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Article by DailyStocks_admin    (06-03-08 08:05 AM)

Filed with the SEC from May 22 to May 28:

Quality Systems (QSII)
QSII director Ahmed Hussein remains "concerned" about QSII's corporate governance and board structure. One of Hussein's primary concerns: Its legal counsel, whom Hussein had intended to have removed under a previous agreement, continued working for QSII and assumed responsibilities of corporate counsel, board counsel and general counsel, Hussein said. Hussein believes the board's special committee "lacks transparency and fails to divulge its minutes to the other members of the board," and believes QSII needs a balanced board and impartial legal counsel. Hussein holds 4,651,600 shares (16.62% of the total outstanding).

BUSINESS OVERVIEW

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 UNIX 1 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 NT 2 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 (NextMD 4 .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.

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:






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






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






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






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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:






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






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






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






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






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

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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:






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Data captured using user-customizable input “templates”;






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






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Data electronically acquired through interfaces with clinical instruments or external systems;






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Other records, documents or notes, including electronically captured handwriting and annotations; and






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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, 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:






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






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






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Electronic insurance eligibility verification; and






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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.

CEO BACKGROUND

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

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

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

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

Sheldon Razin is a director. He is the founder of our company and has served as our Chairman of the Board since our inception in 1974. He served as our Chief Executive Officer from 1974 until April 2000. Since its inception until April 2000, he also served as the our President, except for the period from August 1990 to August 1991. Additionally, Mr. Razin served as Treasurer from our inception until October 1982. Prior to founding our company, he held various technical and managerial positions with Rockwell International Corporation and was a founder of our predecessor, Quality Systems, a sole proprietorship engaged in the development of software for commercial and space applications and in management consulting work. Mr. Razin holds a B.S. degree in Mathematics from the Massachusetts Institute of Technology.

Ibrahim Fawzy is a director and has been president of Fawzy Consultant Group since 2001. Fawzy Consultant Group works mainly in industrial investment projects. Dr. Fawzy has taught mechanical engineering at Cairo University in Egypt since 2001. Previously, he taught mechanical engineering at the University of London in England. Prior to forming his own consultancy group, Dr. Fawzy held several posts with the Egyptian government, including as cultural attaché in London, from 1979 to 1983. Dr. Fawzy was the Minister of Industry and Mineral Wealth from 1993 through 1996 and the Chairman of the General Authority for Investment from 1996 to 1999. Dr. Fawzy is a director of seven companies in Egypt, three of which are public (The Egyptians Abroad for Investment and Development, Misr Canada Lube Oil and El-Nubaria for Agricultural Mechanization). Dr. Fawzy has been a director of our company since 2005.

Edwin Hoffman is a director and has been employed as an engineering consultant with O-H Inc. since 2001. From 1972 to 2001, he was Co-Founder and President of Osborne-Hoffman Inc., a company that developed and marketed products for the security industry. Mr. Hoffman holds a BSEE from the City College of New York and a MSEE and PhD from the Polytechnic Institute of Brooklyn. Mr. Hoffman has been a director of our company since 2006.

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

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

Russell Pflueger is a director and is the Founder, Chairman and Chief Executive Officer of Quiescence Medical, Inc., a medical device development company. During 2001 and 2002, he founded and served as Chairman and Chief Executive Officer of Pain Concepts, Inc, a medical device company. He holds a chemical engineering degree from Texas A&M University and an MBA from the University of California at Irvine. Mr. Pflueger has been a director of our company since 2006.

Steven T. Plochocki is a director and is presently Chairman and Chief Executive Officer of Omniflight, a Dallas-based air medical services company. He previously served as Chief Executive Officer and Director of Trinity Hospice, a national hospice provider from October 2004 through October 2006. Prior to joining Trinity Hospice, he was Chief Executive Officer of InSight, a national provider of diagnostic imaging services from November 1999 to August 2004. He was Chief Executive Officer of Centratex Support Services, Inc., a support services company for the healthcare industry and had previously held other senior level positions with healthcare industry firms. He holds B.A. in Journalism and Public Relations from Wayne State University and a Master’s degree in Business Management from Central Michigan University. Mr. Plochocki has been a director of our company since 2004.

MANAGEMENT DISCUSSION FROM LATEST 10K

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:






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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.






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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:






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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;






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






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We can be expected to perform our contractual obligations; and






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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:









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The price is fixed or determinable;












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












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












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The customer has economic substance;












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The amount of returns can be reasonably estimated; and












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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









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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.












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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.












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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






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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.

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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.






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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.

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.

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.

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.

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:

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 emr and 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 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.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

For the Three-Month Periods Ended December 31, 2007 versus 2006

Net Income . The Company’s net income for the three months ended December 31, 2007 was $11.2 million or $0.41 per share on a basic and $0.40 per share on a fully diluted basis. In comparison, we earned $8.7 million or $0.32 per share on a basic and fully diluted basis for the three months ended December 31, 2006. The increase in net income for the three months ended December 31, 2007 was a result of the following:

The above positive factors to net income were offset by a decline in gross profit margin resulting from a greater proportion of revenue being derived from hardware and EDI revenue which have relatively lower gross margin percentages. The gross profit margin declined to 66.4% in the three months ended December 31, 2007 versus 67.0% in the prior year period.

Revenue. Revenue for the three months ended December 31, 2007 increased 24.9% to $48.1 million from $38.5 million for the three months ended December 31, 2006. NextGen Division revenue increased 28.6% from $34.2 million in the three months ended December 31, 2006 to approximately $44.0 million in the three months ended December 31, 2007, while QSI Division revenue decreased by 4.6% during the three months ended December 31, 2007 over the prior year period.

We divide revenue into two categories, “system sales” and “maintenance, EDI and other services”. Revenue in the system sales category includes software license fees, third party hardware and software, and implementation and training services related to purchase of the Company’s software systems. 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. Maintenance revenue includes amounts initially deferred in conjunction with new customer arrangements and subsequently amortized and billings to existing customers.

System Sales . Revenue earned from company-wide sales of systems for the three months ended December 31, 2007, increased 25.0% to $23.7 million from $19.0 million in the prior year period.

Our increase in revenue from sales of systems was principally the result of an 27.6% increase in category revenue at our NextGen Division. Divisional sales in this category grew from $17.9 million during the three months ended December 31, 2006 to $22.8 million during the three months ended December 31, 2007. This increase was driven by higher sales of NextGen emr and NextGen epm software to both new and existing clients, as well as increases in sales of hardware, third party software and supplies and implementation and training services.

NextGen Division software license revenue increased 26.7% between the three months ended December 31, 2007 and the prior year period. The Division’s software revenue accounted for 81.0% of divisional system sales revenue during the three months ended December 31, 2007. As of December 31, 2006, divisional software revenue as a percentage of divisional system sales revenue was 81.6%. Sales of additional licenses to existing customers was $9.4 million during the three months ended December 31, 2007 up from $4.5 million in the prior year period. The sale of licenses to existing customers can fluctuate significantly from quarter to quarter and year to year. NextGen’s growing client base has been a source of increased sales of add-on licenses.

During the three months ended December 31, 2007, 7.0% of NextGen’s system sales revenue was represented by hardware and third party software compared to 3.0% in the prior year period. During the three months ended December 31, 2007, there was a shift in the revenue mix with increased revenue coming from hardware revenue. The number of customers who purchase hardware and third party software and the dollar amount of hardware and third party software revenue fluctuates each quarter depending on the needs of customers. The inclusion of hardware and third party software in the Division’s sales arrangements is typically at the request of the customer and is not a priority focus for us.

Implementation and training revenue related to system sales at the NextGen Division remained unchanged in the three months ended December 31, 2007 compared to the three months ended December 31, 2006. The amount of implementation and training services revenue in any given quarter 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 three months ended December 31, 2007 versus 2006 in order to accommodate the increased amount of implementation services sold in conjunction with increased software sales. In order to achieve growth in this area, additional staffing increases and additional training facilities are anticipated, though actual future increases in revenue and staff will depend upon the availability of qualified staff, business mix and conditions, and our ability to retain current staff members.

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

For the QSI Division, total system sales decreased 19.4% in the three months ended December 31, 2007 versus the same period ended December 31, 2006. We do not presently foresee any material changes in the business environment for the Division with respect to the weak purchasing environment in the dental group practice market that has existed for the past several years.

Maintenance, EDI and Other Services. For the three months ended December 31, 2007, Company-wide revenue from maintenance, EDI and other services grew 24.9% to $24.4 million from $19.5 million in the prior year period. The increase in this category resulted from an increase in maintenance, EDI and other services revenue from the NextGen Division’s client base. Total NextGen Division maintenance revenue for the three months ended December 31, 2007 grew 40.7% to $13.1 million from $9.3 million in the prior year period, while EDI revenue grew 44.1% to $4.6 million compared to $3.2 million during the prior year period. Other services revenue for the three months ended December 31, 2007 declined 9.0% to $3.5 million from $3.8 million in the prior year period. QSI Division maintenance revenue remained fairly unchanged in the three months ended December 31, 2007 as compared to the prior year period while QSI divisional EDI revenue increased by 3.4% in the three months ended December 31, 2007 as compared to the prior year period.

CONF CALL

Louis Silverman

Thank you, Jonathan. Welcome everyone to the Quality Systems third quarter fiscal 2008 earnings call. Paul Holt, our CFO; and Pat Cline, President of our NextGen Healthcare Information Systems Division, join me as participants on this afternoon's call.

Please note that the comments made on this call may include statements that are forward-looking within the meaning of the securities laws, including without limitation statements related to anticipated industry trends, the company's plans, products, prospectus and strategies, preliminary and/or projected operating results, capital and equity initiatives, and the implementation of or potential impact of legal, regulatory and accounting requirements.

Actual events or results may differ materially from our expectations and projections, and you should refer to our prior SEC filings, including our Forms 8-K, 10-K and 10-Q, for discussions of the risk factors, management discussion and analysis and other information that could impact our actual performance. We undertake no obligation to update any projections or forward-looking statements in the future.

I will now provide some summary comments on the quarter. Paul and Pat will follow with additional details.

For the quarter, the company recorded revenue of $48.1 million, which is a new record for the company. On a year-over-year basis, total company revenue increased approximately 25%.

NextGen's revenue for the quarter was a record $44 million up 29% over the prior year. The QSI high division recorded $4.1 million which was down approximately 4.6% over the prior year fully diluted earnings per share for the quarter.

The record $0.40 per share was up from $0.32 in the year ago quarter. Note that the quarter's financial performance is impacted by a net $0.03 per share increase as result of life insurance proceeds and associated compensation expenses related to the recent passing of Mr. Greg Flynn, our former Executive Vice President and General Manager.

To take care of a couple of housekeeping items relevant to the QSI division, divisional sales staffing is at for FTEs and the division sales pipeline is approximately $3.9 million. As a reminder the QSI division's pipeline is defined as sales situations where QSI is included among the final three purchase choices and where we believe that the sale will occur within 180 days.

As previously announced our Board approved another quarterly $0.25 per share dividend to be paid to shareholders of record as of March 14, 2008, with an anticipated distribution date of April 7, 2008.

Regarding investor conferences, during the quarter the company presented at the Piper Jaffray and CIBC conferences and in January the company presented at the J.P. Morgan conference in San Francisco. During the remainder of the current quarter the company has scheduled to present at the UBS, Raymond James and Sidoti conferences.

Regarding acquisitions, we continue to review potentially interesting acquisition opportunities that come to our attention.

In closing my prepared comments for this call, I want to again clearly point out that there are no guarantees that the company or either of its divisions will meet or exceed past, present or expected levels of performance in future. It is possible that investors or analysts will set new short, medium or long-term expectations for the company.

In response to this possibility, please continue to note that we do not give our financial guidance to the investments community and we do not comment on guidance advanced by members of the financial community.

I will now turn things over to Paul Holt, our CFO.

Paul Holt

Thanks Lou and hello everyone. Consolidated system sales of $23.7 million this quarter represents an increase of 25% compared to $19 million in the prior year quarter. Our consolidated maintenance EDI and other services revenue rose 25% to $24.4 million compared to $19.5 million in the year ago quarter.

Consolidated gross profit margin this quarter came in at 66.4%, down slightly from 67% a year ago. The decrease in our gross margin over last year was due primarily to a relatively larger amount of hardware and third-party software as a percentage of system sales.

Our total SG&A expenses increased by approximately $2.7 million to $13.3 million in the quarter that compares to $10.6 million a year ago. The increase in SG&A expenses compared to the prior year was primarily due to $1.9 million in higher compensation expenses due to increased headcounts, $0.6 million in increased selling-related expenses, $0.5 million in higher corporate expenses and that was offset by a decline of $0.3 million in other general and administrative expenses.

SG&A expenses, as a percentage of revenue this quarter increased to 27.6%. That's roughly unchanged but slightly higher compared to the year-ago quarter which was 27.5%.

Interest income in the three months ended December 31, 2007 decreased to $710,000 compared to $935,000 in the year ago quarter. Interest income this quarter was declined primarily due to a greater portion of funds invested in tax-favored auction-rate securities, which offer lower interest rates but higher after-tax yields compared to money market or short-term US Treasuries.

The company's effective income tax rate was roughly unchanged compared to the year-ago quarter at 35.7% compared to 35.6% a year ago. The effective rate for our current quarter was impacted by the receipt of tax free insurance proceeds during the quarter as well as an increase in deductions for qualified production activities.

The addition of tax-exempt interest income and deductions relate to incentive stock options. Prior year quarter included the reenactment of federal R&D tax credit statutes which occurred during the quarter resulting in a catch-up of the prior two quarters R&D tax credit.

Moving to divisional performance system sales in our NextGen division rose 28% to $22.8 million this quarter compared to $17.9 million a year ago. Continued growth in NextGen's base of installed users drove maintenance, EDI and other revenue in that division 30% higher than last year at $21.2 million versus $16.3 million a year ago.

Operating income in the NextGen division was up 33% to $17,823,000 compared to $13,423,000 a year ago. The dental division reported a year-over-year decline of 5% reporting revenue of $4.72 million compared to $4.266 million a year ago. Operating income for the QSI division was $650,000.

Moving on to our balance sheet, our cash and marketable securities increased by approximately $5.5 million this quarter to $78.4 million or $2.86 per share, compared to $72.9 million or $2.67 at the end of the prior quarter. Note that the company paid a dividend of approximately $6.8 million or $0.25 per share in October of 2007 and again in January of 2008.

The Board of Directors has also declared an additional $0.25 per share dividend to shareholders of record on March 14 of 2008 to be paid in early April 2008. This quarter, our DSOs were unchanged compared to the prior quarter at 138 days. DSO's in the year-ago quarter was 140. DSOs net amount included in both the accounts receivable and deferred revenue was also unchanged compared to the prior quarter at 90 days. DSO's by division was 96 days for the QSI division and 142 days for the NextGen division.

Deferred maintenance and services revenue at $41.3 million was up $1.4 million from the prior quarter and up $0.7 million compared to the prior year. And as a customer we do -- I am going to provide our non-cash expenses for the quarter which breakdown as follows.

Total amortization expenses, $1.85 million, $33,000 for QSI and $1.52 million for NextGen. Total depreciation expenses, $616,000 at $64,000 for QSI and $552,000 for NextGen. Stock option compensation which is a non-cash expense was $921,000 in the quarter.

And our investing activities were as follows: capitalized software, $1.447 million, that's $62,000 for QSI and $1.385 million for NextGen, fixed assets, $487,000 that's $30,000 for QSI and $457,000 for NextGen.

Again I want to thank you all for being on our call and your interest in our company. And I'll turn things over to Pat Cline, President of our NextGen division, who will provide you an update on NextGen.

Pat Cline

Thank you, Paul. I am very pleased with NextGen's record sharing performance. During the quarter, we executed about 52 agreements and our pipeline is increased to over $80 million. As I have reported on our last call the size of our sales force is reduced somewhat from -- well, it was reduced to somewhat last quarter.

Our sales force currently stands at 58 people, directionally, we want to continue to increase the number of sales people but we feel it's critical to maintain top quality as we do. NextGen continues to compete very effectively in the marketplace when in key deals against our competition and our market continues to be robust.

I would like to once again thank NextGen employees for their dedication to customer service and I would like to thank our customers for the confidence that they place in our company.

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