water lines of any split heating, air conditioning and ventilating systems; trash removal for the Common Area (to the extent not covered by the terms of Section 9.5 below); a reasonable portion of whatever management fee Landlord pays to the manager of the Project, a reasonable allowance for Landlord’s overhead costs and the cost of any insurance for which Landlord is not reimbursed pursuant to Section 6.2, but specifically excluding all expenses paid or reimbursed pursuant to Article 6. With regard to capital expenditures (i) the original investment in capital improvements, i.e., upon the initial construction of the Project, cannot be included, and (ii) improvements and replacements, to the extent capitalized on Landlord’s records may be included only to the extent of a reasonable depreciation or amortization (including interest accruals commensurate with Landlord’s interest costs). If this lease should commence on a date other than the first day of a calendar year or terminate or expire on a date other than the last day of a calendar year, Tenant’s proportionate share of costs under this Section 7.4 will be prorated based upon Landlord’s expenses for the entire calendar year.

ARTICLE 8
INTENTIONALLY DELETED

ARTICLE 9
USE AND CARE OF DEMISED PREMISES

9.1 Tenant must commence business operations in the entirety of the Demised Premises on or immediately after the Commencement Date and must operate its business in an efficient, high class and reputable manner. Tenant must not at any time leave the Demised Premises vacant, but must in good faith continuously throughout the term of this lease conduct and carry on in the entire Demised Premises the type of business for which the Demised Premises is leased. Tenant must, except during reasonable periods for repairing, cleaning and decorating, keep the Demised Premises open to the public for business with adequate personnel in attendance on all business days, except to the extent Tenant may be prohibited from being open for business by applicable law, ordinance or governmental regulation.

9.2 The Demised Premises may be used only for the purpose or purposes specified in Section 1.1(p) above, and only under the trade name specified in Section 1.1(e) above (or, if Section 1.1(e) is not filled in, any trade name approved in advance in writing by Landlord), and for no other purpose and under no other trade name, it being understood and acknowledged that Landlord has entered into this lease in large part because it believes that such use and trade name will benefit the Project as a whole.

9.3 Tenant must not, without Landlord’s prior written consent, keep anything within the Demised Premises or use the Demised Premises for any purpose which creates a risk of toxic or otherwise hazardous substances or which increases the insurance premium cost or invalidates any insurance policy carried on the Demised Premises or other parts of the Project. All property kept, stored or maintained within the Demised Premises by Tenant is at Tenant’s sole risk. Tenant shall indemnify Landlord and hold Landlord harmless from and against any and all liability, liens, claims, demands, damages, expenses, fees, costs, fines, penalties, suits, proceedings, actions and causes of action (including without limitation all attorneys’ fees and expenses) arising out of or relating to, directly or indirectly, any violation or alleged violation by Tenant of any law, rule, regulation, order or determination of any government authority pertaining to health or the environment relating to the Demised Premises and the Project (“Environmental Laws”), now existing or hereafter arising, except for violations of Environmental Laws caused by Landlord. This indemnification survives the expiration or termination of this lease. Tenant must immediately notify Landlord if Tenant suspects, discovers or receives notice of any violation of Environmental Laws at the Demised Premises or the Project, and must cooperate with Landlord in identifying and investigating any such violation or suspected violation. Tenant further agrees to abide by

the terms of any and all protocols, procedures and agreements of which Landlord gives Tenant written notice and which address the detection, management or remediation of environmental or health hazards at the Demised Premises or the Project.

9.4 Tenant must not permit any objectionable noises or odors to emanate from the Demised Premises; nor place or permit any radio, television, loudspeaker or amplifier on the roof or outside the Demised Premises or where the same can be seen or heard from outside the building; nor place any antenna, equipment, awning, fixture or other projection on the exterior of or above the Demised Premises; nor take any other action which would constitute a nuisance or would disturb or endanger other tenants of the Project or unreasonably interfere with their use of their respective demised premises; nor permit any unlawful or immoral practice to be carried on or committed on the Demised Premises; nor do anything which would tend to injure the reputation of the Project.

9.5 Tenant must take good care of the Demised Premises, keep the Demised Premises secure (Tenant acknowledges that it is not relying on any representation or warranty of Landlord in this regard), and keep the Demised Premises free from waste at all times. Tenant at all times must not overload the floors in the Demised Premises, nor deface or injure the Demised Premises. Tenant at all times must keep the Demised Premises neat, clean and free from dirt and rubbish. Tenant must receive and deliver goods and merchandise and remove garbage and trash in the frequency, schedule, manner, and areas Landlord prescribes. Tenant must not operate an incinerator or burn trash or garbage within the Project.

9.6 Tenant must include the address and identity of its business activities in the Demised Premises in all advertisements made by Tenant in which the address and identity of any similar local business activity of Tenant is mentioned.

9.7 Tenant must procure at its sole expense any permits and licenses required for the transaction of business in the Demised Premises and otherwise comply with all applicable laws, ordinances and governmental regulations. In addition, if the nature of Tenant’s business makes it advisable for Tenant to take any extra precautions (for example, in the case of a business which is affected by so-called “dram shop” laws, Tenant’s compliance with all “dram shop” educational programs and procedures), Tenant must take all such extra precautions. At Landlord’s request, Tenant must deliver to Landlord copies of all such permits and licenses and proof of Tenant’s compliance with all such laws, ordinances, governmental regulations and extra precautions.

ARTICLE 10
MAINTENANCE AND REPAIR OF DEMISED PREMISES

10.1 Landlord must keep the foundation, the exterior walls (except signs, placards, decorations or other advertising media of any type; and interior painting or other treatment of exterior walls) and roof (subject to the first sentence in Section 7.1 above), all mechanical, electrical, and plumbing systems, and the heating, air conditioning, and ventilating systems of or serving the Demised Premises in good repair. In the event any heating or air conditioning is provided by a system that Tenant uses in common with other occupants of the Project, then Landlord will perform the maintenance and repair for such system. Landlord, however, is not required to make any repairs occasioned by the act or negligence of Tenant, its agents, employees, subtenants, licensees and concessionaires (including, but not limited to roof leaks resulting from any roof penetration or placement), although Landlord may do so and bill Tenant for the cost as additional rent, due thirty (30) days after Landlord delivers such bill to Tenant. The provisions of the first sentence of this Section 10.1 are expressly recognized to be subject to the provisions of Article 3, Article 17 and Article 18 of this lease. In the event that the Demised Premises should become in need of repairs required to be made by Landlord hereunder, Tenant must give immediate written notice thereof to Landlord and Landlord will have a reasonable time after receipt by Landlord of such written notice in which to make such repairs.

10.2 Tenant must keep the Demised Premises in good, clean and habitable condition and must make all repairs and replacements to the lamps in the lighting system and to those mechanical, electrical, plumbing, heating, and air conditioning systems of or serving the Demised Premises which were not installed by Landlord. If any repairs required to be made by Tenant hereunder are not made within ten days after written notice delivered to Tenant by Landlord or, in the case of a situation which by its nature requires an immediate response or a response within less than ten (10) days, Landlord may at its option make such repairs without liability to Tenant for any loss or damage which may result to Tenant’s stock or business by reason of such repairs; and Tenant must pay to Landlord upon demand, as additional rental hereunder, the cost of such repairs plus interest at the maximum contractual rate which could legally be charged in the event of a loan of such payment to Tenant (but in no event to exceed 1½% per month), such interest to accrue continuously from the date of payment by Landlord until repayment by Tenant. At the termination or expiration of this lease, Tenant must surrender the Demised Premises in good

condition, excepting reasonable wear and tear and losses required to be restored by Landlord in Section 10.1, Article 17 and Article 18 of this lease.

ARTICLE 11
ALTERATIONS

11.1 Tenant must not make any alterations, additions or improvements to the Demised Premises without the prior written consent of Landlord (including, without limitation, consent as to all plans and specifications therefor and contractor(s) to be used or employed with respect thereto), except for the installation of unattached, movable trade fixtures which may be installed without drilling, cutting or otherwise defacing the Demised Premises and which are not visible from the exterior of the Demised Premises.

11.2 All construction work done by Tenant within the Demised Premises must be performed in a good workmanlike manner, lien-free and in compliance with all governmental requirements and all approved plans and specifications therefor, and in such manner as to cause a minimum of interference with other construction in progress and with the transaction of business in the Project, and Tenant must procure and/or cause its contractor to maintain the insurance described in Exhibit “C” to this Lease and provide Landlord with certificates of insurance evidencing such coverage. Tenant agrees to indemnify Landlord and hold Landlord harmless against any loss, liability (including, without limitation, reasonable attorneys’ fees and expenses) or damage resulting from such work, and Tenant must, if requested by Landlord, furnish a bond or other security satisfactory to Landlord against any such loss, liability or damage.

11.3 In the event Tenant uses a contractor to perform construction work within the Demised Premises, Tenant must, prior to the commencement of such work, obtain Landlord’s approval of such contractor and require such contractor to execute and deliver to Landlord a waiver and release on the form attached hereto as Exhibit “E” of any and all claims against Landlord and liens against the Project to which such contractor might at any time be entitled and to execute and record a Bond to Pay Claims (the “Bond”) in accordance with Chapter 53, Subchapter I of the Texas Property Code, as such may be amended, superseded or replaced from time to time, and must deliver a copy of the recorded Bond to Landlord. The delivery of the waiver and release of lien and the Bond within the time period set forth above is a condition precedent to Tenant’s ability to enter on and begin its construction work at the Demised Premises and, if applicable, to any reimbursement from Landlord for its construction work.

11.4 In the event that Landlord elects to remodel all or any portion of the Project, Tenant will cooperate with such remodeling, including Tenant’s tolerating temporary inconveniences (and even the temporary removal of Tenant’s signs in order to facilitate such remodeling, as it may relate to the exterior of the Demised Premises).

ARTICLE 12
LANDLORD’S RIGHT OF ACCESS

12.1 Landlord is entitled to enter upon the Demised Premises at any time upon reasonable notice for the purpose of inspecting the same, or of making repairs to the Demised Premises, or of making repairs, alterations or additions to adjacent premises, or of showing the Demised Premises to prospective purchasers, tenants or lenders.

12.2 Tenant will permit Landlord to place and maintain “For Rent” or “For Lease” signs on the Demised Premises during the last 180 days of the lease term or during any period that an event of default is continuing hereunder, it being understood that such signs in no way affect Tenant’s obligations pursuant to Section 9.4, Section 13.1 or any other provision of this lease.

12.3 Except as described in Section 7.2(c) above, use of the roof above the Demised Premises is reserved to Landlord.

ARTICLE 13
SIGNS; STORE FRONTS

13.1 Tenant acknowledges that because of the unique nature of the Project, Tenant’s sign will consist of lettering on the exterior window of the Demised Premises. Tenant can only have one (1) such sign unless the Demised Premises have more than one (1) frontage (e.g. the Demised Premises is a corner space and therefore have two (2) frontages), in which case Tenant must have one (1) sign on each frontage. The sign must comply with Landlord’s sign criteria, which will address such matters as (a) the size of the letters, (b) the materials used, (c) the content of the sign, and (d) the location of the sign. Landlord’s current sign criteria is attached to and made a part of this lease as Exhibit “F”.

13.2 Except as required under the term of Section 13.1 above, Tenant must not, without Landlord’s prior written consent (a) make any changes to the exterior of the Demised Premises, or (b) install any exterior lighting, decorations, paintings, awnings, canopies or the like, or (c) erect or install any signs, window or door lettering, placards, decorations or advertising media of any type which can be viewed from the exterior of the Demised Premises; provided, however, Tenant shall have the right, at its sole cost and expense, to place signage on the building directories at both building entries as well as the building directory at the elevator and at Tenant’s entry door. All signs, lettering, placards, banners, portable signs, decorations and advertising media (including the sign required by Section 13.1 above) must conform in all respects to the sign criteria established by Landlord for the Project time to time in the exercise of its sole discretion and must further comply with all applicable laws. All signs are subject to Landlord’s requirements as to construction, method of attachment, size, shape, height, lighting, color and general appearance. Tenant must keep all signs in good condition and in proper operating order at all times.

ARTICLE 14
UTILITIES

14.1 Landlord agrees to cause to be provided to the Project the necessary mains, conduits and other facilities necessary to supply water, gas (if deemed appropriate by Landlord), electricity, telephone service and sewerage service to the building in which the Demised Premises are located.

14.2 Intentionally Deleted

14.3 Landlord is not liable for any interruption whatsoever in utility services not furnished by Landlord, nor for interruptions in utility services furnished by Landlord which are due to fire, accident, strike, acts of God or other causes beyond the control of Landlord or which are necessary or useful in connection with making any alterations, repairs or improvements.

ARTICLE 15
INSURANCE COVERAGES

15.1 Landlord must procure and maintain throughout the term of this lease a policy or policies of insurance, at its sole cost and expense (but subject to Article 6 above), causing the Project to be insured under Special Form or similar property insurance and commercial general liability insurance (with whatever deductibles, endorsements, exceptions or special coverages Landlord, in its sole discretion, may consider appropriate), to the extent necessary to comply with Landlord’s obligations pursuant to other provisions of this lease.

15.2 Tenant must procure and maintain throughout the term of this lease a policy or policies of insurance, at its sole cost and expense, (a) causing Tenant’s fixtures and contents to be fully insured for their replacement value under standard Special Form or similar property insurance, (b) providing commercial general liability insurance insuring Tenant, on an occurrence basis, against all claims, demands, or actions arising out of or in connection with Tenant’s use or occupancy of the Demised Premises, or by the condition of the Demised Premises, and (c) providing worker’s compensation insurance in statutory amounts and employer’s liability coverage with limits of not less than $500,000.00. Tenant’s commercial general liability policy or policies must provide coverage with a combined single limit of not less than $1,000,000 per occurrence (with no offset for occurrences on property other than the Demised Premises), must list Landlord as a loss payee (as to the Special Form or similar property insurance), as to Landlord’s interest in any of Tenant’s property, and as an “additional insured” (as to all other insurance, including, without limitation, the commercial general liability insurance), and must be written by insurance companies and on forms and with deductibles satisfactory to Landlord, and Tenant’s insurance shall be primary (with any policies of Landlord or Landlord’s mortgagees being excess, secondary and non-contributory). Additionally, Tenant’s worker’s compensation and employer’s liability policies must include waivers of subrogation in favor of Landlord. Tenant must obtain a written obligation on the part of each insurance company to notify Landlord at least thirty (30) days prior to cancellation or modification of such insurance. Tenant must promptly deliver such policies or duly executed certificates of insurance to Landlord before Tenant occupies any portion of the Demised Premises and must promptly deliver renewals thereof as required to Landlord at least thirty days prior to the expiration of the respective policy terms. If Tenant should fail to comply with the foregoing requirements relating to insurance, Landlord may obtain such insurance and Tenant must pay to Landlord on demand as additional rental hereunder the premium cost thereof plus interest at the maximum contractual rate (but in no event to exceed 1 ½% per month) from the date of payment by Landlord until repaid by Tenant.

ARTICLE 16
INDEMNIFICATION; WAIVER OF LIABILITY; MUTUAL WAIVER OF SUBROGATION

16.1 Landlord and Landlord’s agents and employees are not liable to Tenant, nor to Tenant’s employees, agents or visitors, nor to any other person whomsoever, for any injury to person or damage to property caused by the Demised Premises becoming out of repair or by defect or failure of any structural element of the Demised Premises or of any equipment, pipes or wiring, or broken glass, or by the backing up of drains, or by gas, water, steam, electricity or oil leaking, escaping or flowing into the Demised Premises (except where due to Landlord’s willful failure to make repairs required to be made by Landlord hereunder after the expiration of a reasonable time after written notice to Landlord of the need for such repairs and in such case, Landlord’s liability to Tenant therefor shall be limited to the cost to repair such items), nor is Landlord liable to Tenant, nor to Tenant’s employees, agents or visitors, nor to any other person whomsoever, for any loss or damage that may be occasioned by or through the acts or omissions of other tenants of the Project or of any other persons whomsoever. Landlord cannot be held responsible in any way on account of any construction, repair or reconstruction (including widening) of any private or public roadways, walkways or utility lines.

16.2 TENANT SHALL INDEMNIFY, DEFEND, AND HOLD LANDLORD AND ITS AFFILIATED ENTITIES, AND THEIR AGENTS, EMPLOYEES, OFFICERS, DIRECTORS, SHAREHOLDERS, PARTNERS AND PRINCIPALS (COLLECTIVELY, THE “INDEMNITEES” OR INDIVIDUALLY, AN “INDEMNITEE”) HARMLESS FROM AND AGAINST ANY AND ALL LOSS, COST, LIABILITY, CLAIM, DAMAGE, AND EXPENSE FOR ANY INJURY TO PERSON OR DAMAGE TO PROPERTY (INCLUDING, WITHOUT LIMITATION, REASONABLE ATTORNEYS’ FEES) (COLLECTIVELY, THE “DEMISED PREMISES LIABILITIES”) OCCURRING IN THE DEMISED PREMISES, EVEN IF THE DEMISED PREMISES LIABILITIES ARE CAUSED IN PART BY LANDLORD’S OR ANY OTHER INDEMNITEE’S NEGLIGENCE. TENANT’S INDEMNIFICATION DOES NOT APPLY, HOWEVER, TO ANY DEMISED PREMISES LIABILITIES CAUSED BY LANDLORD’S WILLFUL ACT OR OMISSION.

16.3 EXCEPT AS MAY BE OTHERWISE EXPRESSLY PROVIDED HEREIN TO THE CONTRARY, LANDLORD SHALL INDEMNIFY, DEFEND AND HOLD TENANT AND ITS AFFILIATED ENTITIES, AND THEIR AGENTS, EMPLOYEES, OFFICERS, DIRECTORS, SHAREHOLDERS, PARTNERS AND PRINCIPALS HARMLESS FROM AND AGAINST ANY AND ALL LOSS, COST, LIABILITY, CLAIM, DAMAGE AND EXPENSE FOR ANY INJURY TO PERSON OR DAMAGE TO PROPERTY (INCLUDING, WITHOUT LIMITATION, REASONABLE ATTORNEYS’ FEES) (COLLECTIVELY, THE “COMMON AREA LIABILITIES”) OCCURRING IN THE COMMON AREAS OF THE PROJECT, EVEN IF THE COMMON AREA LIABILITIES ARE CAUSED IN PART BY TENANT’S NEGLIGENCE. LANDLORD’S INDEMNIFICATION DOES NOT APPLY, HOWEVER, TO ANY COMMON AREA LIABILITIES CAUSED BY TENANT’S WILLFUL ACT OR OMISSION.

16.4 Landlord and Tenant each hereby release the other from any and all liability or responsibility to the other, or to any other party claiming through or under them by way of subrogation or otherwise, for any loss or damage to property caused by a casualty which is insurable under standard Special Form or similar property insurance and agree to obtain an endorsement to that effect in their respective Special Form or similar property insurance policies, EVEN IF SUCH LIABILITY OR LOSS IS CAUSED BY THE NEGLIGENCE OF THE OTHER PARTY; provided, however, that this mutual waiver and agreement is applicable only with respect to a loss or damage occurring during the time when Special Form or similar property insurance policies which are readily available in the marketplace contain a clause or permit an endorsement to the effect that any such release does not adversely affect or impair the policy or the right of the insured party to receive proceeds under the policy; provided, further, that this release is not applicable to the portion of any damage which is not reimbursed by the damaged party’s insurer because of the “deductible” in the damaged party’s insurance coverage. The release specified in this Section 16.4 is cumulative with any releases or exculpations which may be contained in other provisions of this lease.

ARTICLE 17
DAMAGES BY CASUALTY

17.1 Tenant must give immediate written notice to the Landlord of any damage caused to the Demised Premises by fire or other casualty.

17.2 In the event that the Demised Premises are damaged or destroyed by fire or other casualty insurable under standard Special Form or similar property insurance and Landlord does not elect to terminate this lease as hereinafter provided, Landlord must proceed with reasonable diligence and at its sole cost and expense to rebuild and repair the Demised Premises. In the event (a) the building in which

the Demised Premises are located is destroyed or substantially damaged by a casualty not covered by Landlord’s insurance, or (b) such building is destroyed or rendered untenantable to an extent in excess of fifty percent of the first floor area by a casualty covered by landlord’s insurance, or (c) the holder of a mortgage, deed of trust or other lien on such building at the time of the casualty elects, pursuant to such mortgage, deed of trust or other lien, to require the use of all or part of Landlord’s insurance proceeds in satisfaction of all or part of the indebtedness secured by the mortgage, deed of trust or other lien, then Landlord may elect either to terminate this lease or to proceed to rebuild and repair the Demised Premises. Landlord must give written notice to Tenant of such election within sixty days after the occurrence of such casualty and, if it elects to rebuild and repair, must proceed to do so with reasonable diligence and at its sole cost and expense.

17.3 Landlord’s obligation to rebuild and repair under this Article 17 is in any event limited to restoring one of the following (as may be applicable): (a) if this lease does not include an attached exhibit describing Landlord’s initial construction responsibility (defined in such exhibit as “Landlord’s Work”), restoring the Demised Premises to substantially the condition in which the same existed immediately prior to such casualty, exclusive of any alterations, additions, improvements, fixtures and equipment installed by Tenant; or (b) rebuilding concrete floors, walls made of metal studs and drywall, a roof (but no ceiling), and Landlord’s Work, as described in an exhibit attached to this lease, to substantially the same condition in which the same existed immediately prior to the casualty. Tenant agrees that promptly after completion of such work by Landlord, Tenant will proceed with reasonable diligence and at Tenant’s sole cost and expense to restore, repair and replace all alterations, additions, improvements, fixtures, signs and equipment installed by Tenant, or, if an exhibit describing Tenant’s Work is attached hereto, all items of Tenant’s Work as described in such exhibit, as the case may be, and to re-commence business operations at the Demised Premises as soon as reasonably possible.

17.4 Tenant agrees that during any period of reconstruction or repair of the Demised Premises, it will continue the operation of its business within the Demised Premises to the extent practicable. During the period from the occurrence of the casualty until Landlord’s repairs are completed, the minimum guaranteed rental will be reduced to such extent as may be fair and reasonable under the circumstances; however, there will be no abatement of the other charges provided for herein.

17.5 Notwithstanding the above, should the Demised Premises be damaged by casualty to the extent it becomes uninhabitable and Landlord does not restore the Demised Premises to a habitable condition within two hundred seventy (270) days of the casualty, then Tenant may terminate this lease by written notice to Landlord delivered on or before the earlier of (i) thirty (30) days after the end of such two hundred seventy (270) day period or (ii) Landlord’s restoration of the Demised Premises to a habitable condition. Additionally, should the casualty occur in the last twelve (12) months of the lease term, then either Landlord or Tenant may terminate this lease by written notice to the other delivered on or before sixty (60) days after the occurrence of such casualty.

ARTICLE 18
EMINENT DOMAIN

18.1 In the event (a) thirty percent (30%) or more of the floor area of the Demised Premises or (b) fifty percent (50%) or more of the building in which the Demised Premises are located (whether or not the Demised Premises are affected) should be taken for any public or quasi-public use under any governmental law, ordinance or regulation or by right of eminent domain or by private purchase in lieu thereof, then Landlord may terminate this lease. Landlord must give written notice to Tenant of such termination within sixty (60) days after the occurrence of such taking. If this lease is so terminated, the rent will be abated during the unexpired portion of this lease, effective on the date physical possession is taken by the condemning authority.

18.2 If less than (a) thirty percent (30%) of the floor area of the Demised Premises or (b) less than fifty percent (50%) of the building in which the Demised Premises are located (whether or not the Demised Premises are affected) should be taken as aforesaid; or if this lease is not terminated pursuant to Section 18.1 above following a taking, then this lease will continue in effect following such taking, however, the minimum guaranteed rental payable hereunder during the unexpired portion of this lease will be reduced in proportion to the area taken, effective on the date physical possession is taken by the condemning authority. In such case, Landlord must make all necessary repairs or alterations to the remaining Demised Premises or, if an exhibit describing Landlord’s Work is attached to this lease, all necessary repairs within the scope of Landlord’s Work as described in such exhibit, as the case may be, required to make the remaining portions of the Demised Premises an architectural whole.

18.3 If any part of the Common Area should be taken as aforesaid, this lease will not terminate, nor will the rent payable hereunder be reduced, except that either Landlord or Tenant may terminate this lease if the size of the parking area remaining following such taking plus any additional

parking area provided by Landlord in reasonable proximity to the Project is less than seventy percent of the size of the parking area immediately prior to the taking. Any election to terminate this lease in accordance with this provision must be evidenced by written notice of termination delivered to the other party within thirty days after the date physical possession is taken by condemning authority.

18.4 All compensation awarded for any taking (or the proceeds of private sale in lieu thereof) of the Demised Premises or Common Area is the property of Landlord, and Tenant hereby assigns its interest in any such award to Landlord; provided, however, Landlord has no interest in any award made to Tenant for Tenant’s moving and relocation expenses or for the loss of Tenant’s fixtures and other tangible personal property if a separate award for such items is made to Tenant as long as such separate award does not reduce the amount of the award that would otherwise be awarded to Landlord.

ARTICLE 19
ASSIGNMENT AND SUBLETTING

19.1 Tenant is not permitted to assign or in any manner transfer this lease or any estate or interest therein, or sublet the Demised Premises or any part thereof, or grant any license, concession or other right of occupancy of any portion of the Demised Premises without the prior written consent of Landlord. Landlord agrees that it will not withhold consent in a wholly unreasonable and arbitrary manner (as further explained in Section 28.4 of this lease); however, in determining whether or not to grant its consent, Landlord is entitled to take into consideration factors such as (a) Landlord’s desired tenant mix; (b) the experience, reputation and financial condition of the proposed transferee; (c) whether Landlord is already in negotiation with such proposed transferee; (d) whether such proposed transferee is already an occupant of the Project; (e) whether such proposed transferee is a governmental agency; (f) whether such proposed transferee is incompatible with the character of occupancy of the Project; (g) whether such proposed transferee would subject the Demised Premises to a use which would: (i) involve increased personnel or wear upon the Project, (ii) conflict with the primary use of another tenant or violate any exclusive right granted to another tenant of the Project, (iii) require any addition to or modification of the Demised Premises or the Project in order to comply with building code or other governmental requirements, or (iv) involve a potential environmental risk or issue; and (h) and the then current market conditions (including market rentals). In addition, Landlord is entitled to charge Tenant a reasonable fee for processing Tenant’s request. Consent by Landlord to one or more assignments or sublettings does not operate as a waiver of Landlord’s rights as to any subsequent assignment and sublettings.

19.2 If Tenant is a corporation, partnership or other entity and if at any time during the term of this lease the person or persons who own a majority of either the outstanding voting rights or the outstanding ownership interests of Tenant at the time of the execution of this lease cease to own a majority of such voting rights or ownership interests or otherwise lose control (except as a result of transfers by devise or descent), then such loss or transfer of a majority of such voting rights or ownership interests or control is deemed to be an assignment of this lease by Tenant and, therefore, subject in all respects to the provisions of Section 19.1 above. The previous sentence does not apply, however, if at the time of the execution of this lease, Tenant is a corporation and the outstanding voting shares of capital stock of Tenant are listed on a recognized security exchange or over-the-counter market.

19.3 Any assignee or sublessee of an interest in and to this lease will be deemed, by acceptance of such assignment or sublease or by taking actual or constructive possession of the Demised Premises, to have assumed all of the obligations set forth in or arising under this lease. Such assumption will be effective as of the earlier of the date of such assignment or sublease or the date on which the assignee or sublessee obtains possession of the Demised Premises. If requested by Landlord, however, such assignee or sublessee shall additionally execute a commercially reasonable form of assumption agreement.

19.4 Notwithstanding any assignment or subletting, Tenant and any guarantor of Tenant’s obligations under this lease will at all times remain fully responsible and liable for the payment of the rent herein specified and for compliance with all of its other obligations under this lease (even if future assignments and sublettings occur subsequent to the assignment or subletting by Tenant, and regardless of whether or not Landlord’s approval has been obtained for such future assignments and sublettings). Moreover, in the event that the rental due and payable by a sublessee (or a combination of the rental payable under such sublease plus any bonus or other consideration therefor or incident thereto) exceeds the rental payable under this lease, or if with respect to a permitted assignment, permitted license or other transfer by Tenant permitted by Landlord, the consideration payable to Tenant by the assignee, licensee or other transferee exceeds the rental payable under this lease, then Tenant is bound and obligated to pay Landlord all such excess rental and other excess consideration within ten (10) days following receipt thereof by Tenant from such sublessee, assignee, licensee or other transferee, as the case may be [after first deducting therefrom (i) any reasonable costs incurred by Tenant for alterations or improvements

(including, but not limited to, third-party architectural and space planning costs) in the Demised Premises in connection with such assignment or subletting, and (ii) any real estate commissions and reasonable attorneys’ fees actually incurred by Tenant in connection with such assignment or subletting]. Finally, in the event of an assignment or subletting, it is understood and agreed that Tenant will receive all rentals paid to Tenant by an assignee or sublessee in trust for Landlord, to be forwarded immediately to Landlord without offset or reduction of any kind; and upon election by Landlord such assignee or sublessee must pay all rentals directly to Landlord as specified in Section 4.2 of this lease (to be applied as a credit and offset to Tenant’s rental obligation).

19.5 Tenant is not permitted to mortgage, pledge or otherwise encumber its interest in this lease or in the Demised Premises.

19.6 In the event of the transfer and assignment by Landlord of its interest in this lease and in the building containing the Demised Premises to a person expressly assuming Landlord’s obligations under this lease, Landlord will thereby be released from any further obligations hereunder, and Tenant agrees to look solely to such a successor-in-interest of the Landlord for performance of such obligations. Any security given by Tenant to secure performance of Tenant’s obligations hereunder may be assigned and transferred by Landlord to such successor-in-interest and Landlord will thereby be discharged of any further obligation relating thereto.

ARTICLE 20
SUBORDINATION; ATTORNMENT; ESTOPPELS

20.1 Tenant accepts this lease subject and subordinate to any mortgage, deed of trust or other lien presently existing or hereafter placed upon the Project or any portion of the Project which includes the Demised Premises, and to any renewals and extensions thereof. Tenant further agrees to attorn to any mortgagee, ground lessor, trustee under a deed of trust, or purchaser at a foreclosure sale or trustee’s sale as landlord under this lease (as the case may be, “Mortgagee”); provided, however, as part of such attornment, Tenant agrees for the benefit of any Mortgagee that if such Mortgagee succeeds to Landlord’s (or any successor’s) interest in this lease, such Mortgagee will have no liability for any act or omission of any prior landlord under this lease that occurs prior to the date such Mortgagee succeeds to Landlord’s (or any successor’s) interest in this lease nor any liability for claims, offsets, or defenses that Tenant might have had against Landlord (or any successor). Tenant agrees that any Mortgagee has the right at any time to subordinate its mortgage, deed of trust or other lien to this lease; provided, however, whether or not that this lease may be (or be made to be) superior to a mortgage, deed of trust or other lien, the Mortgagee will not be liable for prepaid rentals, security deposits and claims accruing during Landlord’s ownership; further provided that the provisions of a mortgage, deed of trust or other lien relative to the rights of the Mortgagee with respect to proceeds arising from an eminent domain taking (including a voluntary conveyance by Landlord) and provisions relative to proceeds arising from insurance payable by reason of damage to or destruction of the Demised Premises will be prior and superior to any contrary provisions contained in this instrument with respect to the payment or usage thereof. Landlord is hereby irrevocably vested with full power and authority to subordinate this lease to any mortgage, deed of trust or other lien hereafter placed upon the Demised Premises or the Project as a whole, and Tenant agrees upon demand to execute such further instruments subordinating this lease (or evidencing the subordination of this lease pursuant to the terms hereof) as Landlord may request; provided, however, that upon Tenant’s written request and notice to Landlord, Landlord must use good faith efforts to obtain from any such Mortgagee a written agreement that after a foreclosure (or a deed in lieu of foreclosure) the rights of Tenant will remain in full force and effect during the term of this lease, except as otherwise provided in this Section 20.1 and as may be required by Mortgagee, so long as Tenant recognizes and performs all of the covenants and conditions of this lease. Tenant agrees to execute a non-disturbance, attornment and subordination agreement in the form attached hereto as Exhibit “H”, if requested by Landlord, and Tenant further agrees that the non-disturbance, attornment and subordination agreement attached hereto as Exhibit “H” constitutes a written agreement meeting the requirements of the agreement which Tenant may request that Landlord obtain, as described above.

20.2 At any time when the holder of an outstanding mortgage, deed of trust or other lien covering Landlord’s interest in the Demised Premises has given Tenant written notice of its interest in this lease (or if Tenant otherwise receives written notice from Landlord of such holder’s interest in this lease), Tenant (i) may not exercise any remedies for default by Landlord hereunder unless and until the holder of the indebtedness secured by such mortgage, deed of trust or other lien has received written notice of such default and a reasonable time (not less than 30 days) has thereafter elapsed without the default having been cured, (ii) shall not prepay any rent or other amounts due under this lease more than thirty (30) days in advance except as expressly permitted by this lease, and (iii) shall not -- without such Mortgagee’s prior consent -- enter into any surrender or cancellation of this lease or any modification or amendment that decreases the lease term or decreases the amount of minimum guaranteed rent or other charges due under this lease.

20.3 Tenant agrees that it will from time to time upon request by Landlord execute and deliver to Landlord a written statement addressed to Landlord (or to a party or parties designated by Landlord), which statement must identify Tenant and this lease, must certify that this lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as so modified), must confirm that Landlord is not in default as to any obligations of Landlord under this lease (or if Landlord is in default, specifying any default), must confirm Tenant’s agreements contained above in this Article 20, and must contain such other information or confirmations as Landlord may reasonably require. Tenant acknowledges that the form of estoppel certificate attached to this lease as Exhibit “G” is an example of the type of written statement described in this Section 20.3, and Tenant agrees to execute and deliver to Landlord such form of written statement (with the appropriate blanks completed) as required from time to time by this Section 20.3. Landlord is hereby irrevocably appointed and authorized as the agent and attorney-in-fact of Tenant to execute and deliver any such written statement on Tenant’s behalf if Tenant fails to do so within seven (7) days after the delivery of a written request from Landlord to Tenant.

ARTICLE 21
PARKING

21.1 Landlord and Tenant acknowledge the importance of providing Project customers with sufficient ground level parking space reasonably close to the stores and offices they wish to visit. Accordingly, Tenant and Tenant’s employees may park only in the areas designated by Landlord, from time to time, as employee parking in the Project. Without limiting the terms of the foregoing sentence, Tenant acknowledges and agrees that neither Tenant nor its employees will use any on-street parking for the Project, it being understood and agreed that such parking is for the office and retail customers of the Project. With respect to any elevated parking garages located on the Project or adjacent land (collectively, the “Parking Garages”), Tenant agrees that Tenant shall (i) restrict its employees from parking in parking spaces located on the first (1^st) and second (2^nd) floors of the Parking Garages and (ii) comply with the City of Southlake’s rules and regulations governing the Parking Garages, as amended from time to time. Tenant must furnish Landlord with a complete list of license numbers of all automobiles operated by Tenant, its employees, its subtenants, its licensees and its concessionaires, and their employees; Tenant must furnish such list to Landlord within five (5) days after the Commencement Date of this lease, and Tenant must notify Landlord of any changes to such list within five (5) days after such changes occur. Tenant agrees that if any automobile or other vehicle owned by Tenant or any of its employees, its subtenants, its licensees or its concessionaires, or their employees, at any time are parked in any part of the Project other than the parking areas specified above as being permitted parking areas for Tenant and its employees, Tenant must pay to Landlord as additional rent upon demand an amount equal to the daily rate or charge for such parking as established by Landlord (currently, $10.00 for the first violation and $50.00 for each violation thereafter) from time to time for each day, or part thereof, that such automobile or other vehicle is so parked. In addition, Tenant must immediately remove the vehicle to parking areas specified above as being permitted parking areas for Tenant and its employees. If Tenant fails to respond immediately, Landlord has the right to take either such action; and Tenant hereby indemnifies Landlord and agrees to hold Landlord harmless from all removal and parking expenses and liabilities which may arise out of Landlord’s action. In addition to the rights granted by the preceding sentences, any violation of this Section, whether by Tenant or by one of Tenant’s employees, entitles Landlord to exercise at its option any one or more of the remedies which are authorized in Article 22 of this Lease.

ARTICLE 22
DEFAULT BY TENANT AND REMEDIES


	22.1 The following events will be deemed to be events of default by Tenant under this lease:

	(a) Tenant fails to pay any installment of rental or any other obligation under this lease involving the payment of money and such failure continues for a period of ten (10) days after written notice thereof to Tenant; provided, however, that for each calendar year during which Landlord has already given Tenant one written notice of the failure to pay an installment of rental or other obligation under this lease involving the payment of money, no further notice will be required (i.e., the event of default will automatically occur on the tenth day after the date upon which the rental was due).

	(b) Tenant fails to comply with any provision of this lease, other than as described in Subsection (a) above, and following notice thereof to Tenant (i) does not promptly commence and diligently pursue the cure of such failure to completion, or (ii) fails to cure such failure within fifteen (15) days after such notice to Tenant, or (iii) cures that particular failure but again fails to comply with the same provision of this lease within three (3) months after such notice to Tenant.


	(c) Tenant or any guarantor of Tenant’s obligations under this lease becomes insolvent, or makes a transfer in fraud of creditors, or makes an assignment for the benefit of creditors.

	(d) Tenant or any guarantor of Tenant’s obligations under this lease files a petition under any section or chapter of the federal Bankruptcy Code, as amended, or under any similar law or statute of the United States or any state thereof; or Tenant or any guarantor of Tenant’s obligations under this lease is adjudged bankrupt or insolvent in proceedings filed against Tenant or any guarantor of Tenant’s obligations under this lease thereunder.

	(e) A receiver or Trustee is appointed for the Demised Premises or for all or substantially all of the assets of Tenant or any guarantor of Tenant’s obligation under this lease.

	(f) Tenant deserts or vacates or commences to desert or vacate the Demised Premises or any substantial portion of the Demised Premises or at any time prior to the last month of the lease term removes or attempts to remove, without the prior written consent of Landlord, all or a substantial amount of Tenant’s goods, wares, equipment, fixtures, furniture, or other personal property.

	(g) Tenant does or permits to be done anything which creates a lien upon the Demised Premises or upon all or any part of the Project.

	(h) Tenant makes an anticipatory breach of this lease. The term “anticipatory breach” means either (a) Tenant’s repudiation of this lease in writing, or (b) the combination of (i) Tenant’s desertion or vacation or commencement of desertion or vacation of the Demised Premises or removal of all or a substantial amount of Tenant’s goods, wares, equipment, fixtures, furniture, or other personal property from the Demised Premises, and (ii) Tenant’s failure to pay any minimum guaranteed rent or other amounts due under this lease as and when they are due and payable.

22.2 Upon the occurrence of any such events of default, Landlord has the option to pursue any one or more of the following remedies:

(a) Without any further notice or demand whatsoever, Landlord may enter upon and take possession of the Demised Premises and expel or remove Tenant and any other person who may be occupying the Demised Premises or any part of the Demised Premises, by force, if necessary (except to the extent prohibited by Texas law), without being liable for prosecution or any claim for damages for such action. Such expulsion and removal by Landlord cannot be deemed a termination or forfeiture of this lease or acceptance of Tenant’s surrender of the Demised Premises unless Landlord expressly notifies Tenant in writing that Landlord is terminating or forfeiting this lease or accepting Tenant’s surrender of the Demised Premises. If Landlord expels or removes Tenant and any other person from the Demised Premises without terminating or forfeiting this lease or accepting surrender of the Demised Premises, Landlord must attempt to mitigate its damages. In any situation in which Landlord is attempting to mitigate its damages, Landlord will conclusively be deemed to have done so if Landlord lists the Demised Premises with a real estate broker or agent (which may be affiliated with Landlord) and considers all written proposals for such space made by such broker or agent; provided, however, that in no event will Landlord (i) be obligated to travel outside a radius of thirty (30) miles from its principal office in order to meet with a prospective tenant, (ii) be obligated to expend monies for finish-out requested by a prospective tenant unless Landlord, in its sole discretion, believes that the excess rent Landlord will receive and the credit of the prospective tenant support such a decision, (iii) be required to give preference to the Demised Premises over other spaces in the Project, (iv) be required to agree to allow an existing tenant of the Project to move from their existing space to all or any of the Demised Premises, or (v) be required to accept any lease proposal which Landlord, in its sole discretion, deems unacceptable. In attempting to relet or actually reletting the Demised Premises, Landlord will be free to enter into a direct lease with the proposed replacement tenant and will not be acting as Tenant’s agent, although the proceeds Landlord actually receives for any time period will be credited against Tenant’s obligations for the same time period. Tenant will not be entitled to any additional credit (for example, if Landlord receives amounts during a particular time period in excess of Tenant’s obligations for the same time period, Landlord will not be required to credit such excess against Tenant’s obligations for any other time period). Until Landlord is able, through such efforts, to relet the Demised Premises, Tenant must pay to Landlord, on or before the first day of each calendar month, in advance, the monthly rentals and other charges provided in this lease. At such time, if any, as Landlord relets the Demised Premises, Tenant must pay to Landlord on the 20th day of each calendar month the difference between the monthly rentals and other charges provided in


	this lease for such calendar month and the amount actually collected by Landlord for such month from the occupant to whom Landlord has re-let the Demised Premises. If it is necessary for Landlord to bring suit in order to collect any deficiency, Landlord has 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 cannot prejudice in any way the right of Landlord to bring a similar action for any subsequent deficiency or deficiencies.

	(b) Without any further notice or demand whatsoever, Landlord may terminate this lease by written notice to Tenant, in which event Tenant must immediately surrender the Demised Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which Landlord may have for possession or arrearages in rent (including any late charge or interest which may have accrued pursuant to Section 4.3 of this lease), enter upon and take possession of the Demised Premises and expel or remove Tenant and any other person who may be occupying the Demised Premises or any part thereof, by force, if necessary (except to the extent prohibited by Texas law), without being liable for prosecution or any claim for damages therefor. In such event and to the fullest extent permitted by applicable law, Tenant hereby agrees to pay the difference between the total of all monthly rentals and other charges provided in this lease for the remainder of the term and the reasonable rental value of the Demised Premises for such period, such difference to be discounted to present value at a rate equal to the rate of interest which is allowed by law in the State of Texas when the parties to a contract have not agreed on any particular rate of interest (or, in the absence of such law, at the rate of six percent per annum).

	(c) Without any further notice or demand whatsoever, Landlord may pursue the following remedies for the following specific defaults:


	(i) In the event of any default described in Subsection 22.1(b) of this lease, Landlord has the right to enter upon the Demised Premises, by force, if necessary (except to the extent prohibited by Texas law), without being liable for prosecution or any claim for damages therefor, and do whatever Tenant is obligated to do under the terms of this lease; and Tenant agrees to reimburse Landlord on demand for any expenses which Landlord may incur in thus effecting compliance with Tenant’s obligations under this lease, and Tenant further agrees that Landlord cannot be liable for any damages resulting to the Tenant from such action.

	(ii) In the event of any default described in Subsection 22.1(g) of this lease, Landlord may pay or bond around such lien, whether or not contested by Tenant; and in such event Tenant agrees to reimburse Landlord on demand for all costs and expenses incurred in connection with any such action, with Tenant further agreeing that Landlord is in no event liable for any damages or claims resulting from such action.

If Landlord elects to exercise the remedy prescribed in Subsection 22.2(a) or 22.2(c) above, this election in no way prejudices Landlord’s right at any time thereafter to cancel such election in favor of the remedy prescribed in Subsection 22.2(b) above, provided that at the time of such cancellation Tenant is still in default. Pursuit of any of the above remedies does not preclude pursuit of any other remedies prescribed in other sections of this lease and any other remedies provided by law or in equity. Forbearance by Landlord to enforce one or more of the remedies herein provided upon an event of default cannot be deemed or construed to constitute a waiver of such default. No agreement to accept a surrender of the Demised Premises and no act or omission by Landlord or Landlord’s agent during the term of this lease will constitute an acceptance of surrender of the Demised Premises unless made in writing and signed by Landlord. Similarly, no reentry or taking of possession of the Demised Premises by Landlord will constitute an election by Landlord to terminate this lease unless a written notice of such intention, signed by Landlord, is given to Tenant.

22.3 It is expressly agreed that in determining “the monthly rentals and other charges provided in this lease,” as that term is used throughout Subsections 22.2(b) and 22.2(c)(ii) above, there will be added to the minimum guaranteed rental (as specified in Sections 1.1(m) of this lease) a sum equal to the charges for maintenance of the Common Area (as specified in Section 7.4 of this lease), the payments for taxes, charges and insurance (as specified in Article 6 of this lease). It is further understood and agreed that the phrase “without any further notice or demand whatsoever” incorporates Tenant’s full, final, and complete waiver of all demands and notices permitted or required by applicable law, whether statutory or common law, and in equity (including, without limitation, any statutory requirement of prior written notice for filing eviction or damage suits for nonpayment of rent), it being understood and agreed that if any notice is appropriate, it is provided for in Section 22.1.

22.4 It is further agreed that, in addition to payments required pursuant to Section 22.2 above, Tenant must compensate Landlord for all expenses incurred by Landlord in repossession (including, among other expenses, any increase in insurance premiums caused by the vacancy of the Demised Premises), all expenses incurred by Landlord in reletting (including, among other expenses, repairs, remodeling, replacements, advertisements and brokerage fees), all concessions granted to a new tenant upon reletting (including, among other concessions, renewal options), all losses incurred by Landlord as a direct or indirect result of Tenant’s default (including, among other losses, any adverse reaction by Landlord’s Mortgagee or by other tenants or potential tenants of the Project) and a reasonable allowance for Landlord’s administrative efforts, salaries and overhead attributable directly or indirectly to Tenant’s default and Landlord’s pursuing the rights and remedies provided herein and under applicable law.

22.5 Landlord may restrain or enjoin any breach or threatened breach of any covenant, duty or obligation of Tenant herein contained without the necessity of proving the inadequacy of any legal remedy or irreparable harm. The remedies of Landlord hereunder are deemed cumulative and not exclusive of each other.

22.6 If on account of any breach or default by Tenant in its obligations hereunder, Landlord employs an attorney to present, enforce or defend any of Landlord’s rights or remedies hereunder, Tenant agrees to pay any reasonable attorney’s fees and court costs incurred by Landlord in such connection.

22.7 In the event that Tenant fails to pay any rent or other amounts due under this lease, or in the event any one or more provisions of this Article 22 authorizes Landlord to enter the Demised Premises, Landlord is entitled and is hereby authorized, without any notice to Tenant, to enter upon the Demised Premises by use of a duplicate key, a master key, a locksmith’s entry procedures or any other means not involving personal confrontation, and to alter or change the door locks on all entry doors of the Demised Premises, thereby permanently excluding Tenant. In such event Landlord will not be obligated to place any written notice on the Demised Premises explaining Landlord’s action; moreover, if a reason for Landlord’s action is the failure of Tenant to pay any one or more rentals when due pursuant to this lease, Landlord will not be required to provide the new key (if any) to Tenant until and unless all rental defaults of Tenant have been fully cured.

22.8 Tenant acknowledges its obligation to deposit with Landlord the sum stated in Section 1.1(o) above, to be held by Landlord without interest as security for the performance by Tenant of Tenant’s covenants and obligations under this lease. Tenant agrees that such deposit may be co-mingled with Landlord’s other funds and is not an advance payment of rental or a measure of Landlord’s damages in case of default by Tenant. Upon the occurrence of any event of default by Tenant, Landlord may, from time to time, without prejudice to any other remedy provided herein or provided by law, use such fund to the extent necessary to make good any arrears of rentals and any other damage, injury, expense or liability caused to Landlord by such event of default, and Tenant must pay to Landlord on demand the amount so applied in order to restore the security deposit to its original amount. If Tenant is not then in default hereunder, any remaining balance of such deposit will be returned by Landlord to Tenant upon termination of this lease (subject to the provisions of Section 19.6 above).

22.9 In the event of any default described in Subsection (d) of Section 22.1 of this lease, any assumption and assignment must conform with the requirements of the Bankruptcy Code which provides, in part, that the Landlord must be provided with adequate assurance (i) of the source of rent and other consideration due under this lease; (ii) that the financial condition and operating performance of any proposed assignee and its guarantors, if any, is similar to the financial condition and operating performance of Tenant and its guarantors, if any, as of the date of execution of this lease; (iii) that any assumption or assignment is subject to all of the provisions of this lease (including, but not limited to, restrictions as to use) and will not breach any such provision contained in any other lease, financing agreement or other agreement relating to the Project; and (iv) that any assumption or assignment will not disrupt any tenant mix or balance in the Project.

(a) In order to provide Landlord with the assurance contemplated by the Bankruptcy Code, Tenant must fulfill the following obligations, in addition to any other reasonable obligations that Landlord may require, before any assumption of this lease is effective: (i) all defaults under Subsection (a) of Section 22.1 of this lease must be cured within ten (10) days after the date of assumption; (ii) all other defaults under Section 22.1 of this lease other than under Subsection (d) of Section 22.1 must be cured within fifteen (15) days after the date of assumption; (iii) 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 (iv) Landlord must receive within ten (10) days after the date of assumption a security deposit in the amount of six (6) months minimum guaranteed rent (using the minimum guaranteed rent rate in effect for the first full month immediately following the assumption) and an advance prepayment of minimum guaranteed rent in the amount of three (3) months minimum


	guaranteed rent (using the minimum guaranteed rent in effect for the first full month immediately following the assumption), both sums to be held by Landlord in accordance with Section 22.8 above and deemed to be rent under this lease for the purposes of the Bankruptcy Code as amended and from time to time in effect.

	(b) 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 (i) 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 (ii) 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 this lease.

22.10 In addition to any and all other remedies available to Landlord herein, Landlord shall at any and/or all times have a right of offset against any sums of money due from Landlord to Tenant for the payment of any and all rentals and other sums of money becoming due hereunder from Tenant, and for the payment of any and all damages or loss which Landlord may suffer by reason of the breach by Tenant of any covenant, agreement or condition contained herein.

ARTICLE 23
LANDLORD’S CONTRACTUAL SECURITY INTEREST

23.1 In addition to the statutory Landlord’s lien, Landlord has at all times a valid security interest to secure payment of all rentals and other sums of money becoming due hereunder from Tenant, and to secure payment of any damages or loss which Landlord may suffer by reason of the breach by Tenant of any covenant, agreement or condition contained herein, upon all goods, wares, equipment, fixtures, furniture, improvements and other personal property of Tenant presently, or which may hereafter be, situated on the Demised Premises, and all proceeds therefrom, and such property must not be removed without the consent of Landlord until all arrearages in rent as well as any and all other sums of money then due to Landlord or to become due to Landlord hereunder first have been paid and discharged and all the covenants, agreements and conditions hereof have been fully complied with and performed by Tenant. Upon the occurrence of an event of default by Tenant, Landlord may, in addition to any other remedies provided herein, enter upon the Demised Premises and take possession of any and all goods, wares, equipment, fixtures, furniture, improvements and other personal property of Tenant situated on the Demised Premises, without liability for trespass or conversion, and sell the same at public or private sale, with or without having such property at the sale, after giving Tenant reasonable notice of the time and place of any public sale or of the time after which any private sale is to be made, at which sale the Landlord or its assigns may purchase unless otherwise prohibited by law. Unless otherwise provided by law, and without intending to exclude any other manner of giving Tenant reasonable notice, the requirement of reasonable notice will be met if such notice is given in the manner prescribed in this lease at least five days before the time of sale. Any sale made pursuant to the provisions of this paragraph will be deemed to have been a public sale conducted in a commercially reasonable manner if held in the above-described Demised Premises or where the property is located after the time, place and method of sale and a general description of the types of property to be sold have been advertised in a daily newspaper published in the county in which the property is located, for five consecutive days before the date of the sale. The proceeds from any such disposition, less any and all expenses connected with the taking of possession, holding and selling of the property (including reasonable attorney’s fees and legal expenses), will be applied as a credit against the indebtedness secured by the security interest granted in this paragraph. Any surplus will be paid to Tenant or as otherwise required by law; the Tenant must pay any deficiencies forthwith. Tenant hereby agrees that a carbon, photographic or other reproduction of this lease is sufficient to constitute a financing statement. Tenant nevertheless agrees that upon request by Landlord, Tenant will execute and deliver to Landlord a financing statement in form sufficient to perfect the security interest of Landlord in the aforementioned property and proceeds thereof under the provisions of the Uniform Commercial Code (or corresponding state statute or statutes) in force in the state in which the property is located, as well as any other state the laws of which Landlord may at any time consider to be applicable; moreover, Landlord is hereby irrevocably vested with a power of attorney from Tenant to execute any and all such financing statements on behalf of Tenant.

23.2 Landlord agrees to subordinate Landlord’s foregoing contractual lien rights and any statutory or constitutional lien rights with respect to Tenant’s property to a third party providing furniture, fixtures and/or equipment for Tenant’s use in the Demised Premises during the term of this lease (or providing funds for the acquisition of same) provided that (i) there is no uncured event of default by

Tenant under this lease at the time of such subordination, (ii) such subordination shall be limited to the specified items, amounts, and times stated in the subordinating instrument, and (iii) such subordination shall be in writing, signed by all parties, and in the form attached hereto as Exhibit “I” or another form acceptable to Landlord.

ARTICLE 24
HOLDING OVER; SURRENDER OF PREMISES

24.1 In the event Tenant remains in possession of the Demised Premises after the expiration of this lease and without the execution of a new lease, it will be deemed to be occupying the Demised Premises as a tenant at sufferance at a daily rental equal to the rental herein provided plus fifty percent of such amount, pro-rated on a daily basis, otherwise subject to all the conditions, provisions and obligations of this lease insofar as the same are applicable to a tenancy at sufferance. In addition to the foregoing, Tenant shall be and remain liable to Landlord for, and shall protect Landlord from and indemnify and defend Landlord against, all losses and damages, including any claims made by any succeeding tenant resulting from such failure of Tenant to vacate, and any consequential damages that Landlord suffers from the holdover.

24.2 At the end of the term or the termination of Tenant’s right to possess the Demised Premises, Tenant must (1) deliver to Landlord the Demised Premises with all improvements located thereon in good repair and condition, reasonable wear and tear (subject however to Tenant’s maintenance obligations) excepted, (2) deliver to Landlord all keys to the Demised Premises, and (3) remove all signage placed by or on behalf of Tenant on the Demised Premises. All fixtures, alterations, additions, and improvements (whether temporary or permanent) are Landlord’s property and must remain on the Demised Premises except as provided in the next two sentences. Provided that Tenant has performed all of its obligations hereunder, Tenant may remove all unattached trade fixtures, furniture, and personal property placed in the Demised Premises by Tenant (but Tenant cannot remove any such item which was paid for, in whole or in part, by Landlord). Additionally, Tenant must remove such alterations, additions, improvements, fixtures, equipment, wiring, furniture, and other property as Landlord may request, provided such request is made within six months after the end of the term. All items not so removed will, at the option of Landlord, be deemed abandoned by Tenant and may be appropriated, sold, stored, destroyed, or otherwise disposed of by Landlord without notice to Tenant and without any obligation to account for such items and Tenant must pay for the costs incurred by Landlord in connection therewith. Any such disposition cannot be considered a strict foreclosure or other exercise of Landlord’s rights in respect of the security interest granted under Article 23. All work required of Tenant under this Section 24.2 must be coordinated with Landlord and be done in a good and workmanlike manner, in accordance with all laws, and so as not to damage the Office Building or the Project. Tenant must, at its expense, repair all damage caused by any work performed by Tenant under this Section 24.2.

ARTICLE 25
NOTICES

25.1 Wherever any notice is required or permitted hereunder, such notice must be in writing. Any notice or document required or permitted to be delivered hereunder will be deemed to be delivered when actually received by the designated addressee or, if earlier and regardless of whether actually received or not, when deposited in the United States mail, postage prepaid, certified mail, return receipt requested, addressed to the parties hereto at the respective addresses set out in Section 1.1 above (or at Landlord’s option, to Tenant at the Demised Premises), or such other addresses as they have theretofore specified by written notice.

25.2 If and when included within the term “Landlord” as used in this instrument there are more than one person, firm or corporation, all must jointly arrange among themselves for their joint execution of such notice specifying some individual at some specific address for the receipt of notices and payments to the Landlord; if and when included within the term “Tenant” as used in this instrument there are more than one person, firm or corporation, all must jointly arrange among themselves for their joint execution of such a notice specifying some individual at some specific address for the receipt of notices and payments to Tenant. All parties included within the terms “Landlord” and “Tenant,” respectively, are bound by notices and payments given in accordance with the provisions of this Article to the same effect as if each had received such notice or payment. In addition, Tenant agrees that notices to Tenant may be given by Landlord’s attorney, property manager or other agent.

ARTICLE 26
AMERICANS WITH DISABILITIES ACT

26.1 Landlord represents that the Common Area was (or if not yet constructed, will be) constructed in accordance with the requirements of the Americans With Disabilities Act of 1990, as amended from time to time, and related state and municipal laws and regulations (collectively, the

“ADA”) as it existed at the time Landlord constructed the Project. However, Landlord’s sole obligation and responsibility in the event such representation is not true is to cause the Common Area to comply with the requirements, as such requirements have been modified or limited. If there are any changes to the ADA which require changes to the Common Area, Landlord will improve the Common Area of the Project in order to comply with the ADA. All costs incurred by Landlord complying with the terms of the immediately preceding sentence may be included as Common Area expenses pursuant to and in accordance with the terms of Section 7.4 of this lease.

26.2 Tenant is responsible for compliance with the ADA in all matters regarding both the configuration of the Demised Premises (the interior as well as all public and/or employee door entrances) and Tenant’s improvement or alteration of or business operations at the Demised Premises.

ARTICLE 27
REGULATIONS

27.1 Landlord and Tenant acknowledge that there are in effect federal, state, county and municipal laws, orders, rules, directives and regulations (collectively referred to hereinafter as the “Regulations”) and that additional Regulations may hereafter be enacted or go into effect, relating to or affecting the Demised Premises or the Project, and concerning the impact on the environment of construction, land use, maintenance and operation of structures, toxic or otherwise hazardous substances, and conduct of business. Subject to the express rights granted to Tenant under the terms of this lease, Tenant will not cause, or permit to be caused, any act or practice, by negligence, omission or otherwise, that would adversely affect the environment, or do anything or permit anything to be done that would violate any of the Regulations. Moreover, Tenant has no claim against Landlord by reason of any changes Landlord may make in the Project or the Demised Premises pursuant to the Regulations or any charges imposed upon Tenant, Tenant’s customers or other invitees pursuant to same.

27.2 If, by reason of any Regulations, the payment to, or collection by, Landlord of any rental or other charge (collectively referred to hereinafter as “Lease Payments”) payable by Tenant to Landlord pursuant to the provisions of this lease is in excess of the amount (the “Maximum Charge”) permitted thereof by the Regulations, then Tenant, during the period (the “Freeze Period”) when the Regulations are in force and effect will not be required to pay, nor will Landlord be permitted to collect, any sum in excess of the Maximum Charge. Upon the earlier of (i) the expiration of the Freeze Period, or (ii) the issuance of a final order or judgment of a court of competent jurisdiction declaring the Regulations to be invalid or not applicable to the provisions of this lease, Tenant, to the extent not then proscribed by law, and commencing with the first day of the month immediately following, must pay to Landlord as additional rental, in equal monthly installments during the balance of the term of this lease, a sum equal to the cumulative difference between the Maximum Charges and the Lease Payments during the Freeze Period. If any provisions of this section, or the application thereof, are to any extent declared to be invalid and unenforceable, the same will not be deemed to affect any of the other provisions of this section or of this lease, all of which will be deemed valid and enforceable to the fullest extent permitted by law.

ARTICLE 28
MISCELLANEOUS

28.1 Nothing in this lease can be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent or of partnership or of joint venture between the parties hereto, it being understood and agreed that neither the method of computation of rent, nor any other provision contained herein, nor any acts of the parties hereto, will be deemed to create any relationship between the parties hereto other than the relationship of landlord and tenant.

28.2 Tenant must not for any reason withhold or reduce Tenant’s required payments of rentals and other charges provided in this lease, it being agreed that the obligations of Landlord under this lease are independent of Tenant’s obligations except as may be otherwise expressly provided herein. The immediately preceding sentence cannot be deemed to deny Tenant the ability of pursuing all rights granted it under this lease or at law; however, as contemplated in Rule 174(b) of the Texas Rules of Civil Procedure (as such may be amended from time to time), at the direction of Landlord, Tenant’s claims in this regard will be litigated in proceedings different from any litigation involving rental claims or other claims by Landlord against Tenant (i.e., each party may proceed to a separate judgment without consideration, counterclaim or offset as to the claims asserted by the other party). Tenant hereby waives and surrenders, for itself and for all persons or entities claiming by, through, and under Tenant (including creditors of all kinds), any rights, privileges, and liens set out under Section 91.004 and 93.003 of the Texas Property Code (as amended), and Tenant exempts Landlord from any duty or liability thereunder.

28.3 The liability of Landlord to Tenant for any default by Landlord under the terms of this lease will be limited to the proceeds of sale on execution of the interest of Landlord in the Demised

Premises; and neither Landlord nor any of Landlord’s agents, employees, representatives, officers, directors, or partners will be personally liable for any deficiency, except that Landlord will, subject to the provisions of Section 19.6 hereof, remain personally liable to account to Tenant for any security deposit under this lease. This clause cannot be deemed to limit or deny any remedies which Tenant may have in the event of default by Landlord hereunder which do not involve the personal liability of Landlord.

28.4 In all circumstances under this lease where the prior consent of one party (the “consenting party”), whether it be Landlord or Tenant, is required before the other party (the “requesting party”) is authorized to take any particular type of action, such party must not withhold such consent in a wholly unreasonable and arbitrary manner; however, the requesting party agrees that its exclusive remedy if it believes that consent has been withheld improperly (including, but not limited to, consent required from Landlord pursuant to Section 9.2 or Section 19.1) is to institute litigation either for a declaratory judgment or for a mandatory injunction requiring that such consent be given (with the requesting party hereby waiving any claim for damages, attorneys fees or any other remedy by reason thereof unless the consenting party refuses to comply with a court order or judgment requiring it to grant its consent).

28.5 One or more waivers of any covenant, term or condition of this lease by either party cannot be construed as a waiver of a subsequent breach of the same covenant, term or condition. The consent or approval by either party to or of any act by the other party requiring such consent or approval cannot be deemed to waive or render unnecessary consent to or approval of any subsequent similar act.

28.6 Whenever a period of time is herein prescribed for action to be taken by Landlord, Landlord will not be liable or responsible for, and there will be excluded from the computation of any such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations or restrictions or any other causes of any kind whatsoever which are beyond the reasonable control of Landlord.

28.7 If any provision of this lease is held to be invalid or unenforceable, the validity and enforceability of the remaining provisions of this lease will not be affected thereby.

28.8 The laws of the State of Texas govern the interpretation, validity, performance and enforcement of this lease. Venue for any action under this lease will lie exclusively in Tarrant County, Texas.

28.9 The captions used herein are for convenience only and do not limit or amplify the provisions hereof.

28.10 Whenever herein the singular number is used, the same includes the plural, and words of any gender include each other gender, as the context so requires.

28.11 The terms, provisions and covenants contained in this lease apply to, inure to the benefit of and bind the parties hereto and their respective heirs, successors in interest and legal representatives except as otherwise herein expressly provided.

28.12 This lease contains the entire agreement between the parties, and no rights are created in favor of either party other than as specified or expressly contemplated in this lease. No brochure, rendering information or correspondence will be deemed to be a part of this agreement unless specifically incorporated herein by reference. In addition, no agreement will be effective to change, modify or terminate this lease in whole or in part unless such is in writing and duly signed by the party against whom enforcement of such change, modification or termination is sought.

28.13 LANDLORD AND TENANT HEREBY ACKNOWLEDGE THAT THEY ARE NOT RELYING UPON ANY BROCHURE, RENDERING, INFORMATION, REPRESENTATION OR PROMISE OF THE OTHER, OR OF THE AGENT OR COOPERATING AGENT, EXCEPT AS MAY BE EXPRESSLY SET FORTH IN THIS LEASE.

28.14 Intentionally deleted.

28.15 If Tenant is a corporation or a partnership (general or limited), each person(s) signing this lease as an officer or partner of Tenant represents to Landlord that such person(s) is authorized to execute this lease without the necessity of obtaining any other signature of any other officer or partner, that the execution of this lease has been authorized by the board of directors of the corporation or by the partners of the partnership, as the case may be, and that this lease is fully binding on Tenant. Landlord reserves the right to request evidence of the approval of this lease and authorization of Tenant’s signatories to bind Tenant, which evidence shall be satisfactory in form and content to Landlord and Landlord’s counsel. Tenant hereby represents to Landlord that Tenant is duly incorporated if Tenant is a corporation or duly

formed if Tenant is a partnership, and in good standing in the State of Texas, and that Tenant is not a subsidiary of any other entity.

28.16 The submission of this lease for examination does not constitute a reservation of or option for the Demised Premises and shall vest no right in either party hereto. This lease shall become effective only after the full execution and delivery hereof by all of the parties hereto and upon the approval by the holder of any mortgage encumbering the Project.

28.17 This lease has been entered into by the undersigned parties after arms-length negotiation, with each party hereto hereby acknowledging that it and its counsel, if it so chooses, have had an opportunity to review this lease, and therefore, the parties agree that this lease shall not be construed against Landlord on the ground that Landlord’s representatives prepared this lease.

28.18 This lease may be executed in several counterparts, each of which will be deemed an original, and all of which will constitute but one and the same instrument.

28.19 Tenant shall not record this lease nor any memorandum or short form hereof, nor shall Tenant permit or cause same to be recorded, without Landlord’s prior written consent. Any attempted recordation of this lease or of a memorandum or short form hereof by Tenant without having first obtained Landlord’s written approval — which approval may be granted or denied in Landlord’s sole discretion — shall, at Landlord’s option, constitute an event of default by Tenant and, at Landlord’s option, may void this lease and Tenant’s rights hereunder.

28.20 This lease is for the sole benefit of Landlord and Tenant, and, other than any ground lessor under any ground lease and/or any holder of any mortgage, deed of trust or other lien encumbering the Project (or any part thereof), no third party shall be deemed a third party beneficiary hereof.

28.21 Tenant’s obligations under this lease (including, without limitation, each indemnity agreement and hold harmless agreement of Tenant contained herein) shall survive the expiration or earlier termination of this Lease.

28.22 IT IS AGREED BY AND BETWEEN LANDLORD AND TENANT THAT THE RESPECTIVE PARTIES HERETO SHALL, AND THEY HEREBY DO, WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER ON ANY MATTERS ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, AND/OR TENANT’S USE OR OCCUPANCY OF THE DEMISED PREMISES.

28.23 This lease consists of twenty-eight articles and Exhibits “A” through “J”. All exhibits, attachments and addenda referred to herein shall be considered a part hereof for all purposes with the same force and effect as if copied at verbatim herein. The exhibits and/or addenda attached hereto are listed as follows:


	Exhibit “A”		Site Plan of the Project
	Exhibit “A-l”		First Stage of Grand Avenue Project
	Exhibit “A-2”		Site Plan of Southlake Town Square Development
	Exhibit “B”		Demised Premises
	Exhibit “C”		Construction: Turnkey Improvements by Landlord
	Exhibit “C-1”		Depiction of Landlord’s Work
	Exhibit “D”		Prohibited and Restricted Uses
	Exhibit “E”		Relinquishment of Lien Rights
	Exhibit “F”		Sign Criteria
	Exhibit “G”		Tenant Estoppel Certificate
	Exhibit “H”		Nondisturbance, Attornment and Subordination Agreement
	Exhibit “I”		Landlord Subordination
	Exhibit “J”		Communications Antenna

(signature blocks on following page)

EXECUTED as of the latest date accompanying a signature by Landlord or Tenant below.


	LANDLORD:

	SLTS GRAND AVENUE, L.P.,
ATTEST or WITNESS :	a Texas limited partnership

	By:	SLTS Grand Avenue Genpar, L.L.C.,
		a Texas limited liability company,
		its general partner

		By:	Cooper & Stebbins, L.P.,
			sole member

			By:	CS Town Centres, LLC,
				general partner

				By:

					Brian R. Stebbins, Member

	Date of Signature: May 10, 2006

	Landlord’s Taxpayer I.D. No.: 20-1394380

	TENANT:

	QUALITY SYSTEMS INC.,
	a California corporation, d/b/a QSI, Inc.

ATTEST or WITNESS:

	By:

	Name: Patrick Clive
	Title: Executive VP

	Date of Signature: 5-3-06

	Taxpayer I.D. No.: 95-2888568

EXHIBIT “A”

SITE PLAN OF THE PROJECT

THIS SITE PLAN IS PRESENTED SOLELY FOR THE PURPOSE OF IDENTIFYING THE APPROXIMATE LOCATION AND SIZE OF THE DEMISED PREMISES. BUILDING SIZES, SITE DIMENSIONS, ACCESS AND PARKING AREAS, EXISTING TENANT LOCATIONS AND IDENTITIES ARE SUBJECT TO CHANGE AT THE LANDLORD’S DISCRETION, EXCEPT AS OTHERWISE EXPRESSLY RESTRICTED IN THE TEXT OF THE LEASE. THE PROJECT INCLUDES LAND THAT IS OWNED (OR WILL BE OWNED) BY LANDLORD AND ITS AFFILIATES, BUT THE PROJECT WILL BE OPERATED AS A UNIFIED WHOLE.

EXHIBIT “B”

DEMISED PREMISES

EXHIBIT “C”
CONSTRUCTION: TURNKEY IMPROVEMENTS BY LANDLORD

ARTICLE 1
GENERAL

A. Subject to the provisions below and the conditions in the Lease, Landlord agrees that it will proceed to construct (or, to the extent already partially constructed, will complete) an office unit upon the Demised Premises in substantial compliance with the description of Landlord’s Work in Articles III and V below and in Exhibit “C-1”; provided, however, Landlord’s total cost to construct Landlord’s Work (including all space planning, design services, and construction manager fees relating to Landlord’s Work) will not exceed Eighty-Seven Thousand Eight Hundred Thirty-Three and No/100 Dollars ($87,833.00) (“Maximum Landlord Cost”). Tenant shall be solely responsible for all construction costs for the Demised Premises above the Maximum Landlord Cost. Simultaneously with Tenant’s execution of this lease, Tenant shall deliver to Landlord the sum of Twenty Thousand Six Hundred Seventy-Nine and 79/100 Dollars ($20,679.79) representing Tenant’s estimated share of the construction costs for the Demised Premises above the Maximum Landlord Cost. If Landlord subsequently determines in its reasonable judgment that Tenant’s estimated share of the construction costs of the Demised Premises is greater than $20,679.79, then Tenant shall promptly deposit with Landlord upon written demand additional funds, as necessary, so that Tenant pays one hundred percent (100%) of Tenant’s actual share of the construction costs of the Demised Premises. The Demised Premises shall be deemed “ready for occupancy” when Landlord’s Work has been substantially completed (except for minor finishing jobs); provided, however, that if Landlord’s Work is delayed because of a default or failure, or both, of Tenant, then the Demised Premises shall also be deemed “ready for occupancy” when Landlord’s Work would have been substantially completed if Tenant’s default or failure, or both, had not occurred. When the Demised Premises are ready for occupancy (which, unless Tenant objects and Landlord’s architect or general contractor fails to certify to the date selected by the Landlord, shall be the date Landlord delivers to Tenant a written or verbal statement to the effect that they are ready for occupancy), Tenant agrees to accept possession thereof and to proceed with due diligence to perform Tenant’s Work, as described in Article IV below, and to open for business at the Demised Premises. Tenant agrees that at the request of Landlord, Tenant will, following the Commencement Date, execute and deliver a written statement acknowledging that Tenant has accepted possession and reciting the exact Commencement Date and expiration date of this lease.

B. If for any reason the Demised Premises are not ready for occupancy by the estimated date specified in Section 1.1(k) above, Landlord cannot be deemed to be in default or otherwise liable in damages to Tenant, nor shall the term of this lease be affected. If, however, for any reason the Demised Premises are not ready for occupancy by July 1, 2006, Landlord cannot be deemed to be in default or otherwise liable in damages to Tenant, but this lease will automatically terminate, in which event, neither party will have any further liabilities or obligations except that Landlord must repay to Tenant any prepaid rent or security deposit.

C. In the event of any dispute as to work performed or required to be performed by Landlord or Tenant, the certificate of Landlord’s architect or general contractor is conclusive. By occupying the Demised Premises, Tenant will be deemed to have accepted the same and to have acknowledged that the same fully comply with Landlord’s covenants and obligations under this lease. Occupancy of the Demised Premises by Tenant prior to the Commencement Date is subject to all of the terms and provisions of this lease, excepting only those requiring the payment of rent.

ARTICLE II
PRE-CONSTRUCTION OBLIGATIONS

If Tenant desires any improvements within the Demised Premises other than those described in Articles III and IV of this Exhibit “C” or Exhibit “C-l” attached to this lease, then the provisions set forth in this Article II will apply to such improvements:

A. All plans, diagrams, schedules, specifications and other data relating to Tenant’s preferences in connection with Landlord’s Work must be furnished by Tenant to Landlord complete, sufficient to obtain a building permit, and ready for Landlord’s consideration and final

approval within five (5) days after execution of this lease (or at such time as may be specified in this exhibit).

B. Tenant shall secure Landlord’s written approval of all designs, plans, specifications, materials, construction schedule, contractors and contracts for work to be performed by Tenant before beginning the work (including following whatever “work letter” instructions, if any, which Landlord may deliver to Tenant in connection with the work), and shall secure all necessary licenses and permits to be used in performing the work. Tenant’s finished work shall be subject to Landlord’s approval and acceptance.

C. Should Tenant request and Landlord approve any variation in the interior finishing of the Demised Premises, and if such items are a part of Landlord’s Work as described below, the variation must be incorporated in the plans to be furnished by Tenant. In such event, Tenant must pay to Landlord any increase in the cost of Landlord’s Work, including, without limitation, design, architectural and other professional costs, as determined by Landlord or its contractor or architect at the time of incorporation of such variation into Landlord’s Work.

D. The insurance requirements under Article l5 of the lease and the indemnity requirements under Article 16 of the lease shall apply during the construction contemplated in this exhibit, and Tenant must provide evidence of appropriate insurance coverage prior to beginning any of Tenant’s Work. In addition, and without limiting the generality of the immediately preceding sentence, at Landlord’s option, Landlord may require that prior to beginning any of Tenant’s Work, Tenant must provide Landlord with evidence of insurance covering both Tenant and Tenant’s contractor against damage to their personal property, as well as against third-party liability and worker’s compensation claims arising out of all construction and associated activities, as stated below:


	1. Worker’s Compensation at statutory limits, as required by the state where work is being performed and Employer’s Liability with limits no less than One Million Dollars ($1,000,000.00) for each accident or occupational disease.

	2. Commercial General Liability, including Premises Operations, Products, and Completed Operations Liability, Independent Contractors Liability, Contractual Liability and Broad Form Property Damage Liability with limits no less than:


	Bodily Injury and	Two Million Dollars
	($2,000,000.00)
	Property Damage Liability	each occurrence/aggregate

	Personal Injury Liability	Two Million Dollars
	($2,000,000.00)
		each occurrence/aggregate


	Such liability insurance shall provide coverage for explosion, collapse, and underground exposures, if applicable, and contractual liability coverage, shall insure Tenant’s contractors and any subcontractors against any and all claims for personal injury, including death resulting therefrom, and damage to property of others arising from operations under contracts whether such operations are performed by Tenant’s contractors or by any subcontractor for whose acts any of them may be liable and shall include the condition that it is primary and that any liability insurance maintained by Landlord or any other additional insured is excess and noncontributory.

	3. Comprehensive Automobile Liability Insurance, including the ownership, maintenance, and operation of any automobile equipment owned, hired, and non-owned, including the loading and unloading thereof in the following minimum amounts:


	Bodily Injury and	Two Million Dollars
	($2,000,000.00)
	Property Damage Liability	each accident


	4. Umbrella Liability Insurance covering all operations of contractor with limits no less than:


	Bodily Injury and	Two Million Dollars
	($2,000,000.00)
	Property Damage Liability	each occurrence/aggregate


	5. Builder’s Risk Completed Value Form covering All Risks of Physical Loss or Damage on Tenant’s Work in the Demised Premises as it relates to the building in which the Demised Premises are located, naming the interests of Landlord and its agents and employees and Tenant’s contractors as additional insureds, as their respective interests may appear.

All policies of insurance are subject to Landlord’s prior approval and special conditions, including the following:

	a. Each policy must be endorsed to provide that the carrier waives its right of subrogation against Landlord and its general partners, agents, managers, and lenders. During Landlord’s construction activities, each such policy shall in addition be endorsed to provide that the carrier waives its right of subrogation against Landlord’s general contractor.

	b. Each policy shall be endorsed to name Landlord and its general partners, agents, managers, and lenders as additional insureds, and that the policy is primary over any other applicable insurance. During Landlord’s construction activities, each such policy shall in addition be endorsed to name Landlord’s general contractor.

ARTICLE III
DESCRIPTION OF LANDLORD’S WORK

The work to be done by Landlord is limited to the purchase and installation of all items required to complete the work described in Articles III and V of this Exhibit “C”, subject to the terms of this Exhibit “C”.


A.	Structure:

	1.	Exterior building walls, roof, and all structural items shall be provided per Landlord’s design and specifications.

	2.	A flat concrete floor slab shall be installed to receive Tenant’s selected floor finish.

B.	Building Finishes:

	1.	Interior fire escape type stairs shall be installed.

	2.	ADA accessible men’s and/or women’s restrooms shall be provided for each floor.

	3.	Building standard doors, frames, and hardware shall be provided only for the building core areas, such as stairs, restrooms, service and utility closets and other public areas, as required.

	4.	Glass shall be thermal window units.

	5.	Building standard 2’X2’ suspended grid will be installed, continuous, over interior partitions and demising walls. Ceiling height is 9’-2” in all Tenant improvement areas. Building standard ceiling tile will be furnished and is to be installed by the Tenant.

	6.	Interior walls shall be limited to perimeter drywall at elevator shafts, stairs shafts, restrooms, corridors and support rooms within the core areas. The interior surface of exterior walls will be 5/8” gypsum board to roof deck on metal studs with R-19 insulation. Finish will include tape and bed only. Side wall demising partitions for Tenant’s premises shall extend to the ceiling grid and are Tenant’s responsibility. Tenant’s side of corridor walls will be 5/8” gypsum board to 8” above ceiling with R-11 insulation. Finish will include tape and bed only.

	7.	Drywall ceilings shall be limited to the restrooms, lower lobbies and stairwells.


	8.	Interior finishes/paint shall be at the elevator lobbies, stairs, restrooms and common corridors.

	9.	Restrooms shall be completely fitted with the appropriate toilet partitions and accessories.

C.	Mechanical/Electrical/Utilities

	1.	All elevators shall be hydraulic.

	2.	Fire sprinklers shall be included on the basis of an open area concept (code minimum). The sprinkler heads will be turned up for modification by the Tenant contractor.

	3.	Primary electrical service shall be extended into the Building along with main panels.

	4.	2’ X 4’ fluorescent fixtures with 24 cell parabolic reflectors (LF-1) are building standard and will be provided at the rate of one (1) per 134 square feet of usable area. These fixtures will be installed in the ceiling grid but not wired.

		Fire alarm systems shall be per code minimum.

	5.	Conditioned air will be extended to the Demised Premises. This consists of fan powered induction boxes (PIB) located in the above ceiling areas of the shell building. Tenant provides secondary distribution from the PIB to their individual space.

	6.	Landlord shall provide a means of supplying telephone service for the building. Telephone service to individual suites will be provided by the Tenant.

D.	Parking Areas and Walks:

	1.	Parking areas must be hard surfaced.

	2.	Walks must be surfaced with concrete, stone, brick or other hard material as specified by Landlord.

	3.	Parking areas and walks must be provided with reasonably adequate artificial lighting.

E.	Limitations and Conditions:

	1.	Landlord’s Work is limited to that required by this Article III and by Article V. All work not so classified as Landlord’s Work is Tenant’s Work.

	2.	Landlord will perform work which is in excess of that required by this Article III and by Article V only after Tenant has deposited full payment for same (estimated amount of $20,679.79) with Landlord in the form of cash, money order or cashier’s check as provided in Article I, Item A of this Exhibit “C” (with any delay in Tenant’s making such deposit to be deemed a default under this lease, without the requirement of additional notice from Landlord, and causing Tenant’s time period for completing Tenant’s Work and opening for business to commence as if Tenant’s delay had not occurred).

	3.	Landlord will provide Tenant with keys to corridor entry doors, upon move in, at no charge. Landlord will be sole provider of keys to the Demised Premises. Changes to key or core interior doors are the responsibility of the Tenant.

ARTICLE IV
DESCRIPTION OF TENANT’S WORK

A. If Tenant desires any improvements within the Demised Premises other than those described in Articles III and V of this Exhibit “C” or in Exhibit “C-l” attached to this lease, all such work must be undertaken by Tenant at Tenant’s expense and must not damage the building or any part thereof. Any roof penetration shall be performed by Landlord’s roofer or, at Landlord’s option, by a bonded roofer approved in advance by Landlord. The work shall be begun only after Landlord has given consent, which consent shall in part be conditioned upon Tenant’s plans, to include materials acceptable to Landlord, in order to prevent injury to the roof and to spread the weight of any equipment being installed. Tenant shall also be responsible for obtaining, and paying for, professional inspections of any structural work (including, without limitation, any roof work or concrete work).

B. Tenant is responsible for all fixtures, furniture, and equipment within the Demised Premises except as otherwise expressly set forth in this lease.

C. All work undertaken by Tenant shall be awarded to Landlord’s contractor unless, before any construction begins, Tenant chooses and receives Landlord’s written approval for another contractor to complete Tenant’s Work.

ARTICLE V
TURNKEY IMPROVEMENTS BY LANDLORD

A. Notwithstanding anything to the contrary set forth elsewhere in this Exhibit “C”, Landlord agrees to provide at its sole cost and expense, using building standard materials, all mechanical, electrical and plumbing components and all partitions, doors, carpet, ceiling and exterior window blinds, if any, pursuant to the plan for the Demised Premises on such Exhibit “C-1” (except where such Exhibit “C-l” indicates that any such item is to be provided by Tenant or where it otherwise indicates that any such item is not Landlord’s responsibility); provided, however, that regardless of what might be indicated on such Exhibit “C-l”, Landlord is not responsible in any manner for any security alarm system, appliances or telephone/data lines (other than providing empty conduit, to the extent, if any, set forth on Exhibit “C-l” ). Tenant must pay Landlord in advance for any construction upgrades which it desires for the Demised Premises, and such upgrades must be incorporated into the approved, final plans and specifications so as not to delay Landlord’s construction efforts. Tenant is solely responsible and shall install at Tenant’s expense all furniture, fixtures, equipment, and phone and data lines within the Demised Premises.


	INITIALED:

	LANDLORD:


	TENANT:

EXHIBIT “C-1”
DEPICTION OF LANDLORD’S WORK

MESSAGE

QSI
286 Grand Avenue
Suite 201
Southlake, TX 76092

EXHIBIT “D”
PROHIBITED AND RESTRICTED USES


1.	any use which constitutes a public or private nuisance;

2.	any use causing loud noises or noxious or offensive smoke or odors (including any business using exterior loud speakers);

3.	manufacturing facility;

4.	dry cleaner (except facilities for drop off and pick up of clothing cleaned at another location);

5.	any facility for the sale, lease, or rental of automobiles, trucks, motorcycles, recreational vehicles, boats or other vehicles;

6.	automobile repair shop or service station or any facility storing or selling gasoline or diesel fuel in or from tanks;

7.	used clothing or thrift store or liquidation outlet;

8.	massage parlor;

9.	adult book shop or adult movie house or so-called “head” shop;

10.	off-track betting, gambling, or gaming facility;

11.	currency exchange, check cashing or payday loan facility;

12.	mortuary or funeral parlor;

13.	motor inn or any transient residential use;

14.	coin operated laundry;

15.	cocktail lounge, night club, bar or tavern or sale of alcoholic beverages, whether or not packaged;

16.	cinema or theater;

17.	place of recreation (including but not limited to bowling alley, skating rink, carnival game arcade, gymnasium, disco, or banquet hall);

18.	church;

19.	fast food drive-throughs;

20.	children’s recreational, education, or day-care facility;

21.	telemarketing;

22.	schools of any nature (as used herein, “school” includes, but is not limited to, a beauty school, barber college, reading room, place of instruction or any other operation serving primarily students or trainees rather than retail customers);

23.	any type of medical, dental, or other health professional office;

24.	any other use inconsistent with the operation of an upscale, high-end, high quality retail and professional office development; and

25.	any unlawful use.

EXHIBIT “E”
RELINQUISHMENT OF LIEN RIGHTS


THE STATE OF TEXAS	§
	§
COUNTY OF ________________	§

The undersigned, by written agreement dated _____________, 2006, (the “Agreement”), has contracted with _________________ (“Tenant”) to furnish certain labor and materials (the “Work”) on the Tenant’s leasehold estate in certain improvements located on the real property described on Exhibit A hereto (the “Property”), which is owned by _________________ (“Owner”).

The undersigned, in performing such Work, acknowledges that it has entered into a contract with Tenant for the performance thereof and that any lien rights it may have arising out of performing such work, including, but not limited to, mechanics’ and materialmens’ liens, whether arising under statutory or constitutional law, shall attach to and affect only the Tenant’s leasehold estate, and in no event shall the undersigned have any such lien rights in, to or with respect to, the fee title to the Property.

This Relinquishment of Lien Rights is entered into for good and valuable consideration, including the Owner’s agreement to provide certain inducements to the Tenant with respect to performance of the Work.

Executed as of ______________________, 2006.


	By:

	Name:

	Title:


THE STATE OF TEXAS	§
	§
COUNTY OF _______________	§

This instrument was acknowledged before me on the ___ day of ____________, 2006, by ___________ ________________ of _________________________, a ____________________________, on behalf of said ___________________________.




	Notary Public, State of Texas

EXHIBIT “F”
SIGN CRITERIA

Signs will be designed to promote the downtown atmosphere, establish identities of tenants, and give clear, functional information. All signage will be subject to Landlord’s prior written consent, including graphic design, materials, construction and method of installation.

I. DEFINITIONS

Awning: A covering attached to a building or structure, erected in or over a window or door, and usually supported by gravity and a metal frame.

Projection: The distance by which a sign extends over public property or beyond the building line.

Sign, Awning: “Awning Sign” means a sign consisting of one line of letters painted, placed or installed upon the valance of any awning or canopy and an identification emblem, insignia, initial or other similar feature painted, placed or installed elsewhere on any awning or canopy; provided, that any sign, emblem, insignia, initial or other similar feature shall comply with all other appropriate provisions of this title. Where steel canopies are used, the Awning Sign may consist of individually cut out metal letters placed on the top of the canopy’s outside edge parallel to the face of the building.

Sign, Blade: Any sign, oriented perpendicular to the face of the building, identifying the name of the business, affixed to or supported by a building or structure, which projects more than twelve inches (12”) beyond the surface of that portion of the building or structure to which it is affixed or supported.

Sign, Building Blade: A primary Blade Sign permitted either: (a) in lieu of a Fascia Sign; and/or (b) at a building corner.

Sign, Building Identification: Any sign stating the use and name given to the use of a building, structure or area, when such use is permitted in the zone in which the sign is located.

Sign, Fascia: A sign affixed directly to the exterior wall or screening surface, confined within the limits thereof, and which projects from the surface less than twelve inches (12”) at all points, and located either: (a) above the first floor storefront, and below the second level windows; or (b) where permitted, above the upper story windows and below the next level windows or building parapet, as applicable. Fascia Signs are displayed parallel to the face of the building, and identify the name of the business.

Sign, Pedestrian Blade: A secondary Blade Sign which indicates use or business name and/or logo, located at least seven feet (7’) above ground.

II. ADMINISTRATION

A. Submittals. Landlord’s approval will be required for all signs to assure compatibility with the architecture and to verify compliance with these guidelines. There will be three (3) sequential signage submittals to and/or reviews by Landlord:


	1. The concept submittal sketch should indicate the size, shape, color, illumination, material palette, and type face. Sign(s) should be shown superimposed in scale on the building elevation.

	2. The shop drawing submittal should indicate structural attachments, construction details, materials, power requirements, illumination levels, dimensions, etc. Each submittal should also include an updated elevation drawing with the sign shown in scale.

	3. Final review by Landlord of the installation must occur prior to Tenant’s final payment to the sign contractor.

B. Permits. The City of Southlake will require a sign permit. Tenant is responsible for the sign
permit(s), including, without limitation, applying for and obtaining the same.

C. Costs. All costs associated with the signs and awnings, including design, construction, permitting, installation, coordination, and supporting structural and electrical infrastructure will be borne

by Tenant. This also includes removal of the signs and awnings upon the expiration or termination of the lease.

D. Limitations. Signs are limited to the name under which Tenant does business, not including logos or associated names or trademarks. Use of logos as a decorative element will be reviewed on an individual basis and, if approved, will be limited to Tenant’s business logo and will not extend to products or services offered by Tenant.

E. Compliance. Tenant is responsible for strict compliance with these guidelines. Landlord retains the right but not the obligation to notify Tenants of infractions to the guidelines, and may take any action it deems necessary to bring Tenant into compliance.

III. SIGN REGULATIONS

A. Number of Signs- The following number of signs shall be permitted.


	1. First Floor – There shall be permitted up to a combination of two (2) of the following three (3) types of signs per use. On each storefront wall which faces a street, drive, or parking area: (a) one (1) Fascia Sign or one (1) Building Blade Sign; and (b) one (1) Pedestrian Blade Sign, with all such signs subject to the area requirements. A Building Blade Sign shall be permitted at a building corner in addition to permitted Fascia Signs, provided such sign is erected at a 135° angle to the building corner.

	2. Above the First Floor - For lease space above the first floor, one (1) Window Sign or (1) Awning Sign at every other window shall be permitted. In addition, one (1) Fascia Sign may be permitted on facades of fifty feet (50’) or more in length.

B. Maximum Letter/Logo Height

Lettering. Except as otherwise provided, lettering size shall be determined by the maximum sign area allowed. Lettering on the following types of Signs shall not exceed the maximum size indicated:


Building Blade Sign	-	twelve inches (12”)

Pedestrian Blade Sign	-	eight inches (8”)

First Floor Window/Awning Sign	-	twelve inches (12”)

Upper Story Fascia Sign	-	ten inches (10”)

Upper Story Window/ Awning Sign	-	four inches (4”)

C. Maximum Area

The total area of all signs displayed on a storefront wall which faces a street, drive or parking area shall not exceed one (1) square foot for each foot of storefront width facing the street, drive or parking area. Size of the following types of Signs shall not exceed the maximum area indicated:


Fascia Sign	-	thirty (30) sq.ft.

Building Blade Sign	-	twelve (12) sq.ft.

Pedestrian Blade Sign	-	four (4) sq.ft.

Notwithstanding the foregoing, on any frontage where public access and a storefront are not provided, allowable signage on such frontage shall be limited to not more than seventy-five percent (75%) of the area of the principal signage permitted where public access and a storefront are provided.

The area of all faces of a Blade Sign shall be included in determining the area of the sign, except where two (2) such faces are placed back to back and are at no point more than two (2) feet from one another, in which case the area of the Blade Sign shall be taken as the area of a single face if the two (2) faces are of equal area, or as the area of the larger face if the two (2) faces are of unequal area.

For multi-story buildings, the Maximum Area shall be permitted only for signs displayed between the sidewalk and a height of twenty feet (20’) on any storefront wall. The total area of all signs displayed above the twenty foot (20’) height limit shall be: (a) for permitted Fascia Signs, one-half (0.5) square foot for every one foot (1’) of width of building or lease space; and (b) for Window Signs and Awning Signs, limited to signage which does not obscure more than twenty-five percent (25%) of the total window area.

D. Illumination


		Examples of permitted first floor signs include:

		•	Exterior illuminated (by externally mounted spot lighting)

		•	Silhouette Lighting (e.g., neon illumination behind a solid, opaque letter)

		•	Up lighting (e.g., projecting fixtures attached to the building under the letters)

		•	Sign box panel with push through letters, internally illuminated.

		•	Exposed neon lighting

Neon signs will be reviewed on an individual basis. If the neon contributes decoratively to the environment and does not create a presence which diminishes attention to its neighbors, approval will be considered.

Illumination of signs shall be designed, located, shielded and directed in such a manner that the light source is fixed and is not directly visible from, and does not cast glare or direct light from artificial illumination upon, any adjacent public right-of-way, surrounding property, residential property or motorist’s vision.

Attached signs may not be illuminated by internally illuminated, face lit channel cut letters.

Awnings, Awning Signs, Window Signs and Signs above the first floor shall not be permitted to be illuminated.

E. Signs over/on ROW – Blade Signs shall not be higher than the eave line or parapet wall of the top of the principal building; shall be a minimum of seven feet (7’) above grade when located adjacent to or projecting over a pedestrian way; and shall not extend more than four feet (4’) from the building wall to which they are attached, except where such sign is an integral part of an approved canopy or awning.

F. Awnings. Awnings may be permitted on a case-by-case basis and will be subject to Landlord review and approval.


	1. Awning materials can be fabric or painted metal. Material samples must be submitted with design. The design, color and material must be approved in writing by Landlord prior to fabrication.

	2. Awnings must extend not less than three feet (3’) and not more than three feet six inches (3’6”) from the building face. The bottom of the structure must be at least seven feet (7’) above the sidewalk. Each awning must be equal in length to the window behind it. All awnings on any facade must be at the same height, although adjacent facades may vary in height.

	3. Signage on the awnings is limited to the vertical front edge of the awning in text and/or graphics and in color approved by Landlord. Logos will be permitted as approved by Landlord on the top surface only in the event that they are used decoratively and are limited to Tenant’s logo. No signage is permitted on the underside of the awning.

	4. Awnings with closed, illuminated soffits are not permitted.

	5. Awning and support framing will be installed by Tenant subject to Landlord’s prior written approval as to method of installation.

G. Service Door Signs. Non-customer doors receiving merchandise will have uniformly applied signs designed and installed by Landlord at Tenant’s expense. Tenant will supply Tenant’s name and address to Landlord for sign fabrication and installation.

H. Temporary Signs.


	1. Window Signs - Window signs are permitted during construction of tenant improvements to obscure up to one hundred percent (100%) of the total window area, provided that no such sign may be displayed for a period longer than 120 days.

	2. Construction Barricades - Signage on a construction barricade shall be permitted along each building or lease space frontage for sites under construction, provided that:


		•	No such barricade shall be located within twenty-five feet (25’) of a public right-of-way; and

		•	Such signs may be erected and maintained only for a period beginning not earlier than five (5) days prior to commencement of construction and shall be removed upon termination of construction, with the total of such period not to exceed 120 days.


	3. Any temporary signs such as “Opening Soon” or “Sale” signs must be approved by Landlord in writing in advance.

	I. Unacceptable Signage.

	1. Prohibitions include the following:


			a.	Internally illuminated, face lit channel cut letters.

			b.	Internally illuminated boxes.

			c.	Flashing, rotating, blinking, or other moving signs.

			d.	Reader boards, matrix boards, or other light grids which can produce a changeable image.

			e.	Signs producing odors or sound.


	2. Non-conforming signs will be reviewed on an individual basis by Landlord and the City of Southlake. Any signs which are not covered under these guidelines are not permitted unless specifically approved in writing, in advance, by Landlord. However, approval by Landlord does not guarantee approval by the City of Southlake.

J. Non-Conforming Signs

In recognition of the uniqueness of the downtown environment, individuality of signage is encouraged. Certain signs, while not technically meeting the requirements set forth herein, will nonetheless be considered for approval on a case-by-case basis. Such signage may be approved if it:


		•	Harmonizes with the structure or structures on the parcel on which it is to be applied;

		•	Is compatible with the other signs or graphic designs on the premises;

		•	Is suitable and appropriate to the Town Square;

		•	Contributes to any special characteristics of the particular area in which it is to be located;

		•	Is well designed and pleasing in appearance;

		•	Is desirable as an urban “downtown” design characteristic;

		•	Does not constitute a nuisance to the occupants of adjacent or contiguous property;

		•	Is not detrimental to property values; and

		•	Does not constitute a traffic and safety hazard because it is distracting, or is not considered obscene, lewd, indecent or otherwise offensive to public morals.

Approval of any such signage shall be subject to any conditions which in Landlord’s judgment are necessary to carry out the purposes and intent of the review standards.


	INITIALED:

	LANDLORD:


	TENANT:

EXHIBIT “G”
TENANT ESTOPPEL CERTIFICATE


To:	______________________________________________________________________ (“Lender”)

Re:	Property Address:	______________________________________________________ (“Property”)
	Lease Date: ________________________________________________________________________
	Between ___________________________________________________________ (“Landlord”) and
	________________________________________________________________________ (“Tenant”)
	Square Footage Leased: ______________________________________________________________
	Suite No./Floor: _________________________________________________________ (“Premises”)

Tenant understands that Lender is contemplating making a loan (the “Loan”) to Landlord. The undersigned, as the tenant under the above-referenced lease (“Lease”) hereby certifies to Lender, the following:

1. The Lease is in full force and effect and has not been modified, supplemented, or amended in any way except by amendment(s) dated ________________________, ____ [Please insert the phrase “N/A” if the Lease has not been amended] and, together with such referenced amendments (if any), represents the entire agreement between the parties as to the Premises or any portion thereof. As used in this estoppel, the term Lease shall be deemed to include any amendments referenced in the first sentence of this Paragraph 1. Attached hereto is a true, correct and complete copy of the Lease. [Attach Lease, including all amendments]

2. The amount of fixed monthly rent is $_________; the monthly common area or other charges are $_________. If applicable, the base year for operating expenses and real estate taxes, as defined in the Lease, is ______________. No such rent has been or will be paid more than one (1) month in advance of its due date, except:____________________________________________________.

3. The undersigned’s security deposit is $________. The undersigned has paid rent for the Premises up to and including _________, 2006. The undersigned hereby waives collection of the deposit against Lender or any purchaser at a foreclosure sale, unless Lender or such purchaser actually received the deposit from Landlord.

4. Lender will not be bound by any material modification or amendment to the Lease made without Lender’s prior written consent, which consent shall be Landlord’s responsibility to obtain.

5. The commencement date of the Lease was __________________, 2006, the Lease terminates on _______________, ______ and we have the following renewal/extension option(s) ______________________
__________________________________________________.

6. All work to be performed for us under the Lease has been performed as required and has been accepted by us; and any payments, free rent, or other payments, credits, allowances or abatements required to be given by Landlord to us have already been received by us, except _____________________________________
__________________________________________________.

7. The Lease is free from default by Landlord; we have no offset, defense, deduction or claim against Landlord.

8. The undersigned has received no notice of any prior sale, assignment, pledge or other transfer of the said Lease or of the rents received therein, except ______________________________________________
__________________________________________________.

9. The undersigned has not assigned said Lease or sublet all or any portion of the Premises, the undersigned does not hold the Premises under assignment or sublease, nor does anyone except us and our employees occupy the Premises except __________________________________________________________
__________________________________________________.

10. The undersigned has no right or option to purchase all or any part of the Premises or the building of which the Premises is a part or to occupy any additional space at the Property.

11. No actions, whether voluntary or otherwise, are pending against the undersigned under the bankruptcy laws of the United States or any state and there are no claims or actions pending against the undersigned which if decided against us would materially and adversely affect our financial condition or our ability to perform the tenant’s obligations under the Lease.

12. Tenant acknowledges that Landlord has assigned to Lender its right, title and interest in the Lease and to the rents due thereunder, and that Landlord will collect such rents provided no event of default has occurred under the Loan. Tenant agrees to pay all rents and other amounts due under the Lease directly to Lender upon receipt of written demand by Lender, and Landlord hereby consents thereto. The assignment of the Lease to Lender, or collection of rents by Lender pursuant to such assignment, shall not obligate Lender to perform Landlord’s obligations under the Lease.

13. If the undersigned is not the party named in the Lease, describe below the chain of assignments into the undersigned and attach a copy of each assignment document hereto:____________________________
__________________________________________________.

14. The undersigned recognizes that Lender would not make the Loan to Landlord but for its execution of this Tenant Estoppel Certificate. The statements contained herein may be relied upon by the Lender its successors and assigns and by third (3rd) parties who are interested in the matters covered by this Tenant Estoppel Certificate.

15. In the event that Lender succeeds to the interest of Landlord or any successor to Landlord, then Tenant hereby agrees to attorn to and accept Lender and to recognize Lender as its landlord under the Lease for the then remaining balance of the term thereof, and upon request of Lender, Tenant shall execute and deliver to Lender an agreement of attornment reasonably satisfactory to Lender.

If we are a corporation, the undersigned is a duly appointed officer of the corporation signing this certificate and is the incumbent in the office indicated under his name. In any event, the undersigned is duly authorized to execute this certificate.

Dated this ____ day of ____________________, 2006.


TENANT:
___________________________________________________

a(n) ________________________________________________

By:	_____________________________________________
Name:	_____________________________________________
Title:	_____________________________________________

ATTACH LEASE, including all amendments

EXHIBIT “H”
NONDISTURBANCE, ATTORNMENT AND SUBORDINATION AGREEMENT

THIS NON-DISTURBANCE, ATTORNMENT AND SUBORDINATION AGREEMENT (the “Agreement”) is made and entered into as of the _____________ day of _______________________, 2006, by and between QUALITY SYSTEMS INC., a California corporation, d/b/a QSI, Inc. (the “Tenant”), whose address is 18191 Von Karman Ave., Suite 450, Irvine, California 92612-7113, and INLAND WESTERN RETAIL REAL ESTATE TRUST, INC., a Maryland corporation (“Lender”), whose address for purposes hereof is 2901 Butterfield Road, Oak Brook, Illinois 60523, Attention: General Counsel.

RECITALS:

SLTS GRAND AVENUE, L.P., a Texas limited partnership (the “Landlord”), owns the land described in Exhibit.“ A” attached hereto and hereby made a part hereof for all purposes (the “Land”).

Reference is hereby made to that certain Lease Agreement dated effective ______________________________, 2006, between Landlord, as landlord, and Tenant, as tenant, (said Lease Agreement shall herein be referred to as the “Lease Agreement”). Pursuant to the terms of the Lease Agreement, Tenant is the owner of a leasehold estate in a portion of the existing improvements located on the Land (such portion of the Land, and the leased improvements thereon, being herein called the “Premises”). The Lease Agreement, together with all subsequent renewals, extensions and modifications of the Lease Agreement which are made in accordance with the terms hereof, are hereinafter collectively called the “Lease.”

Landlord has executed or will execute one or more Deed of Trust and Security Agreements (collectively, the “Mortgage”) covering, among other property, the Land in favor of the Lender as security for indebtedness of Landlord to the Lender as more particularly described therein.

As a condition to the extension by the Lenders to Landlord of the indebtedness to be evidenced or secured by the Mortgage, the Lender has required that Tenant subordinate Tenant’s leasehold interest in the Premises to all liens, security interests and assignments securing payment of any and all indebtedness now or hereafter secured by the Mortgage.

Tenant is willing to proceed with such subordination of its leasehold interest; provided, however, that as a condition to such subordination, Tenant has required that Tenant’s right of possession to the Premises shall not be disturbed by the Lender or any third any in the exercise of any of the Lender’s rights under the Mortgage and all other security instruments securing payment of any of the indebtedness of Landlord secured by the Mortgage, which protection the Lender is willing to grant in order to induce Tenant to proceed with such subordination.

AGREEMENTS:

In consideration of the premises and the sum of Ten Dollars ($10.00) paid by the Lender to Tenant, the receipt and sufficiency of which is hereby acknowledged by Tenant, the Lender and Tenant mutually agree as follows:

1. Tenant hereby acknowledges to the Lender that the Lease is in full force and effect and has not been changed since execution. As of the date hereof, the Lease embodies the entire agreement between Landlord and Tenant and there are no side letters or other ancillary agreements between Landlord and Tenant. To the best of Tenant’s knowledge, as of the effective date hereof, there exists no default on the part of Landlord or Tenant under the Lease.

2. Tenant covenants and agrees with the Lender that all of Tenant’s right, title and interest in and to the Premises and any other interest of Tenant in the Land and any improvements thereon are and shall be subject, subordinate and inferior to (a) the lien and security interests of the Mortgage and all renewals, increases, replacements, extensions or modifications thereof and all other security instruments securing payment of any indebtedness of Landlord secured by the Mortgage, including any future advances made with respect to the Land and/or any improvements thereon, and (b) all right, title and interest of the Lender in the Land and the improvements thereon, including, without limitation, the Premises, pursuant to the Lender’s enforcement of the lien and security interest of the Mortgage and/or any lien or security interest of any other security instruments securing payment of any indebtedness of Landlord secured by the Mortgage.

3. The Lender covenants and agrees with Tenant that, so long as no event of default by Tenant has occurred and is continuing under the Lease (after the expiration of the applicable notice and

curative periods contained therein, if any), the Lender shall not disturb Tenant’s right of possession to the Premises in the event that the Lender or the Lender’s successors or assigns, or any other purchaser at any foreclosure sale pursuant to the Mortgage or any other security instrument (hereinafter referred to as a “Foreclosure Transferee”) acquires title to all or any part of the Premises pursuant to the exercise of any remedy provided for in the Mortgage or any other security instrument, nor shall Tenant be named as a party defendant to any action to foreclose the liens and security interests of the Mortgage or any other security instrument, except to the extent required by applicable law.

4. Tenant covenants and agrees to attorn to the Lender or any other Foreclosure Transferee, as Tenant’s new landlord, and agrees that the Lease shall continue in full force and effect as a direct lease between Tenant and the Lender or any other Foreclosure Transferee, if applicable, upon all of the terms, covenants, conditions and agreements set forth in the Lease; provided, however, the Lender or such other Foreclosure Transferee shall not be:


	a. liable for any act, omission or breach of warranty or representation of any prior landlord, including Landlord, including without limitation, failure by Landlord to timely complete the construction of any of the improvements required to be constructed upon the Land pursuant to the terms of the Lease;

	b. subject to any offset, defense or counterclaim which Tenant might be entitled to assert against any prior landlord, including Landlord;

	c. bound by any payment of rent, additional rent or other sum made by Tenant to Landlord for more than one (1) month in advance of its due date under the Lease;

	d. bound by any amendment or modification of the Lease hereafter made without the prior written consent of the Lender;

	e. personally liable for any obligation under the Lease, it being understood that any recovery of a judgment by Tenant against Lender or such other Foreclosure Transferee, as the case may be, shall be limited strictly to Lender or such Foreclosure Transferee’s interest in the Land and the improvements thereon;

	f. required to make any repairs to the Premises or any other improvements located on the Land as a result of any fire or other casualty or by reason of condemnation unless Lender or such other Foreclosure Transferee, as the case may be, shall be obligated under the Lease to make such repairs and shall have received sufficient casualty insurance proceeds or condemnation awards, as the case may be, to finance completion of such repairs; and

	g. in any way responsible for any deposit or security which was not delivered to the Lender or the Foreclosure Transferee, as applicable.

To the extent of any conflict between the provisions of this Section 4 and the provisions of the Lease, the provisions of this Section 4 shall control as to the Lender, a Foreclosure Transferee or any subsequent holders of the indebtedness secured by the Mortgage.

5. Tenant hereby agrees to give written notice to the Lender of any default of Landlord under the Lease, contemporaneously with delivery of such notice to Landlord. It is further agreed that such notice will be given to any successor in interest of the Lender under the Mortgage provided that prior to any such default of Landlord, such successor in interest shall have given written notice to Tenant of its acquisition of the Lender’s interest therein, and shall have designated the address to which such notice is to be directed. Notwithstanding any provisions of the Lease to the contrary, Tenant may not terminate the Lease as a result of any default by Landlord without affording to the Lender or its successors a period of time to remedy any such default equal to the greater of (a) sixty (60) days or (b) the curative period afforded Landlord for such default under the provisions of the Lease, such period to commence upon the effective delivery date to the Lender of Tenant’s notice of such default pursuant to Section 8 of this Agreement.

6. After notice is given to Tenant by the Lender that an Event of Default (as defined in Mortgage) has occurred and that rentals due and payable under the Lease should be paid directly to the Lender pursuant to the terms of one or more of the assignments of rents (collectively, the “Rent Assignments”) executed and delivered or to be executed and delivered by Landlord to the Lender in connection with the Mortgage, Tenant shall thereafter pay directly to Lender all rentals and other monies due or to become due and payable under the Lease. The Lender hereby represents and warrants to Tenant that under the terms of said Rent Assignments, Landlord has expressly authorized Tenant to make such payments directly to the Lender and Landlord has released and discharged Tenant from any liability to

Landlord on account of any such payments made to the Lender in accordance with the Lender’s written instructions to Tenant.

7. Any use of the terms “Landlord,” “Tenant,” or “Lender” are hereby deemed to refer to and include, not only the original party named in this Agreement in such respective capacities, but also any and all heirs, legal representatives, successors or assigns of any such parties with respect to such parties’ interest in the Lease, the Premises or in the indebtedness secured by the Mortgage.

8. All notices, demands or requests provided for or permitted to be given pursuant to this Agreement must be in writing and shall be given or served by depositing in the United States Mail, postpaid, registered or certified, return receipt requested, or by Federal Express or comparable overnight delivery service, and addressed, as to the Lender, to the address set forth on the first page hereof, and as to Tenant, to the address set forth on the first page hereof. All notices, demands and requests shall be deemed effective and received two (2) business days after being deposited in the United States Mail or one (1) business day after being deposited with Federal Express or comparable overnight delivery service for next business day delivery. By giving ten (10) days prior written notice thereof pursuant to the provisions hereof, Tenant or the Lender shall have the right from time to time and at any time during the term of this Agreement to change their respective addresses.

9. This Agreement may not be discharged or modified orally or in any manner other than by an agreement in writing specifically referred to this Agreement and signed by all parties hereto.

10. The provisions hereof shall be self-operative and effective without the necessity of execution of any further instruments on the part of any party hereto or the respective heirs, legal representatives, successors or assigns of any such party. This Agreement may be executed in multiple counterparts.

This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns.

(signature blocks on following page)

IN TESTIMONY WHEREOF, this instrument is executed effective as of the day and year first above written.


	LENDER:

	INLAND WESTERN RETAIL REAL ESTATE TRUST, INC., a Maryland corporation


	By:

	Name:

	Title:


:	LANDLORD:

	SLTS GRAND AVENUE, L.P.,
	a Texas limited partnership


By:	SLTS Grand Avenue Genpar, L.L.C., a Texas limited liability company, its general partner

	By:	Cooper & Stebbins, L.P., sole member

		By:	CS Town Centres, LLC, general partner

			By:

				Brian R. Stebbins, Member


	TENANT:

	QUALITY SYSTEMS INC., a California corporation, d/b/a QSI, Inc.

	By:

	Name:

	Title:


STATE OF________________	§
	§
COUNTY OF______________	§

This instrument was acknowledged on the____ day of ____________________, 2006, by ________________________________________, _________________________________________ of Inland Western Retail Real Estate Trust, Inc., a Maryland corporation, on behalf of said corporation.



	Notary Public in and for the State of______________


STATE OF TEXAS	§
	§
COUNTY OF TARRANT	§

This instrument was acknowledged by me on this _____ day of ________________, 2006, by Brian R. Stebbins, Member of CS Town Centres, LLC, as general partner of Cooper & Stebbins, L.P., as sole member of SLTS Grand Avenue Genpar, L.L.C., a Texas limited liability company, as general partner of SLTS Grand Avenue, L.P., a Texas limited partnership, on behalf of such limited liability companies and limited partnerships.



	Notary Public for the State of Texas


STATE OF TEXAS	§
	§
COUNTY OF______________	§

This instrument was acknowledged on the ____ day of ____________________, 2006, by ________________________________________, ________________________________________ of Quality Systems Inc., a California corporation, d/b/a QSI, Inc., on behalf of said corporation.



	Notary Public in and for the State of Texas

EXHIBIT “I”
LANDLORD’S SUBORDINATION

The undersigned is the Landlord pursuant to lease dated ________________________________ (the “Lease”) between SLTS GRAND AVENUE, L.P., a Texas limited partnership, as Landlord and QUALITY SYSTEMS INC., a California corporation, d/b/a QSI, Inc. as Tenant for the Demised Premises located at ________________________________________________, Southlake, Texas 76092.

Wherein Tenant, in order to induce ________________________________________________ (“Lender”), to make all or any part of a loan to Tenant (“Loan”), Landlord hereby, in order to enable Tenant to obtain the Loan from Lender, subordinates its lien, whether constitutional, statutory or contractual, in any personal property or removable trade fixtures of Tenant now or hereafter located on the Demised Premises (the “Collateral”, to the security interest of Lender in the Collateral, and agrees that Landlord’s lien in the Collateral shall be inferior to Lender’s security interest in the Collateral. In the event Tenant is in default under the Loan and Lender shall deem it necessary or desirable to foreclose on Lender” security interest, and to take possession of the Collateral, Lender may, upon ten (10) days prior written notice to Landlord, enter the Demised Premises and remove and take possession of the Collateral; provided, however, that Lender will only be entitled to enter onto the Demised Premises for the minimum period of time necessary to remove the Collateral. If Landlord delivers written notice to Lender requiring that Lender remove the Collateral and Lender does not do so within thirty (30) days after the date of such notice, then Lender will be deemed conclusively to have abandoned the Collateral and Landlord may remove the Collateral and dispose of it as Landlord wishes without being required to account for such disposition or the Collateral to Lender. If Lender’s removal of the Collateral damages the Demised Premises or the Project in any way, then Lender must, upon demand by Landlord, reimburse Landlord for the cost of repairing the Demised Premises or the Project or both, as the case may be. Before Lender enters upon the Demised Premises or at any time while Lender is in the Demised Premises, Landlord may make a reasonable estimate of the anticipated cost of such repair work and require Lender to deposit a reasonably estimated amount with Landlord as a condition to Lender’s right to enter upon or continue to enter upon the Demised Premises, although such estimate will not be binding upon Landlord and will not limit Lender’s liability to Landlord for such damage to the Demised Premises.

Lender agrees to provide to Landlord copies of any notices of default or foreclosure proceedings contemporaneously with providing such notices to Tenant.

Dated this ____ day of __________________________, 2006.


LANDLORD:

SLTS GRAND AVENUE, L.P.,
a Texas limited partnership

By:	SLTS Grand Avenue Genpar, L.L.C.,
	a Texas limited liability company,
	its general partner

	By:	Cooper & Stebbins, L.P.,
		sole member

		By:	CS Town Centres, LLC,
			general partner

			By:

				Brian R. Stebbins,
				Member


STATE OF TEXAS	§
	§
COUNTY OF TARRANT	§

This instrument was acknowledged by me on this _____ day of _________________, 2006, by Brian R. Stebbins, Member of CS Town Centres, LLC, as general partner of Cooper & Stebbins, L.P., as sole member of SLTS Grand Avenue Genpar, L.L.C., a Texas limited liability company, as general partner of SLTS Grand Avenue, L.P., a Texas limited partnership, on behalf of such limited liability companies and limited partnerships.



	Notary Public for the State of Texas


Address of Lender for Notice:


Address of Landlord:	c/o Cooper & Stebbins, L.P.
	1256 Main Street, Suite 240
	Southlake, Texas 76092

EXHIBIT “J”
COMMUNICATION ANTENNA

1. License to Use Antenna Site. Throughout the term, Landlord grants to Tenant a nonexclusive license to install, maintain, and operate a communication satellite dish and associated cabling (collectively, “Antenna ”) on a portion of the roof of the building designated by Landlord as the “Antenna Site ”. Tenant may use the Antenna Site only for the purpose of providing communications services for Tenant’s business activities in the building – Tenant may not provide communications services from the Antenna Site for any third party. Landlord shall provide reasonable access to the Antenna Site to Tenant and Tenant’s contractors, subject to Landlord’s rules and regulations regarding controlled access to the roof. Tenant’s access to the Antenna must be coordinated through Landlord and Landlord’s representative may accompany Tenant or any of Tenant’s contractors during such access. Landlord makes no representation to Tenant regarding the suitability of the Antenna Site for Tenant’s Antenna – Landlord is not responsible for any electrical output, electromagnetic output, radio frequency, or other interference with the Antenna. Furthermore, Tenant covenants that its Antenna may not interfere with any other communication equipment on the roof of the building or with Landlord’s building systems.

2. Installation. Tenant shall install the Antenna on the Antenna Site in accordance with plans, specifications and technical standards approved in advance by Landlord. These plans and specifications must indicate the size of the Antenna, the means of attaching the Antenna to the roof of the building, and the methods for screening the Antenna so that it is not visible to the public from the Common Areas or public streets. Tenant and Tenant’s contractors performing the installation of the Antenna must comply with the terms and conditions of Article XI (Alterations) and Exhibit “C” to the Lease. Any penetrations of the building roof must be performed by a contractor designated by Landlord so as to maintain the building roof warranties. Landlord may elect to perform any of such work which affects building systems with its own personnel or contractors, and Tenant shall promptly reimburse Landlord therefor, as additional rent.

3. Governmental Compliance. Tenant is solely responsible for securing, at Tenant’s expense, all necessary approvals from state, federal and other governmental authorities to construct, operate and maintain the Antenna, but Landlord shall reasonably cooperate with Tenant to obtain these approvals. Tenant shall construct and maintain the Antenna in accordance with the requirements of the insurers of the building and with reasonable rules, regulations and technical standards of Landlord relating to use of the building roof as Landlord may establish from time to time. Tenant shall give to Landlord written notice of any notices received by Tenant from third parties stating that the Antenna is or may be in violation of any law, ordinance or regulation.

4. License Fee. In consideration of this license granted by Landlord, Tenant shall pay Landlord, without demand, offset or counterclaim, a monthly fee of $100.00 commencing upon the installation of the Antenna and continuing until Tenant’s removal of all of its equipment from the Antenna Site. Landlord may increase this monthly fee for any renewal of the initial term. Additionally, Tenant shall pay for all electricity consumed by such Antenna and the cost of any separate meters to determine such consumption.

5. Maintenance and Removal of Antenna. Tenant shall maintain Antenna in good working order and repair and shall keep the area immediately surrounding the Antenna neat and clean. Tenant may not erect or display any sign, advertisement, placard or lettering on such Antenna. Tenant’s use and maintenance of the Antenna may not create any nuisance or interfere with any other licensee or tenant of the Building. Landlord has no obligation to maintain, operate or safeguard the Antenna. Upon the expiration or termination of the lease or at any time that Tenant is no longer using the Antenna, Tenant must remove the Antenna at Tenant’s sole cost and expense and must promptly repair, at its own expense, any damage to the building resulting from this removal.


Period		Rentable Square Footage		Annual Base Rental Per Square Foot		Annual Base Rental		Monthly Installment of Base Rental

from	through

05/01/2007	04/09/2008		10,671	$	24.50	$	261,439.56		$21,786.63
04/10/2008	04/09/2009		10,671	$	25.24	$	269,336.04		$22,444.67
04/10/2009	04/09/2010		10,671	$	26.00	$	277,446.00		$23,120.50
04/10/2010	04/09/2011		10,671	$	26.77	$	285,662.64		$23,805.22
04/10/2011	10/31/2011		10,671	$	27.57	$	294,199.44		$24,516.62


If by U.S. Mail:	Tower Place, L.P.
	75 Remittance Drive
	Suite 6706
	Chicago, IL 60675-6706

If By Wire Transfer:	The Northern Trust Company
	50 South LaSalle Street
	Chicago, IL 60675
	ABA No.: 071-000-152
	For Credit to:	Tower Place, L.P. Lockbox Account a Property of Tower Place, L.P., by RREEF Management Company
	Account No.:	2726769


	To Landlord:


		Tower Place, L.P.
		c/o RREEF
		3340 Peachtree Road, Suite 250
		Atlanta, Georgia 30326
		Attn: Faye Z. Phillips

	and

		Tower Place, L.P.
		c/o Regent Partners, LLC
		3348 Peachtree Road, NE, Suite 1000
		Atlanta, Georgia 30326-1008
		Attn: Debra Cohbs


Date:		2-5-07	LANDLORD:

			TOWER PLACE, L.P., a Georgia limited partnership

			By: RREEF America REIT III Corp. O, a Maryland corporation, general partner

			By: RREEF Management Company, a Delaware corporation, Authorized Agent

			By:

				Faye Phillips Vice President – District Manager

Date:	1-31-07		TENANT:

			QUALITY SYSTEMS, INC., a California corporation

			By:

				Name:	Paul Holt
				Title:	CFO

			Attest:

				Name:

				Title:


			[CORPORATE SEAL]


	(A) Tenant shall review each draft of the Expansion Construction Documents received from Landlord, and either (a) approve the same or (b) return the same to Landlord with a written notice detailing only those requested modifications which are required in order to correct material deviations from the Additional Expansion Schematic Plan and/or the Conference Center Schematic Plan, in either event within five (5) business days after receipt thereof from Landlord. Any other


	changes to the Expansion Construction Documents desired by Tenant shall be requested under Section 5(i).

	(B) If Tenant shall return the Expansion Construction Documents to Landlord in timely fashion with written requested modifications, Landlord shall, subject to Section 5(d)(ii)(D), revise the Expansion Construction Documents within a reasonable period of time and resubmit same to Tenant for approval pursuant to Section 5(d)(ii)(A), until the Expansion Construction Documents are approved.

	(C) The Expansion Construction Documents shall be deemed approved by Tenant upon the first to occur of (i) Landlord’s receipt of Tenant’s written notice approving same, or (ii) Tenant’s failure to deliver written notice to Landlord either approving or suggesting modifications of the Expansion Construction Documents of the sort permitted under Section 5(d)(ii)(A), within the time required under Section 5(d)(ii)(A), or (iii) if all of Tenant’s requested modifications of the Expansion Construction Documents are disapproved by Landlord pursuant to Section 5(d)(ii)(D).

	(D) Landlord shall not unreasonably disapprove modifications of the Expansion Construction Documents requested by Tenant pursuant to Section 5(d)(ii)(A). Without limiting the generality of the foregoing, Tenant acknowledges that it shall be reasonable for Landlord to disapprove modifications requested by Tenant under this Section 5(d)(ii) because the work detailed in the proposed modification is inconsistent with the work contemplated in the Additional Expansion Schematic Plan or the Conference Center Schematic Plan, or because the work detailed in the proposed modification; (a) is likely to adversely affect Building systems, the structure of the Building or the safety of the Building and/or its occupants; (b) might impair Landlord’s ability to furnish services to Tenant or other tenants in the Building; (c) would materially increase the cost of operating the Building; (d) would violate any governmental laws, rules or ordinances (or interpretation thereof); (e) contains or uses hazardous or toxic materials or substances; (f) would adversely affect the appearance of the Building; (g) might adversely affect another tenant’s premises; (h) is prohibited by a ground lease affecting the Building or any mortgage, trust deed or other instrument encumbering the Building; or (i) is likely to be substantially delayed because of unavailability or shortage of labor or materials necessary to perform such work or the difficulties or unusual nature of such work. The foregoing reasons, however, shall not be the only reasons for which Landlord may withhold its approval whether or not such other reasons are similar or dissimilar to the foregoing. Neither the preparation by or for Landlord of the Additional Expansion Schematic Plan, the Conference Center Schematic Plan or the Expansion Construction Documents, nor Landlord’s performance, supervision or monitoring of the construction of the Work, shall constitute any warranty by Landlord to Tenant of the adequacy of the design for Tenant’s intended use of the Additional Expansion Premises or Conference Center.


June 2, 2006 through June 31 , 2007	$1,080,726.94 per annum (sum of $741,712.00 for Original Premises and Expansion Premises and $339,014.94 for additional 22,333 square feet)¹	$90,060.58 per month

July 1, 2007 through June 31, 2008	$1,115,071.94 per annum (sum of $764,890.50 for Original Premises and Expansion Premises and $350,181.44 for additional 22,333 square feet)	$92,922.66 per month

July 1, 2008 through June 31, 2009	$1,149,416.94 per annum (sum of $788,069.00 for Original Premises and Expansion Premises and $361,347.94 for additional 22,333 square feet)	$95,784.75 per month

July 1,2009 through June 31, 2010	$1,183,761.94 per annum (sum of $811,247.50 for Original Premises and Expansion Premises and $372,514.44 for additional 22,333 square feet)	$98,646.83 per month

July 1, 2010 though June 31, 2011	$1,218,106.94 per annum (sum of $834,426.00 for Original Premises and Expansion Premises and $383,680.94 for additional 22,333 square feet)	$101,508.91 per month


Additional Expansion Premises Rent Commencement Date through First Anniversary of Rent Commencement Date	$1,124,703.40 per annum (sum of $741,712.00 for Original Premises and Expansion Premises and $382,991.40 for Additional Expansion Premises)	$93,725.28 per month

First Anniversary of Rent Commencement Date through Second Anniversary of Rent Commencement Date	$1,160,496.90 per annum (sum of $764,890.50 for Original Premises and Expansion Premises and $395,606.40 for Additional Expansion Premises)	$96,708.08 per month

Second Anniversary of Rent Commencement Date through Third Anniversary of Rent Commencement Date	$1,196,290.40 per annum (sum of $788,069.00 for Original Premises and Expansion Premises and $408,221.40 for Additional Expansion Premises)	$99,690.87 per month

Third Anniversary of Rent Commencement Date through Fourth Anniversary of Rent Commencement Date	$1,232,083.90 per annum (sum of $811,247.50 for Original Premises and Expansion Premises and $420,836.40 for Additional Expansion Premises)	$102,673.66 per month

Fourth Anniversary of Rent Commencement Date through Fifth Anniversary of Rent Commencement Date	$1,267,877.40 per annum (sum of $834,426.00 for Original Premises and Expansion Premises and $433,451.40 for Additional Expansion Premises)	$105,656.45 per month


Conference Center Rent Commencement Date through First Anniversary of Rent Commencement Date	$1,219,502.50 per annum (sum of $741,712.00 for Original Premises and Expansion Premises and $477,790.50 for Second Expansion Premises)	$101,625.21 per month

First Anniversary of Rent Commencement Date through Second Anniversary of Rent Commencement Date	$1,258,418.50 per annum (sum of $764,890.50 for Original Premises and Expansion Premises and $493,528.00 for Second Expansion Premises)	$104,868.21 per month

Second Anniversary of Rent Commencement Date through Third Anniversary of Rent Commencement Date	$1,297,334.50 per annum (sum of $788,069.00 for Original Premises and Expansion Premises and $509,265.50 for Second Expansion Premises)	$108,111.21 per month

Third Anniversary of Rent Commencement Date through Fourth Anniversary of Rent Commencement Date	$1,336,250.50 per annum (sum of $811,247.50 for Original Premises and Expansion Premises and $525,003.00 for Second Expansion Premises)	$111,354.21 per month

Fourth Anniversary of Rent Commencement Date through Fifth Anniversary of Rent Commencement Date	$1,375,166.50 per annum (sum of $834,426.00 for Original Premises and Expansion Premises and $540,740.50 for Second Expansion Premises)	$114,597.21 per month


	LANDLORD:
	HUB PROPERTIES LLC,
	a Massachusetts limited liability company


	By:	MA PO, LLC,
		a Delaware limited liability company,
		its Managing Member


TENANT:

QUALITY SYSTEMS, INC.,
a California corporation

By:

	Name:	Paul Holt
	Title: CFO


		____________________ 2006

	Conference Center Commencement Date:
		____________________ 2006

	Termination Date:

		____________________, 2011


	By:

		Name: Jennifer B. Clark
		Title: Vice President

TENANT:

QUALITY SYSTEMS, INC., a California corporation

By:

	Name:
	Title:


	•	Lou Silverman – $440,000 (to increase from $400,000), effective November 1, 2007;

	•	Pat Cline - $495,000 (to increase from $450,000), effective November 1, 2007;

	•	Greg Flynn - $250,000 (to increase from $230,000), effective November 1, 2007; and

	•	Paul Holt - $250,000 (to increase from $230,000), effective July 23, 2007.


	(i)	for Lou Silverman, the Company’s President and Chief Executive Officer, cash compensation of up to $475,000 may be earned based on meeting certain target increases in earnings per share (“EPS”) performance and revenue growth during the fiscal year as well as meeting certain operational requirements established by the Board of Directors; of the total $475,000 potential cash compensation, 40% is allocated to the EPS performance criteria, 40% is allocated to the revenue growth criteria and the remaining 20% is discretionary and is allocated in part to the operational requirements criteria.

	(ii)	for Pat Cline, the President of the Company’s NextGen Healthcare Information Systems Division, cash compensation of up to $550,000 may be earned based on meeting certain target increases in EPS performance and revenue growth during the fiscal year as well as meeting certain operational requirements established by the Board of Directors; of the total $550,000 potential cash compensation, 40% is allocated to the EPS performance criteria, 40% is allocated to the revenue growth criteria and the remaining 20% is discretionary and is allocated in part to the operational requirements criteria.

	(iii)	for Greg Flynn, the Executive Vice President/General Manager of the Company’s QSI Division, cash compensation of up to $80,000 may be earned based upon the achievement of certain qualitative and quantitative goals related to both QSI Division performance and other corporate objectives as approved by the Compensation Committee of the Board of Directors and the Board of Directors; of the total $80,000 potential cash compensation, payment of up to $50,000 is based on achievement of quantitative goals, and payment of the remaining amount


		(up to the $80,000 total) is discretionary based on achievement of qualitative goals; and

	(iv)	for Paul Holt, the Company’s Chief Financial Officer and Secretary, cash compensation of up to $80,000 may be earned based upon the achievement of certain qualitative goals as approved by the Compensation Committee and the Board of Directors.


•	Lou Silverman – $400,000, effective November 1, 2006 (unchanged from salary level that became effective November 1, 2005);

•	Pat Cline – increased to $450,000, effective November 1, 2006;

•	Greg Flynn – increased to $230,000, effective November 1, 2006; and

•	Paul Holt – increased to $230,000, effective July 23, 2006.


	•	Lou Silverman is to receive cash totaling $228,000, comprising $72,000 attributable to the Company’s performance under the EPS performance criteria, $126,000 attributable to the Company’s performance under the revenue growth criteria, and $30,000 attributable to the discretionary component. In addition, Mr. Silverman is to receive options to purchase up to 22,000 shares of the Company’s common stock.

	•	Pat Cline is to receive cash totaling $320,000, comprising $80,000 attributable to the Company’s performance under the EPS performance criteria, $140,000 attributable to the Company’s performance under the revenue growth criteria, and $100,000 attributable to the discretionary component. In addition,


		Mr. Cline is to receive options to purchase up to 55,000 shares of the Company’s common stock.

	•	Greg Flynn is to receive cash totaling $70,000, comprising payment of $50,000 under the quantitative goal component and $20,000 under the discretionary qualitative goal component. In addition, Mr. Flynn is to receive options to purchase up to 5,500 shares of the Company’s common stock.

	•	Paul Holt is to receive cash totaling $70,000. In addition, Mr. Holt is to receive options to purchase up to 5,500 shares of the Company’s common stock.


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 A. HOLT

Date: June 8, 2007		Paul A. Holt,
		Chief Financial Officer
		(Principal Financial Officer)


Dated: June 8, 2007	By: /s/ LOUIS E. SILVERMAN

		Louis E. Silverman
		Chief Executive Officer (principal executive officer)

Dated: June 8, 2007	By: /s/ PAUL A. HOLT

		Paul A. Holt
		Chief Financial Officer (principal financial officer)