Computer Programs and Systems Annual Report 2005

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FY2005 Annual Report · Computer Programs and Systems

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clear direction
for healthcare
information
solutions

CPSI

2 0 0 5 A N N U A L R E P O R T

Company Profile

CPSI is a leading provider of healthcare information solutions for community hospitals with over 580

client hospitals in 46 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 800 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 11, 2006, at 9:00 a.m. Central Time at the

Mobile Convention Center, One South Water Street, Mobile, Alabama.

Financial Highlights

Total sales revenues
Total cost of sales
Gross profit

Total operating expenses

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

Year Ended
December 31,

2005
$ 108,826
60,707
48,119

2004
$ 82,664
49,576
33,088

24,827

21,886

23,292
653
5
23,950
9,381
$ 14,569

$
$

1.38
1.37

10,560
10,646

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

0.67
0.67

10,490
10,536

$
$

Revenues

Net Income (1)

Hospital Clients

9
6
5
,
4
1

0
8
5

4
3
5

0
9
4

4
4
4

0
0
4

6
2
8
,
8
0
1

4
6
6
,
2
8

3
0
3
,
1
8

4
4
7
,
3
7

6
6
6
,
9
5

4
4
0
,
8

6
6
8
,
7

4
6
0
,
7

9
4
4
,
5

01 02 03 04 05

(1) Net income for years 2001 & 2002 are pro forma for comparative purposes.

To Our Shareholders:

CPSI enjoyed a record-setting year in 2005. Our company set new highs with sales of $108.8 million and net

income of $14.6 million, the latter an increase of 106.3% over the prior year. Importantly, especially in light of

our growth, we also continued to enjoy strong free cash flow. In fact, for the second consecutive year, our free

cash flow surpassed net income. We remain debt free and continue to reward our shareholders by paying a

quarterly dividend. CPSI’s customer base now numbers 580 hospitals located in 46 states across the country.

Our performance in 2005 was positively impacted by two external factors that we have discussed a great deal

with our shareholders in years past. First, the financial health of community hospitals remained stable to

slightly improved, enabling them to consider larger investments in information technology. Medicare

reimbursement, which represents more than 50% of net revenue for the vast majority of our community

hospital clients, continued to benefit from the reimbursement changes contained in the Medicare

Modernization Act of 2003.

Second, the demand for healthcare information technology, notably clinical software solutions, continued to

increase throughout the year. The use of clinical information technology in community hospitals to improve

patient safety and enhance operational efficiency has progressed from being a novelty just a few years ago to

becoming necessary for quality hospital operations. In concert with this trend, the most notable change in

2005 was the number of physicians who continue to traverse the technology spectrum from reluctance to

acceptance, with many now reaching the point of demanding access to their patients’ clinical information

electronically as opposed to via the paper chart.

While CPSI certainly benefited from the two factors mentioned above, we are particularly pleased with the

strong competitive performance we enjoyed within this vibrant marketplace in 2005. We continue to believe

that the primary reason behind this competitive success is high quality support to our current hospital clients.

Over 25 years in this business has taught us that if we do not lose sight of our primary goal of taking care of

our customers, everything that we strive for as a company in the future, notably long-term growth, will take
care of itself.

Additionally, our competitive position is enhanced because CPSI remains the only hospital information
technology vendor that provides a single source solution that includes software, hardware, data conversion,

installation and training and outsourcing services. This approach offers a clear advantage for the hospital
customer, because they have just one number to call for all of their IT service and support needs.

We also remain the only healthcare IT provider to offer an end-to-end financial and clinical information
system solution that is entirely internally developed. As a result, our hospital clients enjoy the advantages of a
complete electronic medical record, populated solely by input into the CPSI system and accessible via the

CPSI system by doctors, nurses and other clinical professionals. This is done without the costly, clumsy
interfaces between disparate systems that are necessary with other vendors.

The best example of CPSI’s commitment to in-house development is our PACS module, ImageLink™. This

digital imaging application, developed over the last four years, is now installed in over 40 CPSI client hospitals.

Radiologists use ImageLink to read such image types as X-ray, MRI, CT and Ultrasound. And most
importantly, because of the integration with the rest of the CPSI system, patient images are available for
viewing by all other physicians involved in the patient’s care, such as family physicians, consultative physicians
and surgeons.

Our popular physician electronic medical record portal, ChartLink®, delivers real time clinical information, such

as vital signs, lab results, medication information and previous patient clinical history. More than 2,000 doctors

at over 150 CPSI client hospitals use ChartLink® every day from the hospital floor, their clinic offices, their

homes and anywhere else they have access to the Internet. As our country moves toward nationwide electronic

patient record interoperability over the next several years, CPSI client hospitals are assured of being at the

forefront of this effort as a result of the integrated clinical platform that populates the ChartLink® virtual chart.

On the outsourcing services front, we continue to be pleased with the growth in this segment of our business.

More than half of our hospital customers now choose to outsource their statement and electronic claims

processing to CPSI, while the number of facilities outsourcing their business office operations to us continues

to grow as well. Outsourcing revenue in 2005 accounted for more than 13% of total sales and increased 55%

over 2004.

O U R G O A L S F O R 2 0 0 6 A N D B E Y O N D I N C L U D E :

1) To continue to provide the best customer support in the industry to our current hospital clients.

2) To continue to internally develop application software that meets the needs of community hospitals in

their quest to use technology to improve the quality of patient care.

3) To increase add-on sales volume, particularly of our clinical modules, to our current customer base as they

move toward an electronic medical record.

4) To continue to increase CPSI’s market share by demonstrating to prospective client hospitals that CPSI is

the clear choice for their long-term information technology partner.

5) To continue to expand our outsourcing division by convincing more and more of our existing hospital

clients that CPSI is best suited to provide their business office services, therefore enabling hospital
leadership to concentrate fully on their mission of providing high quality patient care.

We have spent the past quarter century building a solid foundation, one constructed upon a sound model, the
most conservative revenue recognition policies in our industry and an unwavering commitment to our
customers. As we move from a successful past into what we believe will be an even more exciting future, we

remain grateful for your support and your investment in our company.

Sincerely,

David A. Dye

President and Chief Executive Officer

DIRECTORS AND OFFICERS

Board of Directors

Officers

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

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

Computer Programs and Systems, Inc.

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

Dravo Corporation

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
Reitred Executive Vice President
and Chief Operating Officer

Computer Programs and Systems, Inc.

William R. Seifert, II
Executive Vice President
AmSouth Bank

Dennis P. Wilkins
Retired President and Chief Executive Officer
Computer Programs and Systems, Inc.

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

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

David A. Dye
President and Chief Executive Officer

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

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

CORPORATE DATA

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

Transfer Agent
American Stock Transfer & Trust Company
59 Maiden Lane
Plaza Level
New York, NY 10038
(866) 668-6550

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

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

Charles P. Huffman
Senior Vice President and Chief Financial Officer
EnergySouth, Inc.

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

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, 2005

(cid:133)

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: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:133) No ⌧

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:133) No ⌧

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 (cid:133)

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer (cid:133) Accelerated filer ⌧ Non-accelerated filer (cid:133)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:133) No ⌧

The aggregate market value of common stock held by non-affiliates of the registrant at June 30, 2005 was $310,607,882.

As of March 10, 2006 the registrant had outstanding 10,746,914 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 11, 2006 are incorporated by reference
into Part III of this report.

Item No.

Page No.

TABLE OF CONTENTS

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

PART I

1. Business .............................................................................................................................................
Overview .......................................................................................................................................
Industry Dynamics.........................................................................................................................
Our Solution ..................................................................................................................................
Strategy..........................................................................................................................................
Our Products and Services.............................................................................................................
System Implementation and Training............................................................................................
Technology....................................................................................................................................
Research and Development ...........................................................................................................
Customers, Sales and Marketing ...................................................................................................
Competition ...................................................................................................................................
Internal Management Control System ...........................................................................................
Intellectual Property ......................................................................................................................
Employees .....................................................................................................................................
Executive Officers .........................................................................................................................
Company Website .........................................................................................................................
1A. Risk Factors .......................................................................................................................................
1B. Unresolved Staff Comments ..............................................................................................................
2. Properties ...........................................................................................................................................
3. Legal Proceedings..............................................................................................................................
4. Submission of Matters to a Vote of Security Holders........................................................................

PART II

Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Securities ..................................................................................................
6. Selected Financial Data .....................................................................................................................
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ............
7A. Quantitative and Qualitative Disclosures about Market Risk ............................................................
8. Financial Statements and Supplementary Data..................................................................................
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............
9A. Controls and Procedures ....................................................................................................................
9B. Other Information ..............................................................................................................................

PART III

10. Directors and Executive Officers of the Registrant ...........................................................................
11. Executive Compensation ...................................................................................................................
12. Security Ownership of Certain Beneficial Owners and Management ...............................................
13. Certain Relationships and Related Transactions................................................................................
14. Principal Accountant Fees and Services ............................................................................................

PART IV

15. Exhibits, Financial Statement Schedules ..........................................................................................

SIGNATURES ...........................................................................................................................................................

* Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 11, 2006 are

incorporated by reference in Part III of this Form 10-K.

1
1
1
2
2
3
9
9
10
10
10
11
11
11
12
12
13
16
17
17
17

18
19
20
27
27
47
47
47

48*
48*
48*
48*
49*

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

13 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.

ITEM 1. BUSINESS
Overview

PART I

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 580 hospital customers across 46 states and the District
of Columbia. In 2005, we generated revenues of $108.8 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 2005 total healthcare expenditures in the United States were approximately
$1.9 trillion, or approximately 15.6% of the U.S. gross domestic product. CMS estimates that by fiscal 2014 total U.S.
healthcare spending will reach $3.4 trillion, or 18.7% 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
2006, spending on hospital services will amount to approximately $623.5 billion, or 30.0% of total healthcare expenditures.
According to the American Hospital Association, there are approximately 5,100 community hospitals in the United States
that are 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. Community hospitals typically generate a significant portion of their revenues from

beneficiaries of the Medicare program. Consequently, even small changes in this federal program have a disproportionately
larger impact on community hospitals as compared to larger facilities where greater portions of their revenues are typically
generated from beneficiaries of private insurance programs. For 2006, CMS reports that rural hospitals, the largest segment
of the community hospital market, will receive an average increase in Medicare reimbursements of 3.3% per inpatient case
and 3.9% for outpatient services. Conversely, the Medicaid program, which is a federal/state program managed by the
individual states and dependent in part on funding from the states, continues to struggle due to the increasing cost of
healthcare and the detrimental effect of the lagging economy on state revenues. In addition to issues in state funding, a
recently passed federal budget reconciliation bill, the Deficit Reduction Act of 2005, which includes cuts of $6.4 billion and
$4.7 billion from Medicare and Medicaid, respectively, over the next five years, will cut deeper into Medicaid
reimbursements, and the gains made in Medicare reimbursements may be adversely affected in the future.

Continued Push for Improved Patient Care. With pressure mounting to reduce medical errors and improve patient

safety, hospitals are actively seeking information technology solutions for clinical decision support. This point is illustrated
by the results of the 17th Annual HIMSS Leadership Survey sponsored by Superior Consulting Company, which reflects that
patient safety is expected to continue to be the top information technology priority in 2006. Down only slightly from 2005’s
results, approximately 50% of respondents to this survey identified the reduction in medical errors and increased patient
safety as their number one priority. 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.

Emergence of Electronic Medical Records/Electronic Health Records. In his January 31, 2006 State of the Union
address, President of the United States George W. Bush reiterated his administration’s commitment to making electronic
health records available to most Americans. The President’s fiscal 2007 budget proposal provides for an increase of 35.2% in
health information technology funding with an emphasis on interoperability between vendor systems. The stated goal of the

national electronic health record is to bring together patient information from across the disparate healthcare vendor systems
used in all of the individual hospitals, clinics and physician offices where a patient may receive healthcare services.
Achievement of this ambitious goal will revolutionize the healthcare industry. Data sharing of this magnitude will increase
the efficiency of healthcare delivery, support better clinical decision making, and reduce clinical errors in all participating
facilities. However, the first requirement for participation in national or regional initiatives is the implementation of an
electronic medical record in the individual healthcare facilities. To share patient information electronically, the information
must first be captured and stored electronically. Hospitals understand this fact, and, according to the 17th Annual HIMSS
Leadership Survey referenced above, 45% of respondents identified the implementation of an electronic medical record as
their top information technology priority in 2006. The increase from 29% in the 2005 survey to 45% in the 2006 survey
represents the greatest shift in respondent priorities reported in the 2006 survey. We believe hospitals utilizing fully
integrated enterprise-wide medical information systems, and consequently the vendors that supply such systems, will be best
positioned to participate in and benefit from national and regional initiatives.

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 45% of the respondents to the 17th Annual HIMSS Leadership Survey referenced above predicted
a definite increase in their organizations’ information technology operating budgets during 2006, with an additional 27% of
the respondents predicting a probable increase in their organizations’ information technology operating budgets during 2006.
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, HIPAA
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 5,100 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. 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
New Products
Ambulatory Clinical Documentation. During 2005, we completed the development of our Ambulatory Clinical
Documentation module, which is a complete and flexible medical practice patient tracking and documentation solution that
improves clinical decision support and expands the patient’s electronic medical record (“EMR”) to include ambulatory care.
We completed initial installations of this module in customer facilities during the fourth quarter of 2005.

The module automates medical practice workflow with an interactive white board, template driven documentation,

image capture/document scanning, and an integrated Superbill. The result is a comprehensive real-time EMR that virtually
eliminates paper records. Through integration with CPSI’s ChartLink® EMR portal, the module provides the physician
practice with immediate and secure access to the patient’s complete ambulatory and inpatient history.

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

•
• manages patient status, room assignments and recurring charges

Patient Accounting

Health Information
Management

•

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

Patient Index

• 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:

Enterprise Wide
Scheduling

Contract
Management

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

General Ledger

Accounts Payable

Payroll/Personnel

Time and Attendance

Electronic Direct
Deposits

Human Resources

Budgeting

Fixed Assets

•

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

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

processes vendor invoices and payments and their related general ledger entries

calculates all employee wages and benefits for an unlimited number of salaried and
hourly employees
allocates employee time to user-defined cost centers

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

•

provides for computerized bank deposits to meet payroll and accounts payable
needs

provides for computerized employee files through document/image scanning and
data entry

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

Materials Management

•

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

Laboratory Instrument
Interfaces

Radiology Information
Systems

ImageLinkTM

Physical Therapy and
Respiratory Care

Pharmacy

•

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

provides an automated solution for reviewing test results and completing patient
orders

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

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 ChartLink®.

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

•

provides efficient order and result communication
automates the entry of patient charges

Point-of-Care System

Patient Acuity

ChartLink®

Medication Verification

Resident Assessment
Instruments

Medical Practice Access

Electronic Forms

•

reduces “lost” charges and mistakes due to legibility

increases efficiency of nursing stations
provides interactive, real time status reports for orders

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 portal to patient information
through a hospital’s website

optional computerized physician order entry, including the ability to enter
medication, ancillary test and treatment orders

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

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

electronic form templates replace paper based records and care forms

completed forms become a permanent part of the patient’s electronic medical
record

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 and an 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.

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 553 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 provide 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.

Payroll Outsourcing. We offer customers the option of using us to perform their payroll functions, including payroll

processing, tax and deduction management, and quarterly and yearly reporting.

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 5,100 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, 2006, we had installed our system in 580 facilities in 46 states and the District of
Columbia. Approximately 93% 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 22 employees dedicated to direct sales, seven of whom concentrate on new prospects, and 15
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 10.6 years of prior
experience in installation, training and customer support. While centrally based at our headquarters in Mobile, Alabama, 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, 2006, we had 858 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: 579 in financial and clinical software services
and support, 121 in information technology services and support, 83 in programming, 37 in sales and marketing and 38 in
administration. We have 28 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 2005, 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 15 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 36, 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 39, 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 56, 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 – Senior Vice President—Corporate and Business Development. Victor S. Schneider, age 47,

has served as our Senior Vice President—Corporate and Business Development since December 2005. Mr. Schneider is
responsible for revenue generation efforts, customer relations, strategic growth initiatives and positioning, and market
execution. 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. He served as our Vice President—Sales and Marketing from July 1999 until
December 2005.

Robert D. Hinckle – Vice President—Financial Software Services. Robert D. Hinckle, age 36, 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 – Senior Vice President—Clinical Services. Mr. Peterson, age 54, has served as our Senior
Vice President—Clinical Services since October 2005. He served as our Vice President—Clinical Software Services from
July 1999 through October 2005. 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 35, 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.

Troy D. Rosser – Vice President – Sales. Troy D. Rosser, age 41, has served as our Vice President — Sales since
October 2005. Mr. Rosser is responsible for overseeing all of our sales and marketing efforts. Mr. Rosser began his career
with us in March 1989 as a Financial Software Support Representative. In 1992, Mr. Rosser was transferred to the Sales and
Marketing division where he has worked in various positions, including Sales Manager and, since October 2000, as Director
of Sales.

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 1A. 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 Deficit Reduction Act of 2005 will significantly reduce Medicare and
Medicaid 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.

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 the Health Insurance Portability
and Accountability Act of 1996 (“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 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our corporate headquarters and executive offices are located on approximately 28 acres in Mobile, Alabama. We
occupy approximately 135,500 square feet of space in thirteen buildings. Our main building consists of approximately 66,000
square feet of space. We also have eleven 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 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 from C.P. 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 C.P. Investments, Inc.
expire at various times between April 2012 and December 2015. 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 2006. 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 10, 2006, CPSI had 81 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 10,746,914 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

2004
First Quarter ....................................................................................... $
Second Quarter...................................................................................
Third Quarter......................................................................................
Fourth Quarter....................................................................................
2005
First Quarter ....................................................................................... $
Second Quarter...................................................................................
Third Quarter......................................................................................
Fourth Quarter....................................................................................

22.00 $
21.25
21.58
23.63

28.50 $
38.96
41.09
45.38

16.75 $
17.69
17.39
19.90

20.93 $
25.19
30.66
33.01

0.12
0.12
0.12
0.12

0.22
0.22
0.22
0.22

The last reported sales price of CPSI’s common stock as reported on the NASDAQ Stock Market on March 10, 2006

was $45.42.

Dividends

During 2004, we paid a quarterly dividend in the amount of $0.12 per share. During 2005, we paid a quarterly dividend

in the amount of $0.22 per share. On February 2, 2006, we announced a dividend for the first quarter of 2006 in the amount
of $0.36 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.

ITEM 6. SELECTED FINANCIAL DATA

INCOME DATA:
Total sales revenues
Total costs of sales
Gross profit
Total operating expenses
Operating income
Total other income
Income before taxes
Income taxes
Net income (1)
Net income per share – basic
Net income per share – diluted
Weighted average shares outstanding:

Basic
Diluted

Pro forma income data: (2)
Historical income before provision for

income taxes

Pro forma income taxes
Pro forma net income
Pro forma net income per share – basic

Pro forma net income per share –

diluted

BALANCE SHEET DATA
Cash and cash equivalents
Working capital
Total assets
Total current liabilities
Note payable
Total stockholders’ equity

2005

Year ended December 31,
2002
2003
(in thousands except for share and per share data)

2004

108,826 $
60,707

82,664 $
49,576

81,303 $
48,405

73,744 $
42,925

48,119
24,827

23,292
658

23,950
9,381

33,088
21,886

11,202
501

11,703
4,639

32,898
20,352

12,546
338

12,884
5,018

30,819
18,750

12,069
552

12,621
1,971

14,569 $

7,064 $

7,866 $

10,650 $

1.38 $

1.37 $

0.67 $

0.75 $

1.06 $

2001

59,666
36,242

23,424
14,948

8,476
204

8,680
—

8,680

0.93

10,559,589
10,646,376

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 $

0.80 $

8,680
3,231

5,449

0.59

0.80 $

0.59

2005

2004

As of December 31,
2003

2002

2001

11,670 $
29,308
46,984
9,897
—
36,388

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) CPSI operated as an S corporation through May 20, 2002 and, as such, was not subject to federal and certain state

income taxes.

(2) Pro forma information reflects the provision for income taxes that would have been recorded had CPSI been a C

corporation during all 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 580 hospitals in 46 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 93% of our customers.

Overview

We have achieved a compounded annual growth rate in revenues and net income of approximately 17.2% and 36.6%,
respectively, over the past five years. We experienced a steady improvement in revenues and net income during each quarter
of 2004 and 2005. Our net income margin progressively increased from 4.0% in the first quarter of 2004 to 15.4% in the
fourth quarter of 2005.

We added 46 new hospital clients in 2005, with the size of our average installation contract increasing from

approximately $635,000 in 2004 to approximately $735,000 in 2005.

Our gross revenues increased 31.6% over 2004, while our net income increased 106.3%, principally as a result of the

improved financial condition of community hospitals during much of 2005. Cash flow from operations and total cash
collections increased in 2005 and reached record levels of $17.8 million and $107.7 million, respectively. We continue to
believe that our strong cash performance reflects both the quality of our customer service and our product offerings.

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 and 2005 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 the execution of a sales contract. Upon the
execution of 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 on-site training 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, 2005, 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.

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, 2005, expressed as a percentage of our total revenues for these periods (dollar amounts in thousands):

2005

Amount

% Sales

Year ended December 31,
2004

Amount

% Sales

2003

Amount

% Sales

51,170
43,051
14,605

47.0% $
39.6%
13.4%

35,252
38,010
9,402

42.6% $
46.0%
11.4%

39,708
34,567
7,028

48.9%
42.5%
8.6%

108,826

100.0%

82,664

100.0%

81,303

100.0%

33,295
19,029
8,383

30.6%
17.5%
7.7%

60,707

55.8%

48,119

44.2%

7,778
17,049

7.1%
15.7%

24,827

22.8%

23,292

21.4%

653
5

—

658

0.6%
0.0%
0.0%

0.6%

27,064
16,916
5,596

49,576

33,088

6,055
15,831

21,886

11,202

258
243
—

501

32.7%
20.5%
6.8%

28,045
16,101
4,259

60.0%

48,405

40.0%

32,898

7.3%
19.2%

6,125
14,227

26.5%

20,352

13.5%

12,546

0.3%
0.3%
0.0%

0.6%

216
122
—

338

34.5%
19.8%
5.2%

59.5%

40.5%

7.5%
17.5%

25.0%

15.5%

0.3%
0.1%
0.0%

0.4%

23,950

22.0%

11,703

14.1%

12,884

15.9%

9,381

8.6%

14,569

13.4% $

4,639

7,064

5.6%

5,018

8.5% $

7,866

6.2%

9.7%

INCOME DATA:
Sales revenues:

System sales
Support and maintenance
Outsourcing

Total sales revenues

Costs of sales:

System sales
Support and maintenance
Outsourcing
Total costs of sales
Gross profit

Operating expenses:

Sales and marketing
General and administrative

Total operating expenses
Operating income

Other income (expense):
Interest income
Miscellaneous income
Interest expense

Total other income
Income before taxes

Income taxes
Net income

2005 Compared to 2004

Revenues. Total revenues increased by 31.6%, or $26.2 million, to $108.8 million for 2005, from $82.7 million for

2004.

System sales revenues increased by 45.2%, or $15.9 million, to $51.2 million in 2005, from $35.3 million in 2004. We

added 46 new hospital clients in 2005, compared to 40 new hospital clients in 2004. The size of our average installation
contract increased in 2005 to approximately $735,000 from approximately $635,000 in 2004.

Support and maintenance revenues increased by 13.3%, or $5.1 million, to $43.1 million in 2005, from $38.0 million in
2004. The increase in revenues from support and maintenance was attributable to an increase in recurring revenues as a result
of a larger customer base. We had over 570 customers at December 31, 2005, compared to 530 at December 31, 2004. ASP
services revenues increased by 12.1%, or $0.4 million, and ISP services revenues remained unchanged.

Outsourcing revenues increased by 55.3%, or $5.2 million, to $14.6 million in 2005, from $9.4 million in 2004.

Outsourcing revenues increased as a result of continued growth in customer demand for electronic billing and statement
outsourcing services. Statement outsourcing revenues increased 13.3% and electronic billing revenues increased 31.5%.
Revenue from business outsourcing services increased 148.0%. We were providing business outsourcing services to 26
customers at December 31, 2005, compared to 16 customers at December 31, 2004.

Costs of Sales. Total costs of sales increased by 22.5%, or $11.1 million, to $60.7 million in 2005, from $49.6 million

in 2004. As a percentage of revenues, cost of sales decreased to 55.8% for 2005, from 60.0% for 2004.

Cost of system sales increased by 23.0%, or $6.3 million, to $33.3 million for 2005, from $27.0 million for 2004. The
increase in the cost of system sales is primarily due to an increase in travel expense of $2.1 million as a result of an increase
in new hospital installations. Payroll related expenses increased $1.7 million as a result of increased average employee
headcount needed to support increasing sales volume. Cost of equipment also increased by $2.3 million as a direct result of
our increase in system sales. The gross margin on system sales improved to 34.9% for 2005, from 23.2% for 2004. The
increase in gross margin was due to an increase in the number of new hospital clients, as well as an increase in the average
contract size, without a commensurate increase in the personnel utilized in the system installation process.

Cost of support and maintenance increased by 12.5%, or $2.1 million, to $19.0 million for 2005, from $16.9 million for
2004. The increase in the cost of support and maintenance was caused primarily by an increase in payroll related expenses of
$1.7 million as a result of increased average employee headcount needed to support our increasing customer base. Also,
general departmental expenses increased $0.3 million and depreciation expense increased $0.1 million. The gross margin on
support and maintenance revenues increased to 55.8% for 2005, from 55.5% for 2004. 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 49.8%, or $2.8 million, to $8.4 million in 2005, from $5.6

million in 2004. Cost of outsourcing services increase was primarily due to increased payroll related expense of $2.8 million
due to the full-year expense of additional employees hired during 2004 and additional employees hired in 2005 to support our
business office outsourcing services. Postage costs increased $0.4 million as a result an increase in transaction volumes of our
statement outsourcing services.

Sales and Marketing Expenses. Sales and marketing expenses increased 28.5%, or $1.8 million, to $7.8 million in

2005, from $6.0 million in 2004. The increase in sales and marketing expense was attributable to increased sales
commissions of $1.4 million based on the increase in system sales. Payroll related expenses also increased $0.3 million due
to the addition of sales personnel during 2005.

General and Administrative Expenses. General and administrative expenses increased by 7.7%, or $1.2 million, to

$17.0 million for 2005, from $15.8 million for 2004. The increase in general and administrative expenses was due primarily
to an increase in payroll related expenses of $0.5 million and professional fees of $0.5 million. Additional expense increases
were $0.2 million for various general expenses, $0.1 million for employee health insurance, $0.1 million for depreciation,
$0.2 million for taxes and licenses, and $0.1 million for facilities rent. The increases were offset by a decrease of $0.6 million
in bad debt expense.

As a result of the foregoing factors, income before taxes increased by 104.6%, or $12.2 million, to $23.9 million for

2005, from $11.7 million for 2004.

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.

Liquidity and Capital Resources

As of December 31, 2005, we had $11.7 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 return cash to our shareholders in the form of dividends. 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 $9.3 million, $5.0 million and $2.7 million in 2005, 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 $17.8 million, $11.1 million and $8.0 million for 2005, 2004 and

2003, respectively. In 2005, our cash collections from customers increased $23.8 million over 2004, which produced a
meaningful increase in our cash from operating activities. 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 $12.9 million, $1.7 million and $2.0 million for 2005, 2004 and 2003,
respectively. In 2005, we purchased investments in the amount of $10.3 million which are classified as available for sale. We
also purchased $2.5 million of property and equipment. In 2004 and 2003 we used cash for the purchase of property and
equipment.

Net cash used in financing activities totaled $ 7.1 million, $5.0 million and $2.9 million for 2005, 2004 and 2003,

respectively. During 2005, we declared and paid dividends in the aggregate amount of $9.3 million. We also received
proceeds of $2.2 million from the exercise of employee stock options. 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.

Our days sales outstanding for the years 2005, 2004 and 2003 were 40, 45 and 50 days, 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 our corporate headquarters campus from C.P. 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 2005, we paid total lease payments in the amount of $1,471,005 to
C.P. Investments, Inc. Under these lease agreements, we make annual lease payments in the amount of $1,649,040, 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.

During 2005, the building which houses our research and development team and other staff was sold to C.P.
Investments, Inc. from DJK, LLC, a limited liability company owned by Dennis Wilkins. Our lease with DJK, LLC was
assumed by C.P. Investments, Inc. In 2005, we paid total lease payments in the amount of $20,691 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, 2005, will be as follows:

Payment due by period

Contractual Obligations
Operating Lease Obligations

Off-Balance Sheet Arrangements

Total

1-3 Years
$ 11,236,470 $ 1,649,040 $ 3,298,080 $ 3,298,080 $ 2,991,270

3-5 Years

More than 5
years

Less than
1 year

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),

Revenue Recognition in Financial Statements, as amended by SAB No. 104, Revenue Recognition, and the American
Institute of Certified Public Accountants Statement of Position (SOP) 97-2, Software Revenue Recognition. SAB No. 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.

Allowance for Doubtful Accounts. Trade accounts receivable are stated at the amount the Company expects to collect

and do not bear interest. The collectibility of trade receivable balances is regularly evaluated based on a combination of
factors such as customer credit-worthiness, past transaction history with the customer, current economic industry trends and
changes in customer payment patterns. If it is determined that a customer will be unable to fully meet its financial obligation,
such as in the case of a bankruptcy filing or other material events impacting its business, a specific reserve for bad debt is
recorded to reduce the related receivable to the amount expected to be recovered.

Stock-Based Compensation. The Company accounts for stock-based compensation using the intrinsic value method
prescribed in APB No. 25. The Company grants stock options with exercise prices equal to the respective grant date’s fair
market value and, as such, recognized no compensation cost for such stock options. Effective January 1, 2006, we began
implementing the provision of SFAS No. 123R. See Note 7 of the Financial Statements for further discussion of the impact
on the Company’s earnings.

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, 2005, we had a twelve-month backlog of approximately $22.0
million in connection with non-recurring system purchases and approximately $57.0 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 Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 123R, Share-Based Payment, which requires companies to measure and recognize compensation
expense for stock-based payments at fair value. SFAS No. 123R was initially effective as of the first interim or annual
reporting period that begins after June 15, 2005. In April 2005, the SEC issued a rule amending the compliance date which
allows companies to implement SFAS No. 123R at the beginning of their next fiscal year, instead of the next reporting
period, that begins after June 15, 2005. As a result, the Company will implement SFAS No. 123R in the reporting period
starting January 1, 2006. The Company estimates the impact of adoption in 2006 will be $219,000 additional compensation
expense, net of taxes based on outstanding options at December 31, 2005. This estimate does not include the estimated
impact of any share based payments subsequent to December 31, 2005.

In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 03-1, The Meaning of Other-

Than-Temporary Impairment and Its Application to Certain Investments. EITF No. 03-1 provides guidance on other-than-
temporary impairment models for marketable debt and equity securities accounted for under SFAS No. 115 and non-
marketable equity securities accounted for under the cost method. The EITF developed a basic three-step model to evaluate
whether an investment is other-than-temporarily impaired. In November 2005, the FASB approved the issuance of FASB
Staff Position FAS No. 115-1 and FAS No. 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments. The FSP addresses when an investment is considered impaired, whether the impairment is other-than-
temporary and the measurement of an impairment loss. The FSP also includes accounting considerations subsequent to the
recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been
recognized as other-than-temporary. The FSP is effective for reporting periods beginning after December 15, 2005 and is
required to be adopted by us on January 1, 2006. The adoption of this accounting principle is not expected to have a
significant impact on the Company’s financial position or results of operations.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets - an amendment of APB
Opinion No. 29. SFAS No. 153 amends APB No. 29 to require that assets exchanged in a nonmonetary transaction are to be
measured at fair value except for those exchanges of nonmonetary assets that lack commercial substance. SFAS No. 153 is
effective for nonmonetary asset exchanges occurring in fiscal years beginning after June 15, 2005. The adoption of this
accounting principle is not expected to have a significant impact on the Company’s financial position or results of operations.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 replaces

Accounting Principles Board (APB) Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes
in Interim Financial Statements. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a
voluntary change in accounting principle unless it is impracticable. APB No. 20 previously required that most voluntary
changes in accounting principle be recognized by including the cumulative effect of changing to the new accounting principle
in net income in the period of the change. SFAS No. 154 is effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005. The adoption of this accounting principle is not expected to have a
significant impact on the Company’s financial position or results of operations.

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, 2005 and 2004 ...........................................................................................................

Statements of Income — Years ended December 31, 2005, 2004 and 2003 ..................................................................

Statements of Stockholders’ Equity — Years ended December 31, 2005, 2004 and 2003 ............................................

Statements of Cash Flows — Years ended December 31, 2005, 2004 and 2003 ...........................................................

Notes to Financial Statements.........................................................................................................................................

Index to Financial Statement Schedules

Page

Schedule II — Valuation and Qualifying Accounts ......................................................................................................

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, 2005. 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, 2005.

CPSI’s Independent Registered Public Accounting Firm, Grant Thornton, LLP, has issued an attestation report on

management’s assessment of CPSI’s internal control over financial reporting. That report appears on page 30 of this Form
10-K.

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

Board of Directors and
Shareholders of Computer Programs and Systems, Inc.

We have audited the accompanying balance sheets of Computer Programs and Systems, Inc. as of December 31, 2005 and
2004, and the related statements of income, stockholders’ equity, and cash flows for each of the years 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 audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of
Computer Programs and Systems, Inc. as of December 31, 2005 and 2004, and the results of its operations and its cash flows
for each of the years 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 years ended December 31, 2005 and 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 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,
2005, 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 February 17, 2006 expressed an unqualified
opinion on management’s assessment of, and the effective operation of, internal controls over financial reporting.

/s/ GRANT THORNTON LLP

Atlanta, Georgia
February 17, 2006

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

Board of Directors and
Shareholders of Computer Programs and Systems, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Controls Over
Financial Reporting, that Computer Programs and Systems, Inc. maintained effective internal control over financial reporting
as of December 31, 2005, 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, 2005, is fairly stated, in all material respects, based on the 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, 2005, based on criteria established in
Internal Control—Integrated Framework issued by the COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the balance sheets of Computer Programs and Systems, Inc. as of December 31, 2005 and 2004, and the related statements of
income, stockholders’ equity, and cash flows for each of the years then ended and our report dated February 17, 2006
expressed an unqualified opinion on those financial statements.

/s/ GRANT THORNTON LLP

Atlanta, Georgia
February 17, 2006

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

The Board of Directors
Computer Programs and Systems, Inc.

We have audited the accompanying statements of income, stockholders’ equity and cash flows of Computer Programs and
Systems, Inc. for the year ended December 31, 2003. Our audit also included the 2003 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
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. We were not engaged to perform an audit of the Company’s internal control
over financial reporting. Our audit included 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and
cash flows of Computer Programs and Systems, Inc. for the year ended December 31, 2003, in conformity with U. S.
generally accepted accounting principles. Also, in our opinion, the 2003 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

Assets

Current assets:

Cash and cash equivalents
Investments
Accounts receivable, net of allowance for doubtful accounts of $704,000 and

$1,636,000, respectively

Financing receivables, current portion
Inventories
Deferred tax assets
Prepaid income taxes
Prepaid expenses

Total current assets
Property and equipment

Land
Maintenance equipment
Computer equipment
Office furniture and equipment
Automobiles

Less accumulated depreciation

Net property and equipment
Financing receivables

Total assets
Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable
Deferred revenue
Accrued vacation
Other accrued liabilities

Total current liabilities

Deferred tax liabilities

Stockholders’ equity:

Common stock, $0.001 par value; 30,000,000 shares authorized; 10,624,901

and 10,489,849 shares issued and outstanding

Additional paid-in capital
Deferred compensation
Accumulated other comprehensive loss
Retained earnings

Total stockholders’ equity
Total liabilities and stockholders’ equity

See accompanying notes.

December 31,
2005

December 31,
2004

$ 11,669,690 $ 13,785,377
—

10,231,446

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

30,005,474

936,026
3,298,140
4,854,331
1,481,314
89,934

10,659,745
(5,204,730)

12,413,797
1,168,472
1,988,184
1,200,637
268,321
265,128
39,205,675

936,026
3,674,200
5,690,497
1,626,940
111,394
12,039,057
(5,866,020)
6,173,037
1,605,226

5,455,015
617,657
$ 46,983,938 $ 36,078,146

2,051,195 $
3,285,678
1,875,365
2,685,231
9,897,469

969,454
2,602,235
1,630,382
2,323,433

7,525,504

698,320

718,753

10,625
20,576,268
(72,305)
(67,979)
15,941,540
36,388,149

10,490
17,292,079
(123,345)
—
10,654,665

27,833,889
$ 46,983,938 $ 36,078,146

COMPUTER PROGRAMS AND SYSTEMS, INC.

Statements of Income

Sales revenues:

System sales
Support and maintenance
Outsourcing

Total sales revenues

Costs of sales:

System sales
Support and maintenance
Outsourcing
Total costs of sales
Gross profit

Operating expenses:

Sales and marketing
General and administrative

Total operating expenses
Operating income

Other income (expense):
Interest income
Miscellaneous income

Total other income
Income before taxes

Income taxes
Net income
Net income per share – basic
Net income per share – diluted
Weighted average shares outstanding

Basic
Diluted

See accompanying notes.

2005

Year ended December 31,
2004

2003

51,170,351 $
43,050,811
14,604,433

35,252,410 $
38,010,122
9,401,468

39,707,684
34,567,017
7,028,159

108,825,595

82,664,000

81,302,860

33,295,030
19,028,516
8,382,478

60,706,024

48,119,571

7,777,557
17,049,626

24,827,183

23,292,388

652,806
5,306

658,112

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

23,950,500

11,703,308

12,883,477

9,381,327

4,639,473

5,017,647

14,569,173 $

7,063,835 $

7,865,830

1.38 $

1.37 $

0.67 $

0.75

10,559,589
10,646,376

10,489,849
10,535,555

10,488,406
10,536,929

COMPUTER PROGRAMS AND SYSTEMS, INC.

Statements of Stockholders’ Equity

Common
Shares

Common
Stock

Additional
Paid-in
Capital

Deferred
Compensation

Accumulated
Other
Comprehensive
Loss

Balance at December 31, 2002 10,488,000 $10,488 $17,259,403 $(225,423)

$—

Net income
Issuance of common stock
Dividends
Amortization of deferred

compensation

—
Balance at December 31, 2003 10,489,849

Net income
Issuance of common stock
Dividends
Amortization of deferred

compensation

—
Balance at December 31, 2004 10,489,849

—
1,849
—

—
—
—

—
2
—

—

—
30,507
—

—
—
—

—

51,038

10,490

17,289,910

(174,385)

—
—
—

—

—
2,169
—

—
—
—

—

51,040

10,490

17,292,079

(123,345)

Total
Stockholders’
Equity

Retained
Earnings
$3,434,568 $20,479,036

7,865,830
—
(2,674,440)

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

—

51,038

8,625,958

25,751,973

7,063,835
—
(5,035,128)

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

—

51,040

10,654,665

27,833,889

14,569,173
—

14,569,173
2,228,358

—
—
—

—

—
—
—

—

—
—

—

51,040

(67,979)
—

—
(9,282,298)

(67,979)
(9,282,298)

—

1,055,966

—

51,040

$(72,305)

$(67,979) $15,941,540 $36,388,149

Net income
Issuance of common stock
Unrealized loss on available for
sale investments, net of tax
of $43,460

Dividends
Income tax benefit from stock

option exercise

—
135,052

—
135

—
2,228,223

—
—

—

—
—

—

1,055,966

Amortization of deferred

compensation

—
Balance at December 31, 2005 10,624,901 $10,625 $20,576,268

—

See accompanying notes.

COMPUTER PROGRAMS AND SYSTEMS, INC.

Statements of Cash Flows

Year ended December 31,
2004

2005

2003

14,569,173 $

7,063,835 $

7,865,830

703,736
219,406
51,040
1,055,966
1,797,289

(1,353,068)
(1,181,881)
(513,018)
172,588
1,081,741
683,443
606,781
(96,747)

17,796,449

1,342,654
294,910
51,040
—
1,619,792

(1,190,705)

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

(2,515,311)
(10,342,885)

(1,726,503)

—

(1,982,520)
—

(12,858,196)

(1,726,503)

(1,982,520)

2,228,358
(9,282,298)
—

(7,053,940)

(2,115,687)

—

(5,035,128)

—

(5,035,128)
4,312,634

30,509
(2,674,440)
(250,000)

(2,893,931)

3,120,291

9,472,743
13,785,377
11,669,690 $ 13,785,377 $

6,352,452

9,472,743

— $
8,202,702 $

— $
4,396,112 $

—
5,331,218

$
$

Operating Activities
Net income
Adjustments to net income:
Provision for bad debt
Deferred taxes
Deferred compensation
Income tax benefit from stock option exercises
Depreciation

Changes in operating assets and liabilities:

Accounts receivable
Financing receivables
Inventories
Prepaid expenses
Accounts payable
Deferred revenue
Other liabilities
Prepaid income taxes

Net cash provided by operating activities

Investing Activities
Purchases of property and equipment
Purchases of investments
Net cash used in investing activities

Financing Activities
Proceeds from exercise of stock options
Dividends paid
Distributions to S corporation shareholders
Net cash used in financing activities
Increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information
Cash paid for interest
Cash paid for income taxes

See accompanying notes.

COMPUTER PROGRAMS AND SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005

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 can include time deposits, commercial paper, municipal bond funds and bankers acceptances with
original maturities of three months or less or that are highly-liquid and readily convertible to a known amount of cash. These
investments are stated at cost, which approximates market, due to their short duration or liquid nature.

Investments
The Company accounts for investments in accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Accordingly, investments are classified as available-for-
sale securities and are reported at fair value, with unrealized gains and losses excluded from earnings and reported in a
separate component of shareholders’ equity. The Company’s management determines the appropriate classifications of
investments in fixed maturity securities at the time of acquisition and re-evaluates the classifications at each balance sheet
date. The Company’s investments in fixed maturity securities are classified as available-for-sale.

Investments are comprised of the following:

Short term investments ........................................ $
Obligations of U.S. Treasury, U.S.

government corporations and agencies ...........
Mortgaged backed securities................................
Municipal obligations ..........................................
Corporate bonds ...................................................

Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Fair
Value

142,027 $

— $

142,027

4,066,068
938,308
400,000
4,796,502

6,020
—
—
808

(27,061)
(6,514)

—

(84,692)

4,045,027
931,794
400,000
4,712,618

10,342,905 $

6,828 $

(118,267) $

10,231,466

Shown below are the amortized cost and estimated fair value of securities with fixed maturities at December 31, 2005, by
contract maturity date. Actual maturities may differ from contractual maturities because issuers of certain securities retain
early call or prepayment rights.

Due in 2006
Due in 2007
Due in 2008
Due thereafter

Amortized
Cost
5,960,020 $
1,844,594
1,509,506
886,758

Fair
Value
5,437,278
1,831,201
1,940,716
880,244

10,200,878 $

10,089,439

Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are stated at the amount the Company expects to collect and do not bear interest. The collectibility
of trade receivable balances is regularly evaluated based on a combination of factors such as customer credit-worthiness, past
transaction history with the customer, current economic industry trends and changes in customer payment patterns. If it is
determined that a customer will be unable to fully meet its financial obligation, such as in the case of a bankruptcy filing or
other material events impacting its business, a specific reserve for bad debt is recorded to reduce the related receivable to the
amount expected to be recovered.

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
The Company’s revenue is generated from three sources:

•

the sale of information systems, which includes software, conversion and installation services, hardware,
peripherals, forms and supplies

the provision of system support services, which includes software application support, hardware maintenance,
continuing education, application service provider (“ASP”) products, and internet service provider (“ISP”)
products.

the provision of outsourcing services, which includes electronic billing, statement processing, and business office
outsourcing.

Depending upon the terms of the contract, revenue is recognized in accordance with SEC Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial Statements, as amended by SAB No. 104, Revenue Recognition, and the
American Institute of Certified Public Accountants Statement of Position (SOP) 97-2, Software Revenue Recognition, which
states that revenue should be recognized when persuasive evidence of an agreement exists, the product or service has been

delivered, fees and prices are fixed and determinable, collectibility is probable, and when all other significant obligations
have been fulfilled.

License revenue in connection with license agreements for proprietary software is recognized upon delivery of the software,
providing collection is considered probable, the fee is fixed or determinable, there is evidence of an arrangement, and vendor
specific objective evidence (VSOE) exists with respect to any undelivered elements of the arrangement. For multiple-element
arrangements, the Company recognizes revenue under the residual method as permitted by the American Institute of Certified
Public Accountants Statement of Position (SOP) 98-9, Modification of SOP 97-2, Software Revenue Recognition, with
Respect to Certain Transactions, whereby (1) the total fair value of the undelivered elements, as indicated by VSOE, is
deferred and subsequently recognized in accordance with SOP 97-2 and (2) the difference between the total arrangement fee
and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements.

Revenue derived from maintenance contracts primarily includes software application support, hardware maintenance,
continuing education and related services. Maintenance contracts are typically sold for a separate fee with initial contractual
periods ranging from one to three years with renewal for additional periods thereafter. Maintenance revenue is recognized
ratably over the term of the maintenance agreement. In situations where all or a portion of the maintenance fee is bundled
with the license fee, VSOE for maintenance is determined based on prices when sold separately.

Revenue for hardware is recognized under SAB No. 104. Under SAB No. 104, revenue is recognized provided that
persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or
determinable, and collectibility is reasonably assured. For hardware, delivery is considered to have occurred upon shipment
provided that risk of loss has been transferred to the customer.

Revenue for ISP, ASP, and outsourcing services are recognized in the period in which the 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, 2005, 2004 or 2003. 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,
2005, 2004 and 2003 would have been impacted as indicated below. There were no employee stock options granted during
the year ended December 31, 2005, 2004 or 2003. The effects of applying SFAS No. 123 on a pro forma basis for the years
ended December 31, 2005, 2004 and 2003, are not likely to be representative of the effects on reported pro forma net income
for future years as options vest over several 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, net of tax

Pro forma
Basic income per share as reported
Pro forma basic income per share
Diluted income per share as reported
Pro forma diluted income per share

December 31,
2004
$ 14,569,173 $ 7,063,835 $ 7,865,830

2005

2003

31,900

31,899

(257,308)

(224,067)
$ 14,343,765 $ 6,784,874 $ 7,673,662

(310,861)

1.38 $

1.36 $

1.37 $

1.35 $

0.67 $
0.64 $
0.67 $
0.64 $

0.75

0.73

0.75

0.73

During 2005, the Company adopted and shareholders approved the Computer Programs and Systems, Inc. 2005 Restricted
Stock Plan. At December 31, 2005, no shares had been granted under the Plan

Research and Development Costs
Research and development costs are expensed as incurred. Research and development costs totaled approximately
$1,177,000, $1,362,000 and $1,143,000 for the years ended December 31, 2005, 2004 and 2003, 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 $51,000, $108,000 and $189,000 were charged to expense during the years ended
December 31, 2005, 2004 and 2003, respectively.

Advertising
Advertising costs are expensed as incurred. Advertising expense was approximately $50,000, $80,000 and $307,000, for the
years ended December 31, 2005, 2004 and 2003, 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 and included in general and administrative expenses. Shipping and
handling costs totaled approximately $954,000, $890,000 and $764,000 for the years ended December 31, 2005, 2004 and
2003, 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 Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 123R, Share-Based Payment, which requires companies to measure and recognize compensation expense for
stock-based payments at fair value. SFAS No. 123R was initially effective as of the first interim or annual reporting period
that begins after June 15, 2005. In April 2005, the SEC issued a rule amending the compliance date which allows companies
to implement SFAS No. 123R at the beginning of their next fiscal year, instead of the next reporting period, that begins after
June 15, 2005. As a result, the Company will implement SFAS No. 123R in the reporting period starting January 1, 2006.
The Company estimates the impact of adoption in 2006 will be approximately $219,000 additional compensation expense,
net of taxes based on outstanding options at December 31, 2005. This estimate does not include the estimated impact of any
anticipated share based payments subsequent to December 31, 2005.

In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 03-1, The Meaning of Other-Than-
Temporary Impairment and Its Application to Certain Investments. EITF No. 03-1 provides guidance on other-than-
temporary impairment models for marketable debt and equity securities accounted for under SFAS No. 115 and non-
marketable equity securities accounted for under the cost method. The EITF developed a basic three-step model to evaluate
whether an investment is other-than-temporarily impaired. In November 2005, the FASB approved the issuance of FASB
Staff Position FAS No. 115-1 and FAS No. 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments. The FSP addresses when an investment is considered impaired, whether the impairment is other-than-
temporary and the measurement of an impairment loss. The FSP also includes accounting considerations subsequent to the
recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been
recognized as other-than-temporary. The FSP is effective for reporting periods beginning after December 15, 2005 and is
required to be adopted by the Company on January 1, 2006. The adoption of this accounting principle is not expected to have
a significant impact on the Company’s financial position or results of operations.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets - an amendment of APB Opinion
No. 29. SFAS No. 153 amends APB No. 29 to require that assets exchanged in a nonmonetary transaction are to be measured
at fair value except for those exchanges of nonmonetary assets that lack commercial substance. SFAS No. 153 is effective for
nonmonetary asset exchanges occurring in fiscal years beginning after June 15, 2005. The adoption of this accounting
principle is not expected to have a significant impact on the Company’s financial position or results of operations.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 replaces
Accounting Principles Board (APB) Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes
in Interim Financial Statements. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a
voluntary change in accounting principle unless it is impracticable. APB No. 20 previously required that most voluntary
changes in accounting principle be recognized by including the cumulative effect of changing to the new accounting principle
in net income in the period of the change. SFAS No. 154 is effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005. The adoption of this accounting principle is not expected to have a
significant impact on the Company’s financial position or results of operations.

Reclassifications
Certain amounts in the 2004 financial statements have been reclassified to conform to the 2005 presentation.

4. DETAILS OF BALANCE SHEET AMOUNTS
Other accrued liabilities are comprised of the following at December 31, 2005 and 2004:

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

2005
1,920,861 $
306,704
380,600
77,066

2004
1,613,420
436,307
244,500
29,206

2,685,231 $

2,323,433

5. NET INCOME PER SHARE
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, 2005, 2004,
and 2003 these dilutive shares were 86,787, 45,706, and 48,523 respectively.

6. INCOME TAXES
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,
2005 and 2004:

Deferred tax assets:

Accounts receivable
Accrued vacation
Other accrued liabilities

Total deferred tax assets
Deferred tax liabilities:

Deferred compensation
Depreciation
Total deferred tax liabilities

2005

2004

274,520 $
731,392
194,725

638,044
635,849
123,123

1,200,637 $

1,397,016

28,199 $

670,121

698,320 $

48,104
670,649

718,753

Significant components of the income tax provision for the year ended December 31, 2005, 2004 and 2003 are as follows:

Current provision:
Federal
State
Deferred provision:
Federal
State

Total income tax provision

2005

2004

2003

7,551,987 $
1,609,934

3,560,880 $
783,683

4,339,486
644,864

198,615
20,791

262,036
32,874

29,793
3,504

9,381,327 $

4,639,473 $

5,017,647

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, 2005, 2004 and 2003 are as follows:

Income taxes at U.S. Federal statutory rate

State income tax, net of federal tax effect
Impact of graduated tax rates
Other

2005
8,382,675 $
1,067,247
—
(68,595)

9,381,327 $

2004
4,096,158 $
646,722
(100,000)
(3,407)
4,639,473 $

2003
4,509,217
427,923
(100,000)
180,507

5,017,647

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 865,333 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 2005, 2004 or
2003.

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

Beginning of year
Granted
Exercised
Forfeited
End of year
Exercisable

2005

2004

2003

Shares
399,948 $

—
(135,052)
(13,377)

Exercise
Price

16.50
—
16.50
16.50

Shares
424,759 $

—
—
(24,811)

Exercise
Price

16.50
—
—
16.50

Shares
444,998 $

—
(1,849)
(18,390)

251,519 $

16.50

399,948 $

16.50

424,759 $

51,666 $

16.50

— $

16.50

312 $

Exercise
Price

16.50
—
16.50
16.50

16.50

Shares available for future grants under the

plan at End of Year

Weighted-average grant date fair value

Weighted-average remaining contractual

life

476,913

—

763,536

—

738,725

—

3.5 years

4.5 years

5.5 years

During 2005, the Company adopted and shareholders approved the Computer Programs and Systems, Inc. 2005 Restricted
Stock Plan. In order to ensure that the Restricted Stock Plan does not create the possibility of additional dilutive effect to the
Company’s existing stockholders, the Board of Directors approved an amendment to the Company’s 2002 Stock Option Plan
that reduced the number of shares reserved under the 2002 Stock Option Plan by 300,000. At December 31, 2005, no shares
had been granted under the Restricted Stock Plan.

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.
Investments are reflected in the accompanying financial statements at current market value. Based on the borrowing rates
currently available to the Company for bank loans with similar terms and average maturities, at December 31, 2005 and 2004
the fair values of the 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 2010. 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
Amounts due after one year

Future minimum lease payments to be received at December 31, 2005 are as follows:

2006
2007
2008
2009
2010
Total minimum lease payments to be received
Less unearned income
Net leases receivable

2005
2,176,456 $
(265,036)
1,911,420
(306,194)
1,605,226 $

2004
1,073,547
(171,599)

901,948
(284,291)

617,657

433,363
954,815
581,096
120,113
87,069

2,176,456
(265,036)

1,911,420

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, 2005 and 2004 were $862,278 and $689,869,
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 $1,000,000, $1,059,000 and $935,000 to the plan for the years ended December 31,
2005, 2004 and 2003, 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, 2005 and 2004 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 December 2015. 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,
2005, 2004 and 2003, total rent expense paid to related parties was approximately $1,492,000, $1,385,000 and $1,325,000,
respectively.

The future minimum lease payments payable under operating leases subsequent to December 31, 2005 are as follows:

2006
2007
2008
2009
2010
Thereafter

1,649,040
1,649,040
1,649,040
1,649,040
1,649,040
2,991,270

11,236,470

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. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, requires the disclosure of certain
revenue, expenses, gains and losses that are excluded from net income in accordance with accounting principles generally
accepted in the United States of America. Total comprehensive income for the years ended December 31, 2005, 2004 and
2003 is as follows:

Net income as reported
Other comprehensive income:

Unrealized loss on investments, net of taxes

Total comprehensive income

2005

14,569,173 $

Year ended December 30,
2004
7,063,835 $

2003
7,865,830

(67,979)

—

14,501,194 $

7,063,835 $

7,865,830

16. SUBSEQUENT EVENTS
On February 2, 2006, the Company announced a dividend for the first quarter of 2006 in the amount of $0.36 per share.

On January 27, 2006, the Compensation Committee of the Board of Directors approved the grant of shares of restricted stock,
effective January 30, 2006, to certain executive officers of the Company. The restricted stock vests in five equal annual
installments commencing on the first anniversary of the date of grant. Under SFAS No. 123R, we estimate this grant will
result in compensation expense of approximately $559,000, net of taxes, in 2006.

17. QUARTERLY FINANCIAL STATEMENTS (UNAUDITED)

The following table presents a summary of our results of operations for our eight most recent quarters ended December 31,
2005. 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, 2005

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

Weighted average shares outstanding

Year Ended December 31, 2004

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

Weighted average shares outstanding

Basic
Diluted

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

(in thousands except for share and per share data)

26,397 $
11,915
5,213
3,234

26,970 $
11,705
5,567
3,409

0.31
0.31

0.32
0.32

27,000 $
11,457
5,707
3,565

0.34
0.33

28,459
13,042
6,805
4,361

0.41
0.41

10,489,849
10,574,145

10,527,568
10,613,001

10,603,781
10,695,570

10,615,296
10,703,645

18,212 $
6,496
1,139
755

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

0.07
0.07

0.14
0.14

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

0.20
0.20

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

0.26
0.26

10,489,849
10,527,101

10,489,849
10,531,893

10,489,849
10,533,388

10,489,849
10,549,706

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

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

Balance at
beginning of
period

(1) Additions
charged to cost
and expenses

(2)
Deductions

Balance at end
of period

2003 $
2004
2005

768,000 $
904,000
1,636,000

257,000 $

1,342,000
704,000

121,000 $
610,000
1,636,000

904,000
1,636,000
704,000

(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 2005 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 28 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 30 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 2006 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 2006 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 2006 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table summarizes the securities that have been authorized for issuance as of December 31, 2005 under

our 2002 Stock Option Plan and 2005 Restricted Stock Plan. Both of these plans have been approved by CPSI’s stockholders.
No shares of common stock had been granted under the 2005 Restricted Stock Plan as of December 31, 2005. The 2002
Stock Option Plan is described in Note 8 of the Notes to the Financial Statements.

Plan Category
Equity compensation plans approved by stockholders
Equity compensation plans not approved by

stockholders
Total

Equity Compensation Plan Information

Number of securities
to be issued
upon exercise of
outstanding options,
warrants and rights
(a)

Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)

251,519 $

-0-

251,519

16.50

N/A

Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)

776,9131

-0-

776,9131

Represents 476,913 shares of common stock underlying stock options that are issuable pursuant to our 2002 Stock
Option Plan and 300,000 shares of common stock issuable pursuant to our 2005 Restricted Stock Plan.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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 2006 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

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 2006 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(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 67 of the Form 10-K are filed herewith or are incorporated
herein by reference.

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 13th day of March,
2006.

SIGNATURES

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.

COMPUTER PROGRAMS AND SYSTEMS, INC.

By:

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

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

Date

Chairman of the Board and Director

March 13, 2006

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

March 13, 2006

Executive Vice President,
Chief Operating Officer and Director

March 13, 2006

Vice President - Finance and
Chief Financial Officer

March 13, 2006

Controller (principal accounting officer)

March 13, 2006

Director

March 13, 2006

March 9, 2006

March 13, 2006

HOSPITAL CUSTOMER LOCATIONS

CPSI

6600 Wall Street

Mobile, AL 36695