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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2005.

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)

(251) 639-8100

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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

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

As of April 29, 2005, there were 10,489,849 shares of the issuer’s common stock outstanding.

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COMPUTER PROGRAMS AND SYSTEMS, INC.

Form 10-Q

(For the period ended March 31, 2005)

INDEX

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PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED BALANCE SHEETS (Unaudited)

See accompanying notes.

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COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED STATEMENTS OF INCOME (Unaudited)

See accompanying notes.

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COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)

See accompanying notes.

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COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

See accompanying notes.

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COMPUTER PROGRAMS AND SYSTEMS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and include all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of the periods presented. All such adjustments are considered of a normal recurring nature. Quarterly results of operations are not necessarily indicative of annual results.

Certain financial information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2004 and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2004.

The Company’s revenue is generated from three sources:

Depending upon the terms of the contract, revenue is recognized in accordance with SEC Staff Accounting Bulletin No. 101 (“SAB 101”), Revenue Recognition in Financial Statements, as amended by SAB 104, Revenue Recognition, the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, Software Revenue Recognition, and SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, 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.

For contracts involving multiple deliverables, where the deliverables are governed by more than one authoritative accounting standard, the Company generally applies the FASB Emerging Issues Task Force (“EITF”) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF 00-21”), and evaluates each deliverable to determine whether it represents a separate unit of accounting based on the following criteria: (a) whether the delivered item has value to the customer on a standalone basis, and (b) where there is vendor specific objective evidence (“VSOE”) of the fair value of the undelivered item(s). If VSOE of fair value exists for all units of accounting in the contract, which is based on prices charged when the element is sold separately, revenue is allocated to each unit of accounting or element based on relative fair values. Revenue related to post-contract support, including technical support and unspecified when-and-if available software upgrades (“PCS”), is recognized ratably over the PCS term.

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COMPUTER PROGRAMS AND SYSTEMS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

In situations where there is VSOE of fair value for all undelivered elements, but not for the delivered elements, the residual method is used to allocate the contract consideration. Under the residual method, the amount of revenue allocated to delivered elements equals the total arrangement consideration less the aggregate fair value of any undelivered elements. Each unit of accounting is then accounted for under the applicable revenue recognition guidance.

Revenue for hardware is recognized under SAB 104. Under SAB 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.

Other accrued liabilities are comprised of the following:

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 shareholder’s 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.

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COMPUTER PROGRAMS AND SYSTEMS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

Investments are comprised of the following:

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

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 three month periods ended March 31, 2005 and 2004, these dilutive shares were 84,296 and 37,252 respectively.

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COMPUTER PROGRAMS AND SYSTEMS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

The Company accounts for income taxes using the liability method in accordance with Statement of Financial Accounting Standards (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. Deferred tax assets and liabilities are comprised of the following:

Significant components of the Company’s income tax provision for the three months ended March 31 are as follows:

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COMPUTER PROGRAMS AND SYSTEMS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

The difference between income taxes at the U. S. federal statutory income tax rate of 35% and those reported in the condensed statements of income for the three months ended March 31 are as follows:

The Company measures compensation expense related to stock based compensation using the intrinsic value method. Accordingly, no stock-based employee compensation expense is reflected in net income if the exercise price of the Company’s employee stock options equals or exceeds the market price of the underlying stock on the date of grant. 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 Statement of Financial Accounting Standards No. 123, Accounting for Stock-based Compensation (“SFAS 123”), the Company’s reported net income and income per share for the three months ended March 31, 2005 and 2004 would have been impacted as indicated below:

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

Stock options granted under the 2002 Stock Option Plan to executive officers of the Company become vested as to all of the shares covered by such grant on the fifth anniversary of the grant date and expire on the seventh anniversary of the grant date. Stock options granted under the 2002 Stock Option Plan to employees other than executive officers become vested as to 50% of the shares covered by the option grant on the third anniversary of the grant date and as to 100% of such shares on the fifth anniversary of the grant date, and such options expire on the seventh anniversary of the grant date.

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COMPUTER PROGRAMS AND SYSTEMS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

Under the methodology of SFAS 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.

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

The weighted average grant date fair value of options granted to employees under the 2002 Stock Option Plan during 2002 was $5.30. There were no options granted under the plan during the three months ended March 31, 2005.

A summary of stock option activity under the plan during the three month periods ended March 31, 2005 and 2004 is as follows:

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COMPUTER PROGRAMS AND SYSTEMS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

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 three months ended March 31, 2005 and 2004 are as follows:

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited condensed financial statements and related notes appearing elsewhere herein.

This discussion and analysis 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 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:

Additional information concerning these and other factors which could cause differences between forward-looking statements and future actual results is discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange Commission.

Overview

We are a healthcare information technology company that designs, develops, markets, installs and supports computerized information technology systems to meet the unique demands of small and midsize hospitals. Our target market includes acute care community hospitals with 300 or fewer beds and small specialty hospitals. We are a single-source vendor providing comprehensive software and hardware products, complemented by data conversion, complete installation and extensive support. Our fully integrated, enterprise-wide system automates the management of clinical and financial data across the primary functional areas of a hospital. In addition, we provide services that enable our customers to outsource certain data-related business processes which we can perform more efficiently. We believe our products and services enhance hospital performance in the critical areas of clinical care, revenue cycle management, cost control and regulatory compliance. From our initial hospital installation in 1981, we have grown to serve more than 540 hospital customers across 45 states and the District of Columbia. In the three months ended March 31, 2005, we generated revenues of $26.4 million from the sale of our products and services.

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Results of Operations

Three Months Ended March 31, 2005 Compared with Three Months Ended March 31, 2004

Revenues. Total revenues increased by 44.9%, or $8.2 million, to $26.4 million for the three months ended March 31, 2005, from $18.2 million for the three months ended March 31, 2004.

System sales revenues increased by 78.0%, or $5.5 million, to $12.6 million for the three months ended March 31, 2005, from $7.1 million for the three months ended March 31, 2004. This increase was primarily due to an increase in the number of new system installations. The average installation size also increased. This increase also reflects two ASP implementations during the first quarter of 2004, in which revenues are recognized over the life of the contract.

Support and maintenance revenues increased by 10.1%, or $0.9 million, to $10.2 million for the three months ended March 31, 2005, from $9.3 million for the three months ended March 31, 2004. This increase was attributable to an increase in recurring revenues as a result of a larger customer base and also an increase in the volume of ASP services.

Outsourcing revenues increased by 92.1%, or $1.7 million, to $3.6 million for the three months ended March 31, 2005, from $1.9 million for the three months ended March 31, 2004. We experienced an increase in outsourcing revenues as a result of continued growth in customer demand for electronic billing and business office outsourcing services. We were providing business office outsourcing services to fifteen customers at March 31, 2005, compared to four customers at March 31, 2004.

Costs of Sales. Total costs of sales increased by 23.6%, or $2.8 million, to $14.5 million for the three months ended March 31, 2005, from $11.7 million for the three months ended March 31, 2004. As a percentage of total revenues, costs of sales decreased to 54.9% for the three months ended March 31, 2005 from 64.3% for the three months ended March 31, 2004. The size of our average new installation contract increased. We also experienced an increase in the number of new system installations which produced a higher profit margin.

Cost of system sales increased by 23.7%, or $1.6 million, to $8.0 million for the three months ended March 31, 2005, from $6.4 million for the three months ended March 31, 2004. Cost of equipment increased $0.7 million as a result of an increase in equipment sales. Payroll related expenses increased $0.3 million as a result of annual salary increases and an increase in the number of employees. The gross margin on system sales increased to 37.1% for the three months ended March 31, 2005, from 9.4% for the three months ended March 31, 2004.

Cost of support and maintenance increased by 10.1%, or $0.5 million, to $4.6 million for the three months ended March 31, 2005, from $4.1 million for the three months ended March 31, 2004. This increase was caused primarily by an increase of $0.3 million in payroll related expenses as a result of annual salary increases and an increase in the number of employees. General departmental expenses increased $0.2 million as a result of our increasing customer base. The gross margin on support and maintenance revenues was 55.2% for the three months ended March 31, 2005, the same as for the three months ended March 31, 2004.

Our costs associated with outsourcing services increased by 72.2%, or $0.9 million, to $2.0 million for the three months ended March 31, 2005, from $1.1 million for the three months ended March 31, 2004. This increase was caused primarily by an increase of $0.6 million in payroll related expenses as a result of an increase in the number of employees needed to support our growing business office outsourcing operations and electronic billing operations. Postage cost increased $0.2 million resulting from an increase in transaction volumes of our statement outsourcing services.

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Sales and Marketing Expenses. Sales and marketing expenses increased by 42.8%, or $0.5 million, to $1.8 million for the three months ended March 31, 2005, from $1.3 million for the three months ended March 31, 2004. The increase was attributable to increased commission expense of $0.5 million which resulted from an increase in system sales revenue.

General and Administrative Expenses. General and administrative expenses increased 19.5%, or $0.8 million, to $4.9 million for the three months ended March 31, 2005, from $4.1 million for the three months ended March 31, 2004. The increase in expense was related to increased legal and accounting fees of $0.2 million which resulted from increased audit related fees. Additional expense increases were related to bad debts which increased $0.4 million, payroll related expenses which increased $0.1 million and shipping costs which increased $0.1 million.

As a percentage of total revenues, sales and marketing expenses, and general and administrative expenses decreased to 25.4% for the three months ended March 31, 2005, from 29.4% for three months ended March 31, 2004.

Net Income. Net income for the three months ended March 31, 2005 increased by 328.4%, or $2.4 million, to $3.2 million, or $0.31 per diluted share, as compared with net income of $0.8 million, or $0.07 per diluted share, for the three months ended March 31, 2004. Net income represents 12.3% of revenue for the three months ended March 31, 2005, as compared to 4.1% of revenue for the three months ended March 31, 2004. This increase in net income is attributable to an increase in the number of new system installations and also an increase in the average installation size, as described above.

Liquidity and Capital Resources

At March 31, 2005, we had cash and cash equivalents of $11.1 million, compared with $11.2 million at March 31, 2004. Net cash provided by operating activities for the three months ended March 31, 2005 was $6.5 million, compared to $3.3 million for the three months ended March 31, 2004. The increase was primarily due to increases in net income, accounts payable, income taxes payable and deferred revenue.

Net cash used in investing activities totaled $6.8 million for the three months ended March 31, 2005, compared to $0.4 million for the three months ended March 31, 2004. We used cash primarily for the purchase of $6.1 million in investments which are included on the balance sheet as assets available for sale. We also invested $0.7 million in fixed assets.

Net cash used in financing activities totaled $2.3 million for the three months ended March 31, 2005, compared to $1.3 million for the three months ended March 31, 2004, as a result of dividends that we declared and paid during the quarter.

We currently do not have a bank line of credit or other credit facility in place. Our future capital requirements will depend upon a number of factors, including the rate of growth of our sales, cash collections from our customers and our future investments in fixed assets. We believe that our available cash and cash equivalents and anticipated cash generated from operations will be sufficient to meet our operating requirements for the next 12 months.

Off Balance Sheet Arrangements

We are not currently a party to any material “off-balance sheet arrangement” as defined in Item 303 of Regulation S-K.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We currently do not use derivative financial instruments. Cash and cash equivalents consist of highly liquid financial instruments, primarily cash, money market funds and short term U.S. Government obligations, purchased with an original maturity of three months or less. Interest income on our income statement is included in “Other Income.”

As of March 31, 2005, the Company had no borrowings and is, therefore, not subject to interest rate risks related to debt instruments.

Item 4. 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 SEC 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 15d-15(f)) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. 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 results of operations at some point in the future. However, management believes that this dispute will 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 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

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Item 5. Other Information.

None.

Item 6. Exhibits

SIGNATURE

Pursuant to the requirements 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.

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Exhibit Index

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