SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

OR

Commission File Number 0-15386

CERNER CORPORATION

2800 Rockcreek Parkway
North Kansas City, Missouri 64117
(816) 221-1024
(Address of principal executive offices, including zip code;
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, par value $.01 per share
Preferred Stock Purchase Rights
(Title of Class)

     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   þ    No   o

     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.   o

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

Yes   þ    No   o

     The aggregate value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant as of June 25, 2004 was $1,285,888,117.

     At February 28, 2005, there were 36,781,069 shares of Common Stock outstanding, of which 7,217,797 shares were owned by affiliates. The aggregate market value of the outstanding Common Stock of the Registrant held by non-affiliates, based on the closing sale price of such stock on February 28, 2005, was $1,540,246,471.

     Documents incorporated by reference: portions of the Registrant’s Proxy Statement for the 2005 Annual Meeting of Shareholders to be held on May 27, 2005 are incorporated by reference in Part III hereof.

Table of Contents

example, the Centers for Medicare and Medicaid Services (CMS) is testing financial incentives to reward hospitals that demonstrate high quality performance with its Premier Hospital Quality Incentive, which rewards organizations in acute care. For ambulatory settings, CMS’ Doctors’ Office Quality (DOQ) project develops and tests a comprehensive, integrated approach to measuring the quality of care for chronic disease and preventive services. These efforts are intended to address rapidly increasing healthcare costs and quality of care issues by promoting a best practices approach and stimulating quality improvement and cost savings.

Consumer- and Employer-Driven Healthcare Become More Prevalent

While healthcare spending in the U.S. has held steady over the past two years, insurance costs continue to increase at a double-digit pace, forcing many employers to either shift the costs to employees or drop coverage altogether. According to the California-based Kaiser Family Foundation, in 2003, the number of employees covered by employer-sponsored health insurance dropped to 45 percent, down from 53 percent in 1999. Additionally, there are now 45 million uninsured Americans, an increase of 3.2 percent since 2002. From 2000 to 2004, the average family health insurance premium increased 59 percent.

Unfortunately, experts predict that insurance costs will continue to rise. In a USA Today article, UBS Analyst William McKeever predicted an insurance premium increase between 9 percent and 10 percent for 2005. As a result, employers and consumers are looking to minimize expenses, and an estimated 50 percent of employers have moved to consumer-driven health plans. These plans give consumers greater control and financial responsibility as they select the most cost effective services and prescriptions. Forrester Research predicts that the consumer-driven health plan membership will triple by 2005, making it the fastest-growing health plan sector.

In addition to consumers, many employers are also taking action to control costs and increase quality. Through employer-driven health plans, companies encourage employees to utilize hospitals that meet specific quality criteria. As an example, The Boeing Company established a plan in 2002 to encourage its employees to access hospitals that meet criteria developed by The Leapfrog Group, a coalition of 160 companies working to improve the safety, quality and affordability of healthcare. Hospitals are evaluated on their ability to meet these quality standards, such as the use of computerized physician order entry (CPOE), and certain union groups are encouraged to use the identified organizations over other hospitals. If the participating hospital meets national patient safety standards for specific procedures, the hospital stay is eligible for a benefit incentive payment of 100 percent. Those who select another facility pay 5 percent of their hospital bill, which can often equate to hundreds or thousands of dollars.

These quality initiatives place pressure on hospitals to invest in information technology to remain competitive, and Cerner’s technology is taking part in leading the way with respect to HIT solutions.

Patient Safety Remains in Forefront of National Agenda

The year 2004 marked the fifth anniversary of a report by the Institute of Medicine (IOM) that cited an unacceptably high rate of medical errors that resulted in an estimated 44,000 to 98,000 deaths per year in the United States. This report became a catalyst for improvement in healthcare as experts cited the numerous flaws associated with a paper-based system. While the report exposed the high rate of error, the progress made since its publication is unknown. This is due in large part to fragmented efforts to report medical errors.

Only with a cohesive, comprehensive strategy can patient safety goals be achieved. Cerner’s proven CPOE solution, with 65 acute care and 313 ambulatory live sites, can provide organizations with the clinical functionality and executable knowledge to minimize errors and improve compliance with standards at the point of care.

2004 may well be recognized as the year that the electronic medical record (EMR) entered the national political agenda. Starting in January with the State of the Union address, President Bush called for increased use of computerized health records to reduce costs, improve care and lower the risk of error. He also established a goal of having an EMR for most Americans within 10 years.

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Momentum continued to build in April when the Health Level Seven (HL7) organization announced the passing of its ballot that created a model and accompanying standards for electronic health records. This initiative will aid the adoption of the technology by creating a common platform for their use.

In May, President Bush confirmed his commitment to HIT with the appointment of Dr. David Brailer as the first national health infrastructure technology coordinator. In his position, Dr. Brailer is tasked with bringing together the fragmented segments of healthcare to improve quality and reduce costs.

In July, Neal Patterson, Cerner chairman and CEO, participated in the second annual National Health Information Infrastructure (NHII) Summit in Washington, D.C., during which industry leaders discussed plans to transform the delivery of healthcare by building new health information infrastructure, including electronic health records and a nationwide network to link health records. While there, Patterson suggested a similar urgency as President Bush’s 10-year call for EMRs stating, “We are the generation that has to do this work.”

As the year came to a close, Dr. Brailer and Dr. Mark McClellan, administrator of CMS, spoke at Cerner’s Health Care Leadership Forum and Cerner Health Conference, both held in October. They both talked about the growing momentum around HIT and the important role the marketplace can play in hastening its adoption. 2005 promises to bring additional and important developments. Cerner plans to play a role in shaping them.

The Cerner Vision

Cerner’s vision has evolved from a fundamental thought: Healthcare should not be organized around an encounter; it should revolve around the individual. This concept led to Cerner’s Community Health Model and the creation of the person-centric Cerner Millennium architecture – a truly unified, enterprise-wide architecture. The Community Health Model encompasses four steps:

	•	Automate the Core Processes
	•	Connect the Person
	•	Structure the Knowledge
	•	Close the Loop

Automate the Core Processes

As long as medical information is isolated in a paper record, the inadequacies of today’s healthcare delivery system will likely remain. Nurses and pharmacists will be forced to interpret potentially illegible and incomplete orders. Physicians will not benefit from the real-time, contextual reference information available in automated solutions. And clinicians throughout a healthcare organization will continue to search for the single copy of the paper-based record; when it is not readily available, they may be forced to make critical care decisions without adequate information.

The elimination of the paper record can improve quality and safety, increase productivity, and generate better documentation from which clinical outcomes, financial performance and resource utilization can be benchmarked and analyzed.

With an EMR, clinicians view demographic information, medical history, lab results, vital signs and treatment plans, along with notes from healthcare team members. Guidelines and pathways relevant to the person’s medical condition help the physician make the best possible decisions in diagnosing and treating the patient. This comprehensive view of the person’s health helps ensure safer and higher-quality care.

Once all the steps of healthcare are captured electronically, the enhanced documentation will create the foundation for data collection that can become the backbone for structuring the knowledge of healthcare.

In addition to automating workflow, technology is essential in order to eliminate error, variance, waste, delay and friction – all of which contribute to declines in healthcare quality and increases in medical error. HIT can eliminate these factors, leading to an overall cost reduction in healthcare.

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Connect the Person

Cerner is dedicated to helping build a new medium between the person and the physician, which empowers the individual and delivers higher-quality healthcare. A cultural shift toward self-directed care is breeding a new consumerism in healthcare. With a personal health record, individuals can store and access their medical information securely from anywhere they have Internet access. When combined with personalized health content, consumers gain a better sense of the care they are receiving and the options available to them. They communicate better with providers and more proactively manage their healthcare.

Structure the Knowledge

Cerner is dedicated to building information systems that treat every clinical decision as a learning event. Cerner solutions enable the industry to structure, store and study the application and outcomes of medical practice.

Cerner believes medicine must have a structure that allows physicians to record treatment and outcomes in such a way that it can be compared and contrasted with other methods. A common nomenclature that can exactly capture the meaning of input from physicians and clinicians is a necessary first step.

Cerner solutions store healthcare data and provide a framework for comparability. This structured data enables physicians to make sense of and glean value from the information that is gathered through automated processes and connected persons. Cerner believes that without a knowledge framework, data collected will provide no real benefit. By building this structure, Cerner opens the door for every encounter with a patient and every piece of new knowledge to be catalogued, measured and analyzed. This knowledge framework will allow providers to deliver better care and develop an improved understanding of medicine.

Close the Loop

Cerner is dedicated to building information systems that deliver evidence-based medicine, dramatically reducing the average time from the discovery of an improved method to the change in medical practice.

Advances in technology offer great opportunities in healthcare and must be used to deliver better care faster. The information learned must be applied. Today, patients may wait as long as 10 years before new medical knowledge reaches widespread use. With systems designed to embed evidence-based medicine inside the clinician’s workflow ¾ using pathways, guidelines and alerts ¾ physicians know that the best science can be leveraged in every medical decision. This leads to reduced variance and better outcomes.

Evolution of Community Health Model Connects Larger Communities

Over the next 25 years, medicine will become increasingly personalized and technology will become more accessible. Cerner has created four business areas to address this evolutionary progress. These segments, referred to by the Company as grid services, represent the utility-like potential of the services Cerner will offer to large communities of users. The underlying principles of this initiative are to:

	•	Connect all stakeholders in the healthcare system;
	•	Create a secure, transparent and open network for data sharing; and
	•	Remove the clinical, financial and administrative friction.

The first grid is the physician and metro grid, which focuses on leveraging Cerner’s physician practice organization and on delivering a broad range of financial and clinical solutions to physician offices. The other grids are the state and regional grid, which drives the Company’s State and Regional Health Information Organization (RHIO) strategy and its next version of e-prescribing; the condition and disease management grid, which securely connects individuals with chronic conditions, such as diabetes and asthma, with their healthcare providers; and the transactional services grid, which seeks to eliminate friction in the healthcare system by supporting the processing and management of healthcare transactions.

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The Cerner Strategy

Key elements of the Company’s business strategy include:

Penetrate the integrated healthcare provider market. Large healthcare systems represent a significant component of the healthcare information technology market. These organizations focus on improving safety and reducing costs through operating efficiencies. Cerner’s enterprise-wide, person-centric clinical and management solutions provide the technology to manage healthcare across an organization, significantly reducing costs, improving the efficiency of delivery and enhancing the quality of care.

Increase market share in individual domains and further penetrate the existing client base by cross-selling additional Cerner solutions. Cerner expects continued growth in clinical domain systems for specific markets such as nursing, physician office, laboratory, pharmacy, radiology, surgery, emergency medicine and cardiology, as institutions look to restructure and reengineer these high-cost centers.

Focus on independent physician practices. As healthcare becomes increasingly personalized, access to personal patient information is critical for both large integrated networks and independent physician practices. As such, Cerner will concentrate significant efforts to reaching physician practices of all sizes to systematize the healthcare process.

As part of these efforts, in January 2005, Cerner acquired the medical division of VitalWorks, Inc., a leader in the private physician office information technology market. This transaction expands Cerner’s presence in the physician practice market, an area which is expected to increase considerably as the federal government continues its push to bring medical information to the point of care. This acquisition, which adds 3,500 physician practices, builds on Cerner’s already substantial hospital-affiliated physician client base, giving it additional reach across the entire spectrum of the $4 billion ambulatory market.

Create the perfect client experience. As a client-focused company, Cerner recognizes that relationships are as critical to success as breadth and depth of solutions. As a result, its approach to client services is broad, encompassing everything from implementation and adoption to ongoing service and support. Once these elements are in place, healthcare organizations can realize the full benefits of HIT and achieve their goals of higher quality care and patient safety.

HIT purchasing decisions are expensive and often present a great risk to both the sponsoring organization and the ultimate decision-maker. Cerner is easing this process by creating a comprehensive approach to implementation and management of these complex systems. The Company is automating processes by creating a specific methodology designed to reduce the design/build/maintenance efforts by up to 50 percent. This effort is intended to significantly reduce implementation time and to lower the Company’s clients’ cost of ownership of Cerner solutions. The Cerner strategy also calls for easier system management, which will contribute to Cerner’s ability to achieve its goal of guaranteeing an industry-leading application availability rate.

Remain committed to a common architecture. Because Cerner believes that the constituents in health management need to work together to benefit defined populations in a community, the Company has made a commitment to a single, unified architecture as the platform for its health information and management systems. The Cerner Millennium architecture is scalable on a linear basis, using either Cerner compatible modules for process-oriented applications or competitive systems interfaced using open system protocols.

Develop innovative solutions and services. Building upon the Cerner Millennium architecture, Cerner intends to continue to lead the industry through new innovations. These solutions and services will complement existing solutions, address clients’ emerging HIT needs and employ technological advances.

In 2004, Cerner introduced PathNet Helix ™, a breakthrough genomics solution for the laboratory. This first-of-its-kind solution allows genetic information to be stored in an electronic medical record, providing

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immediate access to information from genetic tests and helping clinicians plan the most effective therapy and treatment.

Additionally, the Company launched INet ^® Virtual , a cutting-edge solution for critical care units to achieve real-time data sharing across all domains of care, thus eliminating the communication barriers between care providers. The solution went live in November at the Borgess Medical Center in Kalamazoo, Michigan, a member of Ascension Health, the largest nonprofit health care system in the United States. This implementation, which will form the foundation for the national design for Ascension Health, was the first INet Virtual conversion for Cerner.

Cerner is committed to offering solutions that improve critical care quality, processes, safety and outcomes. Its vision is for a single critical care quality improvement solution that incorporates all standards and evidence. In February 2004, Cerner acquired Project IMPACT ^TM , a prominent solution in critical care performance benchmarking. This solution provides a unique complement to the Cerner critical care suite of solutions by marrying Project IMPACT with the decision-support and risk-adjustment capabilities of APACHE ^® .

Additionally, the PowerInsight ^® data-warehouse solution for healthcare business intelligence helps to transform healthcare by providing a foundation for the accurate measurement of a healthcare organization’s current business, delivering specific information and services required for continuous performance improvement.

Continue pursuit of excellence in implementations. Since the introduction of the Cerner Millennium architecture, Cerner has steadily decreased implementation timelines while increasing the number of solutions converted within those timelines. In 2004, Cerner turned on 1,079 Cerner Millennium applications, a 22 percent increase over 2003. This brings the total number of live applications to 3,767 at nearly 750 facilities.

Cerner’s prescribed practices implementation model, developed from more than 25 years of success in developing and implementing HIT solutions, is contributing to the record number of implementations. Comprised of a dedicated group of information technology consultants who specialize in Cerner Millennium implementations and work closely with clients, the team takes much of the implementation burden of database design and build activities away from the client. As a result, clients enjoy reduced time, cost and complexity of implementation.

Expand Managed Services. In addition to offering access to talent and economies of scale, there are some services that, in certain circumstances, the Company can perform better and more economically than its clients. Over the past several years, Cerner has added and offered a number of services, called Managed Services. This set of technical services includes remote hosting, application management and disaster recovery.

Build a reputation as a partner characterized by trust and integrity. In an era in which corporate financial scandals seem almost a constant in the headlines, Cerner pledges to promote trust and integrity in every client relationship it establishes. Cerner’s three original founders – still in leadership positions at the Company today – along with its long history of solid financial performance are testaments to the Company’s commitment.

Continue to expand global presence . Cerner has an immense opportunity to revolutionize the practice and delivery of healthcare throughout the world through its leadership in clinical systems and patient safety. To that end, Cerner continues to make significant investments in the infrastructure development to support these efforts.

Cerner signed a contract with St. James’s Hospital in 2004, an organization that has emerged as the largest acute general hospital in the Republic of Ireland. Cerner is providing an integrated RIS/PACS system with Scheduling and PowerChart ^® for orders and results.

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In 2004, Cerner and its partner Atos Origin (formerly SchlumbergerSema) delivered key milestones in bringing the Choose and Book system live in England. From a technical point of view, the project is the most advanced deployment of the Cerner Millennium architecture to date. The Company demonstrated that the solution could handle large volumes of transactions while meeting extremely high service level requirements. The system handled about 2.8 million service requests per hour, and the database managed 5,000 SQL executions per second. The testing validated the scalability and performance of the Cerner Millennium Web Experience architecture.

Other countries and regions around the world are taking England’s lead for a countrywide examination of HIT to modernize their healthcare systems. Across Europe, for example, there is an increased understanding of the need for improved access to information to facilitate the frequent movement of citizens across the European Union, according to a recent report by Frost & Sullivan. Cerner is optimistic about the global market and is expanding to new countries and responding to opportunities.

Solutions

Cerner Millennium solutions run on a single healthcare architecture uniquely capable of storing, retrieving and disseminating clinical and financial information across an entire health system. The Cerner Millennium solutions are dedicated to meeting the automation needs of every segment of the care continuum.

Cerner solutions can be acquired individually or as a fully unified health information system. Cerner also markets more than 200 solution options that complement Cerner’s major information systems. In addition, Cerner offers comprehensive consulting services—including learning services, readiness assessments, planning and change management and process redesign—and also sells third-party computers and related hardware to its software licensees.

Financial information regarding the Company’s operating segments is included under the caption “Operations by Segment” under Item 7, “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and also under the caption “Segment Reporting” as presented in Note 13 of the consolidated financial statements.

Enterprise Repositories

The unique architecture of Cerner Millennium solutions sets Cerner apart from the competition. A key part of the Cerner Millennium architecture is the data repositories ¾ the underlying foundation for Cerner solutions ¾ which allow healthcare organizations to manage and make use of the data collected along the healthcare continuum.

The Open Clinical Foundation® repository manages clinical information with an open, standard medical terminology, providing the foundation for the EMR.

The MultiMedia Foundation™ repository provides the clinical and document imaging foundation for the EMR.

Cerner’s solution categories include:

•

Enterprise-Wide Systems, which automate processes throughout the health system enterprise, including:

	•	Access Management.
	•	Care Management.
	•	Financial and Operational Management Systems, which automate business operations.

•

Clinical Systems, which automate critical processes across the healthcare continuum, and Clinical Centers, which provide efficiencies for ancillary departments such as laboratory and radiology.

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	•	Decision Support and Knowledge, which enhance clinical and business processes with information and actions.
	•	Consumer, which supports Internet-based healthcare communities that effectively connect individuals, providers and health systems.
	•	Packaged Solutions, which address key processes in healthcare.
	•	Segment Solutions, which address issues unique to specific care settings.
	•	Technologies for developing solutions or connecting other technologies and systems to the Cerner Millennium architecture.

Enterprise-Wide Solutions

Access Management

The CapStone ® Enterprise Access Management System is the industry’s most comprehensive suite of solutions designed to automate, integrate and streamline patient access information between and among all key points in the delivery system. Key components of this solution create the enterprise master person index (EMPI) and automate the identification, eligibility, registration and scheduling processes across hospitals, clinics, physician practices and other care delivery organizations.

Care Management

PowerChart Enterprise Clinical Data Repository is Cerner’s enterprise-wide electronic medical record system. It includes a robust data repository that is shared across all Cerner Millennium solutions, and a highly interactive clinician’s desktop used for viewing, ordering, documenting and managing care delivery. PowerChart is unified with the PowerOrders® solution to provide Computerized Physician Order Entry (CPOE).

Financial and Operational

Cerner is leveraging its experience to bridge the gap between clinical settings and the business office, revolutionizing the revenue cycle within healthcare systems.

The ProFit® Enterprise Billing and Accounts Receivable System is Cerner’s patient accounting and financial management solution. The ProFit system brings together clinical and financial data to maximize reimbursement, decrease denials and gain dramatic operational efficiencies.

Cerner ProVision™ Document Image Management System manages document images across the entire healthcare organization, including both clinical and non-clinical departments.

The ProFile ^® Health Information Management System helps meet the operations management needs of the health information management (medical records) department with functionality that simultaneously manages paper, document images and computerized records within a single application.

The Clinically Driven Workforce Management™ solutions align the appropriate resources based on predicted and actual demand. With this comprehensive suite of offerings, organizations are empowered to optimize existing resources while increasing patient throughput and managing employee satisfaction.

The ProCure™ Enterprise Supply Chain Management solutions focus on eliminating variation and clinical staff burden. By connecting materials management processes with key clinical processes, the supply chain is established as a byproduct of care delivery.

Medical Transcription Management Solutions offer unprecedented levels of accuracy and efficiency of transcribed documents by leveraging clinical data to auto-create report content.

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Clinical Systems

Points of Care

The INet® Critical Care Management System is designed to automate the entire care process in critical care settings. It supports complete nursing documentation with automated capture of bedside monitor and device data. Physician workflow is automated with both documentation and flow sheet embedded Computerized Physician Order Entry (CPOE). Both nursing and physician workflows are enhanced with closed loop meds process and remote patient monitoring capabilities. Embedded knowledge augments patient safety with critical care specific nursing and physician documentation templates and alerts. Outcome analysis (with premier solutions like APACHE ®) is also embedded in the critical care workflow.

The CareNet® Acute Care Management System is designed to automate and streamline the work and care delivery processes for nursing and the entire acute care team. It provides the framework for accessing patient data, directing clinicians to care activities that need to be completed and managing tasks. CareNet provides improved communication and the coordination of care as it connects each member of the care team to a unified plan of care and common system. Everyone involved in the care of a patient can view an up-to-date version of the care plan, allowing physicians and nurses to make the best decisions possible. The CareNet system also promotes patient safety through access to strong clinical decision support, evidence-based nursing and knowledge-based best practices, alerts and reminders, thereby reducing errors and variability in the care process.

The CVNet® Cardiology Information System automates the processes within the cardiology department, supporting the scheduling, ordering, documentation and data capture required by professionals in the cardiology domain.

The PowerChart Oncology Information System automates the clinical decision-making and complex communication needs of the medical oncology care team. This oncology solution provides the ability to share crucial patient information across both ambulatory and acute care for management of complex, multi-encounter chemotherapy protocols, improving communication and the real-time flow of patient information across the continuum of care.

The SurgiNet ® Surgery and Anesthesia Management System is designed to automate the needs of the entire perioperative environment, including functions of professional staff and material resource scheduling, supply chain management, perioperative documentation, patient tracking, anesthesia documentation, and physiological monitoring at the bedside or in the operating room suite. The solution gives clinicians real-time access to clinical and historical patient data from past surgical events in addition to supporting planning for anesthesia care and surgical case preparation. The SurgiNet system also offers financial and operational reporting tools to analyze and support continuous improvement in total perioperative workflow.

The Cerner Women’s Health Information System automates the care processes in women’s centers, Ob/Gyn offices, labor and delivery units and in newborn care areas in the hospital. This solution is designed to support the clinical workflow, information needs and specific challenges faced in women’s healthcare.

The FirstNet ® Emergency Department Information System provides a comprehensive solution to the challenges emergency departments face to streamline process flows, comply with Health Insurance Portability and Accountability Act and Emergency Medical Treatment and Active Labor Act regulations, comply with CMS requirements and ensure appropriate reimbursement. The FirstNet system is an emergency department clinician and management tool for quick and effective patient tracking, ordering, results and medical record review, online clinical documentation, prescription writing, patient education and evidenced-based coding.

The PowerChart Office ^® Management System supports the broad range of clinical and business activities that occur within a physician office, clinic or large physician organization. This system ties the physician office together with other medical entities and automates key care team activities in both primary and specialty care settings.

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Clinical Centers

The PathNet ® Laboratory Information System (LIS) addresses the clinical, financial and managerial needs of a comprehensive laboratory setting with unified solutions for: general laboratory, microbiology, blood bank transfusion, blood bank donor, anatomic pathology, human leukocyte antigen (HLA) and total outreach services. Innovative laboratory solutions such as patented Synoptic Reporting for Anatomic Pathology solution, the Gajema® system for outreach client service, courier, fleet and phlebotomy management, and the PathNet Helix ™ solution for molecular diagnostic/genomics are just several examples of how PathNet continues to set the bar in the LIS market. The PathNet system automates laboratory processes while capturing crucial data for operational success and increased patient safety, ensuring the production of accurate and timely reports and the maintenance of accessible laboratory records.

The RadNet ® Radiology Information System addresses the operational and management requirements of radiology departments or services. It allows a department to replace its manual, paper-based system of record-keeping with an efficient computer-based system.

Cerner ProVision ™ PACS (picture archival and communications system) is fully unified with Cerner’s radiology information system to manage storage, viewing, reporting and distribution of images. Using Cerner’s end-to-end, fully unified radiology information and image management systems, radiologists can improve operational efficiencies and reduce medical error.

The MultiMedia Foundation ™ integrates images, slides, photos, audio, video and waveforms, enabling a comprehensive EMR, enterprise-wide access to images and enhanced clinical decision support.

The PharmNet ® Pharmacy Information System is a powerful solution for transforming pharmacy and medication administration processes. The PharmNet system facilitates improved patient safety and operational activities across the continuum of care. The PharmNet system puts patient safety first and foremost in support of clinical pharmacy practice. It is a complete solution offering clinical decision support, formulary management and operational support, facilitating optimal utilization of pharmacy resources.

Decision Support and Knowledge

The Discern Expert ^® solution is an event-driven, rules-based decision support software application that allows users to define clinical and management rules that are applied to event data captured or generated by other applications. It supports both synchronous (real-time, interactive) processing and asynchronous (non-interactive) processing of events.

The Discern Explorer ^® solution is a decision support software application unified with other Cerner Millennium clinical and management information systems that allows users to execute predetermined or ad hoc queries and reports regarding process-related data that is generated by the other applications.

Executable Knowledge ^® solutions help clinicians assess and treat illnesses and improve outcomes based on the most current medical knowledge. Knowledge is customized to the individual and embedded within the Cerner Millennium architecture via order sets, plans of care, alerts and notifications including Adverse Drug Event (ADE) prevention alerts and clinical documentation. Reports measure compliance against key clinical standards to help organizations benchmark and enhance care quality.

MediSource ™ solutions provide caregivers and consumers alike with access to drug information from Cerner Multum and the ability to perform drug interaction checking to prevent adverse events. Patient safety is enhanced through dose range checking capabilities that determine the appropriate medication dose based on the age, weight and physiology of an individual.

APACHE clinical decision support and outcomes management systems manage the clinical and financial outcomes of high-risk patients in critical and acute care.

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The PowerInsight solution is a comprehensive healthcare intelligence and data warehouse for healthcare. It enables clinical leadership and healthcare executives to collect, measure, analyze and benchmark data, thereby deriving insights to enable positive changes in clinical processes and operational performance.

The Health Facts ^® repository is Cerner’s comparative data warehouse for benchmarking information and services for subscribers to support their own improvement processes.

Cerner Health Insights (CHI) provides clinical insight into pharmaceutical and biotech challenges. Cerner’s delves deeply into the realities of clinical practice, helping its clients formulate business responses to outcomes and economic issues.

The HealthSentry ™ bio-surveillance network collects critical biological information about potential disease outbreaks and analyzes data for specific patterns or trends.

Consumer

Cerner’s IQHealth ^® solution is dedicated to closing the healthcare information loop by delivering the right information to the right person at the right time, and often the right person is the patient. A care delivery organization has not truly closed the loop on healthcare information until they have placed the patient at the center of care. Cerner’s IQHealth solution creates an online dialogue between hospital, physician and patient. Using the Internet, patients can maintain their personal health record, gain educational support and receive guidance in managing their health.

Cerner’s IQHealth solution empowers patients to become active members of their care team. By extending the clinical suite to include interaction with patients, healthcare providers can more efficiently deliver care and enhance the satisfaction of the community. Cerner’s IQHealth solution includes the consumer Web framework, personal health record, physician and consumer messaging and disease-specific modules , as well as a patient medical record view and patient appointments module.

Packaged Solutions

Computerized Physician Order Entry (CPOE)

Cerner offers a total CPOE solution ranging from basic automation to complete medication integration.

CPOE enables automated physician ordering of medications, diagnostic tests and treatment plans. Orders are checked using decision-support tools to determine if they are in line with standards and appropriate for the person’s individual situation. Physicians are alerted to potential problems and prompted to consider alternatives. Actions are documented in the patient’s EMR.

Cerner’s CPOE solution facilitates safe and efficient care across multiple care venues. It goes beyond automating the ordering process by embedding the latest clinical knowledge to provide effective decision support and guidance. The solution is seamlessly unified with the EMR, pharmacy, medication administration, care documentation and ancillary systems to close the loop in the medication management process. By unifying care in this manner, Cerner CPOE helps clients address potential errors across the entire process.

Cerner’s CPOE solution includes a physician-centric ordering application ( PowerOrders ), a powerful decision-support engine with rules and alerts ( Discern Expert and MediSource ), and clinical documentation ( Care Documentation and more), all integrated within a robust clinical data repository ( PowerChart ).

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PowerPOC

PowerPOC ^TM is a solution set of supporting, multisystem offerings that automate the documentation of medication administration and documentation of tasks related to specific physician/nursing orders at the point of care (POC). This solution set provides notification to the clinician when inconsistencies occur that could represent potential medication administration errors.

This graduated solution set facilitates patient safety through barcode verification of the “Five Rights” of data review and collection, as well as medical devices integration at the patient bedside. Solutions within the PowerPOC family include: CareAdmin™ ; CareMobile™; and CareGuard™ solutions .

Homecare

Cerner BeyondNow provides innovative information technology solutions to the homecare industry. The HomeWorks â solution is a complete office-based homecare information management system targeting business needs in a quickly changing, fast paced environment. The HomeWorks solution manages data from the point of the first referral call to the point of the last service payment. The RoadNotes â solution enables users to extend complete patient information from point-of-care to the office system. Caregivers have access to complete patient charts, profiles and histories – for the information needed to make informed decisions.

Physician Solutions

Cerner Physician Practice solutions offer high-end, leading technology software solutions to a wide variety of office-based and hospital-based medical specialties, as well as large physician networks and enterprises. This comprehensive physician practice suite enables general medicine and individual specialty practices to provide efficient, high quality care while improving reimbursements and streamlining processes.

Rather than offering a one-size-fits-all “all-specialty” application, Cerner Physician Practice solutions offer many specialty-specific applications and services. Specialty areas include anesthesiology, cardiology, ophthalmology, dermatology and podiatry.

Segment Solutions

Cerner also offers solutions designed for specific segments in the healthcare industry.

Cerner solutions for the Integrated Delivery Network allow organizations to serve multiple facilities, with differing needs, across various geographic locations.

Community Hospital Solutions automate clinical and business processes in the community hospital. Community Hospital Solutions suites include administrative, clinical, patient care, hospital integration and community.

Cerner solutions for the Children’s Hospital setting specifically address those issues unique to the pediatric hospital setting. Cerner solutions include content and functionality specific to meeting the unique needs of children’s hospitals, including dose range checking, weight-based dose calculation, growth charts and immunization schedules.

Cerner solutions for Academic Medical Centers allow medical centers to focus on delivering high-quality care and carry out high-level teaching and research functions . Cerner’s unified architecture also enhances research efforts by allowing access to information via a centralized database.

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The Cerner Academic Education Solution is the only clinical information system adapted to support automated curricula and classroom instruction in nursing, medical and allied health schools, preparing future healthcare professionals for success in an IT-driven environment.

Technologies

The MillenniumObjects ^® toolkit is a collection of reusable programming elements from the revolutionary Cerner Millennium architecture. These segments of code, or objects, allow third-party developers to create front-end applications that draw upon the data model and proven functionality of the Cerner Millennium architecture.

The Open Engine Application Gateway ™ System facilitates the exchange of data and assists in the management of interfaces between foreign systems in a network environment. It serves as a solution kit to help write interface code.

The Open Port Interface ™ System represents Cerner’s standardized technology for providing reliable foreign system, medical device and other standard interfaces in a timely manner. Message translation and data mapping are done with point-and-click solutions and a scripting environment. Communications protocols are configured via table-driven parameters. These sophisticated methodologies result in decreased implementation times and greater client satisfaction.

Software Development

Cerner commits significant resources to developing new health information system solutions. As of January 1, 2005, approximately 1,752 associates were engaged full-time in software solutions development activities. Total expenditures for the development and enhancement of the Company’s software solutions were approximately $188,264,000, $179,999,000 and $149,985,000 during the 2004, 2003 and 2002 fiscal years, respectively. These figures include both capitalized and non-capitalized portions and exclude amounts amortized for financial reporting purposes.

The Company expects to continue investment and development efforts for its current and future solution offerings. As new clinical and management information needs emerge, Cerner intends to enhance its current software solutions lines with new versions released to clients on a periodic basis. In addition, Cerner plans to: expand its current software solution lines by developing additional information systems for clinical, financial, operational and/or consumer use; continue to support simultaneous use of Cerner’s solutions across multiple facilities; and, continue to expand in the global marketplace.

The Company is committed to maintaining open attributes in its system architecture to achieve operability in a diverse set of technical and application environments. The Company strives to design its systems to co-exist with disparate applications developed and supported by other suppliers. This effort is exemplified by Cerner’s Open Engine Application Gateway , Open Port Interface and MillenniumObjects solutions lines.

Sales and Marketing

The markets for Cerner’s HIT solutions include integrated delivery networks, physician groups and networks and their managed service organizations, managed care organizations, hospitals, medical centers, free-standing reference laboratories, home health agencies, blood banks, imaging centers, pharmacies, pharmaceutical manufacturers, employer coalitions and public health organizations. To date, a substantial portion of system sales has been in clinical solutions in hospital-based provider organizations. The Cerner Millennium architecture is highly scalable, with solutions being used in hospitals ranging from fewer than 50 beds to more than 2,000 beds and managed care settings with more than 2,000,000 members. All Cerner Millennium solutions are designed to operate on HP or IBM platforms, thereby allowing Cerner to be price competitive across the full size and organizational structure range of healthcare providers. The sale of a health information system usually takes approximately nine to 18 months, from the time of initial contact to the signing of a contract.

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The Company’s executive marketing management is located in its North Kansas City, Missouri, headquarters, while its client representatives are deployed across the United States and globally. In addition to the United States, the Company, through subsidiaries and joint ventures, has sales staff and/or offices in Argentina, Australia, Belgium, Canada, Chile, France, Germany, India, Singapore, Malaysia, Spain, the United Kingdom and the United Arab Emirates. Cerner’s consolidated revenues include foreign sales of $64,333,000, $54,191,000 and $36,634,000 for the 2004, 2003 and 2002 fiscal years, respectively.

The Company supports its sales force with technical personnel who perform demonstrations of Cerner solutions and assist clients in determining the proper hardware and software configurations. The Company’s primary direct marketing strategy is to generate sales contacts from its existing client base and through presentations at industry seminars and tradeshows. Cerner attends a number of major tradeshows each year and sponsors executive user conferences, which feature industry experts who address the HIT needs of large healthcare organizations.

Client Services

Significantly all of Cerner’s clients enter into software maintenance agreements with Cerner for support of their Cerner systems. In addition to immediate software support in the event of problems, these agreements allow clients the use of new releases of the Cerner solutions covered by maintenance agreements. Each client has 24-hour access to the client support staff located at Cerner’s world headquarters in North Kansas City, Missouri and the Company’s global support organization in the United Kingdom. Most of Cerner’s clients also enter into hardware maintenance agreements with Cerner. These arrangements normally provide for a fixed monthly fee for specified services. In the majority of cases, Cerner subcontracts hardware maintenance to the hardware manufacturer. Cerner also offers a set of managed services that include remote hosting, application management services and disaster recovery.

Backlog

At January 1, 2005, Cerner had a contract backlog of approximately $1,191,170,000 as compared to approximately $938,221,000 at January 3, 2004. Such backlog represents system sales from signed contracts, which had not yet been recognized as revenue. The Company recognizes revenue on a percent of completion basis, based on certain milestone conditions, for its software solutions. At January 1, 2005, the Company had approximately $96,909,000 of contracts receivable, which represents revenues recognized under the percentage of completion method but not yet billable under the terms of the contract. At January 1, 2005, Cerner had a software support and maintenance backlog of approximately $347,662,000 as compared to approximately $312,887,000 at January 3, 2004. Such backlog represents contracted software support and hardware maintenance services for a period of twelve months. The Company estimates that approximately 44% percent of the aggregate backlog at January 1, 2005 of $1,538,832,000 will be recognized as revenue during 2005.

Competition

The Company faces a highly competitive environment in the HIT market. The market for HIT solutions and services is intensely competitive, rapidly evolving and subject to rapid technological change. The Company’s principal existing competitors include Eclipsys Corporation, Epic Systems Corporation, GE Medical Systems, IDX Systems Corporation, iSoft Corporation, McKesson Corporation, Medical Information Technology, Inc. (“Meditech”), Misys Healthcare Systems and Siemens Medical Solutions Health Services Corporation, each of which offers a suite of software solutions and services that compete with many of the Company’s software solutions and services. There are other competitors that offer a more limited number of competing software solutions and services. In addition, the Company expects that major software information systems companies, large information technology consulting service providers and system integrators, Internet-based start-up companies and others specializing in the healthcare industry may offer competitive software/solutions or services. The pace of change in the HIT systems market is rapid and there are frequent new software solution introductions, software solution enhancements and evolving industry standards and requirements. The Company believes that the principal competitive factors in this market include the breadth and quality of system and software solution offerings, the stability of the information systems provider, the features and capabilities of the information

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systems, the ongoing support for the system and the potential for enhancements and future compatible software solutions.

Other Factors Affecting The Company’s Business

Information under the caption “Factors That May Affect Future Results of Operations, Financial Condition of Business” included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 is incorporated herein by reference. Such information includes a discussion of various factors that could, among other things, affect the Company’s business in the future, including: (a) variations in the Company’s quarterly operating results; (b) volatility of the Company’s stock price; (c) changes in the healthcare industry; (d) significant competition; (e) the Company’s proprietary technology may be subjected to infringement claims or may be infringed upon; (f) government regulation; (g) the possibility of product-related liabilities; (h) possible failures or defects in the performance of the Company’s software; (i) risks associated with the Company’s global operations; (j) recruitment and retention of key personnel; (k) risks related to doing business with third party suppliers; and, (l) the potential inconsistencies in sales forecasts compared to actual sales.

Number of Employees (“Associates”)

As of January 1, 2005, the Company employed 5,345 associates worldwide.

Neal L. Patterson has been Chairman of the Board of Directors and Chief Executive Officer of the Company for more than five years. Mr. Patterson also served as President of the Company from March of 1999 until August of 1999.

Clifford W. Illig has been a Director of the Company for more than five years. He also served as Chief Operating Officer of the Company for more than five years until October 1998 and as President of the Company for more than five years until March of 1999. Mr. Illig was appointed Vice Chairman of the Board of Directors in March of 1999.

Earl H. Devanny, III joined the Company in August of 1999 as President. Mr. Devanny also served as interim President of Cerner Southeast from January 2003 through July 2003. Prior to joining the Company, Mr. Devanny served as president of ADAC Healthcare Information Systems, Inc. Prior to joining ADAC, Mr. Devanny served as a Vice President of the Company from 1994 to 1997. Prior to that he spent seventeen years with IBM Corporation.

Paul M. Black joined the Company in March of 1994 as a Regional Vice President. He was promoted in June 1998 to Senior Vice President and Chief Sales Officer and to Executive Vice President in September of 2000. In January of 2003 Mr. Black was named Executive Vice President of the U.S. Client Organization. In February of 2005 Mr. Black was named Chief Operating Officer. Prior to joining the Company, he spent twelve years with IBM Corporation.

Douglas M. Krebs joined the Company in June 1994 as a Regional Vice President. He was promoted to Senior Vice President and Area Manager in April 1999. In February 2000, Mr. Krebs was appointed as President of Cerner Global. Prior to joining Cerner, he spent fifteen years with IBM Corporation.

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Marc G. Naughton joined the Company in November 1992 as Manager of Taxes. In November 1995 he was named Chief Financial Officer and in February 1996 he was promoted to Vice President. He was promoted to Senior Vice President in March 2002.

Jeffrey A. Townsend joined the Company in June 1985. Since that time he has held several positions in the Intellectual Property Organization and was promoted to Vice President in February 1997. He was appointed Chief Engineering Officer in March 1998. He was promoted to Senior Vice President in March 2001.

Mike Valentine joined the Company in December 1998 as Director of Technology. He was promoted to Vice President in 2000 and to President of Cerner Mid America in January of 2003. In February 2005, he was named General Manager of the U.S. Client Organization and was promoted to Senior Vice President in March 2005. Prior to joining the Company, Mr. Valentine was with Accenture Consulting.

Randy D. Sims joined the Company in March 1997 as Vice President and Chief Legal Officer. Prior to joining the Company, Mr. Sims worked at Farmland Industries, Inc. for three years where he served most recently as Associate General Counsel. Prior to Farmland, Mr. Sims was in-house legal counsel at The Marley Company for seven years, holding the position of Assistant General Counsel when he left to join Farmland.

Shellee K. Spring joined the Company in September 1989 as a systems engineer. Since that time, she has held several positions throughout the Company including positions in the Consulting, Sales and Intellectual Property Organizations. She was promoted to Vice President in March 1999.

Julia M. Wilson joined the Company in November 1995. Since that time, she has held several positions in the Functional Group organization. She was promoted to Vice President and to the position of Chief People Officer in August 2003.

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PART II

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Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Cerner Corporation (“Cerner” or the “Company”) is headquartered in North Kansas City, Missouri. Cerner derives revenue by selling, implementing and supporting software solutions and hardware that gives healthcare providers secure access to clinical, administrative and financial data in real time, allowing them to improve the quality, safety and efficiency in the delivery of healthcare. Cerner implements these solutions as stand-alone, combined or enterprise-wide systems. Cerner solutions can be managed by the Company’s clients or in Cerner’s data center via a managed services model.

Results Overview

The Company delivered strong results in 2004. Total new business bookings, which reflect the value of contracts for software, hardware, services and managed services (hosting of software in the Company’s data center), were $917,367,000 in 2004, an increase of 13% compared to $811,258,000 in 2003.

Total revenues for 2004 were $926,356,000, an increase of 10% compared to 2003. The revenue composition was $351,861,000 in system sales, $241,439,000 in support and maintenance, $300,975,000 in services and $32,081,000 in reimbursed travel. Systems sales revenue, which includes licensed software, sub-licensed software, hardware, and subscriptions, grew 6% in 2004. Services revenue, which includes managed services, grew 13% for the year. Support and maintenance revenue grew 15% for the year.

The Company’s solid bookings drove a 27% year-over-year increase in contract backlog, which reflects new business bookings that have not yet been recognized as revenue, and ended the year at $1,191,170,000. Backlog grew faster than revenue again in 2004 as the Company continued to experience strong growth in managed services and subscription bookings, which are recognized as revenue over a longer period of time than other types of bookings, such as software and hardware. Collectively, managed services and subscription bookings accounted for about 24% of total bookings margin in 2004 compared to approximately 20% in 2003 and 15% in 2002. This continued shift in mix provides greater visibility of revenue going into 2005 and beyond.

The strong growth in managed services bookings contributed to a decline in hardware bookings and hardware revenue in 2004 as clients electing managed services do not need to make the upfront hardware purchase that they would make in a transaction that does not include managed services. As a result, hardware revenue declined 18% in 2004 compared to 2003. Licensed software revenue grew at a strong rate of 14% in 2004 , but this growth was partially offset by the decline in hardware revenue, resulting in lower system sales growth of 6% for 2004. Despite the near-term impact on system sales, the Company views this mix shift favorably because the higher level of managed services bookings improves the visibility of future revenue streams.

Net earnings increased from $42,791,000 in 2003 to $64,648,000 in 2004. Included in 2004 results are an adjustment in the third quarter of 2004 related to a prior period vacation pay accrual (see Note 14 to consolidated financial statements) that reduced net earnings by $2,076,000, net of $1,270,000 of tax, and a gain on the sale of Zynx Health Incorporated in the first quarter of 2004 that increased net earnings by $1,826,000, net of $1,197,000 of tax. Excluding these two items, 2004 net earnings would have been $250,000 higher, or $64,898,000.

The increase in net earnings was driven by revenue growth and margin expansion. Operating margins were 12.0% (12.4% prior to the vacation accrual adjustment) for 2004 compared to 9.3% in 2003. Going forward, management believes the Company can continue to increase operating margins by expanding margins on services, leveraging investments in research and development, and controlling sales, general and administrative spending.

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The Company’s operational performance was also very strong in 2004. The Company brought a record 1,079 Cerner Millennium solutions live in 2004, bringing the cumulative number of solutions implemented to more than 3,700 at nearly 750 client facilities. These results included significant progress at implementing computerized physician order entry (CPOE), which is the application generating the highest level of industry attention.

The Company’s strong operational performance is also reflected in its cash flow results. In 2004, the Company generated $168,304,000 of cash flow from operations, compared to $134,150,000 in 2003. Free cash flow, defined as operating cash flow less capital expenditures and capitalized software, was $52,902,000 in 2004 compared to ($8,169,000) in 2003.

Healthcare Information Technology Market

The Company believes the market for healthcare information technology remains strong. The healthcare information technology industry, and Cerner specifically, continues to benefit from the focus healthcare providers have placed on using technology to drive major patient safety and quality initiatives into their organizations with the ultimate goal of becoming completely digital or paperless. In addition, the Company continues to benefit from its clients’ increased desire to have a common architecture spanning clinical, management and financial solutions.

In many ways, the Company believes 2004 was a defining year for the healthcare information technology industry. President Bush began the year by proclaiming in his State of the Union Address that we can avoid dangerous medical mistakes, reduce costs and improve care by computerizing health records. The President also established a goal for every American to have a personal health record within the next 10 years, and he reaffirmed that goal in his 2005 State of the Union Address. In the spring of 2004, the President created a sub-cabinet position at the Department of Health and Human Services (HHS) to spearhead this effort. In the summer of 2004, Senator Hillary Clinton and Majority Leader Bill Frist took to the pages of the Washington Post to opine in bipartisan fashion that information technology is central to solving the healthcare crisis. And as the Democratic and Republican parties laid out their agendas in January of 2005 for the 109th Congress, both signaled a strong commitment to healthcare information technology.

Finally, 2004 saw more widespread adoption of pay-for-performance compensation systems for both hospitals and physician offices. Employers such as General Motors, Delta Airlines, UPS, Verizon, General Electric, and Boeing led the way both at the company level and through The Leapfrog Group’s standards. And in February of 2005, the Center for Medicare and Medicaid Services (CMS) announced the first ever Medicare pay-for-performance initiative for doctors.

In summary, 2004 was an exciting year of increased focus on healthcare information technology. Although no assurances can be provided, management believes, and recent events suggest, that this momentum could continue.

Results of Operations

Year Ended January 1, 2005, Compared to Year Ended January 3, 2004

The Company’s revenues increased 10% to $926,356,000 in 2004 from $839,587,000 in 2003. The Company had net earnings of $64,648,000 in 2004 compared to $42,791,000 in 2003. Included in 2004 net earnings are an adjustment in the third quarter of 2004 related to a prior period vacation pay accrual that reduced net earnings by $2,076,000, net of $1,270,000 of tax, and a gain on the sale of Zynx Health Incorporated, in the first quarter of 2004 that increased net earnings by $1,826,000, net of $1,197,000 of tax. Excluding these two items, 2004 net earnings would have been $250,000 higher, or $64,898,000.

Revenues - In 2004, revenues increased due to an increase in system sales, support of installed systems and an increase in services. Support, maintenance and service revenues increased 14% to $542,414,000 in 2004 from $476,795,000 in 2003. Support and maintenance revenues were $241,439,000 and $209,876,000 in 2004 and 2003, respectively. Services revenues were $300,975,000

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and $266,918,000 in 2004 and 2003, respectively. Included in support, maintenance and service revenues are support and maintenance of software and hardware, managed services and professional services, excluding installation. The increase in support and maintenance revenue was due primarily to the increase in the Company’s installed and converted client base, that was driven by bringing a record number of Cerner Millennium solutions live in 2003 and 2004. The increase in services revenue was driven by increased professional services billable hours and a strong increase in managed services.

System sales increased 6% to $351,861,000 in 2004 from $332,349,000 in 2003. Included in system sales are revenues from the sale of software, hardware and sublicensed software. This increase is due primarily to an increase in license software sales that was partially offset by declines in hardware sales.

At January 1, 2005, the Company had $1,191,170,000 in contract backlog and $347,662,000 in support and maintenance backlog, compared to $938,221,000 in contract backlog and $312,887,000 in support and maintenance backlog at the end of 2003.

Cost of Revenues - The cost of revenues includes the cost of reimbursed travel expense, third party consulting services and subscription content, computer hardware and sublicensed software purchased from computer and software manufacturers for delivery to clients. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to the manufacturers. The cost of revenues was 21% of total revenues in 2004, and 23% of total revenues in 2003. Such costs, as a percent of revenues, typically have varied as the mix of revenue (software, hardware, services and support) components carrying different margin rates changes from period to period. The decrease in the cost of revenue as a percent of total revenues resulted principally from a decrease in the percent of revenue from computer hardware and sublicensed software, which carry a higher cost of revenue percentage. The Company believes this trend could continue because of strong demand for its managed service offering, which results in lower hardware sales because the client does not purchase hardware when it chooses this offering.

Sales and Client Service - Sales and client service expenses include salaries of client service personnel, communications expenses and unreimbursed travel expenses. Also included are sales and marketing salaries, travel expenses, tradeshow costs and advertising costs. These expenses as a percent of total revenues were 41% and 42% in 2004 and 2003, respectively. The increase in total sales and client service expenses to $383,628,000 in 2004 from $352,728,000 in 2003 is primarily due to an increase in personnel and personnel related expenses. The decrease in this spending as a percent of total revenue reflects the Company’s ability to get better utilization of its resources and leverage this spending over a larger revenue stream.

Software Development - Software development expenses include salaries, documentation and other direct expenses incurred in software development and amortization of software development costs. Total expenditures for software development, including both capitalized and noncapitalized portions, for 2004 and 2003 were $188,264,000 and $179,999,000, respectively. These amounts exclude amortization. Capitalized software costs were $58,912,000 and $58,736,000 for 2004 and 2003, respectively. The increase in aggregate expenditures in software development in 2004 is due to continued development of Cerner Millennium solutions.

General and Administrative - 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 7% in both 2004 and 2003. Total general and administrative expenses were $63,327,000 and $58,236,000 for 2004 and 2003, respectively. General and administrative expenses for 2004 include a prior period adjustment to increase vacation pay accrual of $3,346,000. Excluding the adjustment to increase vacation pay accrual, general and administrative expenses as a percent of revenues were 6% in 2004.

Interest Expense, Net - Interest income was $3,022,000 in 2004 compared to $1,219,000 in 2003. This increase is due primarily to higher interest rates, and a higher cash balance fed by cash collections. Interest expense was $9,174,000 in 2004 compared to $8,236,000 in 2003.

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Other Income, Net - Other income increased from $142,000 in 2003 to $2,608,000 in 2004. This increase is due primarily to a gain on the sale of Zynx Health Incorporated. Also included in other income are revenues from office space leased to third parties.

Operations by Segment

In 2003, the Company organized geographically. The Company’s six geographic business segments are: Great Lakes, Mid-America, North Atlantic, Southeast, West and Global. Revenues are derived primarily from the sale of clinical, financial and administrative information systems and solutions. 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. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to the manufacturers. Operating expenses incurred by the geographic business segments consist of sales and client service expenses including salaries of sales and client service personnel, communications expenses and unreimbursed travel expenses. Performance of the segments is assessed at the operating earnings level and, therefore, the segment operations have been presented as such. “Other” includes revenues not generated by the operating segments and expenses such as software development, marketing, general and administrative and depreciation that have not been allocated to the operating segments. The Company does not track assets by geographical business segment.

The following table presents a summary of the operating information for 2004 and 2003 (in thousands):

Operating earnings in the Great Lakes segment increased 9% for the year ended January 1, 2005 compared to the year ended January 3, 2004. Total revenues increased 2% in 2004 compared to 2003. The increase in total revenues is due primarily to strong increases in licensed software and support revenues that were largely offset by a decrease in hardware and professional services revenues in 2004 compared to 2003. Costs of revenues were 19% and 24% of total revenues of the Great Lakes segment for 2004 and 2003, respectively. The decrease in the cost of revenues as a percent of revenue is due primarily to lower hardware sales in 2004 as compared to 2003. Costs of revenues, as a percent of revenues, typically have varied as the mix of revenue (software, hardware, maintenance, support, services and reimbursed travel) components carrying different margin rates changes from period to period.

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Operating earnings in the Mid-America segment increased 37% for the year ended January 1, 2005 compared to the year ended January 3, 2004. Total revenues increased 25% in 2004 compared to 2003. The increase in total revenues is due primarily to a strong increase in licensed software and professional services revenues in 2004 compared to 2003. Costs of revenues were 16% and 22% of total Mid-America segment revenues for 2004 and 2003, respectively. The decrease in the cost of revenues as a percent of revenue is due primarily to lower hardware sales in 2004 as compared to 2003.

Operating earnings in the North Atlantic segment increased 27% for the year ended January 1, 2005 compared to the year ended January 3, 2004. Total revenues increased 20% in 2004 compared to 2003. The increase in revenues is due primarily to an increase in licensed software and professional services revenues in 2004 compared to 2003. Costs of revenues were 23% and 25% of total North Atlantic segment revenues for 2004 and 2003, respectively.

Operating earnings in the Southeast segment increased 6% for the year ended January 1, 2005 compared to the year ended January 3, 2004. Total revenues increased 2% in 2004 compared to 2003. Costs of revenues were 24% and 28% of total Southeast segment revenues for 2004 and 2003, respectively. The increase in total revenues is due primarily to strong increases in licensed software and support revenues that were largely offset by a decrease in hardware and professional services in 2004 compared to 2003.

Operating earnings in the West decreased 16% for the year ended January 1, 2005 compared to the year ended January 3, 2004. Total revenues decreased 7% in 2004 compared to 2003. The decrease in total revenues is due primarily to a decrease in licensed software in 2004 compared to 2003. Costs of revenues were 19% and 17% of total West segment revenues for 2004 and 2003, respectively. Operating expenses increased 20% in 2004 compared to 2003, due primarily to an increase in personnel related expenses.

Operating earnings in the Global segment increased 245% for the year ended January 1, 2005 compared to the year ended January 3, 2004. Total revenues increased 19% in 2004 compared to 2003. The increase in total revenues is due primarily to an increase in professional services in 2004 compared to 2003. Operating expenses increased 7% in 2004 compared to 2003. These increases are due primarily to an increased presence in the global market.

Operating losses in Other increased 9% for the year ended January 1, 2005 compared to the year ended January 3, 2004. This increase is due to an increase in total costs and expenses of 11% in 2004 compared to 2003. The increase in operating expenses is due to an increase in expenses such as software development, marketing, general and administrative and depreciation in 2004 compared to 2003.

Year Ended January 3, 2004, Compared to Year Ended December 28, 2002

The Company’s revenues increased 8% to $839,587,000 in 2003 from $780,262,000 in 2002. The Company had net earnings of $42,791,000 in 2003 compared to $48,022,000 in 2002. Operating results for 2002, as described below, included a gain on the sale of available-for-sale securities and a charge for the impairment of investments, and a change in accounting principle for goodwill. The decrease in net earnings is due primarily to a higher increase in expenses than revenue compared to the prior year. As discussed above, revenue increased less than the Company expected because of the decrease in new contract bookings in the first quarter of 2003 and the shift in bookings mix to more managed services and subscription bookings which are recognized as revenue over longer periods of time. The increase in expenses was driven primarily by continued investments in the Company’s development of software and by sales and client services expenses. Expenses also increased because the Company’s 2003 fiscal year consisted of 53 weeks compared to 52 weeks in 2002.

Revenues - In 2003, revenues increased due to an increase in support of installed systems and an increase in services. Support, maintenance and service revenues increased 14% to $476,795,000 in 2003 from $419,578,000 in 2002. Support and maintenance revenues were $209,877,000 and $171,238,000 in 2003 and 2002, respectively. Services revenues were $266,918,000 and $248,340,000 in 2003 and 2002, respectively. Included in support, maintenance and service revenues are support and

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maintenance of software and hardware and professional services, excluding installation. This increase in support and maintenance revenue was due primarily to the increase in the Company’s installed and converted client base, that was driven by bringing a record number of Cerner Millennium solutions live in 2002 and 2003. The increase in services revenue was driven primarily by an increase in revenue from managed services, which increased $20,000,000 to $34,000,000 as the Company continued to experience high levels of demand for hosting solutions in its data center.

System sales were $332,349,000 in 2003 compared to $332,274,000 in 2002. Included in system sales are revenues from the sale of software, hardware and sublicensed software. System sales were flat because of the aforementioned first quarter bookings shortfall and because of a shift in the mix of bookings during the year.

At January 3, 2004, the Company had $938,221,000 in contract backlog and $312,887,000 in support and maintenance backlog, compared to $732,719,000 in contract backlog and $269,153,000 in support and maintenance backlog at the end of 2002.

Cost of Revenues - The cost of revenues includes the cost of reimbursed travel expense, third party consulting services and subscription content, computer hardware and sublicensed software purchased from computer and software manufacturers for delivery to clients. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to the manufacturers. The cost of revenues was 23% of total revenues in 2003, and 24% of total revenues in 2002. Such costs, as a percent of revenues, typically have varied as the mix of revenue (software, hardware, services and support) components carrying different margin rates changes from period to period. The decrease in the cost of revenue as a percent of total revenues resulted principally from a decrease in the percent of revenue from computer hardware and sublicensed software, which carry a higher cost of revenue percentage.

Sales and Client Service - Sales and client service expenses include salaries of client service personnel, communications expenses and unreimbursed travel expenses. Also included are sales and marketing salaries, travel expenses, tradeshow costs and advertising costs. These expenses as a percent of total revenues were 42% and 41% in 2003 and 2002, respectively. The increase in total sales and client service expenses is attributable to the cost of marketing of solutions. Expenses also increased due to the extra week in the 2003 fiscal year as described above.

Software Development - Software development expenses include salaries, documentation and other direct expenses incurred in software development and amortization of software development costs. Total expenditures for software development, including both capitalized and noncapitalized portions, for 2003 and 2002 were $179,999,000 and $149,985,000, respectively. These amounts exclude amortization. Capitalized software costs were $58,736,000 and $49,984,000 for 2003 and 2002, respectively.

General and Administrative - 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 7% and 6% in 2003 and 2002, respectively.

Interest Expense, Net - Interest income was $1,219,000 in 2003 compared to $1,080,000 in 2002. This increase is due primarily to an increase in invested cash in 2003 compared to 2002. Interest expense was $8,236,000 in 2003 compared to $6,635,000 in 2002. This increase is due primarily to the increase in debt. On December 20, 2002, the Company completed a $60,000,000 private placement of debt pursuant to a Note Agreement dated December 15, 2002.

Other Income, Net - Other income increased to $142,000 in 2003 from $87,000 in 2002. Included in other revenues are revenues from office space leased to third parties.

Gain (Loss) on Sale of Investment — In December 2002, the Company exercised 1,048,783 warrants of WebMD with an exercise price of $3.08 and a cost basis and carrying value of $4,146,000. The warrants were scheduled to expire on January 26, 2003. In December 2002, the Company sold 1,048,783 shares of WebMD for $8,242,000. Accordingly, the Company recorded an investment gain of $527,000, net of $342,000 in tax, as a result of the exercise of the warrants and the sale of the shares. In the second

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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.

Impairment of Investment — The Company’s policy is to review declines in fair value of its marketable equity securities for declines that may be other than temporary. Based on events occurring in the fourth quarter of 2002, the Company recorded a charge of $6,281,000, net of tax of $3,623,000, for the impairment of various investments in non-publicly traded securities. The charge is primarily related to a $3,464,000, net of tax, write down of the Company’s investment in Protocare, Inc. a non-publicly traded company.

Income Taxes - The Company’s effective tax rate was 39.9% in 2003 and 39.4% in 2002. As a result of a decrease in net income from 2002 to 2003, the impact of permanent differences increased the Company’s effective tax rate.

Accounting Change - Effective December 30, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” As a result, goodwill and intangible assets with indefinite lives are no longer amortized but 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 transitional 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.

Liquidity and Capital Resources

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 and the amounts the Company invests in software development, acquisitions and capital expenditures.

The Company’s principal source of liquidity is its cash and cash equivalents. The majority of the Company’s cash and cash equivalents consist of U.S. Government Federal Agency Securities, short-term marketable securities and overnight repurchase agreements. At January 1, 2005 the Company had cash and cash equivalents of $189,784,000 and working capital of $310,229,000 compared to cash and cash equivalents of $121,839,000 and working capital of $246,412,000 at January 3, 2004.

The Company generated cash of $168,304,000, $134,150,000 and $36,906,000 from operations in 2004, 2003 and 2002, respectively. Cash flow from operations increased in 2004 due primarily to increased collections of receivables, improved payment terms and record level conversions. The Company has periodically provided long-term financing options to creditworthy clients through third party financing institutions and typically has directly provided extended payment terms from contract date. Some of these payment streams have been assigned on a non-recourse basis to third party financing institutions. The Company has provided its usual and customary performance guarantees to the third party financing institutions in connection with its on-going obligations under the client contract. During 2004 and 2003, the Company generated cash flow from third party client financing arrangements and non-recourse payment assignments aggregating $53,319,000 and $58,654,000, respectively. Days sales outstanding increased from 103 days at the end of 2003 to 104 days at the end of 2004. Revenues provided under support and maintenance agreements represent recurring cash flows. Support and maintenance revenues increased 15% in 2004 and 23% in 2003, and the Company expects these revenues to continue to grow as the base of installed systems grows.

Cash used in investing activities consisted primarily of capitalized software development costs of $58,912,000 and $58,736,000 and purchases of capital equipment, land and buildings of $56,490,000 and $83,583,000 in 2004 and 2003, respectively. The Company completed acquisitions of businesses for

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$1,957,000 and $6,380,000, net of cash received, in 2004 and 2003, respectively. The Company completed the sale of Zynx Health Incorporated in 2004 for $12,000,000.

The Company’s financing activities for 2004 primarily consisted of repayment of debt of $24,879,000 and the proceeds from the exercise of stock options of $25,717,000. Financing activities for 2003 primarily consisted of the repayment of long term debt of $13,238,000, the purchase of treasury stock of $5,930,000 and the proceeds from the exercise of stock options of $6,703,000.

Prior to May 2002, the Company had a loan agreement with a bank that provided for a current revolving line of credit for working capital purposes. In May 2002, the Company expanded its credit facility by entering into an unsecured revolving credit agreement with a group of banks led by U.S. Bank. The new credit facility increased the amount the Company may borrow from $45,000,000 to $90,000,000. The fee rate on the new facility is approximately the same as the prior facility. The revolving line of credit is unsecured and requires monthly payments of interest only. Interest is payable at the Company’s option at a rate based on prime (5.25% at January 1, 2005) or LIBOR (2.4% at January 1, 2005) plus 2%. The interest rate may be reduced by up to 1.15% if certain net worth ratios are maintained. The agreement contains certain net worth, debt levels and fixed charge coverage covenants and provides certain restrictions on the Company’s ability to borrow, incur liens, sell assets and pay dividends. A commitment fee of 3/10% to 1/2% is payable quarterly based on the usage of the revolving line of credit. The revolving line of credit matures on May 31, 2007. The Company was in compliance with all covenants at January 1, 2005. At January 1, 2005, the Company had no outstanding borrowings under this agreement and had $90,000,000 available for working capital purposes. On January 10, 2005, the Company drew down $35,000,000 from its revolving line of credit in connection with the acquisition of the medical business division of VitalWorks, Inc. (See Note 2 to the consolidated financial statements.)

In December 2002, the Company completed a $60,000,000 private placement of debt pursuant to a Note Agreement. The Series A Senior Notes, with a $21,000,000 principal amount at 5.57%, are payable in three equal annual installments beginning in December 2006. The Series B Senior notes, with a $39,000,000 principal amount at 6.42%, are payable in four equal annual installments beginning December 2009. The proceeds were used to repay the outstanding amount under the bank loan agreement and for general corporate purposes. The Note Agreement contains certain net worth and fixed charge coverage covenants and provides certain restrictions on the Company’s ability to borrow, incur liens, sell assets and pay dividends. The Company was in compliance with all covenants at January 1, 2005.

In April 1999, the Company completed a $100,000,000 private placement of debt pursuant to a Note Agreement. The Series A Senior Notes, with a $60,000,000 principal amount at 7.14%, are payable in five equal annual installments beginning in April 2002. The Series B Senior Notes, with a $40,000,000 principal amount at 7.66%, are payable in six equal annual installments beginning April 2004. The proceeds were used to retire the Company’s existing $30,000,000 of debt, and the remaining funds were used for capital improvements and to strengthen the Company’s cash position. The Note Agreement contains certain net worth, current, and fixed charge coverage covenants and provides certain restrictions on the Company’s ability to borrow, incur liens, sell assets and pay dividends. The Company was in compliance with all covenants at January 1, 2005.

The Company believes that its present cash position, together with cash generated from operations and the line of credit, will be sufficient to meet anticipated cash requirements during 2005.

The following table represents a summary of the Company’s contractual obligations and commercial commitments as of January 1, 2005, except short-term purchase order commitments arising in the ordinary course of business.

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The effects of inflation on the Company’s business during 2004, 2003 and 2002 were not significant.

Recent Accounting Pronouncements

In December 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share Based Payments (“SFAS No. 123(R)”) which replaces SFAS 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.” SFAS No. 123(R) addresses the accounting for share-based payments transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB 25 and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of income. The new standard is effective in the first interim period beginning after June 15, 2005. The Company is currently assessing the impact that the Statement may have on its consolidated financial statements.

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, concentrations, 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 this “Management Discussion and Analysis or Financial Condition and Results of Operations.” In addition, Note 1 to the consolidated financial statements expands upon discussion of the Company’s accounting policies.

Revenue Recognition

The Company recognizes its multiple element arrangements, including software and software-related services, using the residual method under SOP 97-2, “Software Revenue Recognition,” as amended by SOP No. 98-4, SOP 98-9 and clarified by Staff Accounting Bulletin’s (SAB) 101 “Revenue Recognition in Financial Statements” and SAB No. 104 “Revenue Recognition” and Emerging Issues Task Force 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). Key factors in the Company’s revenue recognition model are management’s assessments that installation services are essential to the functionality of the Company’s software whereas implementation services are not. If the Company’s business model were to change such that implementation services became essential to the functionality of the Company’s software, the period of time over which the Company’s licensed software revenue were to be recognized would lengthen. The Company generally recognizes revenue from the sale of its licensed software over two key milestones, delivery and installation, based on percentages that reflect the underlying effort from planning to installation. Additionally, if the time to achieve the Company’s delivery and installation milestones for its licensed software were to be accelerated or decelerated, its milestones would be adjusted and the timing of revenue recognition for its licensed software could materially change.

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Software Development Costs

Costs incurred internally in creating computer software solutions are expensed until technological feasibility has been established upon completion of a detailed program design. Thereafter, all software development costs are capitalized and subsequently reported at the lower of amortized cost or net realizable value. Capitalized costs are amortized based on current and expected future revenue for each software solution with minimum annual amortization equal to the straight-line amortization over the estimated economic life of the software solution. The Company is amortizing capitalized costs over five years.

The Company expects that major software information systems companies, large information technology consulting service providers and systems integrators and others specializing in the healthcare industry may offer competitive products or services. The pace of change in the healthcare information systems market is rapid and there are frequent new product introductions, product enhancements and evolving industry standards and requirements. As a result, the capitalized software solutions may become less valuable or obsolete and could be subject to impairment.

Concentrations

Substantially all of the Company’s cash and cash equivalents and short-term investments, are held at three major U.S. financial institutions. The majority of the Company’s cash equivalents consist of U.S. Government Federal Agency Securities, short-term marketable securities and overnight repurchase agreements. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally these deposits may be redeemed upon demand and, therefore, bear minimal risk.

Substantially all of the Company’s clients are integrated delivery networks, hospitals and other healthcare related organizations. If significant adverse macro-economic factors were to impact these organizations it could materially adversely affect the Company. The Company’s access to certain software and hardware components is dependent upon single and sole source suppliers. The inability of any supplier to fulfill supply requirements of the Company could affect future results.

Allowance for Doubtful Accounts

If the creditworthiness of the Company’s clients were to weaken or the Company’s collections results relative to historical experience were to decline, it could have a material adverse impact on operations and cash flows.

Goodwill

The Company accounts for its goodwill under the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” As a result, goodwill and intangible assets with indefinite lives are no longer amortized but 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 transitional 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 again assessed its goodwill for impairment in the second quarters of 2004 and 2003 and concluded that no goodwill was impaired. The Company used a discounted cash flow analysis to determine the fair value of the reporting units for all periods. The Company completed five acquisitions and one divestiture subsequent to June 30, 2001, which resulted in approximately $35 million of goodwill that was not amortized in accordance with SFAS 142. Goodwill amounted to $54,600,000 and $51,573,000 at January 1, 2005 and January 3, 2004, respectively. If future, anticipated cash flows from the Company’s reporting units, that recognized goodwill, do not materialize as expected the Company’s goodwill could be impaired, which would result in significant write-offs.

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Factors that may Affect Future Results of Operations, Financial Condition or Business

Statements made in this report, the Annual Report to Shareholders in which this report is made a part, other reports and proxy statements filed with the Securities and Exchange Commission, communications to shareholders, press releases and oral statements made by representatives of the Company that are not historical in nature, or that state the Company’s or management’s intentions, hopes, beliefs, expectations or predictions of the future, may constitute “forward-looking statements” within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements can often be identified by the use of forward-looking terminology, such as “could,” “should,” “will,” “intended,” “continue,” “believe,” “may,” “expect,” “hope,” “anticipate,” “goal,” “forecast,” “plan,” “guidance” or “estimate” or the negative of these words, variations thereof or similar expressions. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. It is important to note that any such performance and actual results, financial condition or business, could differ materially from those expressed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below as well as those discussed elsewhere herein or in other reports filed with the Securities and Exchange Commission. Other unforeseen factors not identified herein could also have such an effect. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial condition or business over time.

Quarterly Operating Results May Vary — The Company’s quarterly operating results have varied in the past and may continue to vary in future periods, including, variations from guidance, expectations or historical results or trends. Quarterly operating results may vary for a number of reasons including accounting policy changes mandated by regulating entities, demand for the Company’s software solutions and services, the Company’s long sales cycle, potentially long installation and implementation cycles for these larger, more complex and costlier systems and other factors described in this section and elsewhere in this report. As a result of healthcare industry trends and the market for the Company’s Cerner Millennium solutions, a large percentage of the Company’s revenues are generated by the sale and installation of larger, more complex and costlier systems. The sales process for these systems is lengthy and involves a significant technical evaluation and commitment of capital and other resources by the client. Sales may be subject to delays due to changes in clients’ internal budgets, procedures for approving large capital expenditures, competing needs for other capital expenditures, availability of personnel resources and by actions undertaken by competitors. Delays in the expected sale or installation of these large contracts may have a significant impact on the Company’s anticipated quarterly revenues and consequently its earnings, since a significant percentage of the Company’s expenses are relatively fixed.

The Company recognizes revenue upon the completion of standard milestone conditions and the amount of revenue recognized in any quarter depends upon the Company’s and the client’s ability to meet these project milestones. Delays in meeting these milestone conditions or modification of the contract relating to one or more of these systems could result in a shift of revenue recognition from one quarter to another and could have a material adverse effect on results of operations for a particular quarter. The Company’s revenues from system sales historically have been lower in the first quarter of the year and greater in the fourth quarter of the year, primarily as a result of the clients’ year-end efforts to make all final capital expenditures for the then current year.

Stock Price May Be Volatile — The trading price of the Company’s common stock may be volatile. The market for the Company’s common stock may experience significant price and volume fluctuations in response to a number of factors including actual or anticipated quarterly variations in operating results, rumors about the Company’s performance or software solutions, changes in expectations of future financial performance or changes in estimates of securities analysts, governmental regulatory action, healthcare reform measures, client relationship developments, changes occurring in the securities markets in general and other factors, many of which are beyond the Company’s control. As a matter of policy, the Company does not generally comment on rumors.

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Furthermore, the stock market in general, and the market for software and healthcare and information technology companies in particular, has experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the trading price of the Company’s common stock, regardless of actual operating performance.

Changes in the Healthcare Industry — The healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences. For example, the Balanced Budget Act of 1997 (Public Law 105-32) contained significant changes to Medicare and Medicaid and had an impact for several years on healthcare providers’ ability to invest in capital intensive systems. In addition, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) is having a direct impact on the healthcare industry by requiring identifiers and standardized transactions/code sets and necessary security and privacy measures in order to ensure the protection of patient health information. These factors affect the purchasing practices and operation of healthcare organizations. Federal and state legislatures have periodically considered programs to reform or amend the U.S. healthcare system at both the federal and state level and to change healthcare financing and reimbursement systems. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate. Healthcare industry participants may respond by reducing their investments or postponing investment decisions, including investments in the Company’s software solutions and services.

Many healthcare providers are consolidating to create integrated healthcare delivery systems with greater market power. These providers may try to use their market power to negotiate price reductions for the Company’s software solutions and services. As the healthcare industry consolidates, the Company’s client base could be eroded, competition for clients could become more intense and the importance of acquiring each client becomes greater.

Significant Competition — The market for healthcare information systems is intensely competitive, rapidly evolving and subject to rapid technological change. The Company believes that the principal competitive factors in this market include the breadth and quality of system and software solution offerings, the stability of the information systems provider, the features and capabilities of the information systems, the ongoing support for the system and the potential for enhancements and future compatible software solutions.

Certain of the Company’s competitors have greater financial, technical, product development, marketing and other resources than the Company and some of its competitors offer software solutions that it does not offer. The Company’s principal existing competitors include; Eclipsys Corporation, Epic Systems Corporation, GE Medical Systems, IDX Systems Corporation, iSoft Corporation, McKesson Corporation, Medical Information Technology, Inc. (“Meditech”), Misys Healthcare Systems and Siemens Medical Solutions Health Services Corporation, each of which offers a suite of software solutions that compete with many of the Company’s software solutions and services. There are other competitors that offer a more limited number of competing software solutions.

In addition, the Company expects that major software information systems companies, large information technology consulting service providers and system integrators, Internet-based start-up companies and others specializing in the healthcare industry may offer competitive software/solutions or services. The pace of change in the healthcare information systems market is rapid and there are frequent new software solution introductions, software solution enhancements and evolving industry standards and requirements. As a result, the Company’s success will depend upon its ability to keep pace with technological change and to introduce, on a timely and cost-effective basis, new and enhanced software solutions and services that satisfy changing client requirements and achieve market acceptance.

Proprietary Technology May Be Subjected to Infringement Claims or May Be Infringed Upon -The Company relies upon a combination of license agreements, confidentiality procedures, employee nondisclosure agreements and technical measures to maintain the confidentiality and trade secrecy of its proprietary information. The Company also relies on trademark and copyright laws to protect its intellectual property. The Company has initiated a patent program but currently has a limited patent

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portfolio. As a result, the Company may not be able to protect against misappropriation of its intellectual property.

In addition, the Company could be subject to intellectual property infringement claims as the number of competitors grows and the functionality of its software solutions and services expands. These claims, even if not meritorious, could be expensive to defend. If the Company becomes liable to third parties for infringing their intellectual property rights, it could be required to pay a substantial damage award and to develop noninfringing technology, obtain a license or cease selling the software solutions that contain the infringing intellectual property.

Government Regulation — The healthcare industry is highly regulated at the local, state and federal level. Consequently, the Company may be subject to such regulations, which include regulation in the areas of healthcare fraud, medical devices and the security and privacy of patient data, and the risk of changes in the various local, state and federal laws.

Healthcare Fraud. The federal government continues to strengthen its position and scrutiny over practices involving healthcare fraud affecting healthcare providers whose services are reimbursed by Medicare, Medicaid and other government healthcare programs. Healthcare providers who are clients of the Company are subject to laws and regulations on fraud and abuse which, among other things, prohibit the direct or indirect payment or receipt of any remuneration for patient referrals, or arranging for or recommending referrals or other business paid for in whole or in part by these federal or state healthcare programs. Legislative provisions relating to healthcare fraud and abuse give federal enforcement personnel substantial funding, powers and remedies to pursue suspected fraud and abuse. The effect of this government regulation of the Company’s clients is difficult to predict. While the Company believes that it is in substantial compliance with any applicable laws, many of the regulations applicable to the Company’s clients and that may be applicable to the Company, are vague or indefinite and have not been interpreted by the courts. They may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require the Company’s clients to make changes in their operations or the way that they deal with the Company. If the such laws and regulations are determined to be applicable to the Company and if the Company fails to comply with any applicable laws and regulations, it could be subject to sanctions or liability, including exclusion from government health programs and could have a material adverse effect on the Company’s business, results of operations or financial condition.

Regulation of Medical Devices. The United States Food and Drug Administration (the “FDA”) has declared that certain of the Company’s software solutions are medical devices that are actively regulated under the Federal Food, Drug and Cosmetic Act (“Act”) and amendments to the Act. As a consequence, the Company is subject to extensive regulation by the FDA with regard to those software solutions that are actively regulated. If other of the Company’s software solutions are deemed to be actively regulated medical devices by the FDA, the Company could be subject to extensive requirements governing pre- and post-marketing requirements including pre-market notification clearance prior to marketing. Complying with these FDA regulations would be time consuming and expensive. It is possible that the FDA may become more active in regulating computer software that is used in healthcare.

There have been six FDA inspections since 1998 at various Cerner sites. Inspections conducted at the Company’s World Headquarters in 1999 and its Houston facility in 2002 each resulted in the issuance of an FDA Form 483 that the Company responded to promptly. The FDA has taken no further action with respect to either of the Form 483s that were issued in 1998 and 2002. The remaining four FDA inspections, including an inspection at the Company’s World Headquarters in 2004, resulted in no issuance of a Form 483. The Company, however, remains subject to periodic FDA inspections and there can be no assurances that the Company will not be required to undertake additional actions to comply with the Act and any other applicable regulatory requirements. Any failure by the Company to comply with the Act and any other applicable regulatory requirements could have a material adverse effect on the Company’s ability to continue to manufacture and distribute its software solutions. The FDA has many enforcement tools including recalls, seizures, injunctions, civil fines and/or criminal prosecutions. Any of the foregoing could have a material adverse effect on the Company’s business, results of operations or financial condition.

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Security and Privacy of Patient Information . State and federal laws regulate the confidentiality of patient records and the circumstances under which those records may be released. These regulations govern both the disclosure and use of confidential patient medical record information and require the users of such information to implement specified security measures. Regulations currently in place governing electronic health data transmissions continue to evolve and are often unclear and difficult to apply.

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) requires national standards for some types of electronic health information transactions and the data elements used in those transactions, security standards to ensure the integrity and confidentiality of health information and standards to protect the privacy of individually identifiable health information. Covered entities under HIPAA, which include healthcare organizations such as the Company’s clients, were required to comply with the privacy standards by April 2003 and additional transaction regulations by October 2003. Such organizations must also be in compliance with security regulations by April 2005. As a business associate of the covered entities, the Company, in most instances, must also ensure compliance with the HIPAA regulations.

The effect of HIPAA on the Company’s business is difficult to predict, and there can be no assurances that the Company will adequately address the business risks created by HIPAA and its implementation, or that the Company will be able to take advantage of any resulting business opportunities. Furthermore, the Company is unable to predict what changes to HIPAA, or the regulations issued pursuant to HIPAA, might be made in the future or how those changes could affect the Company’s business or the costs of compliance with HIPAA. Evolving HIPAA-related laws or regulations could restrict the ability of the Company’s clients to obtain, use or disseminate patient information. This could adversely affect demand for the Company’s solutions if they are not re-designed in a timely manner in order to meet the requirements of any new regulations that seek to protect the privacy and security of patient data or enable the Company’s clients to execute new or modified healthcare transactions. The Company may need to expend additional capital, research and development and other resources to modify its solutions to address these evolving data security and privacy issues.

Product Related Liabilities — Many of the Company’s software solutions provide data for use by healthcare providers in providing care to patients. Although no such claims have been brought against the Company to date regarding injuries related to the use of its software solutions, such claims may be made in the future. Although the Company maintains product liability insurance coverage in an amount that it believes is sufficient for its business, there can be no assurance that such coverage will cover a particular claim that may be brought in the future, prove to be adequate or that such coverage will continue to remain available on acceptable terms, if at all. A successful claim brought against the Company, which is uninsured, or under-insured could materially harm its business, results of operations or financial condition.

System Errors and Warranties — The Company’s systems, particularly the Cerner Millennium versions, are very complex. As with complex systems offered by others, the Company’s systems may contain errors, especially when first introduced. Although the Company conducts extensive testing, it has discovered software errors in its software solutions after their introduction. The Company’s systems are intended for use in collecting and displaying clinical information used in the diagnosis and treatment of patients. Therefore, users of the Company software solutions have a greater sensitivity to system errors than the market for software products generally. The Company’s agreements with its clients typically provide warranties against material errors and other matters. Failure of a client’s system to meet these criteria could constitute a material breach under such contracts allowing the client to cancel the contract and obtain a refund and/or damages, or could require the Company to incur additional expense in order to make the system meet these criteria. The Company’s contracts with its clients generally limit the Company’s liability arising from such claims but such limits may not be enforceable in certain jurisdictions or circumstances. A successful claim brought against the Company, which is uninsured, or under-insured could materially harm its business, results of operations or financial condition.

Risks Associated with the Company’s Global Operations — The Company markets, sells and services its software solutions globally. The Company has established offices around the world, including in the Americas, Europe, in the Middle East and in the Asia Pacific region. The Company will continue to

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expand its global operations and enter new global markets. This expansion will require significant management attention and financial resources to develop successful direct and indirect global sales and support channels. The business transacted is in the local functional currency and the Company does not currently have any material exposure to foreign currency transaction gains or losses. All other business transactions are in U.S. dollars. To date, the Company has not entered into any derivative financial instruments to manage foreign currency risk. In some countries, the Company’s success will depend in part on its ability to form relationships with local partners. There is a risk that the Company may sometimes choose the wrong partner. For these reasons, the Company may not be able to maintain or increase global market demand for its software solutions.

Global operations are subject to inherent risks, and the Company’s future results could be adversely affected by a variety of uncontrollable and changing factors. These include:

	•	Greater difficulty in collecting accounts receivable and longer collection periods;
	•	Difficulties and costs of staffing and managing global operations;
	•	The impact of economic conditions outside the United States;
	•	Unexpected changes in regulatory requirements;
	•	Certification or regulatory requirements;
	•	Reduced protection of intellectual property rights in some countries;
	•	Potentially adverse tax consequences;
	•	Different or additional functionality requirements;
	•	Trade protection measures and other regulatory requirements;
	•	Service provider and government spending patterns;
	•	Natural disasters, war or terrorist acts;
	•	Poor selection of a partner in a country; and
	•	Political conditions which may impact sales or threaten the safety of associates or the continued presence of the Company in these countries.

Recruitment and Retention of Key Personnel — To remain competitive in the healthcare information technology industry, the Company must attract, motivate and retain highly skilled managerial, sales, marketing, consulting and technical personnel, including executives, consultants, programmers and systems architects skilled in the healthcare information technology industry and the technical environments in which the Company’s solutions operate. Competition for such personnel in this industry is intense. The Company’s failure to attract additional qualified personnel could have a material adverse effect on the Company’s prospects for long-term growth. The success of the Company is dependent to a significant degree on the continued contributions of key management, sales, marketing, consulting and technical personnel. The Company has succession plans in place; however, the unexpected loss of key personnel could have a material adverse impact to the Company’s business and results of operations, and could potentially inhibit solution development and market share advances.

Third Party Suppliers — The Company licenses or purchases intellectual property and technology (such as software, hardware and content) from third parties, including some competitors, and incorporates it into or sells it in conjunction with the Company’s software solutions and services, some of which intellectual property or technology is critical to the operation of the Company’s solutions. If any of the third party suppliers were to change product offerings, increase prices or terminate the Company’s licenses or supply contracts, the Company might need to seek alternative suppliers and incur additional internal or external development costs to ensure continued performance of the Company’s solutions. Such alternatives may not be available on attractive terms, or may not be as widely accepted or as effective as the intellectual property or technology provided by the Company’s existing suppliers. If the cost of licensing, purchasing or maintaining these third party intellectual property or technology solutions significantly increases, the Company’s gross margin levels could significantly decrease. In addition, interruption in functionality of the Company’s solutions could adversely affect future sales of licenses and services.

Sales Forecasts — The Company’s sales forecasts may vary from actual sales in a particular quarter. The Company uses a “pipeline” system, a common industry practice, to forecast sales and trends in its business. The Company’s sales associates monitor the status of all sales opportunities, such as the date

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when they estimate that a client will make a purchase decision and the potential dollar amount of the sale. These estimates are aggregated periodically to generate a sales pipeline. The Company compares this pipeline at various points in time to evaluate trends in its business. This analysis provides guidance in business planning and forecasting, but these pipeline estimates are by their nature speculative. The Company’s pipeline estimates are not necessarily reliable predictors of revenues in a particular quarter or over a longer period of time, partially because of changes in the pipeline and in conversion rates of the pipeline into contracts that can be very difficult to estimate. A variation in the expected conversion rate or timing of the pipeline into contracts, or in the pipeline itself, could cause the Company’s plan or forecast to be inaccurate and thereby adversely affect business results. For example, a slowdown in information technology spending, or economic conditions or a variety of other reasons can cause purchasing decisions to be delayed, reduced in amount or cancelled, which would reduce the overall pipeline conversion rate in a particular period of time. Because a substantial portion of the Company’s contracts are completed in the latter part of a quarter, the Company may not be able to adjust its cost structure promptly in response to a revenue shortfall resulting from a decrease in its pipeline conversion rate in any given fiscal quarter(s).

Item 7A.	Quantitative and Qualitative Disclosures about Market Risk

The Company does not have any significant market risk.

Item 8.	Financial Statements and Supplementary Data

The Financial Statements and Notes required by this Item are submitted as a separate part of this report.

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9.A.	Controls and Procedures

	a)	Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by the Annual Report (the “Evaluation Date”). They have concluded that, as of the Evaluation Date, these disclosure controls and procedures were effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities and would be disclosed on a timely basis.
	b)	There were no changes in the Company’s internal controls over financial reporting during the year ended January 1, 2005 that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting.
	c)	The Company’s management, including its Chief Executive Officer and Chief Financial Officer, cannot provide complete assurance that its disclosure controls and procedures or the Company’s internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Cerner have been detected.

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Management’s Report on Internal Control over Financial Reporting

The Company’s 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, as amended). The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of January 1, 2005. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in its Internal Control-Integrated Framework. The Company’s management has concluded that, as of January 1, 2005, the Company’s internal control over financial reporting is effective based on these criteria. The Company’s independent registered public accounting firm that audited the consolidated financial statements included in the annual report has issued an audit report on the Company’s assessment of its internal control over financial reporting, which is included herein.

Item 12.	Security Ownership of Certain Beneficial Owners and Management

The Registrant’s Proxy Statement to be used in connection with the Annual Meeting of Shareholders to be held on May 27, 2005, will contain under the caption “Voting Securities and Principal Holders Thereof” the information required by Item 12 of Form 10-K and such information is incorporated herein by this reference.

Item 13.	Certain Relationships and Related Transactions

The Registrant’s Proxy Statement to be used in connection with the Annual Meeting of Shareholders to be held on May 27, 2005, will contain under the caption “Certain Transactions” the information required by Item 13 of Form 10-K and such information is incorporated herein by this reference.

Item 14.	Principal Accountant Fees and Services

The Registrant’s Proxy Statement to be used in connection with the Annual Meeting of Shareholders to be held on May 27, 2005, will contain under the caption “Audit and Non-Audit Fees” the information required by Item 14 of Form 10-K and such information is incorporated herein by this reference.

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41

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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:

44

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Cerner Corporation:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting , that Cerner Corporation (the Corporation) maintained effective internal control over financial reporting as of January 1, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Corporation’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 Corporation’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 opinion.

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 Cerner Corporation maintained effective internal control over financial reporting as of January 1, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Cerner Corporation maintained, in all material respects, effective internal control over financial reporting as of January 1, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cerner Corporation and subsidiaries as of January 1, 2005 and January 3, 2004, and the related consolidated statements of operations, changes in equity, and cash flows for each of the years in the three-year period ended January 1, 2005, and our report dated March 11, 2005 expressed an unqualified opinion on those consolidated financial statements.

(signed) KPMG LLP

Kansas City, Missouri
March 11, 2005

45

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Cerner Corporation:

We have audited the accompanying consolidated balance sheets of Cerner Corporation and subsidiaries (the Corporation) as of January 1, 2005 and January 3, 2004, and the related consolidated statements of operations, changes in equity, and cash flows for each of the years in the three-year period ended January 1, 2005. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cerner Corporation and subsidiaries as of January 1, 2005 and January 3, 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended January 1, 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Cerner Corporation’s internal control over financial reporting as of January 1, 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 March 11, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

(signed) KPMG LLP

Kansas City, Missouri
March 11, 2005

Management’s Report

The management of Cerner Corporation is responsible for the consolidated financial statements and all other information presented in this report. The financial statements have been prepared in conformity with U.S. generally accepted accounting principles appropriate to the circumstances, and, therefore, included in the financial statements are certain amounts based on management’s informed estimates and judgments. Other financial information in this report is consistent with that in the consolidated financial statements. The consolidated financial statements have been audited by Cerner Corporation’s independent certified public accountants and have been reviewed by the audit committee of the Board of Directors.

46

See notes to consolidated financial statements.

47

See notes to consolidated financial statements.

48

See notes to consolidated financial statements.

49