Options to purchase 5,489,000 and 546,000 shares of common stock at per share prices ranging from $21.50 to $574.82 and $51.70 to $574.82 were outstanding at the three-months ended June 28, 2003 and June 29, 2002, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares during the period.

Options to purchase 3,898,000 and 704,000 shares of common stock at per share prices ranging from $27.92 to $574.82 and $49.63 to $574.82 were outstanding at the three-months ended June 28, 2003 and June 29, 2002, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares during the period.

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(3)      Business Acquisitions

On April 30, 2002, the Company purchased Zynx Health, Incorporated (Zynx) for $15 million in cash and $8.5 million in software credits. The Company will not recognize revenues related to the utilization of these software credits as the Company considered the exchange of software credits for Zynx content as an exchange of similar productive assets, which will be accounted for at book value. In the event the software credits are not utilized over the next five years, the Company will make additional cash payments of up to $7.5 million depending on the level of the credits used. Those additional payments, if made, will result in additional goodwill. Zynx is widely recognized for advancing evidence-based medicine through solutions and services that deliver the latest scientific knowledge and best practices. Cerner intends to integrate the evidence-based content from Zynx into the Cerner Millennium ™ technology platform. The allocation of the purchase price to the estimated fair values of the identified tangible and intangible assets acquired and liabilities assumed, resulted in goodwill of $10.7 million and $3.3 million in intangible assets that will be amortized over five years.

(4)      Accounting for Stock Options

The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations including FASB Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25,” issued in March 2000, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123. The following is a reconciliation of reported net earnings to adjusted net earnings had the Company recorded compensation expense based on the fair value at the grant date for its stock options under SFAS 123 for the three and six months ended June 28, 2003 and June 29, 2002.

Pro forma net earnings reflect only options granted since January 1, 1995. Therefore, the full impact of calculating compensation expense for stock options under FAS 123 is not reflected in the adjusted net earnings amounts presented above, because compensation cost is reflected over the options’ vesting period of ten years for these options. Compensation expense for options granted prior to January 1, 1995 is not considered.

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(5)      Investments

In the second quarter of 2002, the Company sold its remaining 14,820,527 shares of WebMD for $90,119,000. Accordingly, the Company recorded an investment gain of $2,736,000, net of $1,572,000 in tax, as a result of the sale.

(6)      Receivables

Receivables consist of accounts receivable and contracts receivable. Accounts receivable represent recorded revenues that have been billed. Contracts receivable represent recorded revenues that are billable by the Company at future dates under the terms of a contract with a client. Billings and other consideration received on contracts in excess of related revenues recognized under the percentage-of — completion method are recorded as deferred revenue. A summary of receivables is as follows:

The Company provides an allowance for estimated uncollectible accounts based upon historical experience and management’s judgement . At June 28, 2003 and December 28, 2002 the allowance for estimated uncollectible accounts was $12,578,000 and $9,502,000, respectively.

(7)      Goodwill and Other Intangible Assets

Goodwill and intangible assets with indefinite lives are evaluated for impairment annually or whenever there is an impairment indicator. All goodwill is assigned to a reporting unit, where it is subject to an impairment test based on fair value. The Company completed its review of the Company’s goodwill values in the second quarter of 2002. As a result of this review, the Company determined that goodwill arising from the acquisition of Mitch Cooper and Associates was impaired due to declining demand and margins in this business. Mitch Cooper and Associates was a supply chain re-engineering consulting practice. The impairment charge to reflect this goodwill at fair value was $786,000, net of tax and is reflected as a cumulative effect of a change in accounting principle as of the beginning of 2002. The Company used a discounted cash flow analysis to determine the fair value of the reporting units. The Company’s 2003 review of goodwill was completed in the second quarter of 2003 and indicated that goodwill was not impaired.

The Company’s intangible assets, other than goodwill or intangible assets with indefinite lives, are all subject to amortization and are summarized as follows:

Aggregate amortization expense for the six months ended June 28, 2003 and June 29, 2002 was $3,111,000 and $1,825,000 respectively. Estimated aggregate amortization expense for each of the next five years is as follows:

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The changes in the carrying amount of goodwill for the six months ended June 28, 2003 are as follows:

(8)      Reclassifications

Certain prior year amounts have been reclassified to conform to current year consolidated financial statement presentation.

(9)      Contingencies

As disclosed in our Form 10Q for the quarterly period ending March 29, 2003, the Company received notice in April 2003 that three shareholder class action lawsuits were filed against it. Since that time, five additional shareholder class lawsuits (Brian K. Counsil, individually and on behalf of all others similarly situated, v. Cerner Corporation, Neal Patterson, Mark Naulten [sic], and Paul Black, United States District Court, Western District of Missouri, Civil Action No. 4:03-cv-00427-DW, Filed May 15, 2003; Charles C. Schmidt, individually and on behalf of all others similarly situated, v. Cerner Corporation, Neal Patterson, Mark Naulton [sic], and Paul Black, United States District Court, Western District of Missouri, Civil Action No. 4:03-cv-00431-JTM, filed May 16, 2003; Andrew Garner, individually and on behalf of all others similarly situated, v. Cerner Corporation, Neal Patterson, Mark Naulten [sic], and Paul Black, United States District Court, Western District of Missouri, Civil Action No. 4:03-cv-00436-GAF, filed May 19, 2003, Dana Bible, individually and on behalf of all others similarly situated, v. Cerner Corporation, Neal L. Patterson, Earl H. Devanny, III, Clifford W. Illig, Marc G. Naughton, and Glenn P. Tobin, United States District Court, Western District of Missouri, Civil Action No. 4:03-cv-00448-JTM, Filed May 21, 2003; Eugene Pronojust, individually and on behalf of all others similarly situated, v. Cerner Corporation, Neal Patterson, Marc Naughton, and Paul Black, United States District Court, Western District of Missouri, Civil Action No. 4:03-cv-00449-DW, Filed May 21, 2003) have been filed against the company. All these lawsuits were filed after a decline in Company’s stock price following the Company’s announcement on April 3, 2003 that the Company would not meet revenue and earnings estimates for the first quarter of 2003.

In general, the lawsuits allege that, during various class periods commencing as early as July 17, 2002 and ending April 2, 2003, the Company and individual named defendants misrepresented or failed to disclose certain factors, which they allege impacted the Company’s business and anticipated revenue and earnings, all allegedly in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

Given that the lawsuits have only recently been filed, we cannot currently predict the outcome of such litigation or the amount of any potential loss if our defense is unsuccessful; however, we believe that all the claims in the lawsuits are without merit and we intend to vigorously defend such claims. The named executive officers and the Company are insured persons within the coverage and subject to the limits of the Company’s Directors and Officers and Corporate Liability Insurance for such claims and notice of these claims has been given to the insurance carrier.

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

Results of Operations

Three Months Ended June 28, 2003 Compared to Three Months Ended June 29, 2002

The Company’s revenues, including revenues from reimbursed travel, increased 11% to $207,695,000 for the three-month period ended June 28, 2003 from $186,824,000 for the three-month period ended June 29, 2002. Beginning in the first quarter of 2003, the Company began including proceeds from reimbursed travel expense in revenue with a corresponding amount included in cost of revenues. This change has no impact on the dollar amount of gross margin, operating margin, or net earnings, but does slightly change the percent of revenue each of these items represent. Net earnings decreased 39% to $8,943,000 in the 2003 period from $14,692,000 for the 2002 period. Net earnings for the three months ended June 29, 2002 included a gain from the sale of shares of WebMD common stock of $2,736,000, net of tax. The decrease in net earnings was primarily due to an increase in expenses compared to the prior year quarter and due to a non-operating gain on the sale of WebMD shares in 2002.

System sales revenues increased 10% to $82,742,000 for the three-month period ended June 28, 2003 from $75,291,000 for the corresponding period in 2002. Included in system sales are revenues primarily from the sale of software, hardware, sublicensed software and for the services required to install them. The increase in system sales is due to an increase in new contract bookings in the quarter ended June 28, 2003 compared to the prior year quarter.

Support, maintenance and service revenues increased 10% to $116,240,000 during the second quarter of 2003 from $105,282,000 during the same period in 2002. Support and maintenance revenues were $50,008,000 and $42,109,000 for the second quarter of 2003 and 2002, respectively. Service revenues were $66,232,000 and $63,173,000 for the second quarter of 2003 and 2002, respectively. Included in support, maintenance and service revenues are support and maintenance of software and hardware, and professional services excluding installation. This increase was due primarily to the increase in professional services, resulting from an increase in services related to and services provided into the Company’s installed and converted client base.

At June 28, 2003, the Company had $788,141,000 in contract backlog and $290,396,000 in support and maintenance backlog, compared to $656,345,000 in contract backlog and $261,267,000 in support and maintenance backlog at June 29, 2002.

The cost of revenues includes the cost of third party consulting services, computer hardware and sublicensed software purchased from computer and software manufacturers for delivery to clients and commissions. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to manufacturers. The cost of revenue was 26% of total revenues in the second quarter of 2003 and 24% of total revenues in the second quarter of 2002. Such costs, as a percent of revenues, typically have varied as the mix of revenue (software, hardware, maintenance, support, and reimbursed travel) components carrying different margin rates changes from period to period.

Sales and client service expenses include salaries of client service personnel, communications expenses and unreimbursed travel expenses. Also included are sales and marketing salaries, trade show costs and advertising costs. These expenses as a percent of total revenues were 42% and 41% in the second quarter of 2003 and 2002, respectively. The increase in total sales and client service expenses to $86,646,000 in the second quarter of 2003 from $76,837,000 in the same period of 2002 was attributable to the cost of a larger field sales and services organization and marketing of new products.

Software development expenses include salaries, documentation and other direct expenses incurred in product development and amortization of software development costs. Total expenditures for software development, including both capitalized and noncapitalized portions, for the second quarter of 2003 and 2002 were $44,171,000 and $35,938,000, respectively. These amounts exclude amortization. Capitalized software costs were $14,508,000 and $11,799,000 for the second quarter of 2003 and 2002, respectively. The increase in aggregate expenditures for software development in 2003 is due to continued development of Cerner Millennium ™ software solutions and development of community care software solutions.

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General and administrative expenses include salaries for corporate, financial and administrative staffs, utilities, communications expenses, and professional fees. These expenses as a percent of total revenues were 6% and 7% in the second quarter of 2003 and 2002, respectively. Total general and administrative expenses for the second quarter of 2003 and 2002 were $13,149,000 and $12,300,000, respectively. The increase is due primarily to the growth of the Company’s core business and as a result of acquisitions.

Net interest expense was $1,603,000 in the second quarter of 2003 compared to $1,373,000 in the second quarter of 2002.

In the second quarter of 2002, the Company sold 14,820,527 shares of WebMD for $90,119,000. Accordingly, the Company recorded an investment gain of $2,736,000, net of $1,572,000 in tax, as a result of the sale.

The Company’s effective tax rates were 39.9 % and 38.3% for the second quarter of 2003 and 2002, respectively.

Six Months Ended June 28, 2003 Compared to Six Months Ended June 29, 2002

The Company’s revenues, including revenues from reimbursed travel, increased 10% to $405,886,000 for the six-month period ended June 28, 2003 from $368,246,000 for the six-month period ended June 29, 2002. Beginning in the first quarter of 2003, the Company began including proceeds from reimbursed travel expense in revenue with a corresponding amount included in cost of revenues. This change has no impact on the dollar amount of gross margin, operating margin, or net earnings, but does slightly change the percent of revenue each of these items represent. Net earnings decreased 40% to $14,536,000 in the 2003 period from $24,310,000 for the 2002 period. Net earnings for the six months ended June 29, 2002 included a gain from the sale of shares of WebMD common stock of $2,736,000, net of tax and a charge of $786,000, net of tax, due to the cumulative effect of a change in accounting for goodwill. The decrease in net earnings was due to a lower level of new contract bookings and an increase in expenses compared to the prior year period as well as a non-operating gain on the sale of WebMD shares in 2002.

System sales revenues increased 4% to $161,336,000 for the six-month period ended June 28, 2003 from $154,535,000 for the corresponding period in 2002. Included in system sales are revenues primarily from the sale of software, hardware, sublicensed software and for the services required to install them.

Support, maintenance and service revenues increased 14% to $229,172,000 during the first six month of 2003 from $201,318,000 during the same period in 2002. Support and maintenance revenues were $98,040,000 and $84,113,000 for the first six months of 2003 and 2002, respectively. Service revenues were $131,132,000 and $117,205,000 for the first six months of 2003 and 2002, respectively. Included in support, maintenance and service revenues are support and maintenance of software and hardware, and professional services excluding installation. This increase was due primarily to the increase in professional services, resulting from an increase in services related to and services provided into the Company’s installed and converted client base.

At June 28, 2003, the Company had $788,141,000 in contract backlog and $290,396,000 in support and maintenance backlog, compared to $656,345,000 in contract backlog and $261,267,000 in support and maintenance backlog at June 29, 2002.

The cost of revenues includes the cost of third party consulting services, computer hardware and sublicensed software purchased from computer and software manufacturers for delivery to clients and commissions. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to manufacturers. The cost of revenue was 25% of total revenues in the six-month period of 2003 and 2002, respectively. Such costs, as a percent of revenues, typically have varied as the mix of revenue (software, hardware, maintenance, support, and reimbursed travel) components carrying different margin rates changes from period to period.

Sales and client service expenses include salaries of client service personnel, communications expenses and unreimbursed travel expenses. Also included are sales and marketing salaries, trade show costs and advertising costs. These expenses as a percent of total revenues were 43% and 41% in the six-month period of 2003 and 2002, respectively. The increase in total sales and client service expenses to

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$174,737,000 in the second quarter of 2003 from $151,255,000 in the same period of 2002 was attributable to the cost of a larger field sales and services organization and marketing of new software solutions.

Software development expenses include salaries, documentation and other direct expenses incurred in product development and amortization of software development costs. Total expenditures for software development, including both capitalized and noncapitalized portions, for the six-month periods of 2003 and 2002 were $87,232,000 and $69,478,000, respectively. These amounts exclude amortization. Capitalized software costs were $28,749,000 and $22,915,000 for the six-month periods of 2003 and 2002, respectively. The increase in aggregate expenditures for software development in 2003 is due to continued development of Cerner Millennium ™ software solutions and development of community care software solutions.

General and administrative expenses include salaries for corporate, financial and administrative staffs, utilities, communications expenses, and professional fees. These expenses as a percent of total revenues were 6% in the first six months of 2003 and 7% in the first six months of 2002. Total general and administrative expenses for the first six months of 2003 and 2002 were $26,291,000 and $24,342,000 respectively. The increase is due primarily to the growth of the Company’s core business and as a result of acquisitions.

Net interest expense was $3,449,000 in the six-month period of 2003 compared to $2,896,000 in the second quarter of 2002.

In the second quarter of 2002, the Company sold 14,820,527 shares of WebMD for $90,119,000. Accordingly, the Company recorded an investment gain of $2,736,000, net of $1,572,000 in tax, as a result of the sale.

The Company’s effective tax rates were 40.2 % and 38.8% for the second quarter of 2003 and 2002, respectively.

Capital Resources and Liquidity

The Company’s liquidity position remains strong with total cash and cash equivalents of $121,038,000 at June 28, 2003 and working capital of $255,257,000. The Company generated cash from operating activities of $58,535,000 and $8,450,000 during the six-month periods ended June 28, 2003 and June 29, 2002, respectively. Cash flow from operations increased in the 2003 period, primarily due to increased collection of receivables and improved payment terms.

Cash used in investing activities consisted primarily of purchases of capital equipment of $11,344,000 and $21,493,000, purchases of land, buildings, and improvements of $22,586,000 and $5,484,000, and capitalized software development costs of $28,749,000 and $22,915,000, in the first six months of 2003 and 2002, respectively. The Company also used cash for the acquisition of a business of $13,429,000 in the first six months of 2002. Cash provided from investing activities in the first six months of 2002 included $90,119,000 from the proceeds from the sale of the WebMD stock.

The Company’s financing activities for the first six months consisted primarily of the repayment of long-term debt of $14,015,000 and the purchase of treasury stock of $5,930,000. For the first six months of 2002, the Company used cash for net repayments of long-term debt of $1,933,000.

The Company’s liquidity is influenced by many factors, including the amount and timing of the Company’s revenues, its cash collections from its clients as implementation of its software solutions proceed and the amounts the Company invests in software development and capital expenditures. The Company believes that its present cash position, together with cash generated from operations, and the Company’s line of credit will be sufficient to meet anticipated cash requirements during 2003. The Company has $90,000,000 of long-term, revolving credit from banks. At June 28, 2003, the Company had no outstanding borrowings under this agreement.

At June 28, 2003, the Company was committed to spending approximately $63,000,000 under construction contracts for two new buildings at its Kansas City headquarters complex. As of June 28, 2003, the Company had spent $49,050,000 of the total commitment. The construction will be financed by the Company’s cash position, cash generated from operations and, if necessary, the line of credit.

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The effects of inflation on the Company’s business during the period discussed herein were minimal.

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” and Interpretation of APB No. 51. The Interpretations provide guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities’ or VIEs”) and how to determine when and which business enterprises should consolidate the VIE (the “primary beneficiary”). In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. For variable interest entities created before February 1, 2003, FIN 46 is applicable in the first fiscal year or interim period beginning after June 15, 2003.

Management is currently in the process of assessing what impact, if any, the adoption of these Interpretations will have on our consolidated financial statements or disclosures.

Critical Accounting Policies

The Company believes that there are several accounting policies that are critical to understanding the Company’s historical and future performance, as these policies affect the reported amount of revenue and other significant areas involving management’s judgments and estimates. These significant accounting policies relate to revenue recognition, software development costs, other-than-temporary declines in the market value of investments, allowance for doubtful accounts, and potential impairments of goodwill. These policies and the Company’s procedures related to these policies are described in detail below and under specific areas within the discussion and analysis of the Company’s financial condition and results of operations.

Revenue Recognition

Revenues are derived primarily from the sale of clinical financial and administrative information systems and solutions. The components of the system sales revenues are the licensing of computer software, installation, subscription content and the sale of computer hardware and sublicensed software. The components of support, maintenance and service revenues are software support and hardware maintenance, remote hosting and outsourcing, training, consulting and implementation services.

The Company recognizes revenue in accordance with the provisions of Statement of Position (SOP) No. 97-2, “Software Revenue Recognition,” as amended by SOP No. 98-4, SOP 98-9 and clarified by Staff Accounting Bulletin (SAB) 101 “Revenue Recognition in Financial Statements.” SOP No 97-2, as amended, generally requires revenue earned on software arrangements involving multiple-elements to be allocated to each element based on the relative fair values of those elements. Revenue from multiple-element software arrangements is recognized using the residual method. Under the residual method, revenue is recognized in a multiple-element arrangement when Company-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement (i.e. professional services, software support, hardware maintenance, hardware and sublicensed software), but does not exist for one or more of the delivered elements in the arrangement (i.e. software solutions). The Company allocates revenue to each element in a multiple-element arrangement based on the element’s respective fair value, with the fair value determined by the price charged when that element is sold separately. Specifically, the Company determines the fair value of the maintenance portion of the arrangement based on the renewal price of the maintenance charged to clients, professional services portion of the arrangement, other than installation services, based on hourly rates which the Company charges for these services when sold apart from a software license, and the hardware and sublicensed software based on the prices for these elements when they are sold separately from the software. If evidence of the fair value cannot be established for the undelivered elements of a license agreement, the entire amount of revenue under the arrangement is deferred until these elements have been delivered or objective evidence can be established.