Computer Programs and Systems Annual Report 2004

FY2004 Annual Report · Computer Programs and Systems

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2 0 0 4 A N N U A L R E P O R T

CPSI

Clear direction for healthcare information solutions

co m p a n y p ro f i le

CPSI is a leading provider of healthcare
information solutions for community hospitals
with over 500 client hospitals in 45 states.
Founded in 1979, the Company is a single-
source vendor providing comprehensive
software and hardware products,
complemented by complete installation
services and extensive support. Its fully
integrated, enterprise-wide system automates
clinical and financial data management in
each of the primary functional areas of a
hospital. CPSI’s staff of over 750 technical,
healthcare and medical professionals provides
system implementation and continuing
support services as part of a comprehensive
program designed to respond to clients’
information needs in a constantly changing
healthcare environment. For more
information, visit www.cpsinet.com.

Annual Meeting

The annual meeting of stockholders will be
held on May 12, 2005, at 9:00 a.m. Central
time at the Mobile Convention Center, One
South Water Street, Mobile, Alabama.

2 0 0 4 C P S I A N N U A L R E P O R T P A G E 1

f i n a n c i a l h i g h l i g h t s
(in thousands, except per share data)

Total sales revenues
Total cost of sales

Gross profit

Year Ended
December 31,

2004
$ 82,664
49,576
33,088

2003
$ 81,303
48,405
32,898

Total operating expenses

21,886

20,352

Operating income

Interest income, net
Other income

Net income before taxes

Provision for income taxes
Net income

Basic earnings per share
Diluted earnings per share

Weighted average shares outstanding:

Basic
Diluted

11,202
258
243
11,703
4,639
$ 7,064

$
$

0.67
0.67

12,546
216
122
12,884
5,018
$ 7,866

$
$

0.75
0.75

10,490
10,536

10,488
10,537

revenues

net income (1)

hospital clients

4
4
0
,
8
$

6
6
8
,
7
$

4
6
0
,
7
$

4
3
5

0
9
4

4
4
4

0
0
4

2
6
3

3
0
3
,
1
8
$

4
6
6
,
2
8
$

4
4
7
,
3
7
$

6
6
6
,
9
5
$

2
2
2
,
9
4
$

9
4
4
,
5
$

5
6
0
,
3
$

(1) Net income for years 2000 and 2001 are pro forma for comparative purposes.

P A G E 2 2 0 0 4 C P S I A N N U A L R E P O R T

to o u r sto c k h o l d e rs :

During our quarter-century
of operation, CPSI has
established itself as a leader
in providing information
technology solutions to small
to medium sized hospitals
and their associated entities,
such as nursing homes,
home health agencies and
physician clinics.

2004 began with the promise of an improving financial climate for community
hospitals based on the increased Medicare reimbursement contained in the Medicare
Modernization Act passed by Congress in late 2003. In concert with these improved
financial dynamics, the demand for integrated healthcare information technology
solutions, most notably advanced clinical applications that provide caregivers with a
real-time electronic medical record, steadily grew throughout the year. CPSI’s results
mirrored this trend, beginning with a difficult yet profitable first quarter and
concluding with a fourth quarter that produced record revenues, earnings and free
cash flow. As a result, we ended 2004 with great optimism for what lies ahead for
our company and our customers, employees and stockholders.

During our quarter-century of operation, CPSI has established itself as a leader in

providing information technology solutions to small to medium sized hospitals and
their associated entities, such as nursing homes, home health agencies and physician
clinics. We have achieved this position by continually striving to meet the unique
needs of our community healthcare clients. Only CPSI offers an integrated, 100%
internally developed software solution for every functional area of the hospital and
then combines these applications with complete hardware sales and support, total
system service, regular software upgrades and comprehensive on-site training. We
can also manage the hospital’s entire business office operations, including patient
billing and insurance claims processing. We are truly a single-source solution.

CPSI is poised to take advantage of improving market conditions.

It is well documented that information technology spending in the healthcare

sector as a percentage of revenue has consistently lagged behind IT spending in
other industries. For a variety of reasons, that situation is changing. Community
hospitals now recognize that information technology systems are not only desirable,
but also a competitive necessity that can no longer be ignored.

Hospitals today are operating with increased awareness of the severe

impact of medical errors. Each year, nearly 100,000 deaths nationwide are
attributed to medical error, costing the healthcare industry approximately $4.5
billion annually. Integrated data management, which helps assure that all relevant
hospital personnel have real-time access to critical patient clinical information,
directly correlates with a reduced incidence of error.

Federal legislation essentially demands that hospitals upgrade their IT

systems in all areas of their operations. HIPAA, the Health Insurance
Portability and Accountability Act, mandates that hospitals ensure the security and
privacy of their data, a virtually impossible task without electronic record-keeping,
and that they adopt uniform electronic transaction code sets. As they near the
deadlines for HIPAA compliance, hospitals are moving aggressively to improve
their data management and are finding that CPSI can help them meet these new
national standards, as well as any future standards for data exchange.

The Bush administration has a recently established goal of nationwide
adoption of healthcare information technology in order that all Americans
have a personal electronic medical record within 10 years. This initiative
enjoys bipartisan political support and growing acceptance among the healthcare

2 0 0 4 C P S I A N N U A L R E P O R T P A G E 3

community. Several bills have been introduced in Congress that are designed to
provide funding for information technology investments by community hospitals
and to offer financial incentives through improved Medicare reimbursement based
on a hospital’s utilization of an electronic patient record and computerized
physician order entry applications.

Hospitals are recognizing that information technology is becoming

particularly important to their recruitment and retention efforts. IT
investments not only produce dividends in the form of improved productivity, but
they are also becoming a necessity for attracting key clinical personnel. Many
physicians are now demanding electronic access to the records of their patients.
Because the success of community hospitals depends so heavily on recruiting and
retaining physicians, investing in sophisticated IT systems inevitably has become a
key part of the overall strategy. Similarly, with a growing and persistent shortage
of experienced nurses in this country and with a direct correlation between reduced
paperwork and increased job satisfaction, information technology investment also
supports hospitals’ efforts to maintain a quality nursing staff.

As a result of these factors, we believe that healthcare IT spending will

continue to accelerate going forward. According to a recent study conducted by
the Healthcare Financial Management Association, hospital CFOs expect to see a
14% annual increase in capital spending over the next five years, with information
technology representing the largest portion of that investment. We believe that
CPSI is well positioned to reap the benefit of this demand and to capture a growing
share of a largely fragmented market.

CPSI is responding to the dynamics of the marketplace.

Our integrated clinical applications are well suited to meet the demands of
community hospitals for a complete electronic medical record across the continuum
of care, inclusive of the hospital and any associated nursing homes, physician clinics
and home health agencies. To illustrate this growing demand, consider that today
only one in four hospitals among our target market has a point-of-care nursing
documentation system, less than one in five has a system for electronic picture
archiving and fewer than one in ten has implemented computerized physician order
entry and bedside medication verification applications. In other words, more than
90% of our market lacks the electronic medical records that are becoming a necessity.
Three of our specialized clinical applications are proving to be especially
valuable to hospitals as they move toward a completely electronic chart. Our
ImageLink picture archiving and communication system (PACS) allows all
radiology films, such as MRIs, CT scans and ultrasound, to be captured and stored
as digital images. As a result, all of the various physician specialists who may be
involved in a patient’s care can view these diagnostic-quality pictures from any
point within the hospital or remotely from their offices or home computers.
ChartLink is our web-based patient chart that includes computerized physician
order entry functionality. By allowing physicians to access patient information
securely through the hospital’s website and to enter medication and ancillary orders
electronically, the system improves efficiency while eliminating the handwritten

P A G E 4 2 0 0 4 C P S I A N N U A L R E P O R T

With solid fundamentals
as a foundation, CPSI is
well positioned to capture
an increasingly larger
share of a market that
will continue to grow as
information technology
penetrates the healthcare
industry.

orders that can lead to medication errors. Our Nursing Point-of-Care application,
which relies on wireless and touch-screen technology, enables caregivers to access
and enter patient data in real time directly at the bedside.

We believe that these clinical modules, entirely designed and built by CPSI,
will contribute significantly to our success over the next few years and will play a
major role in our growth strategy.

At the same time, our outsourcing services, which include patient statement

printing, electronic claims processing and complete business office outsourcing,
enjoyed strong growth in the second half of 2004, with revenues during that period
representing 12% of total sales. For the fourth quarter, outsourcing revenue
increased 67% over the same period in 2003. We believe that as our customer base
continues to place a stronger emphasis on their core mission of delivering quality
patient care, they will look to CPSI as a cost effective and efficient solution for
their business processing needs.

Our fundamentals are strong. We believe our future is even stronger.

CPSI will continue to pursue the same steady, long-term growth that we have

experienced over the past 25 years. In doing so, we will continue to employ the
most conservative revenue recognition policies in the industry. For example, over
the last two years, our cash collections exceed our gross revenues, and our free cash
flow is greater than our net income. CPSI has no debt and had $1.31 per share in
cash at the end of 2004, while continuing to pay a quarterly dividend to our
stockholders. Finally, 57% of our annual revenue in 2004 was recurring revenue.
With solid fundamentals as a foundation, CPSI is well positioned to capture an

increasingly larger share of a market that will continue to grow as information
technology penetrates the healthcare industry. We believe that healthcare
information technology offers a greater opportunity than ever before, and we are
prepared to make the most of it. We are grateful for your support and your
investment in our future. We are also grateful to our customers, who, with their
mission of caring, understand the value of what we do in helping them to fulfill
that mission.

Sincerely,

David A. Dye
President and Chief Executive Officer

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 OR

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: 000-49796

COMPUTER PROGRAMS AND SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
(State or Other Jurisdiction
of Incorporation or Organization)

6600 Wall Street, Mobile, Alabama
(Address of Principal Executive Offices)

74-3032373
(I.R.S. Employer
Identification No.)

36695
(Zip Code)

(251) 639-8100
(Registrant’s telephone number, including area code)

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

None
Common Stock, $.001 par value

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
No

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes

The aggregate market value of common stock held by non-affiliates of the registrant at June 30, 2004 was
$131,847,799.

As of March 11, 2005 the registrant had outstanding 10,489,849 shares of its common stock.

DOCUMENTS INCORPORATED BY REFERENCE IN THIS FORM 10-K:

Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 12, 2005 are
incorporated by reference into Part II and Part III of this report.

TABLE OF CONTENTS

Item No.

Page No.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS................................................................................... 1

2.
3.
4.

6.
7.

7A.

8.
9.

9A.
9B.

10.
11.
12.
13.
14.

PART I

Business ........................................................................................................................................................... 2
Overview ........................................................................................................................................... 2
Industry Dynamics ............................................................................................................................ 2
Our Solution ...................................................................................................................................... 4
Strategy ............................................................................................................................................. 4
Our Products and Services................................................................................................................. 6
System Implementation and Training.............................................................................................. 13
Technology...................................................................................................................................... 14
Research and Development ............................................................................................................. 14
Customers, Sales and Marketing ..................................................................................................... 15
Competition..................................................................................................................................... 15
Internal Management Controls ........................................................................................................ 16
Intellectual Property ........................................................................................................................ 16
Employees ....................................................................................................................................... 17
Executive Officers.......................................................................................................................... 17
Company Website ........................................................................................................................... 18
Properties ....................................................................................................................................................... 18
Legal Proceedings .......................................................................................................................................... 19
Submission of Matters to a Vote of Security Holders .................................................................................... 19

PART II

Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Securities .................................................................................................................... 20*
Selected Financial Data................................................................................................................................... 21
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................................................................. 22
Quantitative and Qualitative Disclosures about
Market Risk................................................................................................................................................... 36
Financial Statements and Supplementary Data ............................................................................................. 37
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................................................................................................ 58
Controls and Procedures.................................................................................................................................. 58
Other Information............................................................................................................................................ 58

PART III

Directors and Executive Officers of the Registrant ....................................................................................... 59*
Executive Compensation............................................................................................................................... 59*
Security Ownership of Certain Beneficial Owners and Management ........................................................... 59*
Certain Relationships and Related Transactions ........................................................................................... 59*
Principal Accountant Fees and Services........................................................................................................ 59*

PART IV

15.

Exhibits, Financial Statement Schedules........................................................................................................ 60

SIGNATURES ............................................................................................................................................................................. 61

Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 12, 2005 are
incorporated by reference in Part II and Part III of this Form 10-K.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of

the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-
looking statements can be identified generally by the use of forward-looking terminology and words such
as "expects," "anticipates," "estimates," "believes," "predicts," "intends," "plans," "potential," "may,"
"continue," "should," "will" and words of comparable meaning. Without limiting the generality of the
preceding statement, all statements in this Annual Report relating to estimated and projected earnings,
margins, costs, expenditures, cash flows, growth rates and future financial results are forward-looking
statements. We caution investors that any such forward-looking statements are only predictions and are
not guarantees of future performance. Certain risks, uncertainties and other factors may cause actual
results to differ materially from those projected in the forward-looking statements. Such factors may
include:

•

• overall business and economic conditions affecting the healthcare industry;
•
•

saturation of our target market and hospital consolidations;
changes in customer purchasing priorities and demand for information technology
systems;
competition with companies that have greater financial, technical and marketing
resources than we have;
failure to develop new technology and products in response to market demands;
fluctuations in quarterly financial performance due to, among other factors, timing of
customer installations;
•
failure of our products to function properly resulting in claims for medical losses;
• government regulation of our products and customers, including changes in healthcare

•
•

policy affecting Medicare reimbursement rates; and
interruptions in our power supply and/or telecommunications capabilities.

•

For more information about the risks described above and other risks affecting us, see “Risk

Factors” beginning on page 31 of this Annual Report. We also caution investors that the forward-looking
information described herein represents our outlook only as of this date, and we undertake no obligation
to update or revise any forward-looking statements to reflect events or developments after the date of this
Annual Report.

PART I

ITEM 1. BUSINESS

Overview

We are a healthcare information technology company that designs, develops, markets, installs and
supports computerized information technology systems to meet the unique demands of small and midsize
hospitals. Our target market includes acute care community hospitals with 300 or fewer beds and small
specialty hospitals. We are a single-source vendor providing comprehensive software and hardware
products, complemented by data conversion, complete installation and extensive support. Our fully
integrated, enterprise-wide system automates the management of clinical and financial data across the
primary functional areas of a hospital. In addition, we provide services that enable our customers to
outsource certain data-related business processes which we can perform more efficiently. We believe our
products and services enhance hospital performance in the critical areas of clinical care, revenue cycle
management, cost control and regulatory compliance. From our initial hospital installation in 1981, we
have grown to serve 530 hospital customers across 45 states and the District of Columbia. In 2004, we
generated revenues of $82.7 million from the sale of our products and services.

Industry Dynamics

The healthcare industry is the largest industry in the United States economy. The Centers for

Medicare and Medicaid Services, or "CMS," has calculated that fiscal 2004 total healthcare expenditures
in the United States were approximately $1.9 trillion, or approximately 15.7% of the U.S. gross domestic
product. CMS estimates that by fiscal 2013 total U.S. healthcare spending will reach $3.4 trillion, or
18.4% of the estimated U.S. gross domestic product.

Hospital services represents one of the largest categories of total healthcare expenditures.

According to CMS, in fiscal 2005 spending on hospital services will amount to approximately
$585.8 billion, or 30.5% of total healthcare expenditures. According to the American Hospital
Association, there are approximately 4,900 community hospitals in the United States, with approximately
4,100 in our target market of hospitals with 300 or fewer acute care beds. In addition, there is a market of
small specialty hospitals that focus on discrete medical areas such as surgery, rehabilitation and
psychiatry.

Notwithstanding the size and importance of the healthcare industry within the United States
economy, the industry is constantly challenged by changing economic dynamics, increased regulation and
pressure to improve the quality of healthcare. These challenges are particularly significant for the
hospitals in our target market due to their more limited financial and human resources. However, we
believe healthcare providers can successfully address these issues with the help of advanced medical
information systems. Specific examples of the challenges facing healthcare providers include the
following.

Changing Economic Dynamics. The federal Balanced Budget Act of 1997, or "BBA,"
significantly lowered Medicare reimbursements for hospital services. These reductions were projected to
total over $250 billion over five years. While the Budget Refinement Act of 1999 and the Benefits
Improvement Act of 2000 lessened the impact of the BBA, aggregate federal reimbursement for hospital
services is still significantly below pre-1997 levels. Additionally, the Medicaid program, which is a
federal/state program managed by the individual states and dependent in part on funding from the states,
is in crisis due to the increasing cost of healthcare and the detrimental effect of the lagging economy on
state revenues. As a result of the recent enactment of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003, however, community hospitals began to experience improved Medicare

reimbursement in 2004. Continuing in 2005 and over the next nine years, this legislation is expected to
raise Medicare reimbursements to rural hospitals by an estimated $25 billion.

Health Insurance Portability and Accountability Act. The federal Health Insurance Portability

and Accountability Act of 1996, or "HIPAA," requires the implementation of national guidelines for
information management by healthcare organizations. Among other things, HIPAA mandates uniform
electronic transactions and code sets, improved data security and increased patient privacy. Final
regulations for privacy standards became effective in April 2003. Final regulations for electronic
transaction/code set standards were adopted in February 2002 and became effective in October 2003.
CMS, however, is currently allowing providers and payors to continue utilizing non-compliant transaction
code sets. The length of this grace period has not yet been determined. The final rules for security
standards were published in February 2003, and covered entities have until April 2005 to comply with the
new security standards. The CPSI system is compliant with all applicable HIPAA rules and regulations
currently in force. However, as the regulations continue to evolve due to the dynamic nature of
governmental action and guidance, future changes to the system may be necessary.

HIPAA continues to be a major influence as illustrated by the results of the 16th Annual HIMSS

Leadership Survey sponsored by Superior Consultant Company. Survey respondents consider HIPAA
compliance more than any other matter as a top business issue that will affect healthcare in 2005 and
2006. Approximately 44% of respondents identified upgrading information technology systems to meet
HIPAA requirements as the number one information technology priority for their organizations.
Approximately 53% of respondents identified increased patient safety as their number one priority. In
addition, results of the Winter 2004 Healthcare Industry HIPAA Compliance Survey conducted by
HIMSS and Phoenix Health Systems indicate that HIPAA readiness is still a serious concern. While
respondent hospitals are decreasing their HIPAA compliance budgets for 2005, the respondent hospitals
are still budgeting significant dollars to address HIPAA concerns. Vendors that offer information
solutions utilizing a common architecture and database structure, such as CPSI, are well positioned to
provide healthcare participants with effective solutions to the HIPAA requirements.

Activism for Improved Clinical Care. In November 1999, the Institute of Medicine published a

report entitled "To Err is Human: Building a Safer Healthcare System." The report indicated that
avoidable medical error is one of the top ten leading causes of death in the United States. The report also
estimates that medical error may add as much as $14.5 billion of preventable cost to the healthcare
industry. As a result of this study, automated medical information systems have been increasingly
identified as a key to improving patient care and reducing medical errors. For example, the Leapfrog
Group, a consortium of more than 100 public and private organizations including General Motors,
General Electric, AT&T and IBM, recommends that its members utilize hospitals with certain automated
medical information systems that are designed to limit medical errors. Moreover, California has adopted
legislation requiring hospitals to use automated medical information systems. We believe hospitals
utilizing fully integrated enterprise-wide medical information systems that allow professionals real-time
access to information such as electronic charts, treatment protocols and pathways, pharmaceutical records
and treatment schedules will be favored by large employers and government payers.

While economic, regulatory and consumer pressures such as those described above have
increased rapidly over the last several years, we believe healthcare organizations have historically
underinvested in information technology and services compared to other industries. This underinvestment
has caused healthcare providers to rely on non-integrated, complex and inefficient information systems. A
hospital's failure to adequately invest in modern medical information systems could result in fewer patient
referrals, cost inefficiencies, lower than expected reimbursement, increased malpractice risk and possible
regulatory infractions.

In the face of decreasing revenue and increasing pressure to improve patient care, healthcare

providers are in need of management tools that (1) increase efficiency in the delivery of healthcare

services, (2) reduce medical errors, (3) effectively track the cost of delivering services so those costs can
be properly managed and (4) increase the speed and rate of reimbursement. We believe the industry has
begun to embrace information technology as a management tool, evidenced by the fact that approximately
42% of the respondents to the 16th Annual HIMSS Leadership Survey referenced above predicted a
definite increase in their organizations' information technology operating budgets during 2005, with an
additional 34% of the respondents predicting a probable increase in their organizations’ information
technology operating budgets during 2005. We believe these dynamics will allow for future revenue
growth.

Our Solution

We have tailored an information technology solution that effectively addresses the specific needs
of small and midsize hospitals. Due to their smaller operating budgets, community hospitals have limited
financial and human resources to operate manual or inefficient information systems. However, these
hospitals are expected to achieve the same quality of care and regulatory compliance as larger hospitals,
placing them in a particularly difficult operating environment.

We believe that the CPSI solution meets this challenge. We provide fully integrated, enterprise-

wide, HIPPA compliant medical information systems and services that collect, process, retain and report
data in the primary functional areas of a hospital, from patient care to clinical processing to administration
and accounting. As a key element of our complete solution, we provide ongoing customer service through
regular interaction with customers, customer user groups and extensive customer support. Further, we
offer outsourcing services that allow customers to avoid some of the fixed costs of a business office. We
are capable of providing a single-source solution for small and midsize hospitals, making us a partner in
their initiatives to improve operations and medical care.

Our customers continuously communicate with us through our support teams and through

organized user groups, allowing us to continue to provide a state-of-the-art solution that meets their
specific needs. By remaining sensitive and responsive to the ever-changing demands of our customers and
regularly updating our products, we believe we provide an information technology solution that meets the
needs of community hospitals. Our business has continued to grow because we have successfully
addressed the needs of community hospitals for fully integrated enterprise-wide information systems that
allow them to improve operating effectiveness, reduce costs and improve the quality of patient care.

Strategy

Our objective is to continue to grow as a leading provider of healthcare information technology

systems and services to small and midsize hospitals by following the same strategy that we have
successfully pursued for over twenty-five years, the key elements of which are described below.

Deliver a Single-Source Solution. When a customer purchases the CPSI system, we provide

everything necessary for the customer to implement and use our system. We deliver the application
software, computer hardware, peripherals, forms and supplies used in the comprehensive information
network. Our installation teams work extensively with each customer to convert existing data to the new
system, to install all of the necessary equipment and to train hospital personnel to use our system. After
installation, our support teams answer and address customer questions and issues related to any aspect of
the system. We also offer customers additional services such as business office outsourcing, electronic
billing outsourcing and ISP services. We believe our single-source approach to delivering a complete
information system makes our system easier and more convenient for customers to understand and
manage, which results in greater customer satisfaction and retention.

Provide Enterprise-Wide, Fully Integrated Software Applications. We have developed all of our
software products internally as part of our fully integrated system architecture. Our experience has taught

us that using a fully integrated system in the primary functional areas of a hospital ensures compatibility
among applications and avoids pitfalls associated with interfacing disparate systems. Our system utilizes
one central database where information is stored and used by all of our software applications. With our
single database model, our systems provide secure, real-time access to all information across multiple
applications for all those needing such access, including physicians, nurses, laboratory technicians,
pharmacists, clinicians and other users. The enterprise-wide, fully integrated nature of our system also
allows customers to monitor user access to information for purposes of compliance with new federal and
state privacy regulations.

Maintain Commitment to Customer Oriented Operating Philosophy. A key factor in our success

has been our focus on customer service and support. We make available to our customers experienced
support teams that can assist with any question or problem. We currently have a greater than one to one
support staff to customer ratio. Our support teams are extensively trained, and our employees are
generally promoted from within so that they have a thorough knowledge of our system and a commitment
to our culture. Because all of our customers use the same version of our system, our support teams can be
more effective by maintaining a complete understanding of a single system. As part of our commitment to
system support, we actively solicit customer feedback regarding ways in which we can improve the
effectiveness and efficiency of our systems. To further this goal, we have organized our customers into a
national user group to promote the exchange of information regarding our system and to identify product
enhancements based on our customers' operational experiences. We believe our user group concept is a
key component of our success by positively impacting customer satisfaction and retention and by
enhancing product development and system functionality. We will continue to focus on our national user
group as a key component to our goal of maintaining and growing our customer base and market share.

Expand Presence in Target Market. We will continue to target small to midsize domestic

hospitals of 300 or fewer acute care beds. We believe this market of approximately 4,100 community
hospitals nationwide has been traditionally overlooked and underserved by other healthcare technology
companies. In addition, a number of our customers are small specialty hospitals that focus on discrete
medical areas such as surgery, rehabilitation and psychiatry. We intend to continue gaining customers
from this market segment. Our system can help these smaller hospitals reduce costs and increase their
operating efficiencies. We believe our personalized marketing approach and emphasis on customer
relationships are attractive to the management of these hospitals. We also believe our system is well-
suited to hospitals of this size because they typically demonstrate a greater commitment than larger
hospitals to the concept of an enterprise-wide, fully integrated system. While 92% of our current
customers are hospitals of 100 acute care beds or less, we believe there is a substantial opportunity in the
future to increase our market share among hospitals with 100 to 300 acute care beds. In addition, we will
continue to sell additional services and software products to our existing customers who have not
purchased our complete package of services and software applications.

Emphasize Recurring Revenue Opportunities. In addition to revenues from new system
installations, we have developed and will continue to develop sources of recurring revenues. Our current
principal source of recurring revenues is our support and maintenance fees paid by existing customers. As
our customer base grows, our recurring revenues from support and maintenance fees should also grow.
We believe growth in recurring revenues will also continue to come from our outsourcing services, which
we market to our existing customers as well as new customers. These services include electronic billing,
patient statement processing, business office outsourcing, ISP services and web site hosting. We also
provide our software products on an ASP basis. When we provide ASP services, we maintain a
customer's computer server in our facility and provide our system to the customer through remote access.
Instead of the one-time system purchase price, these customers pay a monthly fee for the term of the ASP
customer agreement, generating recurring revenues.

Our Products and Services

Recent Developments

We completed development of the following new products during 2004, and initial installations in

customer facilities occurred during the fourth quarter of 2004:

Electronic Forms. The Electronic Forms module replaces paper-based patient data and care
forms with user-defined electronic ones. Displayed and completed on-line using Microsoft’s Internet
Explorer, the module’s forms are easy to use and can be customized to meet needs such as emergency
department triage, trauma, and assessments, modality worksheets, consent for treatment, information
release requests and transfers. Completed forms become a permanent part of the patient’s electronic
medical record with access provided to patient care forms from within the clinical record. In addition to
their convenience, electronic forms are also a more efficient use of system resources with each form
requiring significantly less storage space than a comparable scanned document.

Application Portal. The Application Portal allows clients to access our applications remotely via

Microsoft Internet Explorer and the Internet without requiring the loading of any additional client
software on the accessing PC. User information and data accessed is secured with HIPAA compliant 128
bit cipher strength Secure Socket Layer (SSL) encryption. Remote access using the Application Portal
results in no discernable difference to the user in software functionality.

Systems

We offer a full array of software applications designed to streamline the flow of information to

the primary functional areas of community hospitals in one fully integrated system. We intend to continue
to enhance our existing software applications and develop new applications as required by evolving
industry standards and the changing needs of our customers. Pursuant to our customer support
agreements, we provide all of our customers with software enhancements and upgrades typically twice
each year. See "--Support and Maintenance Services." These enhancements enable each customer,
regardless of its original installation date, to have the benefit of the most advanced CPSI products
available. Our software applications:

•

provide automated processes that improve clinical workflow and support clinical
decision-making;

allow healthcare providers to efficiently input and easily access the most current patient
medical data in order to improve the quality of care and patient safety;

integrate clinical, financial and patient information to promote efficient use of time and
resources, while eliminating dependence on paper medical records;

provide tools that permit healthcare organizations to analyze past performance, model
new plans for the future and measure and monitor the effectiveness of those plans;

provide for rapid and cost-effective implementation, whether through the installation of
an in-house system or through our ASP services; and

increase the flow of information by replacing centralized and limited control over
information with broad-based, secure access by clinical and administrative personnel to
data relevant to their functional areas.

Our software applications are grouped for support purposes according to the following functional

categories:

•

Patient Management

Financial Accounting

Clinical

Patient Care

Enterprise Applications

Due to the integrated nature of the CPSI system, our software applications are not marketed as

distinct products, and our sales force attempts to sell all applications to each customer as a single product.
New customers must purchase from us and install the core applications of patient management and
financial accounting and all hardware necessary to run these applications. In addition to the core
applications, customers may also acquire one or more of our clinical, patient care and enterprise
applications. Approximately one-third of our customers have purchased a combination of applications
that meet their enterprise-wide information technology needs.

The general functional categories, as well as the software applications in each of these categories,

are described below.

Patient Management. Our patient management software enables a hospital to identify a patient
at any point in the healthcare delivery system and to collect and maintain patient information throughout
the entire process of patient care on an enterprise-wide basis. The single database structure of our
software permits authorized hospital personnel to simultaneously access appropriate portions of a patient's
record from any point on the system. The patient management software performs the following functions:

Registration

•

records patient admissions, discharges and transfers

Patient Accounting

Health Information
Management

Patient Index

• manages patient status, room assignments and

recurring charges

• keeps information available to all hospital personnel in
formats designed for their particular requirements

•

records patient charges and maintains accounts receivable
information including aging, service charges and cash
receipts

• generates and processes insurance claims

•

supports the operational needs of the modern medical
records department including transcription, case
indexing/abstracting and statistical reporting

tracks deficiencies in a patient's chart and provides chart
location information

• maintains a master index of hospital patients and provides

immediate online access to patient financial and medical
data associated with a patient stay

Electronic Claims
Processing

Medical Practice
Management

• provides a computer-to-computer link with intermediaries
for Medicare and other payers for the submission of claims

•

supports patient account management and insurance
processing for single and multiple practices/clinics

•

supports both hospital-based and remote practices/clinics

We also offer the following optional products that may be purchased as part of our core patient

management suite:

Scheduling

Managed Care

Quality Improvement

• maintains all patient scheduling information

•

tracks patients enrolled in managed care plans and
conforms billing functions to such plans

automates hospital-wide total quality management and
reporting requirements for utilization activity, risk
management, infection surveillance and all accreditation
review functions

Financial Accounting. Our financial accounting software provides a variety of business office
applications designed to efficiently track and coordinate information needed for managerial decision-
making. Our financial accounting software:

Executive Information
System

•

summarizes daily financial transactions regarding patient
revenues, receipts, census statistics and billing information
for ready access by hospital administrators

General Ledger

• provides timely, accurate, financial information generated

from daily hospital operations

•

formats financial statements to the specifications of each
user and is able to generate up to 999 different user-
defined reports

Accounts Payable

• processes vendor invoices and payments and their related

general ledger entries

Payroll/Personnel

•

calculates all employee wages and benefits for an
unlimited number of salaried and hourly employees

•

allocates employee time to user-defined cost centers

Time and Attendance

• uses touch screen time clocks to eliminate manual time

entry

•

reduces effort of gathering employee time data and
increases access of managers to such data

• makes time records more accurate by identifying

employees through bar-coding and optional biometric
fingerprint technology

Electronic Direct
Deposits

• provides for computerized bank deposits to meet payroll

and accounts payable needs

Human Resources

• provides for computerized employee files through

document/image scanning and data entry

Budgeting

Fixed Assets

Materials Management

•

allows for complete tracking of benefits and other
employee data through a variety of user-defined reports

tracks job applicant information to assist in the employee
recruiting and hiring process

allows for complete on-line budget preparation through
computerized access to historical data

allows access to information regarding hospital assets
including locations and depreciation scheduling

tracks the flow of materials throughout the hospital

automates the process of inventory control, materials
purchasing, stock requisitions and patient charging

Clinical. Our clinical software automates record keeping and reporting for many clinical
functions including laboratory, radiology, physical therapy, respiratory care, and pharmacy. These
products eliminate tedious paperwork, calculations and written documentation while allowing for easy
retrieval of patient data and statistics. Our clinical software:

Laboratory Information
Systems

• provides an interface to laboratory analytical instruments
in order to transfer results to nurse stations, mobile point-
of-care systems and remote physician offices

•

allows users to receive orders from any designated
location, process orders and report results and maintain
technical, statistical and account information

Laboratory Instrument
Interfaces

• provides an automated solution for reviewing test results

and completing patient orders

Radiology Information
Systems

•

reduces the amount of required manual data entry thereby
reducing the likelihood of human error

reduces time to process laboratory specimens

includes flash card printing, patient scheduling,
transcription, patient indexing by X-Ray film number,
film tracking and location

receives patient data, patient locations and other
interdepartmental communications support

ImageLinkTM

Physical Therapy and
Respiratory Care

Pharmacy

• provides a complete picture archiving and

communications system (PACS) with comprehensive
functionality designed to fit seamlessly with our other
applications

•

allows the realization of an electronic medical record
complete with diagnostic images

• provides physicians real time access to diagnostic images

via the internet through ChartLinkTM

•

communicates to nursing the appropriate procedures and
patient preparation instructions from orders entered into
the CPSI system

• keeps a journal of the orders received and processed

• handles a variety of processing tasks after a patient order

is reviewed

•

allows a department to customize its results to be sent
back to nursing

allows the hospital pharmacist to enter and fill physician
orders

• performs all of the functions related to patient charging,
general ledger upgrading, re-supply scheduling and
inventory reduction/statistics maintenance

•

improves patient care by monitoring drug/drug and
food/drug interactions, allergy contraindications, dosage
ranges and duplicate therapy

• produces drug education information for each patient in an

easy-to-read format

Patient Care. Our patient care applications allow hospitals to create computerized "patient files"

in place of the traditional paper file systems. This software enables physicians, nurses and other hospital
staff to improve the quality of patient care through increased access to patient information, assistance with
projected care requirements and feedback regarding patient needs. Our software also addresses current
safety initiatives in the healthcare industry such as the transition from written prescriptions and physician
orders to computerized physician order entry. Our patient care software:

Order Entry / Results
Reporting

•

automates the entry of patient charges

reduces "lost" charges and mistakes due to legibility

increases efficiency of nursing stations

• provides interactive, real time status reports for orders

Point-of-Care System

Patient Acuity

ChartLink TM

Medication Verification

Resident Assessment
Instruments

•

allows nurses to enter patient data into the network at the
patient's bedside thereby eliminating the duplicate entry of
information

• utilizes touch-screen and wireless technology

• makes patient information instantly available throughout

the entire hospital system

•

categorizes patients according to an assessment of the
acuity of the illness, severity of the symptoms, and
projected nursing dependency

allows nurses to project the total character and amount of
care that should be provided to each patient

• provides physicians with secure and interactive access to

patient information through a hospital's website

• provides for computerized physician order entry including

medication order entry

• verifies the accuracy of patient medication orders at a
patient's bedside by comparing scans of patient and
medication bar codes against the medication orders and
history for that patient

•

screens medication orders for possible patient allergies
and/or drug interactions

allows nursing staff to complete time consuming resident
reporting requirements in an expeditious and efficient
manner

• generates nursing care plans based on deficiencies in the

resident reports

Medical Practice Charting

• provides a permanent electronic encounter record for the

physician office

• provides patient charting customized to the specific needs

of each practice

Medical Practice Access

• provides physicians and their office administrators with

remote access to online, real time, secure patient data such
as insurance and billing information, diagnosis and
procedure coding, discharge summaries, pharmacy profiles
and other clinical and administrative information

Enterprise Applications. We provide software applications that support the products described
above and are useful to all areas of the hospital. These applications include: ad hoc reporting, automatic
batch and real-time system backups, an integrated fax system, archival data repository, document
scanning and Microsoft Office integration.

Home Health Information System. We offer a comprehensive information system for use in

home healthcare, which system incorporates certain of the applications described above. This system is

used primarily by hospitals with a CPSI information system that also have home health departments. Our
home health system provides an advanced solution that includes both home care patient
accounting/billing and remote home care documentation and care tracking. The system is designed,
developed and regularly enhanced to meet the needs and regulatory requirements that challenge home
healthcare.

Support and Maintenance Services

After a customer installs a CPSI system, we provide software application support, hardware

maintenance, continuing education and related services pursuant to a support agreement. The following
describes services provided to customers using CPSI systems.

Total System Support. We believe the quality of continuing customer support is one of the most
critical considerations in the selection of an information system provider. We provide hardware, technical
and software support for all aspects of our system which gives us the flexibility to take the necessary
course of action to resolve any issue. Unlike our competitors who use third-party services for hardware
and software support, we provide a single, convenient and efficient resource for all of our customers'
system support needs. In order to minimize the impact of a system problem, we train our customer service
personnel to be technically proficient, courteous and prompt. Because a properly functioning information
system is crucial to a hospital's operations, our support teams are available 24 hours a day to assist
customers with any problem that may arise. Customers can also use the Internet to directly access our
support system. This allows customers to communicate electronically with our support teams at any time.
With approximately 563 employees who provide customer service and support, we currently have a
greater than one to one support staff to customer ratio.

User Group. All of our customers are members of our user group from which we solicit

feedback regarding our products. We host a national user group meeting annually. We have also
organized several active regional user groups which meet on a semi-annual basis. These groups meet to
discuss and recommend product modifications and improvements which they then evaluate and prioritize.
Upon confirming that the desired improvements are technically feasible, we agree to allocate a significant
amount of programming time each year to undertake the requested modification or improvement. The
majority of our product enhancements originate from suggestions from our customers through the user
group structure.

Software Releases. We are committed to providing our customers with software and technology

solutions that will continue to meet their information system needs. To accomplish this purpose, we
continually work to enhance and improve our application programs. As part of this effort, we typically
release two software updates each year at no additional cost to our customers. We design these
enhancements to be seamlessly integrated into each customer's existing CPSI system. The benefit of these
enhancements is that each customer, regardless of its original installation date, uses the most advanced
CPSI software available. Through this process, we can keep our customers up-to-date with the latest
operational innovations in the healthcare industry as well as changing governmental regulatory
requirements. Another benefit of this "one system" concept is that our customer service teams can be
more effective in responding to customer needs because they maintain a complete understanding of and
familiarity with the one system that all customers use.

Purchasing a new information technology system requires the expenditure of a substantial amount
of capital and other resources, and many customers are concerned that these systems will become obsolete
as technology changes. Our periodic product updates eliminate our customers' concerns about system
obsolescence. We believe providing this benefit is a strong incentive for potential customers to select our
products over the products of our competitors.

Hardware Replacement. As part of our customer service effort, we are also committed to
promptly replacing malfunctioning system hardware in order to minimize the effect of operational
interruptions. By providing all hardware used in our system, we believe we are better able to meet and
address all of the information technology needs of our customers.

Application Service Provider. In some circumstances, we offer ASP services to customers via
remote access telecommunications. As an application service provider, we store and maintain computer
servers dedicated to specific customers which contain all of such customers' critical patient and
administrative data. These customers access this information remotely through direct telecommunications
connections with these servers.

Internet Service Provider. As part of our total information solution, we can provide Internet

connection services to our customers. We also can provide web-site design and hosting services.

Forms and Supplies. We offer our customers the forms that they need for their patient and

financial records, as well as their general office supplies. Furnishing these forms and supplies helps us to
achieve our objective of being a one-source solution for a hospital's complete healthcare information
system requirements.

Outsourcing Services

Electronic Billing. We provide electronic billing for customers at prices competitive with other

electronic billing vendors. Once a customer processes patient insurance claims in our system, we then
perform the electronic billing function with no other participation by hospital staff. With this service,
customers need not prepare billing files or maintain interfaces with third-party software, thereby saving
the customer both time and money.

Statement Processing. Our customers may choose to have us prepare and distribute all patient

billing statements. We use our knowledge of a customer's collection system to produce statements without
requiring any actions on the part of the hospital data processing personnel. Because we can connect
directly with a customer's system, the customer is not required to build and transfer files to us. All system
enhancements are incorporated into the statement process without having to modify any third-party
vendor interface. Like the electronic billing outsourcing, this service saves the customer both time and
money.

Business Office Outsourcing. We offer customers the option of using us to perform their

primary business office functions, including patient billing and accounts receivable management. Using
this service allows customers to reduce costs by employing fewer full time administrative employees.

System Implementation and Training

Conversion Services. When a customer purchases our system, we convert its existing data to the

CPSI system. Our knowledge of hospital data processing, in conjunction with extensive in-house
technical expertise, allows us to accomplish this task in a cost effective manner. When we install a new
system, the data conversion has already occurred so that the system is immediately operational. Our goal
is for each customer to be immediately productive in order not to waste time and money on the costly and
inefficient task of maintaining the same data on parallel systems. Our services also relieve the hospital
staff of the time-consuming burden of data conversion.

Training. In order to integrate the new system and to ensure its success, we spend

approximately three weeks providing individualized training on-site at each customer's facility at the time
of installation. We directly train all hospital users, including staff members and healthcare providers,
during all hospital shifts in the use of hardware and software applications. In contrast, some of our

competitors train only a hospital's training staff at an off-site location. We employ nurses and medical
technicians in addition to our technical training staff in order to help us communicate more effectively
with our customers during the training process.

Technology

Operating Systems and Server Platform. We utilize Intel-based servers running industry
standard "open systems," including Unix and Microsoft Windows 2000 Server operating systems.

ClientWare® Networking. Our ClientWare® application integrates the UNIX and Microsoft
operating systems. This integration brings together the strengths of both operating environments. The
processing power of UNIX combined with the communication capabilities of Microsoft Windows creates
an information system that allows the use of familiar "point and click" processing. This architecture also
facilitates integration of other Microsoft software and provides expanded opportunities for the inclusion
of new technologies without sacrificing system reliability or performance.

Wireless Technology. Traditional workstations were designed around access to electrical and
network outlets. We now use wireless networking technology to connect computers to the CPSI system.
This allows customers to use mobile computers and to place stationary computers in locations for
optimum convenience and ease of use. We incorporate wireless laptop and hand held computers into our
system. Convenient to carry and use, these mobile computers allow effective data collection and real-time
access to patient information from practically anywhere in the hospital. Information efficiently collected
will then be more quickly accessible by other caregivers throughout the hospital.

Point-of-Care Stations. Since 1990, we have used "point-of-care stations" which allow nurses

to enter information into the system at a patient's bedside. These stations consist of compact computers on
individual data entry stations that are lightweight, durable and easy to maneuver. We incorporate our
wireless networking capabilities into these stations in order to provide extended range and mobility.

Touch Sensitive Displays. Data entry is made easier through the use of touch sensitive displays.

With this technology work areas are free of the traditional keyboard and mouse associated with most
personal computers. Touch screens are also more efficient for users who are not proficient in computer
skills.

Voice Transcription. We offer voice transcription software capable of learning an individual
physician's speech patterns. Computerized transcription stations can then transcribe documents dictated
by physicians. The resulting reduction in time required to input patient data and prepare patient
documents positively impacts the quality of patient care by providing caregivers with faster access to the
most up-to-date patient information.

Biometric Recognition. As unique as each individual, a fingerprint cannot be duplicated,

making it one of the most secure methods of verifying a person's identity. Because of the sensitivity of
healthcare information and proposed federal security requirements, we have incorporated licensed
fingerprint identification technology as an option for our systems. When a user signs on to the system, he
or she must scan his or her fingerprint as well as enter a traditional password. The system rapidly
responds with the confirmation or rejection of the user's identity.

Research and Development

We are continually working to improve and enhance the CPSI system and to develop new
products and services for our system. The primary source of ideas for improvements to our products and
services comes from our customers through our national user group. We believe our interaction with
customers and their communication with each other is the most efficient way to learn about and respond

to changes in the healthcare operating environment. This approach to research and development allows us
to quickly adapt to technology advances and improve our products and services to better serve the needs
of our customers. Our management and customer support and service teams play a significant role in
product development by continually monitoring the needs and desires of our customers and our market. In
addition to our customer support and service teams, we currently have five employees whose primary
function is the development of financial and enterprise software products and ten employees whose
primary function is the development of clinical software products. Finally, we currently have eight
research and development employees whose dedicated function is to develop new uses for and
applications of technology available in the marketplace.

Customers, Sales and Marketing

Target Market. The target market for our information system consists of small and midsize

hospitals of 300 or fewer acute care beds. In the United States, there are approximately 4,100 hospitals in
this size range. In addition, we market our products to small specialty hospitals in the United States that
focus on discrete medical areas such as surgery, rehabilitation and psychiatry. As of February 28, 2005,
we had installed our system in 530 facilities in 45 states and the District of Columbia. Approximately
92% of our existing customers are hospitals with 100 or fewer acute care beds, while approximately 99%
of our existing customers are hospitals with 200 or fewer acute care beds. Our goal is to increase sales to
hospitals with 100 to 300 acute care beds while maintaining our competitive position in the under 100 bed
market segment.

Sales Staff. Most of our new customers are referrals from our existing customers, thereby
reducing the need for a large sales force. Currently, we have 18 employees dedicated to direct sales, eight
of whom concentrate on new prospects, and ten of whom are responsible for the sale of additional
products and services to existing customers. We hire our sales representatives from our existing
employees. Our current sales representatives have an average of 10.7 years of prior experience in
installation, training and customer support. While centrally based at our headquarters in Mobile, our sales
representatives have defined geographic territories in the United States in which to target new customers.
A significant portion of the compensation for all sales personnel is performance based.

Marketing Strategy. Our primary marketing strategy is to generate referrals from our existing

customers and directly solicit potential users through presentations at industry seminars and trade shows.
We also advertise in various healthcare industry trade publications. For hospitals that we have targeted as
potential customers, most of our direct sales efforts involve site visits and meetings with hospital
management. The typical sales cycle of a healthcare information system usually takes six to eighteen
months from the time of initial contact to the signing of a contract. Therefore, we believe it is important
for our sales staff to dedicate a substantial amount of time and energy to building relationships with
potential new customers. We do not conduct extensive marketing activities and promotions because
hospitals are easily identified, finite in number and generally send a request for proposal to vendors when
they contemplate the purchase of a hospital information system.

Competition

The market for our products and services is competitive, and we expect additional competition

from established and emerging companies in the future. Our market is characterized by rapidly changing
technology, evolving user needs and the frequent introduction of new products. We believe the principal
competitive factors that hospitals consider when choosing between us and our competitors are:

•

product features, functionality and performance;

level of customer service and satisfaction;

•

ease of integration and speed of implementation;

product price;

knowledge of the healthcare industry;

sales and marketing efforts; and

company reputation.

Our principal competitors are Medical Information Technology, Inc., or "Meditech," and
Healthcare Management Systems, Inc., or "HMS." Meditech and HMS compete with us directly in our
target market of small and midsize hospitals. These companies offer products and systems that are
comparable to our system and address the needs of hospitals in the markets we serve.

Our secondary competitors include McKesson Corporation, Quadramed Corp., Cerner
Corporation and Siemens Corporation. These companies are significantly larger than we are, and they
typically sell their products and services to larger hospitals outside of our target market. However, they
will sometimes compete directly with us. We also face competition from providers of practice
management systems, general decision support and database systems and other segment-specific
applications, as well as from healthcare technology consultants. Any of these companies as well as other
technology or healthcare companies could decide at any time to specifically target hospitals within our
target market.

A number of existing and potential competitors are more established than we are and have greater

name recognition and financial, technical and marketing resources than we have. Products of our
competitors may have better performance, lower prices and broader market acceptance than our products.
We expect that competition will continue to increase.

Internal Management Control System

We have developed and maintain an automated enterprise management system which permits us

to manage not only all of our internal management, accounting and personnel functions, but also all
information relating to each customer's information system. Our system maintains detailed records of all
information regarding each customer's system, including all system specifications, service history and
customer communications, among other things. This internal control system helps us to more effectively
respond to customer support needs through complete and current system information and through
situation-based problem solving.

Intellectual Property

We regard some aspects of our internal operations, software and documentation as proprietary,

and rely primarily on a combination of contract and trade secret laws to protect our proprietary
information. We believe, because of the rapid pace of technological change in the computer software
industry, trade secret and copyright protection is less significant than factors such as the knowledge,
ability and experience of our employees, frequent software product enhancements and the timeliness and
quality of support services. We cannot guarantee that these protections will be adequate or that our
competitors will not independently develop technologies that are substantially equivalent or superior to
our technology.

We do not believe our software products or other CPSI proprietary rights infringe on the property
rights of third parties. However, we cannot guarantee that third-parties will not assert infringement claims

against us with respect to current or future software products or that any such assertion may not require us
to enter into royalty arrangements or result in costly litigation.

Employees

As of February 28, 2005, we had 763 employees, all but four of whom are located at our offices

in Mobile, Alabama. Our employees can be grouped according to the following general categories: 490 in
financial and clinical software services and support, 114 in information technology services and support,
72 in programming, 30 in sales and marketing and 34 in administration. We have 23 employees who
perform research and development activities. These employees are included within the functional areas of
financial and clinical software services and support and information technology services and support. Our
general practice is to recruit recent college graduates for entry-level positions and then promote these
individuals within the organization to fill vacancies in higher positions. We also hire nurses and other
medically-trained professionals in connection with our support services.

Since 1991, we have maintained a non-qualified profit sharing plan under which all full-time

employees with three years of uninterrupted service are eligible to participate, other than executive
officers and commissioned salespeople. The plan is designed to provide each eligible employee with
periodic cash bonuses based on our profitability. Each eligible employee receives a pro rata share of the
amount of cash distributed under the profit sharing plan based on the amount of their base salary
compared to the sum of the salaries of all participating employees. Our profit sharing plan is not a
qualified plan for tax purposes or a guaranteed benefit. Contributions to the plan are made periodically at
the discretion of the Board of Directors. During 2004, we distributed approximately $1.0 million under
this profit sharing plan. We plan to continue to make distributions under the profit sharing plan based on
our profitability.

We are fortunate to have a high rate of employee retention, with our senior management having

an average tenure in excess of 14 years. Our performance depends in significant part on our ability to
attract, train and retain highly qualified personnel. None of our employees are represented by a labor
union, and we believe our relations with our employees are good.

Executive Officers

The Executive Officers of CPSI serve at the pleasure of the Board of Directors. Set forth below
is a list of the current Executive Officers of CPSI and a brief explanation of their principal employment
during the last five (5) years.

David A. Dye – President and Chief Executive Officer. David A. Dye, age 35, has served as
our President and Chief Executive Officer since July 1999. He was elected as a director in March 2002.
Mr. Dye began his career with us in May 1990 as a Financial Software Support Representative. From that
time until June 1999, he worked for us in various capacities, including as Manager of Financial Software
Support, Director of Information Technology and most recently as our Vice President supervising the
areas of sales, marketing and information technology.

J. Boyd Douglas – Executive Vice President and Chief Operating Officer. J. Boyd Douglas,
age 38, has served as our Executive Vice President and Chief Operating Officer since July 1999. He was
elected as a director in March 2002. Mr. Douglas began his career with us in August 1988 as a Financial
Software Support Representative. From May 1990 until November 1994, Mr. Douglas served as Manager
of Electronic Billing, and from December 1994 until June 1999, he held the position of Director of
Programming Services.

M. Stephen Walker – Vice President--Finance, Chief Financial Officer, Secretary and
Treasurer. M. Stephen Walker, age 55, has served as our Vice President--Finance, Chief Financial

Officer, Secretary and Treasurer since July 1999. From February 1991 until June 1999, Mr. Walker
served as our controller with primary responsibility for all of our accounting functions.

Victor S. Schneider – Vice President--Sales and Marketing. Victor S. Schneider, age 46, has

served as our Vice President--Sales and Marketing since July 1999. Mr. Schneider is responsible for
overseeing all of our sales and marketing efforts. Mr. Schneider began his career with us in June 1983 as
Sales Manager. He served in that capacity until January 1997 when he was promoted to Sales Director.

Robert D. Hinckle – Vice President--Financial Software Services. Robert D. Hinckle, age 35,

has served as our Vice President--Financial Software Services since October 2004. Mr. Hinckle is
responsible for overseeing all aspects of the installation and support of our financial software products.
Since beginning his career with us in 1995 as a Financial Software Support Representative, Mr. Hinckle
has worked in various positions in our Financial Software Services Division including Team Manager,
Assistant Director and Director of that division.

Thomas W. Peterson – Vice President--Clinical Software Services. Mr. Peterson, age 53, has
served as our Vice President--Clinical Software Services since July 1999. Mr. Peterson is responsible for
overseeing all aspects of the installation and support of our clinical software products. Since beginning his
career with us in 1988 as a Clinical Software Support Representative, Mr. Peterson has worked in various
positions in our Clinical Software Services Division including Manager and Director of that division.

Patrick A. Immel – Vice President--Information Technology Services. Patrick A. Immel, age
34, has served as our Vice President--Information Technology Services since January 2000. Mr. Immel is
responsible for overseeing technical hardware and support and hardware research and development. Mr.
Immel began his career with us in July 1993 as a Financial Software Support Representative. Since that
time, Mr. Immel has served as a programmer, Manager of Technical Support and most recently as
Director of Information Technology Services.

Company Website

The Company maintains a website at http://www.cpsinet.com. The Company makes available on
its website, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and all amendments to those reports, as soon as it is reasonably practicable after
such material is electronically filed with the Securities and Exchange Commission. The Company is not
including the information contained on or available through its website as a part of, or incorporating such
information into, this Annual Report on Form 10-K.

ITEM 2.

PROPERTIES

Our corporate headquarters and executive offices are located on approximately 28 acres in
Mobile, Alabama. We occupy approximately 123,500 square feet of space in eleven buildings. Our main
building consists of approximately 66,000 square feet of space. We also have nine additional buildings
each consisting of approximately 6,000 square feet. Each of these smaller buildings is designed to
accommodate a team of employees assigned to install and support a particular software application. We
also occupy a building consisting of approximately 3,500 square feet of space which houses our eight
research and development employees dedicated to developing new uses for and applications of available
technology.

We lease approximately 16.5 acres and all of our buildings (other than the research and
development building) from CP Investments, Inc., an Alabama corporation, the stockholders of which are
John Morrissey, John Heyer, Bob O'Donnell, Elissa Stillings, Kevin P. Wilkins, Tabitha M. Wilkins
Olzinski, Ellen M. Harvey, Michael K. Muscat, Jr. and Susan M. Slaton. All of these individuals are
either stockholders of CPSI, or, in the case of Ms. Stillings, the spouse of a stockholder. Our leases with

CP Investments, Inc. expire at various times between April 2012 and March 2015. The research and
development building is leased from DJK, LLC, a limited liability company owned by Dennis Wilkins, a
principal stockholder and a director of CPSI. Our lease with DJK, LLC also expires in April 2012. We
also own 11.3 acres of undeveloped real property adjacent to our primary premises in order to
accommodate future growth.

We believe our existing facilities will be sufficient to meet our needs until the second half of

2005. At that time we believe we will need to construct additional facilities on the undeveloped portion of
our campus in order to accommodate our expansion needs.

ITEM 3.

LEGAL PROCEEDINGS

From time to time, we are involved in routine litigation that arises in the ordinary course of

business. We currently are involved in a litigated dispute relating to the installation of a hospital
information system that, if resolved unfavorably, could have a negative impact on our quarterly earnings
at some point in the future. However, this dispute should not have a material adverse effect on our
business or financial condition. We are not currently involved in any other litigation that we believe
could reasonably be expected to have a material adverse effect on our business, financial condition or
results of operations.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

None.

PART II

ITEM 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES

Market for CPSI Common Stock

At March 11, 2005, CPSI had 89 stockholders of record (which does not include the number of

beneficial owners whose shares are held in "street" names by nominees who are record holders) and
10,489,849 shares of common stock outstanding.

CPSI common stock is traded in the over-the-counter market and prices are quoted on the

NASDAQ National Market under the symbol "CPSI." The following table sets forth, for the calendar
quarters indicated, the high and low sales prices per share for CPSI’s common stock on the NASDAQ
National Market, and the cash dividends declared per share in each such quarter:

High

Low

Dividends
Declared
Per Share

2003
First Quarter ...........................................
Second Quarter.......................................
Third Quarter..........................................
Fourth Quarter ........................................

2004
First Quarter ...........................................
Second Quarter.......................................
Third Quarter..........................................
Fourth Quarter ........................................

$25.93
25.05
21.75
20.35

$22.00
21.25
21.58
23.63

$20.78
17.80
14.04
14.40

$16.75
17.69
17.39
19.90

--
$0.085
0.085
0.085

$0.120
0.120
0.120
0.120

The last reported sales price of CPSI’s common stock as reported on the NASDAQ Stock Market

on March 11, 2005 was $25.82.

Dividends

During 2002, we paid a total of $16.9 million to our pre-IPO stockholders in connection with our
initial public offering (“IPO”), which was completed in May 2002, and our related conversion from an S
corporation to a C corporation. During 2003, we paid an additional $250,000 to these pre-IPO
stockholders.

During the second quarter of 2003, we paid our first dividend on our common stock to our post-
IPO stockholders. In the second, third and fourth quarters of 2003, we paid a dividend in the amount of
$0.085 per share. During 2004, we paid a quarterly dividend in the amount of $0.12 per share. On
February 1, 2005, we announced a dividend for the first quarter of 2005 in the amount of $0.22 per share.
We believe that paying dividends is an effective way of providing an investment return to our
stockholders and a beneficial use of our cash.

With respect to information regarding our securities authorized for issuance under equity

incentive plans, the information contained in the section entitled “Equity Compensation Plan
Information” of CPSI's definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A is incorporated herein by
reference pursuant to General Instruction G(2) of Form 10-K.

ITEM 6.

SELECTED FINANCIAL DATA

2004

2003

2002

2001

2000

Year ended D ecember 31,

IN C O M E D AT A:
T ot al sales revenues
T ot al cost s of sales
G ross p rofit
T ot al op erat ing exp enses
O p erat ing income
T ot al ot her income
Income before t axes
Income t axes
N et income (1)

(in t housands excep t for share and p er share dat a)
$

82,664
49,576
33,088
21,886
11,202
501
11,703
4,639
7,064

81,303
48,405
32,898
20,352
12,546
338
12,884
5,018
7,866

73,744
42,925
30,819
18,750
12,069
552
12,621
1,971
10,650

59,666
36,242
23,424
14,948
8,476
204
8,680
-
8,680

49,222
31,487
17,735
13,080
4,655
236
4,891
-
4,891

N et income p er share - basic

0.67

0.75

1.06

0.93

0.53

N et income p er share - dilut ed

0.67

0.75

1.06

0.93

0.53

W eight ed average shares out st anding:

B asic
D ilut ed

P ro forma income dat a: (2)
H ist orical income before p rovision for income t axes
P ro forma income t axes
P ro forma net income

P ro forma net income p er share - basic

P ro forma net income p er share - dilut ed

B A LA N C E SH EET D A T A
C ash and cash equivalent s
W orking cap it al
T ot al asset s
T ot al current liabilit ies
N ot e p ay able
T ot al st ockholders' equit y

10,489,849
10,535,555

10,488,406
10,536,929

10,024,438
10,061,765

9,288,000
9,288,000

12,621
4,577
8,044

8,680
3,231
5,449

4,891
1,826
3,065

0.80

0.59

0.33

0.80

0.59

0.33

2004

2003

2002

2001

2000

A s of D ecember 31,

(in t housands)

13,785
22,480
36,078
7,526
-
27,834

9,473
19,676
31,270
5,452
-
25,752

6,352
14,812
28,909
8,430
-
20,479

2,019
5,667
17,251
6,551
664
10,036

1,033
4,658
14,515
5,810
749
7,956

(1)

(2)

CPSI operated as an S corporation through May 20, 2002 and, as such, was not subject to federal and certain state
income taxes.
Pro forma information reflects the provision for income taxes that would have been recorded had CPSI been a C
corporation during all of the periods presented.

ITEM 7.

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

You should read the following discussion of our financial condition and results of operations in
conjunction with "Selected Financial Data" and our financial statements and the related notes included
elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that
involve risks, uncertainties and assumptions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of many factors, including but not limited to
those set forth under "Risk Factors" and elsewhere in this Annual Report.

Background

CPSI was founded in 1979 and specializes in delivering comprehensive healthcare information
systems and related services to community hospitals. Our systems and services are designed to support
the primary functional areas of a hospital and to enhance access to needed financial and clinical
information. Our comprehensive system enables healthcare providers to improve clinical, financial and
administrative outcomes. Our products and services provide solutions in key areas, including patient
management, financial management, patient care and clinical, enterprise and office automation. In
addition to servicing small to medium-sized hospitals, we provide information technology services to
other related entities in the healthcare industry, such as nursing homes, home health agencies and
physician clinics.

We sell a fully integrated, enterprise-wide financial and clinical hospital information system
comprised of all necessary software, hardware, peripherals, forms and office supplies, together with
comprehensive customer service and support. We also offer outsourcing services, including electronic
billing submissions, patient statement processing and business office functions, as part of our overall
information system solution. We believe that as our customer base grows, the demand for our
outsourcing services will also continue to grow, supporting further increases in recurring revenues.

Our system currently is installed and operating in over 530 hospitals in 45 states and the District

of Columbia. Our customers consist of community hospitals with 300 or fewer acute care beds, with
hospitals having 100 or fewer acute care beds comprising approximately 92% of our customers.

Overview

We have achieved a compounded annual growth rate in revenues of approximately 10.4% over

the past five years. While we did not achieve this growth rate in 2004, we experienced a steady
improvement in revenues and margins during each quarter of 2004. 2004 was a notably difficult year
financially for community hospitals for several reasons, including a weak Medicare and Medicaid
reimbursement environment during much of the first half of the year, high salary costs due to a
nationwide shortage of clinical professionals such as nurses and pharmacists, and lower than anticipated
patient admissions. The difficult year for our target market led to a challenging year for CPSI. During
the first several months of 2004, many hospitals delayed making significant information technology
purchases due to lack of available capital.

We added 40 new hospital clients in 2004; however, during the first quarter of 2004, as in most of

2003, many hospitals approved purchases for the minimum amount of software needed to begin the
installation of an integrated system. Nevertheless, there was an increasing trend among our hospital
clients, particularly during the latter half of 2004, to purchase comprehensive systems from us.
Accordingly, the size of our average installation contract increased from approximately $500,000 in 2003
to approximately $635,000 in 2004, approaching the size of our average installation contract in 2002 of
$650,000.

Our gross revenues increased 1.7% over 2003, while our net income decreased 10.7%, principally
as a result of the financial difficulties faced by community hospitals during much of 2004. However, cash
flow from operations and total cash collections increased in 2004 and reached record levels of $11.1
million and $83.9 million, respectively. We continue to believe that our strong cash performance reflects
both the quality of our customer service and our conservative revenue recognition practices.

As a result of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003

(2003 Medicare Act), community hospitals began experiencing improved Medicare reimbursement
starting in April 2004, the month in which the 2003 Medicare Act became effective. In the past,
Medicare’s payment formula had created a disproportionate burden on smaller, community-based
hospitals, which also typically depend on Medicare for a greater share of their payer mix than larger,
urban facilities. The 2003 Medicare Act rectifies some of this imbalance, raising Medicare
reimbursements to rural hospitals by an estimated $25 billion over the next ten years. We believe this
legislation will remove one of the primary obstacles to community hospitals’ investing in healthcare
information technology. Many of these hospitals had postponed or substantially limited such investments
prior to the effectiveness of the 2003 Medicare Act. Accordingly, we believe that the financial effects of
this legislation on community hospitals will have a positive impact on our financial results and will put us
in a good position to continue to grow our business. Our improving results throughout 2004 support the
confidence we have in our business, our target market and the quality of the products and services we
offer.

Revenues

System Sales. Revenues from system sales are derived from the sale of information systems

(including software, conversion and installation services, hardware, peripherals, forms and office
supplies) to new customers and from the sale of new or additional products to existing customers. We do
not record revenue upon execution of a sales contract. Upon signing a contract to purchase a system from
us, each customer pays a non-refundable 10% deposit that is recorded as deferred revenue. The customer
pays 40% of the purchase price for the software and the related installation, training and conversion when
we install the system and commence training on-site at the customer's facility, which is likewise recorded
as deferred revenue. When the system begins operating in a live environment, the remaining 50% of the
system purchase price is payable, and we recognize revenue for the total amount of the purchase price for
software and related services. Revenues derived from installation of additional software applications are
generally recognized upon installation. Revenues from the sale of hardware, forms and supplies are
recognized upon the shipment of the product to the customer.

Support and Maintenance. We also derive revenues from the provision of system support
services, including software application support, hardware maintenance, continuing education and related
services. Support services are provided pursuant to a support agreement under which we provide
comprehensive system support and related services in exchange for a monthly fee based on the services
provided. The initial term of these contracts ranges from one to seven years, with a typical duration of
five years. Upon expiration of the initial term, these contracts renew automatically from year-to-year
thereafter until terminated. Revenues from support services are recognized in the month when these
services are performed.

We provide our products to some customers as an application service provider, or "ASP." We
provide ASP services on a remote access basis by storing and maintaining servers at our headquarters
which contain customers' patient and administrative data. These customers then access this data remotely
in exchange for a monthly fee. In addition, as part of our total information solution, we serve as an
Internet service provider, or "ISP," for some of our customers for a monthly fee. We also provide web-site
design and hosting services if needed. Revenues from our ASP and ISP services are recognized in the
month when these services are delivered.

Outsourcing Revenues. We began offering outsourcing services in January 1999. Revenues

from outsourcing services have continued to increase since that time, and we expect that the rate of
growth in our outsourcing revenues will increase in the foreseeable future based on the current demand
for these services. Our outsourcing services include electronic billing, statement processing and business
office outsourcing (primarily accounts receivable management). Most of these outsourcing services are
sold pursuant to one year customer agreements, with automatic one year renewals until terminated.
Revenues from outsourcing services are recognized when these services are performed.

Costs of Sales

System Sales. The principal costs associated with the design, development, sale and installation
of our systems are employee salaries, benefits, travel expenses and certain other overhead expenses. For
the sale of equipment we incur costs to acquire these products from the respective distributors or
manufacturers, as the case may be. Costs are deferred and recognized as an expense at the time the related
revenues are recognized. However, at December 31, 2004, 2003 and 2002, no system sales related costs
were deferred, as all contracts were deemed to be substantially complete, or such amounts were not
considered to be material.

Support and Maintenance. The principal costs associated with our system support and

maintenance services are employee salaries, benefits and certain other overhead expenses. Costs are
expensed as incurred and are not deferred.

We have the same employee groups providing both system installations and support and

maintenance services. Salary related expenses are allocated between cost of system sales and cost of
support and maintenance services based upon an estimate of the percentage of time employees spend
performing each function.

Outsourcing. The principal cost related to our statement outsourcing is postage. The principal

costs related to our electronic billing outsourcing are employee related expenses, such as salaries and
benefits, and long distance telecommunication fees. Supplies and forms represent an additional cost
associated with our outsourcing services. Costs are expensed as incurred and are not deferred.

Results of Operations

The following table sets forth certain items included in our results of operations for each of the
three years in the period ended December 31, 2004, expressed as a percentage of our total revenues for
these periods (dollar amounts in thousands):

Year en d ed Decemb er 31,

2 0 0 4

2 0 0 3

2 0 0 2

A m o u n t

% S a le s

A m o u n t

% S a le s

A m o u n t

% S a le s

IN C O M E D A T A :

S a l e s re v e n u e s :

S ys t e m s a le s

3 5 ,2 5 2

S u p p o rt a n d m a in t e n a n c e

O u t s o u rc in g

T o t a l s a le s re v e n u e s

C o s t s o f s a l e s :

S ys t e m s a le s

S u p p o rt a n d m a in t e n a n c e

O u t s o u rc in g

T o t a l c o s t s o f s a le s

G ro s s p ro fit

O p e ra t i n g e x p e n s e s :

S a le s a n d m a rk e t in g

G e n e ra l a n d a d m in is t ra t iv e

T o t a l o p e ra t in g e xp e n s e s

O p e ra t in g in c o m e

O t h e r i n c o m e ( e x p e n s e ) :

In t e re s t in c o m e

M is c e lla n e o u s in c o m e

In t e re s t e xp e n s e

T o t a l o t h e r in c o m e

In c o m e b e fo re t a xe s

In c o m e t a xe s

3 8 ,0 10

9 ,4 0 2

8 2 ,6 6 4

2 7 ,0 6 4

16 ,9 16

5 ,5 9 6

4 9 ,5 7 6

3 3 ,0 8 8

6 ,0 5 5

15 ,8 3 1

2 1,8 8 6

11,2 0 2

2 5 8

2 4 3

5 0 1

11,7 0 3

4 ,6 3 9

4 2 .6 %

4 6 .0 %

11.4 %

10 0 .0 %

3 2 .7 %

2 0 .5 %

6 .8 %

6 0 .0 %

4 0 .0 %

7 .3 %

19 .2 %

2 6 .5 %

13 .5 %

0 .3 %

0 .0 %

0 .6 %

14 .1%

5 .6 %

3 9 ,7 0 8

3 4 ,5 6 7

7 ,0 2 8

8 1,3 0 3

2 8 ,0 4 5

16 ,10 1

4 ,2 5 9

4 8 ,4 0 5

3 2 ,8 9 8

6 ,12 5

14 ,2 2 7

2 0 ,3 5 2

12 ,5 4 6

2 16

12 2

3 3 8

4 8 .9 %

4 2 .5 %

8 .6 %

10 0 .0 %

3 4 .5 %

19 .8 %

5 .2 %

5 9 .5 %

4 0 .5 %

7 .5 %

17 .5 %

2 5 .0 %

15 .5 %

0 .3 %

0 .1%

0 .0 %

0 .4 %

3 8 ,3 0 9

3 0 ,2 4 6

5 ,18 9

7 3 ,7 4 4

2 5 ,8 3 8

13 ,9 0 5

3 ,18 2

4 2 ,9 2 5

3 0 ,8 19

5 ,9 3 3

12 ,8 17

18 ,7 5 0

12 ,0 6 9

2 14

3 6 2

(2 4 )

5 5 2

12 ,8 8 4

15 .9 %

12 ,6 2 1

5 ,0 18

6 .2 %

1,9 7 1

N e t in c o m e

7 ,0 6 4

8 .5 %

7 ,8 6 6

9 .7 %

10 ,6 5 0

5 1.9 %

4 1.0 %

7 .1%

10 0 .0 %

3 5 .0 %

18 .9 %

4 .3 %

5 8 .2 %

4 1.8 %

8 .0 %

17 .4 %

2 5 .4 %

16 .4 %

0 .3 %

0 .5 %

0 .0 %

0 .8 %

17 .2 %

2 .7 %

14 .5 %

2004 Compared to 2003

Revenues. Total revenues increased by 1.7% or $1.4 million to $82.7 million for 2004 from $81.3

million for 2003.

System sales revenues decreased by 11.2% or $4.4 million to $35.3 million in 2004 from $39.7
million in 2003. The decrease in system sales revenues was attributable to a decrease in the number of
new customer installations and a decrease in the average size of new customer installations. No costs
relating to system sales were deferred under our completed contract method of accounting at
December 31, 2004 or 2003, as all contracts were deemed to be substantially complete.

Our 11.2% decrease in system sales is less than the 3.7% growth rate we achieved from 2002 to

2003. We experienced slowed growth in system sales revenues during 2004 because of adverse financial
conditions affecting community hospitals, including a weak Medicare and Medicaid reimbursement
environment, high salary costs due to a nationwide shortage of clinical professionals such as nurses and
pharmacists, and lower than anticipated patient admissions. Many hospitals delayed making significant
information technology purchases due to lack of available capital. We added 40 new hospital clients in

2004 compared to 48 new hospital clients in 2003. The size of our average installation contract increased
in 2004 to approximately $635,000, from approximately $500,000 in 2003.

Support and maintenance revenues increased by 10.0%, or $3.4 million, to $38.0 million in 2004,

from $34.6 million in 2003. The increase in support and maintenance revenues was attributable to an
increase in recurring revenues as a result of a larger customer base. We had over 530 customers at
December 31, 2004, compared to 490 at December 31, 2003. ASP services revenues increased by 10.5%,
or $0.3 million, and ISP services revenues remained unchanged.

Outsourcing revenues increased by 33.8%, or $2.4 million, to $9.4 million in 2004, from $7.0

million in 2003. We experienced an increase in outsourcing revenues as a result of continued growth in
customer demand for electronic billing and statement outsourcing services. Statement outsourcing
revenues increased 13.4% and electronic billing revenues increased 55.0%. Revenue from business
outsourcing services increased 73.6%. We were providing business outsourcing services to 16 customers
at December 31, 2004, compared to four customers at December 31, 2003.

Costs of Sales. Total costs of sales increased by 2.4%, or $1.2 million, to $49.6 million in 2004,
from $48.4 million in 2003. As a percentage of revenues, cost of sales increased to 60.0% for 2004, from
59.5% for 2003.

Cost of system sales decreased by 3.5%, or $1.0 million, to $27.0 million for 2004, from $28.0

million for 2003. This decrease was caused primarily by a decrease in travel expense of $1.2 million as a
result of fewer new hospital installations. Payroll related expenses increased $0.5 million as a result of
increased average employee headcount needed to support increasing sales volume which occurred in the
second half of the year. Cost of equipment also decreased by $0.3 million as a direct result of our
decrease in system sales. The gross margin on system sales decreased to 23.2% for 2004, from 29.4% for
2003.

Cost of support and maintenance increased by 5.1%, or $0.8 million, to $16.9 million for 2004,

from $16.1 million for 2003. This increase was caused primarily by an increase in depreciation expense of
$0.6 million. Payroll related expenses increased $0.4 million as a result of increased average employee
headcount needed to support our increasing customer base. Also, telecommunication expenses decreased
$0.2 million due to rate adjustments received in 2004. The gross margin on support and maintenance
revenues increased to 55.5% for 2004, from 53.4% for 2003. The increase in the gross margin was
primarily due to the addition of new customers and with a proportionately smaller increase in support
personnel.

Our costs associated with outsourcing services increased 31.4%, or $1.3 million, to $5.6 million
in 2004, from $4.3 million in 2003. Salary expense increased $0.7 million due to the full-year expense of
additional employees hired during 2003 and additional employees hired in 2004 to support our business
office outsourcing services. Postage costs increased $0.5 million as a result an increase in transaction
volumes of our statement outsourcing services.

Sales and Marketing Expenses. Sales and marketing expenses decreased 1.2%, or $0.1 million, to

$6.0 million in 2004, from $6.1 million in 2003. The decrease was attributable to a decrease in
advertising expense.

General and Administrative Expenses. General and administrative expenses increased by 11.3%,
or $1.6 million, to $15.8 million for 2004, from $14.2 million for 2003. The increase was due primarily
to an increase in employee group health insurance of $0.5 million and salary increases of $0.3 million.
Additional expense increases were $1.1 million for bad debt, $0.2 million for taxes and licenses, and $0.1
million for facilities rent. The increases were offset by a decrease of $0.5 million in depreciation expense.

As a result of the foregoing factors, income before taxes decreased by 9.2%, or $1.2 million, to

$11.7 million for 2004, from $12.9 million for 2003. This growth rate in income before taxes is less than
the growth rate we achieved from 2002 to 2003, primarily because of the slower growth in system sales
revenues described above.

2003 Compared to 2002

Revenues. Total revenues increased by 10.2%, or $7.6 million, to $81.3 million for 2003, from

$73.7 million for 2002.

System sales revenues increased by 3.7%, or $1.4 million, to $39.7 million in 2003, from $38.3
million in 2002. The increase in system sales revenue was attributable to an increase in the number and
size of new customer installations. No costs relating to system sales were deferred under our completed
contract method of accounting at December 31, 2003 or 2002 as all contracts were deemed to be
substantially complete.

Our 3.7% growth rate in system sales is less than the 23.6% growth rate we achieved from 2001

to 2002. We experienced slowed growth in system sales revenues during 2003 because of adverse
financial conditions affecting community hospitals, including a weak Medicare and Medicaid
reimbursement environment, high salary costs due to a nationwide shortage of clinical professionals such
as nurses and pharmacists, and lower than anticipated patient admissions. Many hospitals delayed
making significant information technology purchases due to lack of available capital. Although we added
a record 48 new hospital clients in 2003, most hospitals approved purchases for the minimum amount of
software needed to begin the installation of an integrated system. These smaller purchases caused the size
of our average installation contract to decrease from approximately $650,000 in 2002 to approximately
$500,000 in 2002.

Support and maintenance revenues increased by 14.3%, or $4.3 million, to $34.6 million in 2003,

from $30.2 million in 2002. The increase in support and maintenance revenues was attributable to an
increase in recurring revenues as a result of a larger customer base, as well as an increase in ASP and ISP
services volume. We had 490 customers at December 31, 2003, compared to 444 at December 31, 2002.
ASP services revenues increased by 21.4%, or $0.4 million, and ISP services revenues increased by
20.8%, or $0.1 million.

Outsourcing revenues increased by 35.4%, or $1.8 million, to $7.0 million in 2003, from $5.2

million in 2002. We experienced an increase in outsourcing revenues as a result of continued growth in
customer demand for electronic billing and statement outsourcing services. We initiated business office
outsourcing services during the first quarter of 2002 and were providing services to four customers at
December 31, 2003.

Costs of Sales. Total costs of sales increased by 12.8%, or $5.5 million, to $48.4 million in 2003,
from $42.9 million in 2002. As a percentage of revenues, cost of sales increased to 59.5% for 2003 from
58.2% for 2002.

Cost of system sales increased by 8.5%, or $2.2 million, to $28.0 million for 2003, from $25.8

million for 2002. This increase was caused primarily by an increase in travel expenses of $0.6 million as a
direct result of larger system installations requiring larger installation teams. Additionally, payroll related
expenses increased $1.0 million as a result of increased employee headcount needed to support increasing
sales volume. Cost of equipment also increased by $0.2 million as a direct result of our increase in system
sales. The gross margin on system sales decreased to 29.4% for 2003 from 32.6% for 2002.

Cost of support and maintenance increased by 15.8%, or $2.2 million, to $16.1 million for 2003,

from $13.9 million for 2002. This increase was caused primarily by an increase in payroll related

expenses of $1.9 million as a result of increased employee headcount needed to support our increasing
customer base. Also, telecommunication expenses increased $0.1 million due to increased utilization of
our ISP services. The gross margin on support and maintenance revenues decreased to 53.4% for 2003
from 54.0% for 2002. The decrease in the gross margin was primarily due to the addition of customer
support personnel necessary for the planned expansion of our customer base.

Our costs associated with outsourcing services increased 33.8%, or $1.1 million, to $4.3 million
in 2003, from $3.2 million in 2002. Salary expense increased $0.5 million due to the hiring of additional
employees to support our business office outsourcing services. Postage cost increased $0.5 million as a
result of a postal rate increase and an increase in transaction volumes of our statement outsourcing
services.

Sales and Marketing Expenses. Sales and marketing expenses increased 3.2%, or $0.2 million, to

$6.1 million in 2003, from $5.9 million in 2002. The increase was attributable to increased commission
expense of $0.2 million that resulted from increased sales volumes.

General and Administrative Expenses. General and administrative expenses increased by 11.0%,
or $1.4 million, to $14.2 million for 2003, from $12.8 million for 2002. The increase was due primarily
to increases in employee group health insurance of $0.5 million and salary increases of $0.3 million.
Additional expense increases, which resulted from our continued growth, were $0.3 million for
depreciation, $0.1 million for telecommunications and $0.2 million for facilities rent. The increases were
offset by a decrease of $0.6 million in bad debt expense. We have also experienced increased expenses of
$0.3 million in professional fees, investor relations and directors’ fees.

As a result of the foregoing factors, income before taxes increased by 2.1%, or $0.3 million, to

$12.9 million for 2003, from $12.6 million for 2002. This growth rate in income before taxes is less than
the growth rate we achieved from 2001 to 2002, primarily because of the slower growth in system sales
revenues described above.

Liquidity and Capital Resources

As of February 28, 2005, we had $15.9 million in cash and cash equivalents. This cash reserve
plus cash generated from our normal operating activities should be adequate to fund our business for the
foreseeable future. Our principal source of liquidity has been cash provided by operating activities. Cash
provided by operating activities has been used primarily to fund the growth in our business and, prior to
our IPO, to pay S corporation distributions to our stockholders. We paid cash distributions to our pre-IPO
stockholders in the aggregate amounts of $0.3 million and $16.9 million in 2003 and 2002, respectively.
Because of our strong cash position, our board of directors decided to begin paying a quarterly dividend
in 2003. We declared and paid dividends in the aggregate amount of $5.0 million and $2.7 million in
2004 and 2003, respectively. We believe that paying dividends is an effective way of providing an
investment return to our stockholders and a beneficial use of our cash.

Net cash provided by operating activities totaled $11.1 million, $8.0 million and $7.0 million for

2004, 2003 and 2002, respectively. In 2004, we experienced significant improvement in our cash
collections, which produced a meaningful increase in our cash from operating activities. We also
converted to a bi-weekly pay cycle from a semi-monthly payroll cycle in 2004, which resulted in an
increase in other liabilities of approximately $1.0 million due to a payroll accrual at year end. Upon the
completion of our IPO in 2002, we converted from an S corporation to a C corporation for tax purposes.
As a result, some of our cash provided by our operating activities is now required to pay taxes on our
income.

Net cash used in investing activities totaled $1.7 million, $2.0 million and $1.9 million for 2004,

2003 and 2002, respectively. In each of those years, we used cash for the purchase of property and
equipment.

Net cash used in financing activities totaled $5.0 million, $2.9 million and $0.7 million for 2004,

2003 and 2002, respectively. During 2004, we declared and paid dividends in the aggregate amount of
$5.0 million. During 2003, we declared and paid dividends in the aggregate amount of $2.7 million. We
also made a final cash distribution to our pre-IPO stockholders in the amount of $0.3 million for
previously taxed S corporation income in 2003. During 2002, we received $16.9 million as net proceeds
from our IPO. Prior to the IPO, we made cash distributions to our stockholders in the amount of $2.6
million. From the IPO proceeds, we made additional cash distributions to our pre-IPO stockholders in the
amount of $14.3 million for previously taxed S corporation income. We also retired outstanding long-
term debt in the amount of $0.7 million.

Our days sales outstanding for the years 2004, 2003 and 2002 were 45, 50 and 57, respectively.

We currently do not have a bank line of credit or other credit facility in place. Because we have
no debt, we will not be subject to contractual restrictions or other influences on our operations, such as
payment demands and restrictions on the use of operating funds that are typically associated with debt. If
we borrow money in the future, we will likely be subject to operating and financial covenants that could
limit our ability to operate as profitably as we have in the past. Defaults under applicable loan agreements
could result in the demand by lenders for immediate payment of substantial funds and substantial
restrictions on expenditures, among other things.

Related Party Transactions

We lease the majority of our corporate headquarters campus from CP Investments, Inc., an

Alabama corporation, the stockholders of which are John Morrissey, John Heyer, Bob O'Donnell, Elissa
Stillings, Kevin P. Wilkins, Tabitha M. Wilkins Olzinski, Ellen M. Harvey, Michael K. Muscat, Jr. and
Susan M. Slaton. All of these individuals are either stockholders of CPSI, or, in the case of Ms. Stillings,
the spouse of a stockholder. In 2004, we paid total lease payments in the amount of $1,344,492 to CP
Investments, Inc. Under these lease agreements, we make annual lease payments in the amount of
$1,350,888, subject to adjustment as set forth in the agreements. The annual rent payable under these
leases has been determined by an independent, third-party appraisal firm. The parties may agree, from
time to time, to make adjustments in the annual rent payable under these leases based on subsequent third-
party appraisals.

We lease the remainder of our headquarters facilities, which is comprised of one building that

houses our dedicated research and development staff, from DJK, LLC, a limited liability company owned
by Dennis Wilkins. In 2004, we paid total lease payments in the amount of $40,581 to DJK, LLC. The
annual rent payable under this lease has been determined by an independent, third-party appraisal firm.

Contractual Obligations

Our related party real estate leases are our only material contractual obligations requiring

payments in the future. Our payments under these leases subsequent to December 31, 2004 will be as
follows:

Contractual Obligations
Operating Lease Obligations

Total
$10,273,074 $ 1,391,664 $ 2,783,328 $ 2,783,328 $ 3,314,754

Less Than
1 Year

Payment due by period
1 – 3
Years

3 – 5
Years

More Than
5 Years

Off-Balance Sheet Arrangements

We are not currently a party to any material “off-balance sheet arrangement” as defined in Item

303 of Regulation S-K.

Critical Accounting Policies

General. Our discussion and analysis of our financial condition and results of operations are

based on our financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. We are required to make some estimates and
judgments that affect the preparation of these financial statements. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable under the circumstances,
but actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition. We recognize revenue in accordance with SEC Staff Accounting Bulletin

No. 101 (SAB 101), Revenue Recognition in Financial Statements, as amended by SAB 104, Revenue
Recognition, and the American Institute of Certified Public Accountants Statement of Position (SOP) 97-
2, Software Revenue Recognition. SAB 104 and SOP 97-2 require that four basic criteria must be met
before revenues can be recognized: (1) persuasive evidence that an arrangement exists; (2) delivery has
occurred or services have been rendered; (3) the fee is fixed and determinable; and (4) collectibility is
reasonably assured. Determination of criteria (3) and (4) are based on our judgment regarding the fixed
nature of the fee charged for services rendered and products delivered and the collectibility of those fees.
Should changes in conditions cause us to determine these criteria are not met for certain future
transactions, revenues recognized for any reporting period could be adversely affected.

Backlog

Backlog consists of revenues we reasonably expect to recognize over the next twelve months

under existing contracts. The revenues to be recognized may relate to a combination of one-time fees for
system sales, and recurring fees for support, outsourcing, ASP and ISP services. As of December 31,
2004, we had a twelve-month backlog of approximately $20.0 million in connection with non-recurring
system purchases and approximately $50.8 million in connection with recurring payments under support,
outsourcing, ASP and ISP contracts.

Quantitative and Qualitative Disclosures about Market and Interest Rate Risk

We reduce the sensitivity of our results of operations to market risks related to changes in interest
rates by maintaining an investment portfolio comprised solely of highly rated, short-term investments. We
do not hold or issue derivative, derivative commodity instruments or other financial instruments for
trading purposes. We are not exposed to currency exchange fluctuations, as we do not sell our products
internationally, and we currently have no exposure to equity price risks.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which is a
revision of SFAS No. 123 Accounting for Stock-Based Compensation. SFAS No. 123(R) is effective for
public companies for interim or annual periods beginning after June 15, 2005, supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows.
Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123.
However, SFAS No. 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. The new standard will be effective, for us, beginning July 1, 2005.
The Company is in the process of evaluating the impact of this standard on the financial statements.

RISK FACTORS

Market factors may cause a decline in spending for information technology and services by our
current and prospective customers which may result in less demand for our products, lower prices
and, consequently, lower revenues and a lower revenue growth rate.

The purchase of our information system involves a significant financial commitment by our
customers. At the same time, the healthcare industry faces significant financial pressures that could
adversely affect overall spending on healthcare information technology and services. For example, the
Balanced Budget Act of 1997 has significantly reduced Medicare reimbursements to hospitals, leaving
them less money to invest in infrastructure. Moreover, a general economic decline could cause hospitals
to reduce or eliminate information technology related spending. To the extent spending for healthcare
information technology and services declines or increases slower than we anticipate, demand for our
products and services, as well as the prices we charge, could be adversely affected. Accordingly, we
cannot assure you that we will be able to increase or maintain our revenues or our growth rate.

There are a limited number of hospitals in our target market. Continued consolidation in the
healthcare industry could result in the loss of existing customers, a reduction in our potential
customer base and downward pressure on our products' prices.

There are a finite number of small and midsize hospitals with 300 or fewer acute care beds.
Saturation of this market with our products or our competitors' products could eventually limit our
revenues and growth. Furthermore, many healthcare providers have consolidated to create larger
healthcare delivery enterprises with greater market power. If this consolidation continues, we could lose
existing customers and could experience a decrease in the number of potential purchasers of our products
and services. The loss of existing and potential customers due to industry consolidation could cause our
revenue growth rate to decline. In addition, larger, consolidated enterprises could have greater bargaining
power, which may lead to downward pressure on the prices for our products and services.

We may experience fluctuations in quarterly financial performance that cause us to fail to meet
revenues or earnings expectations. Failure to meet these expectations could adversely impact our
stock price.

There is no assurance that consistent quarterly growth in our business will continue. Our quarterly
revenues may fluctuate and may be difficult to forecast for a variety of reasons. For example, prospective
customers often take significant time evaluating our system and related services before making a purchase
decision. Moreover, a prospective customer who has placed an order for our system could decide to
cancel that order or postpone installation of the ordered system. If a prospective customer delays or
cancels a scheduled system installation during any quarter, we may not be able to schedule a substitute
system installation during that quarter. The amount of revenues that would have been generated from that
installation will be postponed or lost. The possibility of delays or cancellations of scheduled system
installations could cause our quarterly revenues to fluctuate.

The following factors may also affect demand for our products and services and cause our

quarterly revenues to fluctuate:

•
•

changes in customer budgets and purchasing priorities;
market acceptance of new products, product enhancements and services from us
and our competitors;
product and price competition; and
delay of revenue recognition to future quarters due to an increase in the sale of
our remote access ASP services.

Variations in our quarterly revenues may adversely affect our operating results. In each fiscal

quarter, our expense levels, operating costs and hiring plans are based on projections of future revenues
and are relatively fixed. If our actual revenues fall below expectations, our earnings will also likely fail to
meet expectations. If we fail to meet the revenue or earnings expectations of securities analysts and
investors, then the price of our common stock will likely decrease.

Competition with companies that have greater financial, technical and marketing resources than
we have could result in loss of customers and/or a lowering of prices for our products, causing a
decrease in our revenues and/or market share.

Our principal competitors are Meditech and HMS. Meditech and HMS compete with us directly
in our target market of small and midsize hospitals. These companies offer products and services that are
comparable to our system and are designed to address the needs of community hospitals.

Our secondary competitors include McKesson Corporation, Quadramed Corp., Cerner
Corporation, and Siemens Corporation. These companies are significantly larger than we are, and they
typically sell their products and services to larger hospitals outside of our target market. However, they
sometimes compete directly with us. We also face competition from providers of practice management
systems, general decision support and database systems and other segment-specific applications, as well
as from healthcare technology consultants. Any of these companies as well as other technology or
healthcare companies could decide at any time to specifically target hospitals within our target market.

A number of existing and potential competitors are more established than we are and have greater
name recognition and financial, technical and marketing resources. Products of our competitors may have
better performance, lower prices and broader market acceptance than our products. We expect increased
competition that could cause us to lose customers, lower our prices to remain competitive and experience
lower revenues, revenue growth and profit margins.

Our failure to develop new products or enhance current products in response to market demands
could adversely impact our competitive position and require substantial capital resources to
correct.

The needs of hospitals in our target market are subject to rapid change due to government
regulation, trends in clinical care practices and technological advancements. As a result of these changes,
our products may quickly become obsolete or less competitive. New product introductions and
enhancements by our competitors that more effectively or timely respond to changing industry needs may
weaken our competitive position.

We continually redesign and enhance our products to incorporate new technologies and adapt our

products to ever-changing hardware and software platforms. Often we face difficult choices regarding
which new technologies to adopt. If we fail to anticipate or respond adequately to technological
advancements, or experience significant delays in product development or introduction, our competitive
position could be negatively affected. Moreover, our failure to offer products acceptable to our target
market could require us to make significant capital investments and incur higher operating costs to
redesign our products, which could negatively affect our financial condition and operating results.

Potential regulation of our products as medical devices by the U.S. Food and Drug Administration
could increase our costs, delay the introduction of new products and slow our revenue growth.

The U.S. Food and Drug Administration, or the "FDA," is likely to become more active in
regulating the use of computer software for clinical purposes. The FDA has increasingly regulated
computer products and computer-assisted products as medical devices under the federal Food, Drug and

Cosmetic Act. If the FDA regulates any of our products as medical devices, we would likely be required
to, among other things:

•

seek FDA clearance by demonstrating that our product is substantially equivalent
to a device already legally marketed, or obtain FDA approval by establishing the
safety and effectiveness of our product;

comply with rigorous regulations governing pre-clinical and clinical testing,
manufacture, distribution, labeling and promotion of medical devices; and

comply with the Food, Drug and Cosmetic Act's general controls, including
establishment registration, device listing, compliance with good manufacturing
practices and reporting of specified device malfunctions and other adverse device
events.

We anticipate that some of our products currently in development will be subject to FDA

regulation. If any of our products fail to comply with FDA requirements, we could face FDA refusal to
grant pre-market clearance or approval of products; withdrawal of existing clearances and approvals;
fines, injunctions or civil penalties; recalls or product corrections; production suspensions; and criminal
prosecution. FDA regulation of our products could increase our operating costs, delay or prevent the
marketing of new or existing products and adversely affect our revenue growth.

Governmental regulations relating to patient confidentiality and other matters could increase our
costs.

State and federal laws regulate the confidentiality of patient records and the circumstances under

which those records may be released. These regulations may require the users of such information to
implement security measures. Regulations governing electronic health data transmissions are also
evolving rapidly, and they are often unclear and difficult to apply.

The Health Insurance Portability and Accountability Act of 1996, or "HIPAA," requires, among

other things, the Secretary of Health and Human Services, or "HHS," to adopt national standards to
ensure the integrity and confidentiality of health information. HHS’s health data privacy regulations
restrict the use and disclosure of personally identifiable health information without the prior informed
consent of the patient. In addition, HHS has also issued final regulations establishing national standards
for some healthcare-related electronic transactions and uniform code sets to be used in those transactions.
While these new standards are in active use by virtually all intermediaries, the regulation leaves some
portions of the code at the discretion of the individual intermediaries. This leaves the potential for future
changes dictated by not only the federal government but also by the individual intermediaries. In February
2003, HHS issued final rules with respect to information security that would require healthcare providers
to implement organizational practices to protect the security of electronically maintained or transmitted
health-related information, such as the use of electronic signatures and single sign-on access to
information. Customers must be in compliance with these new regulations by April 2005. HHS has also
provided a final rule for employer identifiers; however no other rules, proposed or final, have yet been
issued with respect to unique health identifiers for providers or patients. We cannot predict the potential
impact of proposed rules and rules that have not yet been proposed. In addition to HIPAA, other federal
and/or state privacy legislation may be enacted at any time.

In our support agreements with our customers, we agree to update our software applications to
comply with applicable federal and state laws. While we believe we have developed products that will
comply with current HIPAA and other regulatory requirements, new laws, regulations and interpretations
could force us to further redesign our products. Any such product redesign could consume significant

capital, research and development and other resources, which could significantly increase our operating
costs.

Our products assist clinical decision-making and related care by capturing, maintaining and
reporting relevant patient data. If our products fail to provide accurate and timely information, our
customers could assert claims against us that could result in substantial cost to us, harm our
reputation in the industry and cause demand for our products to decline.

We provide products that assist clinical decision-making and related care by capturing,
maintaining and reporting relevant patient data. Our products could fail or produce inaccurate results due
to a variety of reasons, including mechanical error, product flaws, faulty installation and/or human error
during the initial data conversion. If our products fail to provide accurate and timely information,
customers and/or patients could sue us to hold us responsible for losses they incur from these errors.
These lawsuits, regardless of merit or outcome, could result in substantial cost to us, divert management's
attention from operations and decrease market acceptance of our products. We attempt to limit by contract
our liability for damages arising from negligence, errors or mistakes. Despite this precaution, such
contract provisions may not be enforceable or may not otherwise protect us from liability for damages.
We maintain general liability insurance coverage, including coverage for errors or omissions. However,
this coverage may not be sufficient to cover one or more large claims against us or otherwise continue to
be available on terms acceptable to us. In addition, the insurer could disclaim coverage as to any future
claim.

Breaches of security in our system could result in customer claims against us and harm to our
reputation causing us to incur expenses and/or lose customers.

We have included security features in our systems that are intended to protect the privacy and

integrity of patient data. Despite the existence of these security features, our system may experience
break-ins and similar disruptive problems that could jeopardize the security of information stored in and
transmitted through the computer networks of our customers. Because of the sensitivity of medical
information, customers could sue us for breaches of security involving our system. Also, actual or
perceived security breaches in our system could harm the market perception of our products which could
cause us to lose existing and prospective customers.

New products that we introduce or enhancements to our existing products may contain undetected
errors or problems that could affect customer satisfaction and cause a decrease in revenues.

Highly complex software products such as ours sometimes contain undetected errors or failures

when first introduced or when updates and new versions are released. Tests of our products may not
detect bugs or errors because it is difficult to simulate our customers' wide variety of computing
environments. Despite extensive testing, from time to time we have discovered defects or errors in our
products. Defects or errors discovered in our products could cause delays in product introductions and
shipments, result in increased costs and diversion of development resources, require design modifications,
decrease market acceptance or customer satisfaction with our products, cause a loss of revenue, result in
legal actions by our customers and cause increased insurance costs.

Our facilities are located in an area vulnerable to hurricanes and tropical storms, and the
occurrence of a severe hurricane, similar storm or other natural disaster could cause damage to our
facilities and equipment, which could require us to cease or limit our operations.

All of our facilities and virtually all of our employees are situated on one campus in Mobile,

Alabama, which is located on the coast of the Gulf of Mexico. Our facilities are vulnerable to significant
damage or destruction from hurricanes and tropical storms. We are also vulnerable to damage from other
types of disasters, including tornadoes, fires, floods and similar events. If any disaster were to occur, our

ability to conduct business at our facilities could be seriously impaired or completely destroyed. This
would have adverse consequences for our customers who depend on us for system support or outsourcing
services. Also, the servers of customers who use our remote access services could be damaged or
destroyed in any such disaster. This would have potentially devastating consequences to those customers.
Although we have an emergency recovery plan, there can be no assurance that this plan will effectively
prevent the interruption of our business due to a natural disaster. Furthermore, the insurance we maintain
may not be adequate to cover our losses resulting from any natural disaster or other business interruption.

Interruptions in our power supply and/or telecommunications capabilities could disrupt our
operations, cause us to lose revenues and/or increase our expenses.

We currently have backup generators to be used as alternative sources of power in the event of a

loss of power to our facilities. If these generators were to fail during any power outage, we would be
temporarily unable to continue operations at our facilities. This would have adverse consequences for our
customers who depend on us for system support and outsourcing services. Any such interruption in
operations at our facilities could damage our reputation, harm our ability to retain existing customers and
obtain new customers, and could result in lost revenue and increased insurance and other operating costs.

We also have customers for whom we store and maintain computer servers containing critical

patient and administrative data. Those customers access this data remotely through telecommunications
lines. If our power generators fail during any power outage or if our telecommunications lines are severed
or impaired for any reason, those customers would be unable to access their mission critical data causing
an interruption in their operations. In such event our remote access customers and/or their patients could
seek to hold us responsible for any losses. We would also potentially lose those customers, and our
reputation could be harmed.

If we are unable to attract and retain qualified customer service and support personnel our
business and operating results will suffer.

Our customer service and support is a key component of our business. Most of our hospital

customers have small information technology staffs, and they depend on us to service and support their
systems. Future difficulty in attracting, training and retaining capable customer service and support
personnel could cause a decrease in the overall quality of our customer service and support. That decrease
would have a negative effect on customer satisfaction which could cause us to lose existing customers and
could have an adverse effect on our new customer sales. The loss of customers due to inadequate
customer service and support would negatively impact our ability to continue to grow our business.

We do not have employment or non-competition agreements with our key personnel, and their
departure could harm our future success.

Our future success depends to a significant extent on the leadership and performance of our chief

executive officer, chief operating officer and other executive officers. We do not have employment or
non-competition agreements with any of our executive officers. Therefore, they may terminate their
employment with us at any time and may compete against us. The loss of the services of any of our
executive officers could have a material adverse effect on our business, financial condition and results of
operations.

We have limited protection of our intellectual property and, if we fail to adequately protect our
intellectual property, we may not be able to compete effectively.

We consider some aspects of our internal operations, products and documentation to be
proprietary. To some extent we have relied on a combination of confidentiality provisions in our customer
agreements, copyright, trademark and trade secret laws and other measures to protect our intellectual

property. To date, however, we have not filed any patent applications to protect our proprietary software
products. In addition, existing copyright laws afford only limited protection. Although we attempt to
control access to our intellectual property, unauthorized persons may attempt to copy or otherwise use our
intellectual property. Monitoring unauthorized use of our intellectual property is difficult, and the steps
we have taken may not prevent unauthorized use. If our competitors gain access to our intellectual
property, our competitive position in the industry could be damaged. An inability to compete effectively
could cause us to lose existing and potential customers and experience lower revenues, revenue growth
and profit margins.

In the event our products infringe on the intellectual property rights of third-parties, our business
may suffer if we are sued for infringement or if we cannot obtain licenses to these rights on
commercially acceptable terms.

Others may sue us alleging infringement of their intellectual property rights. Many participants in
the technology industry have an increasing number of patents and patent applications and have frequently
demonstrated a readiness to take legal action based on allegations of patent and other intellectual property
infringement. Further, as the number and functionality of our products increase, we believe we may
become increasingly subject to the risk of infringement claims. If infringement claims are brought against
us, these assertions could distract management. We may have to spend a significant amount of money and
time to defend or settle those claims. If we were found to infringe on the intellectual property rights of
others, we could be forced to pay significant license fees or damages for infringement. If we were unable
to obtain licenses to these rights on commercially acceptable terms, we would be required to discontinue
the sale of our products that contain the infringing technology. Our customers would also be required to
discontinue the use of those products. We are unable to insure against this risk on an economically
feasible basis. Even if we were to prevail in an infringement lawsuit, the accompanying publicity could
adversely impact the demand for our system. Under some circumstances, we agree to indemnify our
customers for some types of infringement claims that may arise from the use of our products.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK

The information required by this item is contained in Item 7 herein under the heading

"Quantitative and Qualitative Disclosures about Market and Interest Rate Risk."

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements

Report of Management

Report of Grant Thornton LLP, Independent Registered Public Accounting Firm, on
Financial Statements

Report of Grant Thornton LLP, Independent Registered Public Accounting Firm, on
Internal Control Over Financial Reporting

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm

Balance Sheets -- December 31, 2004 and 2003

Statements of Income -- Years ended December 31, 2004, 2003 and 2002

Statements of Stockholders' Equity -- Years ended December 31, 2004, 2003 and 2002

Statements of Cash Flows -- Years ended December 31, 2004, 2003 and 2002

Notes to Financial Statements

Index to Financial Statement Schedules

Schedule II -- Valuation of Qualifying Accounts

Page

All other schedules to the financial statements required by Article 9 of Regulation S-X are inapplicable
and therefore have been omitted.

REPORT OF MANAGEMENT

Management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. CPSI’s
internal control over financial reporting is 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. CPSI’s internal control over financial reporting
includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly

reflect the transactions and dispositions of the assets of CPSI;

(ii) 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 CPSI; and

(iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of CPSI’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.

Management assessed the effectiveness of CPSI’s internal control over financial reporting as of

December 31, 2004. In making this assessment, management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework.

Based on our assessment and those criteria, management believes that CPSI maintained effective

internal control over financial reporting as of December 31, 2004.

CPSI’s independent auditors, Grant Thornton, LLP, have issued an attestation report on
management’s assessment of CPSI’s internal control over financial reporting. That report appears on page
40 of this Form 10-K.

REPORT OF GRANT THORNTON, LLP, INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM, ON FINANCIAL STATEMENTS

The Board of Directors
Computer Programs and Systems, Inc.

We have audited the accompanying balance sheet of Computer Programs and Systems, Inc. as of
December 31, 2004, and the related statements of income, stockholders' equity and cash flows for the year
then ended. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audit.

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 the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Computer Programs and Systems, Inc. as of December 31, 2004, and
the results of their operations and their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.

Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as
a whole. The Schedule II for the year ended December 31, 2004, 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 consolidated 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 also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Computer Programs and Systems, Inc.’s internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) and our report dated March 4, 2005 expressed an unqualified opinion on management’s
assessment of, and the effective operation of, internal control over financial reporting.

/s/ Grant Thornton LLP

Atlanta, Georgia
March 4, 2005

REPORT OF GRANT THORNTON LLP, INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM, ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors
Computer Programs and Systems, Inc.

We have audited management's assessment included in Management’s Report on Internal Controls Over
Financial Reporting included in Computer Programs and Systems, Inc. Form 10K for 2004, that
Computer Programs and Systems, Inc. maintained effective internal control over financial reporting as of
December 31, 2004 based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Computer Programs
and 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 Computer Programs and Systems, Inc. maintained effective
internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects,
based on criteria established in Internal Control—Integrated Framework issued by the COSO. Also in
our opinion, Computer Programs and Systems, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004, based on criteria established in Internal
Control—Integrated Framework issued by the COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the balance sheet of Computer Programs and Systems, Inc. as of December 31,
2004 and the related statements of income, stockholders' equity, and cash flows for the year then ended
and our report dated March 4, 2005 expressed an unqualified opinion on those financial statements.

/s/ Grant Thornton LLP

Atlanta, Georgia
March 4, 2005

REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

The Board of Directors
Computer Programs and Systems, Inc.

We have audited the accompanying balance sheet of Computer Programs and Systems, Inc. as of
December 31, 2003, and the related statements of income, stockholders’ equity and cash flows for the
years ended December 31, 2003 and 2002. Our audits also included the 2003 and 2002 information
included in the financial statement schedule listed in the index at Item 8. These financial statements and
schedule are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements and schedule 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
consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of Computer Programs and Systems, Inc. at December 31, 2003, and the results of its
operations and its cash flows for the years ended December 31, 2003 and 2002, in conformity with U. S.
generally accepted accounting principles. Also, in our opinion, the 2003 and 2002 information included
in the related financial statement schedule, when considered in relation to the financial statements taken
as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

February 3, 2004
Birmingham, Alabama

COMPUTER PROGRAMS AND SYSTEMS, INC.

Balance Sheets

As s ets

Cu rren t as s ets :

Cas h an d cas h eq u iv alen ts
A cco u n ts receiv ab le, n et o f allo wan ce fo r d o u b tfu l acco u n ts

o f $1,636,000 an d $904,000, res p ectiv ely

Fin an cin g receiv ab les , cu rren t p o rtio n
In v en to ries
Deferred tax as s ets
Prep aid in co me taxes
Prep aid exp en s es
T o tal cu rren t as s ets

Pro p erty an d eq u ip men t

Lan d
M ain ten an ce eq u ip men t
Co mp u ter eq u ip men t
Office fu rn itu re an d eq u ip men t
A u to mo b iles

Les s accu mu lated d ep reciatio n

Net p ro p erty an d eq u ip men t
Fin an cin g receiv ab les

T o tal as s ets

Liabilities and S tock holders ' Equity

Cu rren t liab ilities :

A cco u n ts p ay ab le
Deferred rev en u e
A ccru ed v acatio n
Oth er accru ed liab ilities

T o tal cu rren t liab ilities

Deferred tax liab ilities

Sto ckh o ld ers ' eq u ity :

Co mmo n s to ck, $0.001 p ar v alu e; 30,000,000 s h ares au th o rized ;

10,489,849 s h ares is s u ed an d o u ts tan d in g

A d d itio n al p aid -in cap ital
Deferred co mp en s atio n
Retain ed earn in g s
T o tal s to ckh o ld ers ' eq u ity

T o tal liab ilities an d s to ckh o ld ers ' eq u ity

See accompanying notes.

Decemb er 31,
2004

Decemb er 31,
2003

13,785,377

9,472,743

11,764,465
974,160
1,475,166
1,397,016
171,574
437,716
30,005,474

11,916,414
1,112,773
1,102,061
1,039,439
120,025
364,384
25,127,839

936,026
3,298,140
4,854,331
1,481,314
89,934
10,659,745
(5,204,730)
5,455,015
617,657
36,078,146

936,026
3,172,303
4,320,011
1,391,110
89,934
9,909,384
(4,561,080)
5,348,304
793,870
31,270,013

969,454
2,602,235
1,630,382
2,323,433
7,525,504

1,126,334
1,633,887
1,561,577
1,129,976
5,451,774

718,753

66,266

10,490
17,292,079
(123,345)
10,654,665
27,833,889
36,078,146

10,490
17,289,910
(174,385)
8,625,958
25,751,973
31,270,013

COMPUTER PROGRAMS AND SYSTEMS, INC.

Statements of Income

S al e s re ve n u e s:
Sy st em sales
Sup p ort and maint enance
O ut sourcing
T ot al sales revenues

C osts of sal e s:

Sy st em sales
Sup p ort and maint enance
O ut sourcing
T ot al cost s of sales
G ross p rofit

O pe rati n g e xpe n se s:

Sales and market ing
G eneral and administ rat ive

T ot al op erat ing exp enses
O p erat ing income

O th e r i n com e (e xpe n se ):

Int erest income
M iscellaneous income
Int erest exp ense

T ot al ot her income

Income before t axes

Income t axes

N et income

2004

Year ended D ecember 31,
2003

2002

35,252,410
38,010,122
9,401,468
82,664,000

39,707,684
34,567,017
7,028,159
81,302,860

38,309,227
30,246,030
5,188,963
73,744,220

27,064,273
16,915,781
5,595,774
49,575,828
33,088,172

6,054,654
15,830,863
21,885,517
11,202,655

257,462
243,191
-
500,653

28,045,002
16,100,525
4,258,778
48,404,305
32,898,555

6,125,437
14,227,439
20,352,876
12,545,679

216,001
121,797
-
337,798

25,837,901
13,905,072
3,182,430
42,925,403
30,818,817

5,933,472
12,816,785
18,750,257
12,068,560

214,044
361,682
(23,677)
552,049

11,703,308

12,883,477

12,620,609

4,639,473

5,017,647

1,970,816

7,063,835

7,865,830

10,649,793

N et income p er share - basic

0.67

0.75

1.06

N et income p er share - dilut ed

0.67

0.75

1.06

10,489,849
10,535,555

10,488,406
10,536,929

10,024,438
10,061,765

12,620,609
4,576,654
8,043,955

0.80

W eight ed average shares out st anding

B asic
D ilut ed

Un au di te d pro form a i n com e data:

H ist orical income before p rovision for income t axes
P ro forma income t axes
P ro forma net income

P ro forma net income p er share - basic

P ro forma net income p er share - dilut ed

See accompanying notes.

COMPUTER PROGRAMS AND SYSTEMS, INC.

Statements of Stockholders’ Equity

Common
Shares

Common
Stock

Additional
Paid-In
Capital

Deferred
Compensation

Retained
Earnings

Total
Stockholders'
Equity

Balance at December 31, 2001

9,288,000

9,288

109,811

$
-

9,917,283

10,036,382

Net income
Issuance of common stock
Deferred compensation
Amortization of deferred compensation
Distribution of S corporation shareholders

-
1,200,000
-
-
-

-
1,200
-
-
-

-
16,894,396
255,196
-
-

-
-
(255,196)
29,773
-

10,649,793
-
-
-
(17,132,508)

10,649,793
16,895,596
-
29,773
(17,132,508)

Balance at December 31, 2002

10,488,000

10,488

17,259,403

(225,423)

3,434,568

20,479,036

Net income
Issuance of common stock
Dividends
Amortization of deferred compensation

-
1,849
-
-

-
2
-
-

-
30,507
-
-

-
-
-
51,038

7,865,830
-
(2,674,440)
-

7,865,830
30,509
(2,674,440)
51,038

Balance at December 31, 2003

10,489,849

10,490

17,289,910

(174,385)

8,625,958

25,751,973

Net income
Issuance of common stock
Dividends
Amortization of deferred compensation

-
-
-
-

-
2,169
-
-

-
-
-
51,040

7,063,835
-
(5,035,128)
-

7,063,835
2,169
(5,035,128)
51,040

Balance at December 31, 2004

10,489,849

10,490

17,292,079

(123,345)

10,654,665

27,833,889

See accompanying notes.

COMPUTER PROGRAMS AND SYSTEMS, INC.

Statements of Cash Flows

O perating Activities
Net in co me
A d ju s tmen ts to n et in co me:
Pro v is io n fo r b ad d eb t
Deferred taxes
Deferred co mp en s atio n
Dep reciatio n
Ch an g es in o p eratin g as s ets an d liab ilities :
A cco u n ts receiv ab le
Fin an cin g receiv ab les
In v en to ries
Prep aid exp en s es
A cco u n ts p ay ab le
Deferred rev en u e
Oth er accru ed liab ilities
In co me taxes p ay ab le

Net cas h p ro v id ed b y o p eratin g activ ities

Inves ting Activities
Pu rch as es o f p ro p erty an d eq u ip men t
Net cas h u s ed in in v es tin g activ ities

Financing Activities
Pro ceed s fro m is s u an ce o f co mmo n s to ck, n et o f exp en s es
Prin cip al p ay men ts o n n o te p ay ab le
Div id en d s p aid
Dis trib u tio n s to S co rp o ratio n s h areh o ld ers
Net cas h u s ed in fin an cin g activ ities

Year en d ed Decemb er 31,

2004

2003

2002

7,063,835

7,865,830

10,649,793

732,321
294,910
51,040
1,619,792

(580,372)
314,826
(373,105)
(73,332)
(156,880)
968,348
1,262,262
(49,380)
11,074,265

256,790
33,297
51,038
1,461,039

425,307
275,007
513,251
(36,851)
(967,478)
(713,929)
(852,988)
(313,571)
7,996,742

818,327
(1,006,470)
29,773
1,128,454

(5,309,371)
(413,430)
(488,959)
(131,257)
1,060,463
746,686
(286,187)
193,546
6,991,368

(1,726,503)
(1,726,503)

(1,982,520)
(1,982,520)

(1,920,750)
(1,920,750)

-
-
(5,035,128)
-
(5,035,128)

30,509
-
(2,674,440)
(250,000)
(2,893,931)

16,895,596
(749,897)
-
(16,882,508)
(736,809)

In creas e in cas h an d cas h eq u iv alen ts

4,312,634

3,120,291

4,333,809

Cas h an d cas h eq u iv alen ts at b eg in n in g o f y ear

9,472,743

6,352,452

2,018,643

Cas h an d cas h eq u iv alen ts at en d o f y ear

13,785,377

9,472,743

6,352,452

S upplemental dis clos ure of cas h flow information
Cas h p aid fo r in teres t
Cas h p aid fo r in co me taxes

$
-
$
4,396,112

$
-
$
5,331,218

$
$

23,677
2,783,740

See accompanying notes.

COMPUTER PROGRAMS AND SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004

1. BASIS OF PRESENTATION

Computer Programs and Systems, Inc. (CPSI or the Company) is a healthcare information technology
solutions provider which was formed and commenced operations in 1979. The Company provides, on an
integrated basis, enterprise-wide clinical management, access management, patient financial management,
health information management, strategic decision support, resource planning management and enterprise
application integration solutions to healthcare organizations throughout the United States. Additionally,
CPSI provides other information technology solutions including outsourcing, remote hosting, networking
technologies and other related services.

2. PUBLIC OFFERING OF COMMON STOCK AND RECAPITALIZATION

On May 24, 2002, the Company successfully completed an initial public offering of 3.0 million shares of
common stock at a price of $16.50 per share. Of the shares offered, 1.2 million shares were sold by the
Company and 1.8 million shares were sold by selling stockholders. In addition, the underwriters for the
Company exercised their over-allotment option by purchasing an additional 450,000 shares at $16.50 per
share from selling stockholders. Of the net proceeds to the Company of approximately $16.9 million,
approximately $14.3 million was used to fund a partial distribution to pre-IPO stockholders of previously
taxed S corporation income, and the balance was used to repay outstanding debt and for general corporate
purposes.

On May 1, 2002, the Company declared a 430-for-1 stock split, and on May 6, 2002, the Company
amended its Articles of Incorporation to increase the Company’s total authorized shares to 10,000,000
and to change the par value to $0.001 per share. All share and per share amounts for all periods presented
in the accompanying financial statements have been restated to reflect the split.

Effective immediately prior to the completion of the offering, the Company reincorporated in Delaware.
As a Delaware corporation, the Company now has 30,000,000 shares of authorized common stock with a
par value per share of $0.001.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

Cash and cash equivalents consists of highly-liquid financial instruments, primarily cash and money
market funds, purchased with an original maturity of three months or less.

Inventories

Inventories are stated at cost using the average cost method. The Company’s inventories are composed of
computer equipment, forms and supplies.

Property and Equipment

Property and equipment is recorded at cost, less accumulated depreciation. Additions and improvements
to property and equipment that materially increase productive capacity or extend the life of an asset are
capitalized. Maintenance, repairs and minor renewals are expensed as incurred. Upon retirement or other
disposition of such assets, the related costs and accumulated depreciation are removed from the respective
accounts and any resulting gain or loss is included in the results of operations.

Depreciation expense is computed using the straight-line method over the asset’s useful life, generally 5
years. The Company reviews for the possible impairment of long-lived assets whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable.

Deferred Revenue

Deferred revenue represents amounts received from customers under licensing agreements and
implementation fees for which the revenue earnings process has not been completed.

Revenue Recognition

Systems sales revenues are derived from the sale of information systems (including software, conversion
and installation services, hardware, peripherals, forms and office supplies) to new customers and from the
sale of new or additional products to existing customers. The Company recognizes revenue from systems
sales on a completed contract basis in accordance with American Institute of Certified Public Accountants
Statement of Position (SOP) 97-2, Software Revenue Recognition, and SOP 81-1, Accounting for
Performance of Construction Type and Certain Production-Type Contracts. A contract is regarded as
substantially complete when all hardware and software is installed and the system is operating as
intended. Losses are recorded for the entire estimated loss on the contract in the period that it becomes
evident that current estimates of total contract revenue and contract costs indicate a loss.

The Company does not record revenue upon execution of a sales contract. Each customer initially remits
a non-refundable 10% deposit that is recorded as deferred revenue. The customer then pays 40% of the
purchase price when the Company commences training on-site at the customer’s facility. When the
system becomes operational, the Company bills the remaining 50% of the system purchase price and
recognizes revenue for the total amount of the purchase price. Costs relating to system sales revenues are
deferred and recognized at the time the related revenues are recognized; however, at December 31, 2004
and 2003, no system sales-related costs were deferred as all contracts were deemed to be substantially
complete, or such amounts were not considered to be material. Revenues derived from installation of
additional software applications are generally recognized upon installation. Revenues from the sale of
hardware are recognized upon the shipment of the product to the customer.

The Company also derives revenues from the provision of system support services, including software
application support, hardware maintenance, continuing education and related services. Support services
are provided pursuant to a General Support Agreement under which the Company provides
comprehensive system support and related services in exchange for a monthly fee based on the services
provided. These contracts range in duration from 1 to 7 years, with an average duration of 5 years, and
renew automatically unless terminated by the customer. Revenues from support services are recognized
in the month when these services are performed.

As part of system sales, the Company also provides services to some customers as an application service
provider (ASP) for a monthly fee. In addition, the Company offers Internet services (ISP) to customers
for a monthly fee. Revenues from ASP and ISP services are recognized in the month when these services
are performed.

Outsourcing services are sold pursuant to one-year customer agreements, with automatic one-year
renewals. Revenues from outsourcing services are recognized when services are performed.

Stock Based Compensation

During 2002, the Company adopted the 2002 Stock Option Plan, and in accordance with the disclosure
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, the Company has elected to
follow APB No. 25, Accounting for Stock Issued to Employees and related interpretations in accounting
for employee stock options. Under APB No. 25, because the exercise price of the Company’s employee
stock options equals the market price of the underlying stock on the date of grant, no compensation
expense was reflected in net income for the year ended December 31, 2004, 2003 or 2002. Had the
Company accounted for its stock-based compensation plan based on the fair value of awards at grant date,
consistent with the methodology of SFAS No. 123, the Company’s reported net income and income per
share for the years ended December 31, 2004, 2003 and 2002 would have been impacted as indicated
below. There were no employee stock options granted during the year ended December 31, 2004, 2003 or
2002. The effects of applying SFAS No. 123 on a pro forma basis for the years ended December 31,
2004, 2003 and 2002, are not likely to be representative of the effects on reported pro forma net income
for future years as options vest over several years and it is anticipated that additional grants will be made
in future years.

Net income as reported
Add: Stock-based compensation expense,
net of tax, included in reported net income
Deduct: Total stock-based employee
compensation expense determined under
the fair value method for all awards

2004
$ 7,063,835

December 31,
2003
$ 7,865,830

2002
$10,649,793

31,900

31,899

18,608

(310,861)

(224,067)

(136,044)

Pro forma

$ 6,784,874

$ 7,673,662

$10,532,357

Diluted income per share as reported

0.67

0.75

1.06

Pro forma diluted income per share

0.64

0.73

1.05

Research and Development Costs

Research and development costs are expensed as incurred. Research and development costs totaled
approximately $1,362,000, $1,143,000 and $1,104,000 for the years ended December 31, 2004, 2003 and
2002, respectively.

Software Development Costs

According to Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed, all costs incurred to establish the
technological feasibility of a computer software product to be sold, leased or otherwise marketed are
research and development costs and are charged to expense during the period when the costs are incurred.
Costs incurred subsequent to establishing technological feasibility are capitalized. Capitalization of
computer software costs ceases when the product is available for general release to customers. The
Company has determined that costs to be capitalized based on SFAS No. 86 are not material.
Capitalizable software development costs of approximately $108,000, $189,000 and $104,000 were
charged to expense during the years ended December 31, 2004, 2003 and 2002, respectively.

Advertising

Advertising costs are expensed as incurred. Advertising expense was approximately $80,000, $307,000
and $373,000 for the years ended December 31, 2004, 2003 and 2002, respectively, and are recorded in
general and administrative expenses in the accompanying statements of income.

Shipping and Handling Costs

Shipping and handling costs are expensed as incurred. Shipping and handling costs totaled approximately
$890,000, $764,000 and $664,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

Use of Estimates

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

Recently Issued Accounting Standards

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment, which is a
revision of SFAS No. 123 Accounting for Stock-Based Compensation. SFAS No. 123(R) is effective for
public companies for interim or annual periods beginning after June 15, 2005, supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows.
Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123.
However, SFAS No. 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. The new standard will be effective, upon us, beginning July 1,
2005. The Company is in the process of evaluating the impact of this standard on the financial
statements.

Reclassifications

Certain amounts in the 2003 financial statements have been reclassified to conform to the 2004
classifications.

4. DETAILS ON BALANCE SHEET AMOUNTS

Other accrued liabilities are comprised of the following at December 31, 2004 and 2003:

Accrued salaries and benefits
Accrued commissions
Accrued self-insurance claims
Other

5. NET INCOME PER SHARE

2004
$ 1,613,420
436,307
244,500
29,206
$ 2,323,433

2003
$ 479,677
337,997
270,100
42,202
$ 1,129,976

Pro forma net income per share consists of the Company’s historical net income as an S corporation,
adjusted for additional income taxes that would have been recorded had the Company operated as a C
corporation for the entire period presented. The Company presents both basic and diluted earnings per
share (EPS) amounts. Basic EPS is calculated by dividing net income by the weighted average number of
common shares outstanding during the period presented. Diluted EPS amounts are based upon the weighted
average number of common and common equivalent shares outstanding during the period presented. The
difference between basic and diluted EPS is solely attributable to stock options. The Company uses the
treasury stock method to calculate the impact of outstanding stock options. For the years ended December
31, 2004, 2003, and 2002 these dilutive shares were 45,706, 48,523, and 37,327 respectively.

6. INCOME TAXES

The financial statements of the Company do not include a provision for income taxes through May 20,
2002 because the taxable income of the Company was included in the income tax returns of the
shareholders under the S corporation election through that date. Upon completion of the IPO, the
Company’s S corporation status was terminated, and the Company became subject to federal and state
income taxes. Upon revocation of the S corporation election, the Company recorded a $934,000 credit to
the deferred tax provision. Prior to its termination as an S corporation, the Company declared a
distribution of earned, but undistributed, accumulated S corporation earnings through the date the
Company became a C corporation. A partial distribution in the amount of $12,750,000 was paid on May
28, 2002. An additional distribution of $1,532,510 was made during the fourth quarter of 2002. During
2003, a final distribution of $250,000, representing the remaining balance due, was paid to pre-IPO
stockholders.

The Company provides for income taxes using the liability method in accordance with SFAS No. 109,
Accounting for Income Taxes. Deferred income taxes arise from the temporary differences in the
recognition of income and expenses for tax purposes. A valuation allowance is established when the
Company believes that it is more likely than not that some portion of its deferred tax assets will not be
realized.

Deferred tax assets and liabilities are comprised of the following at December 31, 2004 and 2003:

Deferred tax as s ets :

A cco u n ts receiv ab le

A ccru ed liab ilities

To tal d eferred tax as s ets

Deferred tax liab ilities :

Deferred co mp en s atio n

Dep reciatio n

To tal d eferred tax liab ilities

2004

2003

638,044

343,402

758,972

696,037

1,397,016

1,039,439

48,104

66,266

670,649

718,753

66,266

Significant components of the income tax provision (benefit) for the year ended December 31, 2004, 2003
and 2002 are as follows:

Current provision:

Federal

State

Deferred provision:

Federal

State

2004

2003

2002

3,560,880

4,339,486

2,575,944

783,683

644,864

401,342

262,036

32,874

29,793

3,504

(900,526)

(105,944)

Total income tax provision

4,639,473

5,017,647

1,970,816

The difference between income taxes at the U.S. federal statutory income tax rate of 35% and those
reported in the statement of income for the years ended December 31, 2004, 2003 and 2002 are as
follows:

Income taxes at U. S. Federal statutory rate

4,096,158

4,509,217

4,417,213

State income tax, net of federal tax effect

Impact of graduated tax rates

S corporation

Change in tax status

Other

646,722

(100,000)

427,923

(100,000)

(3,407)

180,507

259,869

(100,000)

(1,657,622)

(934,262)

(14,382)

4,639,473

5,017,647

1,970,816

7. DEFERRED COMPENSATION

On May 17, 2002, Kenny Muscat, one of the Company’s directors and a principal stockholder sold
66,667 shares of common stock to J. Boyd Douglas, Jr., one of the Company’s directors and its Chief
Operating Officer (COO), for a price of $13.20 per share. The share price was determined by an
independent valuation of the fair market value of the shares. A promissory note was delivered for the
entire purchase price. The promissory note bears interest at the applicable rate for federal income tax

purposes, and the entire principal balance is due five years after the date of the stock sale. As a part of the
same transaction, Mr. Muscat also transferred to Mr. Douglas 19,333 shares of common stock for $1.00.
These shares are subject to a mandatory transfer obligation under which Mr. Douglas will be required to
transfer the shares back to Mr. Muscat in the event Mr. Douglas’ employment with the Company
terminates for certain reasons prior to the fifth anniversary of the transaction date. The mandatory transfer
obligation will lapse as to 20% of the shares on each anniversary of the transaction date over the five year
restriction period.

As a result of this transaction, the Company recorded deferred compensation expense of $255,196,
representing the excess of the fair market value of the 19,333 shares transferred by Mr. Muscat to Mr.
Douglas. The Company is amortizing the deferred compensation expense over 20 fiscal quarters,
recognizing pre-tax compensation expense of $12,760 per quarter.

8. STOCK OPTION PLAN

Under the 2002 Stock Option Plan, the Company has authorized the issuance of equity-based awards for
up to 1,165,333 shares of common stock to provide additional incentive to employees and officers.
Pursuant to the plan, the Company can grant either incentive or non-qualified stock options. Options to
purchase common stock under the 2002 Stock Option Plan have been granted to Company employees
with an exercise price equal to the fair market value of the underlying shares on the date of grant.

Stock options granted under the 2002 Stock Option Plan to executive officers of the Company become
vested as to all of the shares covered by such grant on the fifth anniversary of the grant date and expire on
the seventh anniversary of the grant date. Stock options granted under the 2002 Stock Option Plan to
employees other than executive officers become vested as to 50% of the shares covered by the option
grant on the third anniversary of the grant date and as to 100% of such shares on the fifth anniversary of
the grant date. In addition, options become vested upon termination of employment resulting from death,
disability or retirement. Such options expire on the seventh anniversary of the grant date.

Under the methodology of SFAS No. 123, the fair value of the Company’s stock options was estimated at
the date of grant using the Black-Scholes option pricing model. The multiple option approach was used,
with assumptions for expected option life of 5 years and 44% expected volatility for the market price of
the Company’s stock in 2002. An estimated dividend yield of 3% was used. The risk-free rate of return
was determined to be 2.79% in 2002. No options were granted in 2004 or 2003.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions, including expected stock price volatility. Because the
Company’s employee stock options have characteristics significantly different from those of traded
options, and because subjectivity of assumptions can materially affect estimate of fair value, the Company
believes the Black-Scholes model does not necessarily provide a reliable single measure of the fair value
of its employee stock options.

The weighted average grant date fair value of options granted to employees under the 2002 Stock Option
Plan during 2002 was $5.30. During 2002, options were granted under the plan at exercise prices equal to
the market value of the Company’s stock on the date of grant.

A summary of stock option activity under the plan is as follows:

2004

2003

Exercise

Price

Exercise

Price

Beginning of year

424,759

16.50

444,998

16.50

Granted

Exercised

Forfeited

(24,811)

16.50

(1,849)

(18,390)

16.50

End of year

399,948

16.50

424,759

16.50

Exercisable

16.50

312

16.50

Shares available for future grants under

the plan as End of Year

763,536

738,725

Weighted-average grant date fair value

$
-

Weighted-average remaining contractual life

4.5 years

5.5 years

9. CONCENTRATION OF CREDIT RISK

Financial instruments, which potentially subject the Company to concentration of credit risk, consist
principally of temporary cash investments and trade receivables. The Company places its temporary cash
investments with credit-worthy, high-quality financial institutions.

The Company’s customer base is concentrated in the healthcare industry. Customers are located
throughout the United States. The Company requires no collateral or other security to support customer
receivables. An allowance for doubtful accounts has been established for potential credit losses based on
historical collection experience.

10. FAIR VALUES OF FINANCIAL INSTRUMENTS

Cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities are reflected in the
accompanying financial statements at cost, which approximates fair value because of the short-term
maturity of these instruments. Based on the borrowing rates currently available to the Company for bank
loans with similar terms and average maturities, at December 31, 2004 and 2003 the fair values of the
note payable and financing receivables approximate book value.

11. FINANCING RECEIVABLES

The Company leases its information and patient care systems to certain healthcare providers under sales-
type leases expiring in various years through 2009. These receivables typically have terms from 2 to 5

years, bear interest at various rates, and are usually collateralized by a security interest in the underlying
assets. Since the Company has a history of successfully collecting all amounts due under the original
payment terms of these extended payment arrangements without making any concessions to its customers,
the Company satisfies the requirement of SOP 97-2 for revenue recognition. The Company’s history with
these types of extended payment term arrangements supports management’s assertion that revenues are
fixed and determinable and probable of collection.

The components of these lease receivables were as follows on December 31:

Total minimum lease payments receivable
Less unearned income
Lease receivables
Less current portion
A mounts due after one year

2 0 0 4
$

1,073,547
(171,599)
901,948
(284,291)
617,657

2 0 0 3
1,690,917
(232,867)
1,458,050
(665,947)
792,103

Future minimum lease payments to be received at December 31, 2004 are as follows:

2005
2006
2007
2008
2009
Tota l minimum lease payments to be received
Less unearned income
N et leases receivable

357,929
239,627
239,627
181,865
54,499
1,073,547
(171,599)
901,948

The Company has also sold information and patient care systems to certain healthcare providers under
extended payment terms. These receivables, included in current portion of financing receivables,
typically have terms from 3 to 12 months. Total amounts receivable under these arrangements at
December 31, 2004 and 2003 were $689,869 and $448,595 (of which $1,768 is included as a long-term
asset), respectively.

12. BENEFIT PLANS

In January 1994, the Company adopted the Computer Programs & System, Inc. 401(k) Retirement Plan
that covers all eligible employees of the Company who have completed one year of service. The plan
allows eligible employees to contribute up to 15% of their pre-tax earnings up to the statutory limit
prescribed by the Internal Revenue Service. The Company matches the first $1,000 contribution per
participant plus a discretionary amount determined by the Company. The Company contributed
approximately $1,059,000, $935,000 and $816,000 to the plan for the years ended December 31, 2004,
2003 and 2002, respectively.

The Company provides certain health and medical benefits to eligible employees, their spouses and
dependents pursuant to a benefit plan funded by the Company. Each participating employee contributes to
the Company's costs associated with such benefit plan. The Company's obligation to fund this benefit plan

and pay for these benefits is limited through the Company's purchase of an insurance policy from a third-
party insurer. The amount established as a reserve is intended to recognize the Company's estimated
obligations with respect to its payment of claims and claims incurred but not yet reported under the
benefit plan. Management believes that the recorded liability for medical self-insurance at December 31,
2004 and 2003 is adequate to cover the losses and claims incurred, but these reserves are necessarily
based on estimates and the amount ultimately paid may be more or less than such estimates.

13. OPERATING LEASES

The Company leases certain real property, all of which is owned by entities that are owned by one or
more stockholders of the Company. The lease agreements have terms of ten years and expire on or before
June 2013. For the second five years of the leases, the rental may be adjusted with consent of the landlord
and the Company. If mutual consent cannot be obtained, the rental for the second five years will remain
the same as the first five years. For the years ended December 31, 2004, 2003 and 2002, total rent
expense paid to related parties was approximately $1,385,000, $1,325,000 and $1,112,000, respectively.

The future minimum lease payments payable under operating leases subsequent to December 31, 2004 are
as follows:

2005
2006
2007
2008
2009
Thereafter

1,391,664
1,391,664
1,391,664
1,391,664
1,391,664
3,314,754
10,273,074

14. CONTINGENCIES

From time to time, the Company is involved in routine litigation that arises in the ordinary course of
business. Management does not expect this to have a material adverse effect on the Company’s financial
statements.

15. SUBSEQUENT EVENT

On February 1, 2005, the Company announced a dividend for the first quarter of 2005 in the amount of
$0.22 per share.

16. QUARTERLY FINANCIAL STATEMENTS (UNAUDITED)

The following table presents a summary of our results of operations for our eight most recent quarters
ended December 31, 2004. The information for each of these quarters is unaudited and has been prepared
on a basis consistent with the audited financial statements. This information includes all adjustments,
consisting only of normal recurring adjustments, we consider necessary for fair presentation of this
information when read in conjunction with the audited financial statements and related notes. Our
operating results have varied on a quarterly basis and may fluctuate significantly in the future.

Year Ended December 31, 2004

Sales revenues
Gross profit
Operating income
Net income
Net income per share

Basic
Diluted

1st Quarter 2nd Quarter 3rd Quarter

4th Quarter

(in thousands except for share and per share data)

18,212
6,496
1,139
755

19,014
7,542
2,353
1,449

21,132
8,422
3,337
2,086

24,306
10,628
4,374
2,774

0.07
0.07

0.14
0.14

0.20
0.20

0.26
0.26

Weighted average shares outstanding

Basic
Diluted

10,489,849
10,527,101

10,489,849
10,531,893

10,489,849
10,533,388

10,489,849
10,549,706

Year Ended December 31, 2003

Sales revenues
Gross profit
Operating income
Net income
Net income per share

Basic
Diluted

20,075
8,037
3,224
2,071

19,908
8,320
3,308
2,112

19,591
7,319
2,278
1,461

21,729
9,223
3,735
2,222

0.20
0.20

0.14
0.14

0.21
0.21

Weighted average shares outstanding

Basic
Diluted

10,488,000
10,569,223

10,488,000
10,543,577

10,488,000
10,524,832

10,488,181
10,510,879

SCHEDULE II
COMPUTER PROGRAMS AND SYSTEMS, INC.
VALUATION OF QUALIFYING ACCOUNTS

(1)
Additions
charge d to
cost and
expenses

Balance at
beginning
of period

(2)
De duction
s

Balance at
end of
pe riod

2002
2003
2004

532,000
768,000
904,000

818,000
257,000
1,342,000

582,000
121,000
610,000

768,000
904,000
1,636,000

Description
Allowance for doubtful accounts
deducted from accounts
receivable in the balance sheet

(1) Adjustments to allowance for change in estimates.
(2) Uncollectible accounts written off, net of recoveries.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES.

Our management, under the supervision and with the participation of our Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of the
end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company that is required to be included in our
periodic Securities and Exchange Commission filings.

There have not been any changes in the Company’s internal control over financial reporting (as

defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) during the fourth quarter of 2004 that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control over
financial reporting.

Management’s Annual Report on Internal Control Over Financial Reporting

This report is included in Item 8 on page 38 and is incorporated herein by reference.

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

This report is included in Item 8 on page 40 and is incorporated herein by reference.

ITEM 9B.

OTHER INFORMATION.

None.

PART III

ITEM 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

We have adopted a Code of Business Conduct and Ethics applicable to all of our directors,

officers (including our Chief Executive Officer and senior financial officers) and employees. We have
also adopted a separate code of ethics with additional guidelines and responsibilities applicable to our
Chief Executive Officer and senior financial officers, known as the Code of Ethics for CEO and Senior
Financial Officers. Copies of the Code of Business Conduct and Ethics and the Code of Ethics for CEO
and Senior Financial Officers are incorporated by reference in this Form 10-K as Exhibit 14.1 and Exhibit
14.2, respectively.

Other information required by this Item regarding Executive Officers is included in Part I of this
Form 10-K under the caption "Executive Officers" in accordance with Instruction 3 of the Instructions to
Paragraph (b) of Item 401 of Regulation S-K.

Other information required by this Item is incorporated by reference pursuant to General
Instruction G(3) of Form 10-K from CPSI's definitive Proxy Statement for the 2005 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A.

ITEM 11.

EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference pursuant to General
Instruction G(3) of Form 10-K from CPSI's definitive Proxy Statement for the 2005 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

Certain of the information required by this Item is incorporated by reference pursuant to General

Instruction G(3) of Form 10-K from CPSI's definitive Proxy Statement for the 2005 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

PART IV

(a)(1) and (2) and (d) - Financial Statements and Financial Statement Schedules.

Financial Statements: The Financial Statements and related Financial Statements
Schedule of CPSI are included herein in Part II, Item 8.

(a)(3) and (b) – Exhibits.

The exhibits listed on the Exhibit Index at page 62 of this Form 10-K are filed
herewith or are incorporated herein by reference.

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, on this the 15th day of March, 2005.

COMPUTER PROGRAMS AND SYSTEMS, INC.

By:

/s/ David A. Dye
David A. Dye
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.

Name

/s/ John Morrissey
John Morrissey

/s/ David A. Dye
David A. Dye

/s/ J. Boyd Douglas
J. Boyd Douglas

/s/ M. Stephen Walker
M. Stephen Walker

/s/ Darrell G. West
Darrell G. West

/s/ Dennis P. Wilkins
Dennis P. Wilkins

/s/ M. Kenny Muscat
M. Kenny Muscat

/s/ Ernest F. Ladd, III
Ernest F. Ladd, III

/s/ W. Austin Mulherin, III
W. Austin Mulherin, III

/s/ William R. Seifert, II
William R. Seifert, II

/s/ Hal L. Daugherty
Hal L. Daugherty

/s/ John C. Johnson
John C. Johnson

/s/ Charles P. Huffman
Charles P. Huffman

Title

Chairman of the Board and
Director

President, Chief Executive Officer
and Director (principal executive
officer)

Date

March 9, 2005

March 15, 2005

Executive Vice President,
Chief Operating Officer and Director

March 15, 2005

Vice President - Finance and
Chief Financial Officer

Controller (principal accounting
officer)

Director

March 15, 2005

March 7, 2005

March 9, 2005

March 7, 2005

March 15, 2005

March 8, 2005

March 15, 2005

Exhibit
Number

Description

Exhibit Index

3.1

3.2

10.1

10.2

10.3*

10.4*

10.5

10.6

10.7

10.8

14.1

14.2

23.1

23.2

31.1

31.2

32.1

Certificate of Incorporation (filed as Exhibit 3.4 to CPSI’s Registration Statement on Form S-1
(Registration No. 333-84726) and incorporated herein by reference)

Bylaws (filed as Exhibit 3.6 to CPSI’s Registration Statement on Form S-1 (Registration
No. 333-84726) and incorporated herein by reference)

Real Property Lease, dated April 1, 2002, between CPSI and CP Investments, Inc. (filed as Exhibit
10.1 to CPSI’s Registration Statement on Form S-1 (Registration No. 333-84726) and
incorporated herein by reference)

Real Property Lease dated April 1, 2002, between CPSI and DJK, LLC (filed as Exhibit 10.2 to
CPSI’s Registration Statement on Form S-1 (Registration No. 333-84726) and incorporated herein
by reference)

2002 Stock Option Plan (filed as Exhibit 10.3 to CPSI’s Registration Statement on Form S-1
(Registration No. 333-84726) and incorporated herein by reference)

Form of Non-Qualified Stock Option Agreement for executive officers (filed as Exhibit 10.4 to
CPSI’s Registration Statement on Form S-1 (Registration No. 333-84726) and incorporated herein
by reference)

Form of Indemnity Agreement entered into by CPSI and each of its non-employee directors (filed
as Exhibit 10.1 to CPSI’s Quarterly Report on Form 10-Q for the period ended September 30,
2002 and incorporated herein by reference)

Real Property Lease, dated October 1, 2002, between CPSI and CP Investments, Inc. (filed as
Exhibit 10.10 to CPSI’s Annual Report on Form 10-K for the period ended December 31, 2002
and incorporated herein by reference)

Real Property Lease, dated November 1, 2002, between CPSI and CP Investments, Inc. (filed as
Exhibit 10.11 to CPSI’s Annual Report on Form 10-K for the period ended December 31, 2002
and incorporated herein by reference)

Real Property Lease, dated June 16, 2002, between CPSI and CP Investments, Inc. (filed as
Exhibit 10.12 to CPSI’s Annual Report on Form 10-K for the period ended December 31, 2003
and incorporated herein by reference)

Code of Business Conduct and Ethics (filed as Exhibit 14.1 to CPSI’s Annual Report on Form 10-
K for the period ended December 31, 2003 and incorporated herein by reference)

Code of Ethics for CEO and Senior Financial Officers (filed as Exhibit 14.2 to CPSI’s Annual
Report on Form 10-K for the period ended December 31, 2003 and incorporated herein by
reference)

Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm

Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certifications 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

___________________________

Compensation plan or agreement

Board of Directors

d i re c to rs a n d o f f i ce rs

David A. Dye
President and Chief Executive Officer
Computer Programs and Systems, Inc.

William R. Seifert, II
Executive Vice President
AmSouth Bank

J. Boyd Douglas, Jr.
Executive Vice President and
Chief Operating Officer

Dennis P. Wilkins
Retired President and

Chief Executive Officer

Computer Programs and Systems, Inc.

Ernest F. Ladd, III
Retired Executive Vice President
and Chief Financial Officer

Dravo Corporation

Hal L. Daugherty
Chief Executive Officer
The Heart Group, P.C.

John C. Johnson
Real Estate Appraiser
Courtney & Morris Appraisals, Inc.

Charles P. Huffman
Senior Vice President and
Chief Financial Officer

EnergySouth, Inc.

John W. Morrissey
Retired Vice President, Sales

and Marketing

Computer Programs and Systems, Inc.

W. Austin Mulherin, III
Attorney
Frazer, Greene, Upchurch & Baker, LLC

M. Kenny Muscat
Retired Executive Vice President
and Chief Operating Officer

Computer Programs and Systems, Inc.

Officers

David A. Dye
President and Chief Executive Officer

M. Stephen Walker
Vice President of Finance and
Chief Financial Officer

J. Boyd Douglas, Jr.
Executive Vice President and
Chief Operating Officer

co r p o ra te d a ta

Independent Registered
Public Accounting Firm
Grant Thornton LLP
Marquis One
Suite 300
245 Peachtree Center Avenue, NE
Atlanta, GA 30303

Transfer Agent
Wachovia Bank, N.A.
Equity Services Group
1525 West W. T. Harris Blvd., 3C3
Charlotte, NC 28262-1153

Legal Counsel
Maynard, Cooper & Gale, P.C.
1901 Sixth Avenue North
Suite 2400, AmSouth/Harbert Plaza
Birmingham, AL 35203-2618

Common Stock
Computer Programs and Systems, Inc.’s
common stock is traded on The NASDAQ
Stock Market’s National Market under the
symbol CPSI.

Corporate Headquarters
Computer Programs and Systems, Inc.
6600 Wall Street
Mobile, AL 36695
(251) 639-8100
www.cpsinet.com

h o s p i ta l c u sto m e r lo ca t i o n s

CPSI

6600 Wall Street
Mobile, AL 36695