Summary of MEDIWARE INFORMATION SYSTEMS INC

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.

Mediware Information Systems, Inc. (including its subsidiaries, "Mediware" or the "Company") is a New York corporation incorporated in 1970 with its corporate headquarters at 11711 West 79th Street, Lenexa, Kansas. The Company maintains an Internet website at www.mediware.com, at which reports filed with the Securities Exchange Commission under the Securities Exchange Act of 1934, can be obtained under "Investor Relations" without charge as soon as reasonably practicable after filed or furnished with the SEC. The Company may post at its website additional information important to its shareholders and to potential investors. Information on or linked to the Company website is not incorporated by reference into this Annual Report on Form 10-K. Filings with the SEC can also be obtained at the SEC's website, www.sec.gov.

Mediware develops, markets, licenses, implements, services and supports clinical management information solutions. Each of the Company's solutions is designed to create an automated ClosedLoop™ clinical system for the management of medications, blood or biologics. The company licenses and sells its solutions to hospitals, including acute care, long-term care and behavioral health facilities, and to blood and plasma centers.

Mediware generally sells implementation, training, and annual software support services with its software systems for its medication management, blood and biologic management product lines. The software systems typically consist of the Company's proprietary application software, third-party licensed software and third-party hardware. In contrast, Mediware generally provides its blood and plasma center solutions and its MediREC solution on a monthly subscription basis. These customers pay Mediware an initial start-up fee and a monthly fee for use of Mediware's proprietary software and related services.

The Company seeks to develop strategic relationships that are complementary to its core markets and product set, and that provide a greater value proposition to the customer than could be realized without the strategic relationship. The Company's business strategy includes the possibility of growth through acquisitions and other corporate transactions. There can be no assurance that the Company will be able to identify or reach mutually agreeable terms with any strategic relationship or transaction candidate.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. On an on-going basis, we evaluate these estimates, including those related to revenue recognition, capitalized software costs, goodwill, and stock-based compensation. We base these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of the financial statements.

Revenue Recognition

The Company derives revenue from licensing its proprietary applications software and sub-licensed software, sale of computer hardware, transaction fees from software use and the services performed related to the installation, configuration, training, consultation and ongoing support of the software. Software license revenue is generally recognized when evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, collectibility is probable, vendor-specific objective evidence ("VSOE") of the fair value of any undelivered element exists and no other significant obligations on the part of the Company remain. Revenue from the sale of hardware is generally recognized upon shipment. Fees for installation, training and consultation are recognized as the services are provided. Support and maintenance fees, typically sold on an annual renewal basis, are recognized ratably over the period of the support contract.

The Company recognizes revenue in accordance with the provisions of the American Institute of Certified Public Accountants Statement of Position ("SOP") 97-2, "Software Revenue Recognition" as amended by SOP No. 98-4, SOP 98-9 and clarified by Staff Accounting Bulletin ("SAB") 101, SAB No. 104 and Emerging Issues Task Force 00-21.

If the Company enters into an arrangement with a client requiring significant customization of the software or services that are essential to the functionality of the software, the Company recognizes revenue derived from the sale of licensed software, sub-licensed software and services over the period the services are performed, in accordance with SOP 81-1, "Accounting for Performance of Construction-Type and Certain Construction-Type Contracts."

The Company considers many factors when applying accounting principles generally accepted in the United States of America related to revenue recognition. These factors include, but are not limited to:
- contract terms, such as payment terms, delivery dates, and pricing of the various product and service elements of a contract

- availability of products to be delivered

- time period over which services are to be performed

- creditworthiness of the customer

- the complexity of customizations and integrations to the Company's software required by service contracts

- discounts given for each element of a contract and

- any commitments made as to installation or implementation "go live" dates.

Each of the relevant factors is analyzed to determine its impact, individually and collectively with other factors, on the revenue to be recognized for a particular contract with a customer. Management is required to make judgments regarding the significance of each factor in applying the revenue recognition standards, as well as whether or not each factor complies with such standards. Any misjudgment or error by management in its evaluation of the factors and the application of the standards, especially with respect to complex or new types of transactions, could have a material adverse affect on the Company's future revenues and operating results.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts based on its estimates of collectibility. The Company bases these estimates on historical collections, performance and specific collection issues. If actual bad debts differ from the reserves calculated, the Company records an adjustment to bad debt expense in the period in which the difference occurs. If creditworthiness of the Company's clients were to weaken or the Company's collection results relative to historical experience were to decline, it could have a material adverse impact on operations and cash flows.

Capitalized Software Costs

Capitalized computer software costs consist of certain costs incurred to create and develop computer software products. The Company accounts for capitalized software costs in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Software to be Sold, Leased or Otherwise Marketed." As such, the Company capitalizes all software production costs incurred upon the establishment of technological feasibility for the product or enhancement, which ceases upon its general release.

Technological feasibility occurs upon the completion of the planning, designing, coding and testing activities that are necessary to establish that the product or enhancement can be produced to meet its design specifications, including its functions, features and technical performance requirements.

The Company amortizes capitalized software development costs for each product and enhancement over the estimated useful life of the product or enhancement, which ranges from 5 to 7 years. These estimates are based on available information, including product life cycles, past history with similar products, the market and anticipated market share for the product and other factors unique to the product.

The Company reports capitalized software costs at the lower of unamortized cost or net realizable value. Net realizable value for capitalized software costs for each product or enhancement is determined by subtracting the estimated costs of completing and disposing of the product from the estimated future revenue of the product. These estimates are based on available information, including product life cycles, past history and market for the products or enhancement, the market share the Company expects to achieve, current and future pricing of the products, the existing customer base, and other factors unique to each product.

The evaluation of net realizable value is inherently very subjective. However, the Company believes its calculation of net realizable value has historically been accurate in all material respects. Due to the size of our customer base, which generates a recurring support revenue stream, combined with anticipated system sales from our new products, the Company has not historically experienced, and does not anticipate, any significant changes to the net realizable value of our current capitalized software development costs.

Goodwill

Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible assets of businesses acquired. These business acquisitions include Digimedics Corporation in May 1990, certain assets of Information Handling Services Group, including its Pharmakon and JAC business in June 1996, Informedics, Inc. in September 1998, and Integrated Marketing Solutions, LLC in October 2007. Since July 1, 2001, the Company has evaluated goodwill for impairment utilizing undiscounted projected cash flows in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." As of June 30, 2008, the Company believes that no such impairment has occurred. Goodwill was reduced by the recognition of related income tax benefit during fiscal 2008 and 2007.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with SFAS No. 123R, "Share Based Payment" ("SFAS 123R"). The Company adopted the provision of SFAS 123R on July 1, 2005 and selected the modified prospective method for adoption. Prior to adoption, the Company accounted for the issuance of stock options to employees using the intrinsic value method under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25"). The Company granted stock options with an exercise price equal to the fair market value on the date of grant and, accordingly, no compensation expense was recorded for stock options in prior periods. Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is expensed ratably over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including volatility, terms and estimating the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock-based compensation expense and the Company's results of operations could be materially impacted.

Results of Operations

Fiscal Year Ended June 30, 2008, Compared to Fiscal Year Ended June 30, 2007

Total revenue decreased by $1,755,000 or 4% in fiscal 2008 as compared to fiscal 2007. The decrease in revenue in fiscal 2008 occurred as the Company returned to a business cycle that did not include the increased revenue resulting from a sunset program. The anticipated decline in revenue was partially offset by increased revenue associated with the acquisition of substantially all of the assets of IMS in October 2007 and increased service revenue.

Total revenue for the fiscal year ended June 30, 2008 was $39,437,000 compared to $41,192,000 in fiscal 2007. Blood management products and services, including revenue from the recently acquired IMS products and services, recorded total revenue of $19,838,000 during fiscal 2008, a decrease of $3,485,000, or 15%, compared to $23,323,000 in fiscal 2007. The decrease in revenue is largely due to a decline in blood management system sales, partially offset by revenue from the IMS acquisition on October 31, 2007. Medication management products and services (excluding JAC operations) recorded an increase in total revenue of $693,000, or 6%, from $12,249,000 in fiscal 2007 to $12,942,000 in fiscal 2008. The increase was primarily attributable to a very large MediMAR sale in the first half of fiscal 2008. JAC recorded total revenues of $5,842,000 during fiscal 2008, representing an increase of $1,399,000, or 32%, compared to $4,443,000 in fiscal 2007 as JAC continues to take advantage of its positioning in the UK's national program. Perioperative management revenue declined from $1,177,000 during fiscal 2007 to $815,000 during fiscal 2008, as a result of the Company's decision to stop actively marketing its perioperative management products.

System sales, which include proprietary software, third party software and hardware revenue, revenue amounted to $11,612,000 for the fiscal year ended June 30, 2008, a decrease of $4,191,000, or 27%, from $15,803,000 in fiscal 2007. System sales, which include proprietary software, third party software and hardware revenue, revenue for the blood management products were $4,744,000 for fiscal 2008, a decrease of $5,666,000, or 54%, compared to $10,410,000 in fiscal 2007. This decrease is consistent with Mediware's stated expectation of lower system sales in fiscal 2008 due to the completion of the Hemocare and LifeLine sunset program in June 2007. The Company expects that its new blood management offerings, BloodSafe and BiologiCare, will have a positive impact on system sales in fiscal 2009. System sales for the medication management products (excluding JAC) increased from $4,182,000 in fiscal 2007 to $4,926,000 in fiscal 2008, representing an increase of $744,000, or 18%. JAC recorded system sales of $1,936,000 for fiscal 2008, representing an increase of $805,000, or 71%, compared to $1,131,000 reported for fiscal 2007. The Company believes that ongoing delays and changes to the Connecting for Health Program in the United Kingdom and JAC's appointment to the Additional Supply Capability and Capacity framework create opportunities for JAC to increase near term revenues. Perioperative management system sales revenue was immaterial in both fiscal years.

Service revenue, which includes recurring software support, implementation and training services, increased $2,436,000, or 10%, to $27,825,000 in fiscal 2008 compared to $25,389,000 for fiscal 2007. Service revenue for the blood management products totaled $15,094,000 for fiscal 2008, representing an increase of $2,181,000, or 17%, compared to $12,913,000 in fiscal 2007. This increase primarily reflects an increase in implementation activity for the HCLL software systems, which were licensed as part of the sunset program. Mediware anticipates that service revenue will continue to be strong throughout fiscal 2009 as the Company provides services on HCLL implementation projects. Service revenue for the medication management products (excluding JAC) decreased $51,000, or 1%, to $8,016,000 in fiscal 2008. Mediware announced in fiscal 2008 a program to encourage its medication management customers to upgrade their WORx software systems to the most recent version of the software prior to December 31, 2008. As a result, Mediware expects an increase in service fees in fiscal 2009 as the Company assists its customers with the upgrade. Perioperative management service revenue declined from $1,097,000 during fiscal 2007 to $809,000 during fiscal 2008, the result of the Company's decision to stop actively marketing its perioperative management products.

Cost of systems includes the cost of computer hardware and sublicensed software purchased from computer and software manufacturers by the Company as part of its integrated system offering. These costs can vary as the mix of revenue varies between high margin proprietary software and lower margin computer hardware and sublicensed software components. Cost of systems increased $187,000, or 6%, to $3,092,000 during fiscal 2008 as compared to $2,905,000 in fiscal 2007. The gross margin, excluding amortization of capitalized software costs, on system sales was 73% in fiscal 2008 compared to 82% in fiscal 2007. The decrease in gross margin is primarily due to the decline in high margin proprietary software sales during fiscal 2008 compared to fiscal 2007.

Cost of services relates to ongoing support and maintenance services and implementation services and includes the salaries of client service personnel and direct expenses of the client service departments. Cost of services increased $893,000, or 11%, to $9,241,000 during fiscal 2008 as compared to $8,348,000 in fiscal 2007. The increase in cost of services is primarily attributed to increases in customer service personnel to facilitate the implementation of HCLL software systems licensed as part of the sunset program and the promotional activities associated with the BCT services partially offset by a reduction in service personnel in other areas as part of the July 2007 business unit consolidation. Gross margin on service revenue was 67% for both fiscal 2008 and fiscal 2007. The Company believes, but cannot assure, that cost of services as a percentage of service revenue in fiscal 2009 will remain consistent with its current rate as the Company continues to implement the HCLL software and provides significant implementation support to its WORx software users that are upgrading to a new version of the software.

Amortization of capitalized software increased $310,000, or 6%, to $5,737,000 in fiscal 2008 compared to $5,427,000 in fiscal 2007. This increase is primarily due to increased amortization of capitalized software costs related to recent releases of its Mediware products.

Software development costs include the non-capitalizable portions of salaries, consulting, documentation, office and other direct expenses incurred in product development activities. Software development costs increased $112,000, to $4,174,000 in fiscal 2008 compared to fiscal 2007. Expenditures for software development include amounts paid for both capitalizable and noncapitalizable development projects. Total expenditures for software development were $7,418,000 in fiscal 2008 compared to $8,208,000 in the same period 2007, a decrease of $790,000, or 10%. This decrease is primarily a result of the July 2007 business unit consolidation, which allowed the Company to develop software more efficiently in fiscal 2008 with fewer software developers.

Selling, general and administrative ("SG&A") expenses include marketing and sales salaries, commissions, travel and advertising expenses. Also included is bad debt expense; legal, accounting and professional fees; salaries and bonus expenses; utilities, rent, communications and other office expenses; stock-based compensation expenses and other related direct administrative expenses. SG&A expenses decreased $1,261,000, from $17,978,000 in fiscal 2007 to $16,717,000 in fiscal 2008. This decrease is primarily due to cost savings associated with the July 2007 business unit operational consolidation (for which we had a fiscal 2008 savings goal of $1,200,000), along with lower sales commissions, bonuses and bad debt expense. This decrease was partially offset by increases in stock-based compensation expense, employee benefit costs and incremental costs associated with personnel added as part of the acquired IMS business.

Interest and other income for the year ended June 30, 2008 decreased $260,000, or 23%, compared to the year ended June 30, 2007 from $1,152,000 to $892,000. This decrease primarily resulted from a period over period decrease in average interest rates and Mediware's greater average cash and cash equivalents balances during fiscal 2007.

Income tax expense decreased $696,000, from $1,291,000 during fiscal 2007 to $595,000 in fiscal 2008, primarily due to the reduction in operating income. In conjunction with this decrease, the effective tax rate increased from 36% for the year ending June 30, 2007 to 45% in fiscal 2008. The increase in the effective tax rate is primarily attributable to a $225,000 non-cash write-off of certain deferred tax assets relating to fully vested non-qualified stock options that were forfeited as a result of the departure of certain employees during the first quarter of fiscal 2008. During the fourth quarter of fiscal 2008, the Company exhausted its ordinary net operating losses for federal income tax purposes (excluding net operating loss carryforwards which are subject to limitations under Section 382 of the Internal Revenue Code of 1986, as amended). As a result, the Company expects to begin paying federal income taxes during fiscal 2009.

Net income during fiscal 2008 was $728,000, compared to net income of $2,326,000 during fiscal 2007, resulting in a decrease of net income of $1,598,000 or 69%. An increase in service revenue and a decrease in SG&A expenses in fiscal 2008 were not sufficient to offset the decrease in system sales.

Fiscal Year Ended June 30, 2007, Compared to Fiscal Year Ended June 30, 2006

Total revenue for fiscal 2007 was $41,192,000 compared to $37,871,000 in fiscal 2006, an increase of $3,321,000 or 9%. Revenue for blood management products and services increased $3,542,000, or 18%, to $23,323,000 in fiscal 2007 compared to $19,781,000 in fiscal 2006. The revenue increase was principally driven by the sunset in fiscal 2007 of two legacy products. The medication management products and services (excluding JAC) recorded an increase of $39,000, or less than 1% , to $12,249,000 in fiscal 2007 from $12,210,000 in fiscal 2006. JAC recorded an increase of $179,000, or 4%, to $4,443,000 in fiscal 2007 compared to $4,264,000 in fiscal 2006. Revenue from the perioperative management products and services decreased $439,000, or 27%, to $1,177,000 in fiscal 2007 compared to $1,616,000 in fiscal 2006.

System sales were $15,803,000 in fiscal 2007, an increase of $3,639,000, or 30%, from $12,164,000 in fiscal 2006. System sales for the blood management products were $10,410,000, an increase of $3,935,000, or 61%, from $6,475,000 in fiscal 2006. The increase resulted from the sunset of the legacy Hemocare and LifeLine products and customers migrating to the next generation HCLL product. The final sunset date for these legacy products was June 30, 2007. System sales for the medication management products (excluding JAC) increased $138,000, or 3%, from $4,044,000 in fiscal 2006 to $4,182,000 in fiscal 2007. The increase reflects increased sales of the WORx product, as well as strong add-on sales to existing customers. JAC recorded a decrease in system sales of $273,000, or 19%, from $1,404,000 in fiscal 2006 to $1,131,000 in fiscal 2007. The decrease reflects delays in the Connecting for Health Program which resulted in slower than anticipated sales. The perioperative management products experienced a decrease in system sales of $161,000 or 67% from $241,000 in fiscal 2006 to $80,000 in fiscal 2007. The decrease reflects the fact that the Company was unable to gain traction in the sale of its perioperative management products to new customers in fiscal 2007.

Service revenue decreased $318,000, or 1%, from $25,707,000 in fiscal 2006 to $25,389,000 in fiscal 2007. Service revenue for the blood management products decreased $393,000, or 3%, from $13,306,000 in fiscal 2006 to $12,913,000 in fiscal 2007. The decrease is a result of lower support revenues due to the sunset of the legacy products. This was offset partially by increased revenues from implementation services for new HCLL projects. Service revenue for the medication management products (excluding JAC) decreased $99,000, or 1.2%, from $8,166,000 in fiscal 2006 to $8,067,000 in fiscal 2007. The decrease in service revenue is primarily due to a decline in ongoing implementation projects. The decline was offset partially by increased support revenues from customers who have completed their implementation and are now paying annual support fees. Service revenue for JAC increased $452,000, or 16%, from $2,860,000 in fiscal 2006 to $3,312,000 in fiscal 2007. This increase in service revenue is primarily due to increased support activity due to the completion of implementation activity on contracts signed within the last fiscal year. Service revenue for the perioperative management products decreased $278,000, or 20%, from $1,375,000 in fiscal 2006 to $1,097,000 in fiscal 2007. The decrease in service revenue reflects a decline in ongoing implementation projects.

Cost of systems can vary as the mix of revenue varies between high margin proprietary software and lower margin computer hardware and sublicensed software components. Cost of systems increased $708,000, or 32%, from $2,197,000 in fiscal 2006 to $2,905,000 in fiscal 2007. Gross margin on system sales, excluding amortization of capitalized software costs, was 82% in fiscal 2007 compared with 82% in fiscal 2006.

Cost of services for fiscal 2007 increased $865,000, or 12%, over the previous year. The increase in cost of services primarily reflects increased staff associated with the implementation and rollout of the HCLL products. Due to the increased staffing levels and loss of support revenues associated with the legacy blood management software, gross margin on service revenue declined from 71% in fiscal 2006 to 67% in fiscal 2007.

Amortization of capitalized software increased $599,000, or 12.4%, from $4,828,000 in fiscal 2006 to $5,427,000 in fiscal 2007. This increase is primarily due to increased amortization of capitalized software costs related to recent releases of the HCLL and MediMAR products.

Software development costs decreased $193,000, or 4.5%, from $4,255,000 in fiscal 2006 to $4,062,000 in fiscal 2007. The decrease reflects efforts to reduce the utilization of outside contractors. Total expenditures for software development include amounts paid for both capitalizable and noncapitalizable development projects. Total expenditures for software development were $8,208,000 in fiscal 2007, compared to $8,820,000 in fiscal 2006, a decrease of $612,000 or 6.9%.

SG&A expenses increased $1,864,000, or 11.6%, from $16,114,000 in fiscal 2006 to $17,978,000 in fiscal 2007. This increase includes an increase in non-cash charges for equity compensation of $271,000 primarily due to a charge of $469,000 in fiscal 2007. The charge related to the accelerated vesting of certain outstanding and unvested stock options, pursuant to the terms of the 2003 Equity Incentive Plan, upon the acquisition by a third party of more than twenty percent of Mediware's common stock. In addition, increases in labor and related benefit costs and marketing related activities as well as payments of bonuses and commissions. There was also an increase in bad debt and legal expenses.

Interest and other income for the year ended June 30, 2007 increased $467,000, or 68.2%, compared to the year ended June 30, 2006 from $685,000 to $1,152,000. This increase resulted from Mediware's greater cash and cash equivalents balances during fiscal 2007 as well as a period over period increase in average interest rates.

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