UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 xQUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the
quarterly period ended December 31, 2008
  OR
  oTRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    Commission
file number:1-10768
  MEDIWARE
INFORMATION SYSTEMS, INC.
 (Exact
name of registrant as specified in its charter)
  New
      York
                    
                    11-2209324(State
      or other jurisdiction of incorporation or organization)
                    
                    (I.R.S.
      Employer Identification No.)11711
      West 79th StreetLenexa,
      Kansas
                    
                    66214(Address
      of principal executive offices)
                    
                    (Zip
      Code)
   (Registrant's
telephone number, including area code):(913)
307-1000
 (Former
name, former address and former fiscal year, if changed since last
report)
  
 1
   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.   x
Yes      o No
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
  Large
      accelerated filer
                                      o
                                      
                                      Accelerated
      Filer
                                      oNon-accelerated
      filer
                                      o
                                      
                                      Smaller
      reporting company
                                      x(Do
      not check if a smaller reporting company)
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).      o
Yes   x No
  APPLICABLE
ONLY TO CORPORATE ISSUERS:
  As of
January 16, 2009, there were 7,646,000 shares of Common Stock, $0.10 par value,
of the registrant outstanding.
  2
  MEDIWARE INFORMATION SYSTEMS, INC.
  INDEX
 
  PagePART
      I
                                                    Financial InformationITEM
      1.
                                                    Financial StatementsCondensed Consolidated Balance Sheets as of December 31, 2008
      (Unaudited) and June 30, 2008
                                                    4Condensed Consolidated Statements of Operations and
      Comprehensive Income (Loss) (Unaudited) for the Three and Six Months Ended
      December 31, 2008 and 2007
                                                    5Condensed Consolidated Statement of Stockholders’ Equity
      (Unaudited) for the Six Months Ended December 31, 2008
                                                    6Condensed Consolidated Statements of Cash Flows (Unaudited)
      for the Six Months Ended December 31, 2008 and 2007
                                                    7Notes to Unaudited Condensed Consolidated Financial
      Statements
                                                    8Review Report of Independent Registered Public Accounting
      Firm
                                                    20ITEM
      2.
                                                    Management's Discussion and Analysis of Financial Condition
      and Results of Operations
                                                    21ITEM
      3.
                                                    Quantitative and Qualitative Disclosures About Market
      Risk
                                                    32ITEM
      4.
                                                    Controls and Procedures
                                                    33PART
      II
                                                    Other Information
                                                    33ITEM
      1.
                                                    Legal Proceedings
                                                    33ITEM
      1A.
                                                    Risk Factors
                                                    33ITEM
      2.
                                                    Unregistered Sales of Equity Securities and Use of
      Proceeds
                                                    34ITEM
      4.
                                                    Submission of Matters to a Vote of Security
      Holders
                                                    35ITEM
      6.
                                                    Exhibits
                                                    36Signatures
                                                    
                                                    37
  3
 Index
  PART
    I
              FINANCIAL
      INFORMATION
   1.
              FINANCIAL
STATEMENTS
  MEDIWARE INFORMATION SYSTEMS, INC.
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (Amounts
in thousands except shares)
 
 (Unaudited)December
      31,
                        
                        
                        June
      30,2008
                        
                        
                        2008ASSETSCurrent
      AssetsCash
      and cash equivalents
                        
                        $
                        18,631
                        
                        
                        $
                        22,741Accounts
      receivable (net of allowance of $597 and $748)
                        
                        
                        8,023
                        
                        
                        
                        6,812Inventories
                        
                        
                        157
                        
                        
                        
                        102Deferred
      income taxes
                        
                        
                        691
                        
                        
                        
                        872Prepaid
      expenses and other current assets
                        
                        
                        1,071
                        
                        
                        
                        937Total
      current assets
                        
                        
                        28,573
                        
                        
                        
                        31,464Fixed
      assets, net
                        
                        
                        1,840
                        
                        
                        
                        1,831Capitalized
      software costs, net
                        
                        
                        14,451
                        
                        
                        
                        15,512Goodwill,
      net
                        
                        
                        9,318
                        
                        
                        
                        7,378Other
      intangible assets, net
                        
                        
                        2,665
                        
                        
                        
                        1,386Other
      long-term assets
                        
                        
                        54
                        
                        
                        
                        57Total
      Assets
                        
                        $
                        56,901
                        
                        
                        $
                        57,628LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesAccounts
      payable
                        
                        $
                        890
                        
                        
                        $
                        1,044Advances
      from customers
                        
                        
                        8,127
                        
                        
                        
                        7,718Accrued
      expenses and other current liabilities
                        
                        
                        2,978
                        
                        
                        
                        3,707Total
      current liabilities
                        
                        
                        11,995
                        
                        
                        
                        12,469Deferred
      income taxes
                        
                        
                        4,817
                        
                        
                        
                        5,268Total
      liabilities
                        
                        
                        16,812
                        
                        
                        
                        17,737Stockholders'
      EquityPreferred
      stock, $.01 par value; authorized 10,000,000 shares;
      none issuedCommon
      stock, $.10 par value; authorized 25,000,000 shares;
      8,223,000 and 8,180,000 shares issued as
      of December 31, 2008 and June 30, 2008,
      respectively
                        
                        
                        822
                        
                        
                        
                        818Additional
      paid-in capital
                        
                        
                        31,849
                        
                        
                        
                        31,419Treasury
      stock, 577,000 and 549,000 shares at December 31, 2008 and June 30, 2008,
      respectively
                        
                        
                        (3,445
                        )
                        
                        
                        (3,318
                        )Retained
      earnings
                        
                        
                        11,384
                        
                        
                        
                        10,863Accumulated
      other comprehensive income (loss)
                        
                        
                        (521
                        )
                        
                        
                        109Total
      stockholders' equity
                        
                        
                        40,089
                        
                        
                        
                        39,891Total
      Liabilities and Stockholders' Equity
                        
                        $
                        56,901
                        
                        
                        $
                        57,628
 
 See Notes
to Unaudited Condensed Consolidated Financial Statements.
  4
 Index
  MEDIWARE INFORMATION SYSTEMS, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME(LOSS)
 (Amounts
in thousands, except earnings per share)
 
 (Unaudited)
                                                                    Three
      months endedDecember 31,
                                                                  
                                                                  
                                                                  (Unaudited)
                                                                    Six
      Months endedDecember 31,2008
                                                                  
                                                                  
                                                                  2007
                                                                  
                                                                  
                                                                  2008
                                                                  
                                                                  
                                                                  2007RevenueSystem
      sales
                                                                  
                                                                  $
                                                                  2,023
                                                                  
                                                                  
                                                                  $
                                                                  2,032
                                                                  
                                                                  
                                                                  $
                                                                  4,452
                                                                  
                                                                  
                                                                  $
                                                                  6,222Services
                                                                  
                                                                  
                                                                  7,992
                                                                  
                                                                  
                                                                  
                                                                  6,627
                                                                  
                                                                  
                                                                  
                                                                  15,396
                                                                  
                                                                  
                                                                  
                                                                  13,181Total
      revenue
                                                                  
                                                                  
                                                                  10,015
                                                                  
                                                                  
                                                                  
                                                                  8,659
                                                                  
                                                                  
                                                                  
                                                                  19,848
                                                                  
                                                                  
                                                                  
                                                                  19,403Cost
      and ExpensesCost
      of systems (1)
                                                                  
                                                                  
                                                                  967
                                                                  
                                                                  
                                                                  
                                                                  685
                                                                  
                                                                  
                                                                  
                                                                  1,707
                                                                  
                                                                  
                                                                  
                                                                  1,374Cost
      of services
                                                                  
                                                                  
                                                                  2,651
                                                                  
                                                                  
                                                                  
                                                                  2,298
                                                                  
                                                                  
                                                                  
                                                                  5,308
                                                                  
                                                                  
                                                                  
                                                                  4,514Amortization
      of capitalized software costs
                                                                  
                                                                  
                                                                  1,517
                                                                  
                                                                  
                                                                  
                                                                  1,431
                                                                  
                                                                  
                                                                  
                                                                  3,003
                                                                  
                                                                  
                                                                  
                                                                  2,871Software
      development costs
                                                                  
                                                                  
                                                                  882
                                                                  
                                                                  
                                                                  
                                                                  963
                                                                  
                                                                  
                                                                  
                                                                  1,758
                                                                  
                                                                  
                                                                  
                                                                  1,946Selling
      general and administrative
                                                                  
                                                                  
                                                                  3,655
                                                                  
                                                                  
                                                                  
                                                                  4,092
                                                                  
                                                                  
                                                                  
                                                                  7,517
                                                                  
                                                                  
                                                                  
                                                                  8,676Total
      costs and expenses
                                                                  
                                                                  
                                                                  9,672
                                                                  
                                                                  
                                                                  
                                                                  9,469
                                                                  
                                                                  
                                                                  
                                                                  19,293
                                                                  
                                                                  
                                                                  
                                                                  19,381Operating
      income (loss)
                                                                  
                                                                  
                                                                  343
                                                                  
                                                                  
                                                                  
                                                                  (810
                                                                  )
                                                                  
                                                                  
                                                                  555
                                                                  
                                                                  
                                                                  
                                                                  22Interest
      and other income
                                                                  
                                                                  
                                                                  110
                                                                  
                                                                  
                                                                  
                                                                  249
                                                                  
                                                                  
                                                                  
                                                                  248
                                                                  
                                                                  
                                                                  
                                                                  539Interest
      and other (expense)
                                                                  
                                                                  
                                                                  (7
                                                                  )
                                                                  
                                                                  
                                                                  (7
                                                                  )
                                                                  
                                                                  
                                                                  3
                                                                  
                                                                  
                                                                  
                                                                  (34
                                                                  )Income
      (loss) before income taxes
                                                                  
                                                                  
                                                                  446
                                                                  
                                                                  
                                                                  
                                                                  (568
                                                                  )
                                                                  
                                                                  
                                                                  806
                                                                  
                                                                  
                                                                  
                                                                  527Income
      tax benefit (expense)
                                                                  
                                                                  
                                                                  (143
                                                                  )
                                                                  
                                                                  
                                                                  231
                                                                  
                                                                  
                                                                  
                                                                  (285
                                                                  )
                                                                  
                                                                  
                                                                  (401
                                                                  )Net
      income (loss)
                                                                  
                                                                  
                                                                  303
                                                                  
                                                                  
                                                                  
                                                                  (337
                                                                  )
                                                                  
                                                                  
                                                                  521
                                                                  
                                                                  
                                                                  
                                                                  126Other
      comprehensive incomeForeign
      currency translation adjustment
                                                                  
                                                                  
                                                                  (398
                                                                  )
                                                                  
                                                                  
                                                                  (41
                                                                  )
                                                                  
                                                                  
                                                                  (630
                                                                  )
                                                                  
                                                                  
                                                                  (6
                                                                  )Comprehensive
      income (loss)
                                                                  
                                                                  $
                                                                  (95
                                                                  )
                                                                  
                                                                  $
                                                                  (378
                                                                  )
                                                                  
                                                                  $
                                                                  (109
                                                                  )
                                                                  
                                                                  $
                                                                  120Net
      income (loss) per Common ShareBasic
                                                                  
                                                                  $
                                                                  0.04
                                                                  
                                                                  
                                                                  $
                                                                  (0.04
                                                                  )
                                                                  
                                                                  $
                                                                  0.07
                                                                  
                                                                  
                                                                  $
                                                                  0.02Diluted
                                                                  
                                                                  $
                                                                  0.04
                                                                  
                                                                  
                                                                  $
                                                                  (0.04
                                                                  )
                                                                  
                                                                  $
                                                                  0.07
                                                                  
                                                                  
                                                                  $
                                                                  0.01Weighted
      Average Common Shares OutstandingBasic
                                                                  
                                                                  
                                                                  7,659
                                                                  
                                                                  
                                                                  
                                                                  8,156
                                                                  
                                                                  
                                                                  
                                                                  7,651
                                                                  
                                                                  
                                                                  
                                                                  8,154Diluted
                                                                  
                                                                  
                                                                  7,962
                                                                  
                                                                  
                                                                  
                                                                  8,156
                                                                  
                                                                  
                                                                  
                                                                  7,985
                                                                  
                                                                  
                                                                  
                                                                  8,469
 (1)
Excludes amortization of Capitalized Software Costs
 
 See Notes
to Unaudited Condensed Consolidated Financial Statements.
  5
 Index
  MEDIWARE INFORMATION SYSTEMS, INC.
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 (Amounts
in thousands)
 
 Common Stock
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                Accumulated
      Other ComprehensiveShares
                                                                                
                                                                                
                                                                                Amount
                                                                                
                                                                                
                                                                                Additional
      Paid-InCapital
                                                                                
                                                                                
                                                                                TreasuryStock
                                                                                
                                                                                
                                                                                Retained
      Earnings
                                                                                
                                                                                
                                                                                Income (Loss)
                                                                                
                                                                                
                                                                                TotalBalance
      at June 30, 2008
                                                                                
                                                                                
                                                                                8,180
                                                                                
                                                                                
                                                                                $
                                                                                818
                                                                                
                                                                                
                                                                                $
                                                                                31,419
                                                                                
                                                                                
                                                                                $
                                                                                (3,318
                                                                                )
                                                                                
                                                                                $
                                                                                10,863
                                                                                
                                                                                
                                                                                $
                                                                                109
                                                                                
                                                                                
                                                                                $
                                                                                39,891Issuance
      of common stock on vestingof
      restricted shares
                                                                                
                                                                                
                                                                                43
                                                                                
                                                                                
                                                                                
                                                                                4
                                                                                
                                                                                
                                                                                
                                                                                (4
                                                                                )
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                -Stock
      based compensation expense
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                434
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                434Repurchase
      of common stock
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                (127
                                                                                )
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                (127
                                                                                )Foreign
      currency translation adjustment
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                (630
                                                                                )
                                                                                
                                                                                
                                                                                (630
                                                                                )Net
      income
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                521
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                521Balance
      at December 31, 2008(Unaudited)
                                                                                
                                                                                
                                                                                8,223
                                                                                
                                                                                
                                                                                $
                                                                                822
                                                                                
                                                                                
                                                                                $
                                                                                31,849
                                                                                
                                                                                
                                                                                $
                                                                                (3,445
                                                                                )
                                                                                
                                                                                $
                                                                                11,384
                                                                                
                                                                                
                                                                                $
                                                                                (521
                                                                                )
                                                                                
                                                                                $
                                                                                40,089
 
 See Notes
to Unaudited Condensed Consolidated Financial Statements.
  6
 Index
  MEDIWARE INFORMATION SYSTEMS, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Amounts
in thousands)
  (Unaudited)Six
      Months Ended December 31,2008
                              
                              
                              2007Cash
      Flows From Operating ActivitiesNet
      income
                              
                              $
                              521
                              
                              
                              $
                              126Adjustments
      to reconcile net income, to net
      cash provided by operating activities:Depreciation
      and amortization
                              
                              
                              3,527
                              
                              
                              
                              3,236(Gain)
      Loss on disposal of fixed assets
                              
                              
                              (24
                              )
                              
                              
                              10Stock
      based compensation expense
                              
                              
                              434
                              
                              
                              
                              251Deferred
      tax provision
                              
                              
                              (154
                              )
                              
                              
                              352Provision
      for doubtful accounts
                              
                              
                              59
                              
                              
                              
                              109Changes
      in operating assets and liabilities, net of effect of
      acquisition:Accounts
      receivable
                              
                              
                              (1,108
                              )
                              
                              
                              2,295Inventories
                              
                              
                              (50
                              )
                              
                              
                              101Prepaid
      expenses and other assets
                              
                              
                              (77
                              )
                              
                              
                              (49
                              )Accounts
      payable, accrued expenses andadvances from
    customers
                              
                              
                              (436
                              )
                              
                              
                              (436
                              )Net
      cash provided by operating activities
                              
                              
                              2,692
                              
                              
                              
                              5,995Cash
      Flows From Investing ActivitiesAcquisition
      of fixed assets
                              
                              
                              (353
                              )
                              
                              
                              (638
                              )Proceeds
      from sale of fixed assets
                              
                              
                              47
                              
                              
                              
                              -Capitalized
      software costs
                              
                              
                              (1,942
                              )
                              
                              
                              (1,686
                              )Acquisition
      of Integrated Marketing Solutions, LLC
                              
                              
                              (314
                              )
                              
                              
                              (5,501
                              )Acquisition
      of Hann’s On Software, Inc.
                              
                              
                              (3,483
                              )
                              
                              
                              -Net
      cash used in investing activities
                              
                              
                              (6,045
                              )
                              
                              
                              (7,825
                              )Cash
      Flows From Financing ActivitiesPrincipal
      payments on note payable
                              
                              
                              -
                              
                              
                              
                              (4
                              )Repurchase
      of common stock
                              
                              
                              (127
                              )
                              
                              
                              -Net
      cash used in financing activities
                              
                              
                              (127
                              )
                              
                              
                              (4
                              )Foreign
      currency translation adjustments
                              
                              
                              (630
                              )
                              
                              
                              (6
                              )Net
      change in cash and cash equivalents
                              
                              
                              (4,110
                              )
                              
                              
                              (1,840
                              )Cash
      at beginning of period
                              
                              
                              22,741
                              
                              
                              
                              22,789Cash
      at end of period
                              
                              $
                              18,631
                              
                              
                              $
                              20,949Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Income
      taxes paid
                              
                              $
                              29
                              
                              
                              $
                              152
 
 See Notes
to Unaudited Condensed Consolidated Financial Statements.
  7
 Index
  MEDIWARE INFORMATION SYSTEMS, INC.
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 1.
              BASIS
      OF PRESENTATION
 
 In the
opinion of management, the accompanying unaudited, condensed, consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of Mediware Information Systems, Inc. (“Mediware” or the
“Company”) and its results of operations and cash flows for the interim periods
presented. Such financial statements have been condensed in accordance with the
applicable regulations of the Securities and Exchange Commission and, therefore,
do not include all disclosures required by accounting principles generally
accepted in the United States of America. These financial statements should be
read in conjunction with Mediware's audited financial statements for the fiscal
year ended June 30, 2008, included in Mediware's Annual Report filed on Form
10-K for such fiscal year.
 
 The
results of operations for the three and six months ended December 31, 2008 are
not necessarily indicative of the results to be expected for the entire fiscal
year.
 
 
 2.
              EARNINGS
      PER SHARE
 
 Basic
earnings per share is computed by dividing net income by the weighted average
number of shares of common stock outstanding, par value $0.10 (“Common Stock”),
of Mediware.  For the three and six months ended December 31, 2008
and  the six months ended December 31, 2007, the dilutive effect of Common
Stock equivalents is included in the calculation of diluted earnings per share
using the treasury stock method.
 
 
 3.
              TREASURY
      STOCK
 
 In
February 2008, the Board of Directors of the Company authorized Mediware to
repurchase up to $4,000,000 of its Common Stock, at times and prices as the
President and Chief Executive Officer or the Chief Financial Officer of the
Company shall determine to be appropriate (the “Share Repurchase
Program”).  In October 2008, the Board of Directors expanded the Share
Repurchase Program by $3,318,000, bringing the total amount authorized under the
Share Repurchase Program to $7,318,000.  The program has no expiration
date, and Mediware has no obligation to purchase shares under the Share
Repurchase Program.
 
 As of
December 31, 2008, the Company has repurchased a total of 577,000 shares of
Common Stock at a cost of $3,445,000 under the Share Repurchase Program,
including 28,000 shares of Common Stock purchased at a cost of $127,000 during
the three and six months ended December 31, 2008.  As of December 31,
2008, the Company is authorized to purchase up to an additional $3,873,000 of
Common Stock under the Share Repurchase Program.
 
 Shares of
Common Stock repurchased by the Company are recorded at cost as treasury stock
and result in a reduction of stockholders' equity in the accompanying
consolidated balance sheets. When shares are reissued, the Company will use the
weighted average cost method for determining cost. The difference between the
cost of the shares and the issuance price is added or deducted from additional
paid-in capital.
 
 
 4.
              ACQUISITIONS
  Hann’s On Software,
Inc.
 On
November 20, 2008, Mediware acquired substantially all of the assets of Hann’s
On Software, Inc., a California corporation (“HOS”).  HOS provided
medication management solutions to the small hospital, specialty pharmacy and
home infusion markets through integrated software solutions that address the
complex work flow and patient safety needs of these markets.
  8
 Index
  Mediware
believes it will be able to provide medication management solutions to a broader
range of customers as a result of this acquisition.  The Company plans
to continue offering its WORx pharmacy product line to the larger acute care
hospitals and behavioral health facilities, while the HOS product line will
provide comprehensive solutions for the smaller hospital, specialty pharmacy and
home infusion markets.
 
 Mediware
expects the HOS products to generate revenue by licensing its proprietary
software, and by providing professional services and support for it product
lines.  Generally, HOS customers are charged an initial start-up fee
along with monthly fees for the continued use and support of the
software.  Software license fees are recognized up front, subject to
the requirements of the American Institute of Certified Public Accountants
Statement of Position 97-2, “Software Revenue
Recognition.”  Professional services and support revenues are
recognized as the service is delivered.
 
 The
purchase price paid for the assets of HOS consists of an initial purchase price
of $3,455,000 paid in cash at the closing, plus contingent consideration up to
$645,000 based upon the achievement of certain revenue and contractual
milestones through December 2009.  The purchase price is also subject
to a working capital adjustment.  The Company incurred $28,000 of
legal and accounting fees related to this transaction which have been included
in goodwill.  The Company expects to finalize the purchase price,
including all contingent consideration, by December 2009.  The results
of the HOS operations are included in the accompanying financial statements from
the date of acquisition.
 
 The
Company has accounted for the acquisition of HOS as the purchase of a business
under U.S. Generally Accepted Accounting Principles.  The assets and
liabilities of HOS were recorded as of the acquisition date, at their respective
fair values.  The purchase price allocation is based on the estimated
fair value of assets acquired and liabilities assumed.  The
preparation of the valuation required the use of significant assumptions and
estimates.  These estimates were based on assumptions that the Company
believes to be reasonable.  However, actual results may differ from
these estimates.
 
 The
following summarizes the preliminary purchase price allocation (in
thousands):
 
 Purchase
      Price
                          AllocationAccounts
      receivable
                        
                        $
                        197Inventories
                        
                        
                        5Prepaid
      and other current assets
                        
                        
                        38Fixed
      assets
                        
                        
                        48Intangible
      assets subject to amortization
                        
                        
                        1,441Goodwill
                        
                        
                        2,056Other
      long-term assets
                        
                        
                        9Accounts
      payable
                        
                        
                        (25
                        )Advances
      from customers
                        
                        
                        (263
                        )Accrued
      expenses and other current liabilities
                        
                        
                        (23
                        )Total
      Purchase Price
                        
                        $
                        3,483
  9
 Index
  The
excess of the purchase price over the fair value of net tangible assets acquired
was allocated to specific intangible asset categories as follows (in
thousands):
 
 Amount
                      Assigned
                    
                    WeightedAverage
                      AmortizationPeriod
                    
                    Risk-AdjustedDiscount
      Rate
                      Used
      in Purchase Price
                      AllocationAmortizable
      Intangible AssetsPurchased
      technology
                    
                    $
                    403
                    
                    5.0
      years
                    
                    
                    16.0
                    %Customer
      relationships
                    
                    
                    958
                    
                    7.0
      years
                    
                    
                    16.0
                    %Non-compete
      agreements
                    
                    
                    80
                    
                    2.0
      years
                    
                    
                    16.0
                    %$
                    1,441
                    
                    6.2
      yearsGoodwill
                    
                    $
                    2,056
 
 The
Company believes that the estimated tangible assets represent fair value at the
date of acquisition.  The fair value of an asset is defined as the
amount for which an asset or liability could be bought or sold in a current
transaction between knowledgeable, unrelated willing parties when neither party
is acting under compulsion.
 
 The
Company valued the purchased technology using the excess earnings method of the
income approach.  Utilizing this approach, the Company projected
revenue and related expenses.  These projected income amounts were
then reduced by the return on contributory assets and discounted to present
value.  This method requires the use of certain estimates, including
revenue growth rates, technology replacement rates, customer attrition,
expenses, contributory asset charges and discount rates.  Based on
this methodology the Company assigned the value of purchased technology at
$403,000.  The Company will amortize this amount over the estimated
useful life of five years.
 
 The
Company valued the customer relationships using the excess earnings method of
the income approach.  Utilizing this approach, the company projected
revenue and related expenses.  These projected income amounts were
then reduced by the return on contributory assets and discounted to present
value.  This method requires the use of certain estimates, including
revenue growth rates, customer attrition, expenses, contributory asset charges
and discount rates.  Based on this methodology the Company assigned
the value of customer relationships at $958,000.  The Company will
amortize this amount over the estimated useful life of seven years.
 
 The
Company valued the non-compete agreements using the with/without method of the
income approach.  This methodology determines the impact on discounted
net cash flow should the restricted parties decide to compete directly against
the Company.  This method requires the use of certain estimates,
including projected cash flows, discount rates and probability factors related
to the likelihood of future competition.  Based on this methodology
the Company assigned the value of non-compete agreements at
$80,000.  The Company will amortize this amount over the estimated
useful life of two years.
 
 Goodwill
is expected to be deductible for tax purposes.
 
 Unaudited
proforma information for the acquisition of HOS has not been presented as the
acquisition is not significant.
 
 
 Integrated Marketing
Solutions, LLC
 On
October 31, 2007, Mediware acquired substantially all of the assets of
Integrated Marketing Solutions, LLC, a Maryland limited liability company
(“IMS”).  IMS was a provider of software products and services to
blood and plasma donation centers.  IMS serviced the blood donor
center industry by providing integrated software, programs and services to
support donor recruitment, call centers, customer service, hospital services,
sales and prospecting.   Following the acquisition, the Company
expanded its offering of software products and services targeting blood and
plasma donation centers in North America and Europe.  This software
addresses the competitive nature of the blood supply market by enabling blood
and plasma collection facilities with web-based tools to better manage
relationships with donors, staffing and hospitals.  These products
facilitate blood and plasma donor centers’ donor recruitment and retention,
improve blood drives, and enable hospitals with electronic tools to order, ship
and track products.
  10
 Index
 
 The
acquired IMS assets, which are now part of Mediware’s Blood Centers Technology
group, generate revenue through subscription sales of web-based applications
along with professional and promotional services to its
customers.  Subscription revenue is recognized evenly over the
subscription period.  Professional and promotional revenue are
recognized as the services are rendered.
 
 The
purchase price paid for the assets of IMS consisted of an initial purchase price
of $5,458,000 paid in cash at the closing.  Additionally, the Company
paid contingent consideration of $369,000 based on the successful achievement of
certain revenue milestones.  The Company also received $55,000 from
the seller as part of the final working capital adjustment.  The
contingent consideration and the final working capital adjustment were fully
accrued at June 30, 2008, and paid in July 2008.  The Company incurred
$66,000 of legal and accounting fees related to this transaction which have been
included in the total purchase price.  The results of the
IMS  business are included in the accompanying consolidated financial
statements from the date of acquisition.
 
 
 5.
              GOODWILL
      AND OTHER INTANGIBLE ASSETS
   Goodwill
 
 The
change in the carrying amount of our goodwill during the six-months ended
December 31, 2008 is as follows (in thousands):
 
 Carrying
      amount as of June 30, 2008
                        
                        $
                        7,378Acquisition
      of HOS
                        
                        
                        2,056Tax
      benefit of amortization
                        
                        
                        (116
                        )Carrying
      amount as of December 31, 2008
                        
                        $
                        9,318
   Other
Intangible Assets
 
 The
carrying amount of our other intangible assets as of December 31, 2008 is as
follows (in thousands):
 
 Gross
      Carrying
                  Amount
                
                
                Accumulated
                  Amortization
                
                
                Net
      Carrying Amount
                
                
                Weighted
      Average
                  Remaining
      Useful Life
                  (in
      years)Purchased
      technology
                
                $
                876
                
                
                $
                (119
                )
                
                $
                757
                
                
                
                4.4Customer
      relationships
                
                
                2,014
                
                
                
                (192
                )
                
                
                1,822
                
                
                
                6.2Non-compete
      agreements
                
                
                115
                
                
                
                (29
                )
                
                
                86
                
                
                
                1.4$
                3,005
                
                
                $
                (340
                )
                
                $
                2,665
  11
 Index
  Amortization
expense for other intangible assets amounted to $96,000 and $162,000 for the
three and six months ended December 31, 2008, and $44,000 for the three and six
months ended December 31, 2007.  The following represents the expected
amortization in future periods (in thousands):
 
 FiscalYear
                                
                                ExpectedAmortization2009
                                
                                
                                2622010
                                
                                
                                5032011
                                
                                
                                4792012
                                
                                
                                4632013
                                
                                
                                400Thereafter
                                
                                
                                558$
                                2,665
 
 
 6.
              STOCK
      BASED COMPENSATION
 
 The
Company accounts for stock-based compensation in accordance with SFAS 123R,
which establishes a fair value-based method of accounting for stock-based
compensation.  The aggregate noncash stock based compensation expense
totaled $182,000 and $98,000 for the three-months ended December 31, 2008 and
2007, respectively, and $434,000 and $251,000 for the six-months ended December
31, 2008 and 2007, respectively.
   Stock
Based Plans
 
 The
Company's 2003 Equity Incentive Plan, approved by the shareholders in December
2003, provides additional compensation incentives to encourage high levels of
performance and employee retention.  Key employees of the Company,
directors, and persons who render services to the Company as consultants,
advisors or independent contractors are eligible to receive grants under this
plan.  The number of shares that may be issued under this plan is
2,000,000.  Shares may be issued as either incentive stock options,
nonqualified stock options, or restricted common stock.  Options may
be granted for a period of up to ten years.  Restricted common stock
awards may be subject to vesting restrictions and may be forfeited if certain
performance factors are not maintained.  The plan provides that a
maximum of 1,700,000 shares may be issued as any combination of restricted
stock, options and restricted stock unit awards.  The additional
300,000 shares of common stock can only be granted as option
awards.  As of December 31, 2008, there were 1,034,000 shares
available for issuance under this Plan.
 
 The
Company's 2001 Stock Option Plan, approved by the shareholders in January 2002,
provides additional compensation incentives for high levels of performance and
productivity by management, other key employees of the Company, directors, and
persons who render services to the Company as consultants, advisors or
independent contractors.  Up to 900,000 shares may be issued and sold
under such plan and may be issued as either incentive stock options, to eligible
persons, or nonqualified stock options.  Options may be granted for a
period of up to ten years, with option prices not less than fair market value on
the date of grant for incentive stock options, not less than 85% of fair market
value for nonqualified stock options, and not less than 110% of fair market
value for owners of more than 10% of the Company's outstanding voting
stock.  As of December 31, 2008 no options were available to be issued
under this Plan.
 
 
 Restricted
Common Stock Awards
 
 During
fiscal 2006, the Company entered into agreements to provide long-term incentive
compensation opportunities to certain key employees.  Under the terms
of these agreements, the Company granted the employees 200,000 restricted shares
of common stock (the “Performance Shares”).  The Performance Shares
vest in fiscal 2007, 2008 and 2009 only if Mediware achieves certain performance
goals based on revenue and earnings per share.  The Company has not
recorded any compensation expense related to the Performance Shares because it
is not probable the performance goals will be met.  The Company will
continue to assess whether or not the achievement of any performance goals are
probable at each reporting period, and will begin recognizing the related
expense if and when the performance conditions become probable.  As of
December 31, 2008, 75,000 of these Performance Shares were
outstanding.  The Performance Shares may result in compensation
expense in future periods of up to $699,000, representing the fair value on the
date of the grant, if it becomes probable the performance goals will be
met.
  12
 Index
  Beginning
in fiscal 2007, the Company entered into agreements to provide long-term
incentive compensation opportunities to certain employees.  Under the
terms of these agreements, the Company granted the employees 35,000 restricted
shares of common stock (the “Time-Based Shares”).  The Time-Based
Shares vest over a three-year period based upon the continued employment of the
key employee.  The Company recorded a compensation benefit of $4,000
and $7,000 for the three-months ended December 31, 2008 and 2007, respectively,
and a compensation benefit of $3,000 and compensation expense of $63,000 for the
six-months ended December 31, 2008 and 2007, respectively.  These
amounts include a benefit related to the forfeiture of certain Time-Based Shares
of $12,000 and $18,000 for the three and six-months ended December 31, 2008 and
2007, respectively.  The Time-Based Shares will result in compensation
expense in future periods of up to $27,000, representing the fair value on the
date of the grant less the amount of compensation expense already
recorded.
 
 Beginning
in fiscal 2007, each member of the Company’s Board of Directors received an
annual grant of $10,000 of restricted common stock (the “Director Shares”) as
part of their compensation for serving on the Company’s Board of
Directors.  The number of Director Shares granted is determined based
upon the fair market value of the Company’s stock on the first trading day of
each calendar year.  The Director Shares vest on June 30 of each
fiscal year based upon the director’s continued service on the Company’s Board
of Directors.  The Company recorded compensation expense related to
the Director Shares of $17,000 for the three-months ended December 31, 2008 and
2007, respectively, and $35,000 for each of the six-months ended December 31,
2008 and 2007, respectively.    The Director Shares will
result in compensation expense in future periods of up to $35,000, representing
the fair value on the date of the grant less the amount of compensation expense
already recorded.
 
 During
fiscal 2008, the Company entered into agreements to provide long-term incentive
compensation opportunities to certain employees.  Under the terms of
these agreements, the Company granted the employees 220,000 restricted shares of
common stock (the “Enhanced Performance Shares”).  The Enhanced
Performance Shares vest partially upon continued employment of the key employees
and partially upon the achievement of certain performance
objectives.  The Company recorded compensation expense related to the
Enhanced Performance Shares of $123,000 and $60,000 for the three-months ended
December 31, 2008 and 2007, respectively, and $299,000 and $119,000 for the
six-months ended December 31, 2008 and 2007, respectively.  The
Company will continue to assess whether or not the achievement of any
performance goals is probable at each reporting period, and will recognize the
related expense if and when the performance conditions become probable.The Enhanced Performance
Shares may result in compensation expense in future periods of up to $775,000,
representing the fair value on the date of the grant less the amount of
compensation expense already recorded.  This amount includes $147,000
of unrecognized time-based compensation expense related to the continued
employment of the key employees.
 
 Estimated
future stock-based compensation expense related to time-based restricted stock
is as follows (in thousands):
  Fiscal Years Ending June
30,
                                                            
                                                            
                                                            Time-Based
      Shares
                                                            
                                                            
                                                            Enhanced
      Performance Shares (Time-Based Portion)
                                                            
                                                            
                                                            DirectorShares
                                                            
                                                            
                                                            Total2009
                                                            
                                                            
                                                            $
                                                            13
                                                            
                                                            
                                                            $
                                                            74
                                                            
                                                            
                                                            $
                                                            35
                                                            
                                                            
                                                            $
                                                            1222010
                                                            
                                                            
                                                            
                                                            10
                                                            
                                                            
                                                            
                                                            67
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            772011
                                                            
                                                            
                                                            
                                                            4
                                                            
                                                            
                                                            
                                                            6
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            10Total
      estimated future stock-based compensation expense
                                                            
                                                            
                                                            $
                                                            27
                                                            
                                                            
                                                            $
                                                            147
                                                            
                                                            
                                                            $
                                                            35
                                                            
                                                            
                                                            $
                                                            209
  13
 Index
  A summary
of the status of the Company’s nonvested restricted common stock as of December
31, 2008, and changes during the six-months ended December 31, 2008, is
presented below (shares amounts in thousands):
 
 Performance
      Shares
                                                                    
                                                                    
                                                                    Weighted
      Average
                                                                      Grant
      Date
                                                                      Fair
      Value
                                                                    
                                                                    
                                                                    Time-Based
      Shares
                                                                    
                                                                    
                                                                    Weighted
      Average
                                                                      Grant
      Date
                                                                      Fair
      Value
                                                                    
                                                                    
                                                                    Director
      Shares
                                                                    
                                                                    
                                                                    Weighted
      Average
                                                                      Grant
      Date
                                                                      Fair
      Value
                                                                    
                                                                    
                                                                    Enhanced
      Performance Shares
                                                                    
                                                                    
                                                                    Weighted
      Average
                                                                      Grant
      Date
                                                                      Fair
      ValueNonvested
      at June 30, 2008
                                                                    
                                                                    
                                                                    75
                                                                    
                                                                    
                                                                    $
                                                                    9.32
                                                                    
                                                                    
                                                                    
                                                                    20
                                                                    
                                                                    
                                                                    $
                                                                    7.29
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    $
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    208
                                                                    
                                                                    
                                                                    $
                                                                    6.63Granted
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    15
                                                                    
                                                                    
                                                                    
                                                                    4.68
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -Canceled
      or forfeited
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    (7
                                                                    )
                                                                    
                                                                    
                                                                    6.78
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -Vested
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    (5
                                                                    )
                                                                    
                                                                    
                                                                    8.50
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    (38
                                                                    )
                                                                    
                                                                    
                                                                    6.53Nonvested
      at December 31, 2008
                                                                    
                                                                    
                                                                    75
                                                                    
                                                                    
                                                                    $
                                                                    9.32
                                                                    
                                                                    
                                                                    
                                                                    8
                                                                    
                                                                    
                                                                    $
                                                                    6.98
                                                                    
                                                                    
                                                                    
                                                                    15
                                                                    
                                                                    
                                                                    $
                                                                    4.68
                                                                    
                                                                    
                                                                    
                                                                    170
                                                                    
                                                                    
                                                                    $
                                                                    6.65
 
 The fair
value of the restricted shares is determined based on the average trading price
of the Company’s shares on the grant date, except for the Director Shares which
is determined based on the average trading price of the Company’s shares as of
the first trading day of each calendar year, pursuant to the directors’
compensation plan.
   Stock
Option Awards
 
 The fair
value of stock options is determined at the date of grant and is charged to
compensation expense over the vesting period of the options.  The fair
value of options at date of grant was estimated using the Black-Scholes option
pricing model utilizing the following assumptions:
 
 For
      the Three Months
                        Ended
      December 31,
                      
                      For
      the Six Months
                        Ended
      December 31,2008
                      
                      2007
                      
                      2008
                      
                      
                      2007Risk-free
      interest rates
                      
                      
                      2.8
                      %
                      No
      Options
                      
                      
                      2.8
                      %
                      
                      
                      4.6%
      - 4.8
                      %Expected
      option life in years
                      
                      
                      2 –
      3
                      
                      Granted
                      
                      
                      2 –
      3
                      
                      
                      
                      1 -
      5Expected
      stock price volatility
                      
                      
                      51
                      %
                      
                      
                      
                      51
                      %
                      
                      
                      34%
      - 35
                      %Expected
      dividend yield
                      
                      
                      -
                      
                      
                      
                      
                      -
                      
                      
                      
                      -
 
 The
risk-free rate for periods within the contractual life of the option is based on
the U.S. Treasury yield curve in effect at the time of the grant.  The
Company uses historical data to estimate option exercise and employee and
director termination within the valuation model; separate groups of employees
and directors that have similar historical exercise behavior are considered
separately for valuation purposes.  The expected term of options
granted represents the period of time that options granted are expected to be
outstanding; the range given above results from groups of employees and
directors exhibiting different behavior.  Expected volatilities are
based on historical volatility of the Company’s stock.  The Company
has not paid any dividends in the past and does not expect to pay any in the
near future.
  14
 Index
  The
following table sets forth summarized information concerning the Company's stock
options as of December 31, 2008 (share and aggregate intrinsic value amounts in
thousands):
 
 Shares
                                                        
                                                        
                                                        Weighted
      Average Exercise Price
                                                        
                                                        
                                                        Weighted
      Average Remaining Contractual Term
                                                        
                                                        
                                                        Aggregate
      Intrinsic ValueOutstanding
      at June 30, 2008
                                                        
                                                        
                                                        976
                                                        
                                                        
                                                        $
                                                        8.42Granted
                                                        
                                                        
                                                        10
                                                        
                                                        
                                                        
                                                        3.89Exercised
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Forfeited
      or expired
                                                        
                                                        
                                                        (45
                                                        )
                                                        
                                                        
                                                        6.64Outstanding
      at December 31, 2008
                                                        
                                                        
                                                        941
                                                        
                                                        
                                                        $
                                                        8.45
                                                        
                                                        
                                                        
                                                        3.6
                                                        
                                                        
                                                        $
                                                        156Expected
      to vest at December 31, 2008
                                                        
                                                        
                                                        941
                                                        
                                                        
                                                        $
                                                        8.45
                                                        
                                                        
                                                        
                                                        3.6
                                                        
                                                        
                                                        $
                                                        156Options
      exercisable at December 31, 2008
                                                        
                                                        
                                                        741
                                                        
                                                        
                                                        $
                                                        8.94
                                                        
                                                        
                                                        
                                                        2.8
                                                        
                                                        
                                                        $
                                                        149
 
 The
strike price of the options is determined based on the average trading price of
the Company’s shares on the grant date.
 
 There
were no stock options exercised for the three or six-months ended December 31,
2008 and 2007.  Historically, the Company has issued new shares upon
the exercise of stock options.
 
 The
weighted average fair value at date of grant for options granted during the
three and six months ended December 31, 2008 was $1.32 per option, and $2.38 per
option for the six-months ended December 31, 2007.  The Company
recorded $46,000 of compensation expense for stock option plans for each of the
three months ended December 31, 2008 and 2007, and $103,000 and $69,000 for the
six months ended December 31, 2008 and 2007, respectively.
 
 Estimated
future stock-based compensation expense relating to stock options is as follows
(in thousands):
 
 Fiscal Years Ending June
30,
                          
                          
                          FutureStock Option
                            CompensationExpense2009
                          
                          
                          $
                          772010
                          
                          
                          
                          952011
                          
                          
                          
                          422012
                          
                          
                          
                          10Total
      estimated future stock-based compensation expense
                          
                          
                          $
                          224
  15
 Index
 
 A summary
of the status of the Company’s nonvested options as of December 31, 2008, and
changes during the six months ended December 31, 2008 is presented below (share
amounts in thousands):
 
 Nonvested Options
                          
                          Shares
                          
                          
                          Weighted
      Average
                            Grant
      Date
                            Fair ValueNonvested
      at July 1, 2008
                          
                          
                          215
                          
                          
                          $
                          2.22Granted
                          
                          
                          10
                          
                          
                          
                          1.32Canceled
      or expired
                          
                          
                          -
                          
                          
                          
                          -Vested
                          
                          
                          (25
                          )
                          
                          $
                          2.59Nonvested
      at December 31, 2008
                          
                          
                          200
                          
                          
                          $
                          2.12
 
 The total
fair value of shares vested during the six months ended December 31, 2008 was
$65,000.
 
 The
following table presents information relating to stock options at December 31,
2008 (share amounts in thousands):
 
 Options
      Outstanding
                                
                                
                                Options
      ExercisableRange
      of Exercise Prices
                                
                                
                                Shares
                                
                                
                                Weighted Average
      Exercise Price
                                
                                
                                Weighted
      Average Remaining Life in Years
                                
                                
                                Shares
                                
                                
                                Weighted Average
      Exercise Price$
                                0.00
      - $ 4.49
                                
                                
                                
                                167
                                
                                
                                $
                                3.61
                                
                                
                                
                                1.1
                                
                                
                                
                                157
                                
                                
                                $
                                3.59$
                                4.50
      - $ 7.49
                                
                                
                                
                                229
                                
                                
                                $
                                6.83
                                
                                
                                
                                6.6
                                
                                
                                
                                39
                                
                                
                                $
                                6.99$
                                7.50
      - $ 8.99
                                
                                
                                
                                119
                                
                                
                                $
                                8.19
                                
                                
                                
                                1.9
                                
                                
                                
                                119
                                
                                
                                $
                                8.19$
                                9.00
      - $ 10.49
                                
                                
                                
                                172
                                
                                
                                $
                                10.13
                                
                                
                                
                                3.7
                                
                                
                                
                                172
                                
                                
                                $
                                10.13$
                                10.50
      - $11.99
                                
                                
                                
                                92
                                
                                
                                $
                                10.89
                                
                                
                                
                                1.5
                                
                                
                                
                                92
                                
                                
                                $
                                10.89$
                                12.00
      - $13.49
                                
                                
                                
                                117
                                
                                
                                $
                                12.45
                                
                                
                                
                                3.7
                                
                                
                                
                                117
                                
                                
                                $
                                12.45$
                                13.50
      - $14.99
                                
                                
                                
                                45
                                
                                
                                $
                                13.74
                                
                                
                                
                                5.2
                                
                                
                                
                                45
                                
                                
                                $
                                13.74941
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                741
 
 
 7.
              INCOME
      TAXES
 
 The
Company accounts for income taxes under the asset and liability
approach.  Deferred tax assets and liabilities are recognized for the
expected future tax consequences attributed to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.  Deferred tax assets and liabilities are
measured using the enacted rates expected to apply to taxable income in the
years in which those temporary differences are expected to reverse.  A
valuation allowance is provided against net deferred tax assets when it is not
more likely than not that a tax benefit will be realized.  Income
taxes include U.S. and foreign taxes.
 
 In June
2006, the FASB issued interpretation No. 48, “Accounting for Uncertainty in
Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN
48”).  FIN 48 seeks to reduce the diversity in practice associated
with certain aspects of measurement and recognition in accounting for income
taxes.  In addition, FIN 48 provides guidance on derecognition,
classification, interest and penalties and accounting in interim periods and
requires expanded disclosures with respect to the uncertainty in income
taxes.  The Company has adopted FIN 48 effective July 1,
2007.
  16
 Index
  As of
December 31, 2008, the Company’s unrecognized tax benefits totaled $379,000,
including $18,000 relating to accrued interest and penalties, which related to
tax positions which, if recognized, would affect the annual effective tax
rate.  The Company recognizes accrued interest and penalties in income
tax expense.
 
 The
Company files income tax returns in the U.S. federal jurisdiction and various
state and foreign jurisdictions.  In general, the Company’s filed
income tax returns are no longer subject to examination by the respective taxing
authorities for years ending before June 30, 2005.  In January 2009,
the Company was notified that the Internal Revenue Service will be examining its
fiscal 2007 Federal income tax return.  The examination has not yet
commenced and the outcome cannot be determined at this time.
 
 During
the six-months ended December 31, 2007, the Company reduced its deferred tax
assets by approximately $225,000 in connection with fully vested non-qualified
employee stock options which terminated as a result of the departure of certain
employees.
 
 
 8.
              SEGMENT
      INFORMATION
 
 The
Company has three distinct product lines:  Medication Management
systems, Blood Management systems and Perioperative Management
systems.   Based on similar economic characteristics, as well as
the nature of products, production processes, customers and distribution
methods, the Company has aggregated these operating divisions into one reporting
segment.  Revenue by product line are as follows (in
thousands):
 
 For
      the Three Months Ended December 31,
                  
                  
                  For
      the Six Months Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Medication
      Management Systems:System
      revenue
                  
                  
                  1,032
                  
                  
                  
                  1,082
                  
                  
                  
                  2,121
                  
                  
                  
                  4,112Service
      revenue
                  
                  
                  3,584
                  
                  
                  
                  2,824
                  
                  
                  
                  7,093
                  
                  
                  
                  5,654Blood
      Management Systems:System
      revenue
                  
                  
                  991
                  
                  
                  
                  950
                  
                  
                  
                  2,331
                  
                  
                  
                  2,104Service
      revenue
                  
                  
                  4,191
                  
                  
                  
                  3,603
                  
                  
                  
                  7,887
                  
                  
                  
                  7,124Perioperative
      Management SystemsSystem
      revenue
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6Service
      revenue
                  
                  
                  217
                  
                  
                  
                  200
                  
                  
                  
                  416
                  
                  
                  
                  403Total
                  
                  $
                  10,015
                  
                  
                  $
                  8,659
                  
                  
                  $
                  19,848
                  
                  
                  $
                  19,403
  Selected
financial information by geographic area is as follows (in
thousands):
 
 For
      the Three Months Ended December 31,
                  
                  
                  For
      the Six Months Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Revenue
      from Unaffiliated Customers:United
      States
                  
                  $
                  8,724
                  
                  
                  $
                  7,304
                  
                  
                  $
                  17,090
                  
                  
                  $
                  16,946United
      Kingdom
                  
                  
                  1,291
                  
                  
                  
                  1,355
                  
                  
                  
                  2,758
                  
                  
                  
                  2,457Total
                  
                  $
                  10,015
                  
                  
                  $
                  8,659
                  
                  
                  $
                  19,848
                  
                  
                  $
                  19,403Net
      Income (Loss):United
      States
                  
                  $
                  201
                  
                  
                  $
                  (425
                  )
                  
                  $
                  273
                  
                  
                  $
                  7United
      Kingdom
                  
                  
                  102
                  
                  
                  
                  88
                  
                  
                  
                  248
                  
                  
                  
                  119Total
                  
                  $
                  303
                  
                  
                  $
                  (337
                  )
                  
                  $
                  521
                  
                  
                  $
                  126
  17
 Index
 December
      31,2008
                        
                        
                        2007Identifiable
      Assets:United
      States
                        
                        $
                        52,795
                        
                        
                        $
                        55,064United
      Kingdom
                        
                        
                        4,106
                        
                        
                        
                        4,232Total
                        
                        $
                        56,901
                        
                        
                        $
                        59,296
 9.
              CONTINGENCIES
 
 On March
6, 2006, Triad Laboratory Alliance, LLC d/b/a Spectrum Laboratory Network
(“Spectrum”) filed suit against Mediware in the General Court for Justice,
Superior Court Division, County of Guilford, North Carolina. The case was
subsequently removed from North Carolina state court to the United States
District Court for the Middle District of North Carolina. Spectrum sought an
unspecified amount of damages (exceeding $300,000) due to, among other things,
Mediware’s alleged misrepresentations and breaches of warranties under its
license agreement and the alleged violation of the North Carolina unfair trade
practices statute.  Mediware filed a counterclaim alleging, among
other things, breach of contract and misappropriation by Spectrum of Mediware’s
intellectual property.  In November 2008, the parties entered
into a settlement agreement and mutual releases of claims by the parties against
each other, with no material adverse impact on the Company.
 
 On August
16, 2006, Mediware filed a lawsuit against Korchek Technologies, LLC (“Korchek”)
in the United States District Court for the Eastern District of New York
alleging breach of contract and tortous interference with Mediware's contractual
relationships with certain customers.  On September 28, 2006, Korchek
filed an answer to Mediware's lawsuit denying any wrongdoing and filed a
counterclaim. The counterclaim sought unspecified damages and alleged, among
other things, that Mediware improperly interfered with Korchek’s prospective
business relationships; disparaged Korchek, its president and its products and
improperly induced Korchek’s customers to breach their contractual relationship
with Korchek.  In September 2008, the parties entered into a
settlement agreement and mutual releases of claims by the parties against each
other, with no material adverse impact on the Company.
 
 In
February 2007, the California Supreme Court denied the petition for a review
filed by former Mediware employee Donnie L. Jackson, Jr. regarding the decision
of the Third Appellate District in Sacramento, California to vacate the award of
attorney’s fees previously obtained by Mr. Jackson and to remand the case to
Superior Court of El Dorado County, California for further
proceedings.  Mr. Jackson had previously successfully moved for
summary judgment on claims by GlobalMed Technologies, Inc. (“Global Med”) that
he misappropriated trade secrets and breached certain contractual
covenants.  The trial court had awarded fees, costs and interest
against Global Med based on Mr. Jackson’s employment contracts. In the event
that Mr. Jackson ultimately prevails in this case, which was commenced on
September 23, 2002 by Global Med, the Company would be eligible to be reimbursed
for certain attorneys’ fees and costs plus interest advanced to Mr. Jackson by
the Company in connection with Global Med’s claims.  If Mr. Jackson
does not prevail, Mediware could be responsible under an agreement with Mr.
Jackson for damages and certain fees and costs awarded to Global Med, which
could be material.
 
 In
addition to the foregoing, from time to time, Mediware becomes involved in
routine litigation incidental to the conduct of its business, including
employment disputes and litigation alleging product defects, intellectual
property infringements, violations of law and breaches of contract and
warranties.  Mediware believes that such routine litigation, if adversely
determined, would not have a material adverse effect on its business,
financial condition, results of operations or cash flows.
  18
 Index
  10.
              RECENTLY
      ADOPTED ACCOUNTING PRONOUNCEMENTS
 
 In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, Fair Value
Measurements, (“SFAS 157”).  This Standard defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements.  SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years.  The adoption of SFAS 157 on July 1, 2008 did not
have a material impact on the Company’s financial position, results of
operations or cash flows.
 
 In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159,The Fair Value Option for
Financial Assets and Financial Liabilities, (“FASB 159”).  This
standard permits an entity to choose to measure many financial instruments and
certain other items at fair value.  The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently with having to apply complex accounting
provisions.  SFAS 159 is effective for financial statements issued for
fiscal years beginning after November 15, 2007.  The adoption of SFAS
159 on July 1, 2008 did not have a material impact on the Company’s financial
position.
 
 In
December 2007, the FASB issued Statement No. 141 (revised), Business Combinations(“SFAS
141(R)”). The standard changes the accounting for business combinations
including the measurement of acquirer shares issued in consideration for a
business combination, the recognition of contingent consideration, the
accounting for pre-acquisition gain and loss contingencies, the recognition of
capitalized in-process research and development, the accounting for
acquisition-related restructuring cost accruals, the treatment of acquisition
related transaction costs and the recognition of changes in the acquirer’s
income tax valuation allowance. SFAS 141(R) is effective for acquisitions dated
on or after the first annual reporting period beginning on or after December 15,
2008, with early adoption prohibited. The Company is currently evaluating the
impact of the pending adoption of FAS 141(R) on its results of operations and
financial condition.
 
 In
December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS
160”). The standard changes the accounting for noncontrolling (minority)
interests in consolidated financial statements including the requirements to
classify noncontrolling interests as a component of consolidated stockholders’
equity, and the elimination of “minority interest” accounting in results of
operations with earnings attributable to noncontrolling interests reported as
part of consolidated earnings. Additionally, SFAS 160 revises the accounting for
both increases and decreases in a parent’s controlling ownership interest. SFAS
160 is effective for fiscal years beginning after December 15, 2008, with early
adoption prohibited. The Company is currently evaluating the impact of the
pending adoption of SFAS 160, but does not anticipate that the provisions of
SFAS 160 will have a material impact on the financial
statements.
  19
 Index
  REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
 
 To The
Board of Directors and Shareholders of
 Mediware
Information Systems, Inc.
 
 We have
reviewed the accompanying condensed consolidated balance sheet of Mediware
Information Systems, Inc. and subsidiaries (the "Company") as of December 31,
2008, and the related condensed consolidated statements of operations and
comprehensive income (loss) for the three and six-month periods ended December,
31 2008 and 2007, and cash flows for the six-month periods ended December 31,
2008 and 2007.  These interim condensed consolidated financial
statements are the responsibility of the Company's management.
 
 We
conducted our reviews in accordance with standards established by the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
 
 Based on
our reviews, we are not aware of any material modifications that should be made
to the accompanying interim condensed consolidated financial statements in order
for them to be in conformity with accounting principles generally accepted in
the United States of America.
 
 We have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
the Company as of June 30, 2008, and the related consolidated statements of
operations and comprehensive income, shareholders' equity, and cash flows for
the year then ended (not presented herein), and in our report dated September 2,
2008, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of June 30, 2008 is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
 
 
 Eisner
LLP
 New York,
New York
  January
27, 2009
  20
 Index
  ITEM 2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
   Forward-Looking
Statements
 
 This
Quarterly Report on Form 10-Q contains forward-looking statements. Any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act. The words “believes,” “anticipates,” “plans,”
“expects,” “intends” and similar expressions identify some of the
forward-looking statements. Forward-looking statements are not guarantees of
performance or future results and involve risks, uncertainties and assumptions.
The factors discussed elsewhere in this Form 10-Q and in Mediware’s Form 10-K
for the year ended June 30, 2008 and in subsequent Quarterly Reports on Form
10-Q, could also cause actual results to differ materially from those indicated
by the Company’s forward-looking statements.  Mediware undertakes no
obligation to publicly update or revise any forward-looking
statements.
   Overview
 
 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 (“SEC”) under the Securities Exchange Act of
1934 (the “Securities Exchange Act”) 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
Quarterly Report on Form 10-Q.  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.
 The
Company develops, licenses and sells its blood and biologics management
solutions to hospitals and its medication management solutions to hospitals,
long-term care, specialty pharmacy, home infusion and behavioral health
facilities.   Mediware licenses and sells its blood donor
recruitment and management solutions to blood donor and plasma donor centers
through its Blood Center Technologies business group.
 
 The
software systems that Mediware provides to its customers typically consist of
the Company's proprietary application software, third-party licensed software
and third-party hardware.  Mediware generally licenses its medication
management, blood management and biologics management software systems to
customers on a perpetual basis.   These customers typically make
an up-front payment for the software license fees and payments for support
services on an annual basis.     In contrast, Mediware
generally provides its blood and plasma center solutions and its MediREC
software and its recently acquired HOS products on a monthly subscription
basis.  These customers pay Mediware an initial start-up fee and a
monthly fee for use and support of Mediware’s proprietary
software.  Under both payment models, customers may purchase services,
including implementation and additional consultation services, for additional
fees which are generally billed as incurred.  Mediware currently
anticipates that over time an increased number of its systems will be licensed
on a subscription basis.
 
 Mediware
markets its blood donor and its blood and biologic management products primarily
in the United States.  The Company markets its medication management
solutions in the United States and in the United Kingdom, with different
software systems designed for the specific requirements of each
market.  The Company has operations in the United Kingdom relating to
the systems licensed and sold primarily in that market as well as Ireland and
South Africa.  All other operations are in the United
States.
  21
 Index
  Market
Positioning
 
 Mediware
designs, develops and markets software solutions targeting specific processes
within healthcare institutions. Software products are sold to hospitals,
long-term care, specialty pharmacy, home infusion and behavioral health
facilities and stand alone blood and plasma donation centers. The Company
believes that its competitive advantages include rich product knowledge and a
long history of innovation in the areas of medication and blood software
products.
 
 Traditional
healthcare environments leverage disparate information systems and manual
processes throughout the care process. This results in reduced efficiency as
well as increased safety risks due to the potential for human error and delayed
access to patient information and records. Errors and risks associated with
medications, blood, or biologics can often result in tragic consequences, a fact
that can raise the awareness and priority of Mediware solutions.
 
 The
Company’s strategy is to address targeted clinical areas with “suites” of
applications that provide clinicians one data environment for the information
relating to the prescribing, preparation, and administration of drug, blood
and/or biologics therapies. Mediware’s products manage each step of the
therapeutic process in one system environment, including: ordering, fulfillment,
administration, and documentation, to provide care providers a “closed loop”
process for blood and medication therapies.   The process-centric
integrated data environments provided by Mediware’s blood, biologic and
medication management solutions seamlessly extend the discipline and controls of
the pharmacy and blood bank to patient units, operating room suites, and other
venues where adverse events occur. The Company believes this closed loop process
differentiates it from the industry’s catalog and “best of breed”
vendors.
 
 In
November 2008, the Company acquired substantially all the assets of Hann’s On
Software, Inc, a California corporation (“HOS”).   HOS is a
provider of medication management solutions to the small hospital, specialty
pharmacy and home infusion markets.  HOS services these markets by
providing integrated software solutions which address the complex work flow and
patient safety needs of these markets.
   The
Healthcare Information Systems Industry
 
 The
healthcare industry in the United States is highly fragmented, complex, and
inefficient. While advances in medical technology have provided physicians,
nurses and other caregivers leading edge diagnostic and therapeutic
technologies, the information systems supporting the management of clinical
processes in complex healthcare organizations have not made comparable
progress.  Mediware believes that a substantial portion of clinical
workflow still depends upon manual paper-based processes interfaced with various
automated or semi-automated functionally oriented clinical
systems.  Examples of functionally oriented clinical systems include
pharmacy, radiology, blood bank and nursing documentation.
 
 As a
result, the healthcare industry is generally economically inefficient and
produces significant variances in medical outcomes.   While waste
and utilization rates are rarely made public, patient safety and the publicity
surrounding medical errors have focused a tremendous amount of scrutiny on
hospitals and care providing institutions. Recent news reports, professional
studies and government actions have highlighted patient safety errors and
influenced governmental activity.
 
 For
example:
 
 ·
              In
      July 2006, the Institute of Medicine published a study on medication
      errors.  The study found that on average a patient suffers one
      medication error every day the patient stays in the
      hospital.  The study concluded that 1.5 million people are
      harmed and thousands are killed each year in hospitals due to medication
      errors.  In addition to the patient risk, the study estimated
      that errors cost the nation at least $3.5 billion
  annually.
 
 ·
              In
      September 2007, The Joint Commission Journal on Quality and Patient Safety
      included a study on medication errors.  The study found that
      almost 5% of the medication errors identified were attributable to the use
      of medication abbreviations that resulted in
      miscommunication.  It found that 81% of such errors occurred
      during prescribing, 14% occurred during transcribing and 3% occurred
      during dispensing.  The study suggested that electronic
      medication ordering tools can help reduce this source of human
      error.
 
 ·
              The
      Joint Commission on Accreditation of Healthcare Organizations (“JCAHO”),
      which has oversight responsibility for hospitals, has the authority to
      revoke the accreditation of hospitals that fail to meet JCAHO standards of
      care.   A hospital’s failure to meet JCAHO’s standards
      could result in the loss of critical Medicare and Medicaid reimbursement
      revenue.  JCAHO’s mandates require hospitals to document all of
      a patient’s home medication when a patient is admitted to the hospital or
      enters the emergency room, and to reconcile that list with the medications
      prescribed in the hospital and repeat this process when the patient is
      transferred in the hospital and when the patient is
      discharged.
  22
 Index
  ·
              The
      Serious Hazards of Transfusion (“SHOT”), an on-going study in the United
      Kingdom, reviewed facilities accounting for 92% of that country’s blood
      supply.  Of the errors identified, 15% resulted from errors
      during requesting, prescription or sample collection; 29% occurred in the
      blood bank and 50% were due to error when collecting and/or administering
      blood.  The study also found that the single most important
      factor in transfusion errors is misidentification of the
      patient.  As a result, the study recommended the evaluation of
      computerized aids and barcode technology to confirm that the correct unit
      of blood is administered to the
patient.
 
 ·
              Incidents
      where tissue suppliers distributed products that were improperly acquired
      and fraudulently documented have become public through high profile cases
      involving prestigious hospitals transplanting infected tissues into
      unsuspecting patients. While regulatory changes are difficult to predict,
      hospital oversight of these materials is increasing. Prominent cases
      include the 2005 scandal around Biomedical Tissue Services, a New Jersey
      company that is accused of using stolen bodies and shipping nearly 20,000
      potentially tainted body parts. In 2006, the FDA shut down Donor Referral
      Services of Raleigh, N.C. due to “serious deficiencies” in its processing,
      donor screening and record-keeping.
 
 The
Company believes that in addition to healthcare industry evolution and reports,
studies and actions like those identified, the impact of specific potential
health threats such as the variant Creutzfeldt-Jakob (mad cow) virus will
require healthcare organizations to re-examine their ability to track and
analyze patients, donors, procedures and outcomes.  Mediware's
products, which integrate operating and clinical systems, are targeted to
facilitate solutions to these healthcare industry issues.
  The
Company anticipates that a continued increase in government regulation, public
and competitive pressure regarding errors occurring in hospitals, as well as new
health threats, will continue to drive the industry’s expenditures on clinical
information systems.  Further, President Obama’s reported intention to
increase efficiencies in the healthcare industry through spending on health care
information technologies could increase funding available to hospitals for
spending on health care information technologies, including Mediware
products.   Mediware believes that its product strategy and
offerings provide an alternative to monolithic solution architectures of
disparate systems and can play a role in moving healthcare information
technology standards forward to deliver significant results for patients and
customers.
  Competition
in the market for clinical information systems is intense.  The
principal competitive factors are the functionality of the system, its design
and capabilities, site references, the demonstrated need, ability to install,
process redesign capabilities, reputation, software platform, the potential for
enhancements, price, departmental versus enterprise sales and
salesmanship.  Another key factor is the strategic position the
incumbent, or major healthcare information systems vendor, has in the customer
site. Different dynamics and competitors, however, affect each of the Company's
products and each sale.
  
 Blood
and Biologics Management Products
 
 Hospital
Transfusion and Donor Products
 
 The
Company supplies information and management software systems to hospital blood
banks and transfusion centers.  Hospitals face pressures to manage
blood inventory and improve the safety of the blood supply by reducing errors,
improving screening and increasing throughput and cost
efficiencies.  These pressures exist despite pressures across the
healthcare industry to reduce costs and to address ongoing personnel
shortages.  Mediware's blood management software systems are intended
to help hospitals and blood centers address these issues.  The
software is designed to reduce costs through automatic report production,
decreased paperwork, and automated billing.  The Company's products
are also designed to improve blood supply safety through the use of user-defined
truth tables, among other features.
  23
 Index
  The
Company’s flagship blood transfusion product is the HCLL transfusion
software.  Mediware also provides its hospital customers its
complementary HCLL donor software module for use in hospital-based donor
centers. The HCLL software (HCLL Transfusion and HCLL Donor) addresses blood
donor recruitment, blood processing and transfusion activities for hospitals and
medical centers.  These systems are designed to be user intuitive,
scalable, and support product management, resource management, quality control
and testing.  They include advanced data mining and data management
intelligence capabilities, which can be utilized by facilities of all sizes,
including, small hospitals, large medical centers, multi-facility enterprises
and central transfusion services.  HCLL software also can address the
needs of hospitals for operating centralized transfusion services, an area that
is as a key to controlling the rising cost of blood products. As of December 31,
2008, the HCLL software was in productive use at  nearly 200 sites.
The Company has licensed the software for use at approximately 300
facilities.
 
 The
Company is also looking to new products and markets to continue its growth in
the blood management.  In early fiscal year 2008, the Company
announced its new BloodSafeTM suite of products.  The BloodSafe suite
includes hardware and software which enable healthcare facilities to securely
store, monitor, distribute and track blood products from locations removed from
the hospital’s blood bank. Components of the BloodSafe suite include blood
tracking and monitoring software, computer controlled refrigerators, and
handheld point of care tools to verify accurate patient identification and
document transfusion activities. BloodSafe can be integrated with Mediware’s
HCLL software or operate on a stand-alone basis.  Mediware expects its
first Bloodsafe customer to begin productive use of the integrated product in
the Spring of 2009.
 
 Blood
Center Technologies
 
 The
Company also provides software tools and services to large, complex blood
centers for donor targeting, donor recruitment, donation management, unit
testing, blood component manufacturing, inventory control, sales and
distribution. This is accomplished through a combination of the Company’s 510(k)
cleared LifeTrak® software and the products and capabilities acquired in
Mediware’s November 1, 2007 acquisition of substantially all of the business
assets of Integrated Marketing Solutions, Inc (“IMS”).  The addition
of IMS to Mediware’s blood center strategies enables the Company to deliver an
integrated software solution for blood centers to improve collections and
efficiency throughout the entire process from blood donor recruitment to
hospital distribution.  Since the acquisition of IMS, Mediware has
been aggressively integrating software and capabilities to streamline the
effectiveness of blood centers, from donor recruitment, through the clinical
laboratory, to hospital management. With the addition of the IMS components,
LifeTrak has robust clinical capabilities with modern and effective CRM
technologies that enable blood centers to improve the effectiveness of
coordinated blood drive campaigns while still meeting the strict FDA regulations
for safe blood management. Combining IMS and LifeTrak technologies, it is
estimated that Mediware products support over 50% of the U.S. blood supply at
some point in the collection, testing and distribution processes.
  To
capitalize on the integration of IMS and to focus on the unique needs of the
blood center market segment, on July 8, 2008 Mediware announced the launch of
Blood Center Technologies (“BCT”).  Mediware’s BCT business unit is a
customer focused team that combines the IMS assets with Mediware LifeTrak assets
to drive growth as Mediware expands its focus in the blood donor
market.  As of December 31, 2008, the BCT business unit had software
in productive use at over 350 facilities.
  24
 Index
  Biologics
Products
 
 Hospitals
are beginning to face the same pressures to manage biologic product inventory
and improve safety by reducing errors, improving screening and increasing
throughput and cost efficiencies as they have faced with blood products for
years.    In June 2008, Mediware released BiologiCare, the
Company’s first generation bone, tissue and cellular product tracking
software.  The software leverages the HCLL software platform and
Mediware’s blood banking expertise to address the important needs of hospitals
as they begin to manage bone, tissue, cord blood stem cells and other biologic
products.     BiologiCare is designed specifically to
track and manage transplantable materials in hospitals, surgery centers and
other healthcare facilities. The products enable users to document donors,
tissue vendors and tissue recipients and to comply with current regulations
regarding transplantable materials.  With the introduction of
BiologiCare, Mediware believes it is positioned to benefit from the emerging
biologics market, which includes, among other things, bone, tissue and cord
blood stem cells.  BiologiCare can be integrated with Mediware’s HCLL
software or operate on a stand-alone basis.  Mediware expects its
first Biologicare customer to begin productive use of the software in early
2009.
 
 The
Company continues to concentrate on growing all aspects of its blood management
business: hospital transfusion and donor products, biologics products and blood
center technology products.  The blood management products are
marketed primarily through the Company’s direct sales force, and the Company is
working to develop complementary reseller relationships.  In addition
to its sale of software, the Company generates revenue from professional
services and post-contract support.
 
 The blood
management products compete primarily with vendors of laboratory information
systems (“LIS”) providing a blood bank subsystem as a part of their laboratory
product, as well as other companies that market stand-alone blood bank systems.
The LIS vendors are much larger companies with greater technical, marketing,
financial and other resources than the Company.  We believe these
competitors include Cerner, McKesson, and Meditech.   We believe
that stand-alone lab or blood bank vendors include Sunquest, Global Med
Technologies and SCC Soft.  The Company believes, however, that due to
the functionality of the HCLL software, the Company is well-positioned in the
blood bank system market and that it has a good reputation with its customers,
including many of the most sophisticated healthcare systems in the United
States. On the blood donor side of the business, we compete against several of
the companies listed above as well as Haemontics, Blood Bank Computer Services
Company, MAK Software and others.
   Medication Management
Products
 
 The
Company also supplies medication management solutions to hospitals, mental
health facilities, specialty pharmacies, home infusion facilities, penal
institutions and other institutions that require the administration and
management of medication.  The Company’s medication management
solutions are designed to help customers improve patient safety while reducing
costs and improving clinical documentation.  Additionally, the
solutions help medical facilities comply with increasing regulatory and
governmental requirements.
 
 The
Company’s principal software product for medication management is WORx, a core
pharmacy information system designed to manage inpatient and outpatient pharmacy
operations.  WORx software has features and functions designed to help
improve patient safety and manage pharmacy operations effectively.  As
of  December 31, 2008, the WORx software was in productive use at
approximately 180 sites.  The product's market acceptance encompasses
hospitals that are primarily medium to large in size, including multi-facility
healthcare systems.  The acquisition of substantially all of the HOS
assets expanded Mediware’s product offering by adding a pharmacy solution that
meets the needs of small hospital, specialty pharmacy and home infusion
facilities.  The Company currently plans to continue offering the
WORx product line to the medium to larger acute care
hospitals and state behavioral health facilities, while the HOS product line
offers a comprehensive solution for the smaller hospital, specialty pharmacy and
home infusion markets.   The HOS acquisition added approximately
320 hospital and home infusion sites to Mediware’s medication management
customer base.
 
 In fiscal
2004, the Company released MediCOETM and
MediMAR®.  These
products are fully integrated with the WORx software and provide a complete
closed loop drug therapy management system with a physician order entry module
(MediCOE) and nurse point of care administration and bedside documentation
module (MediMAR).  The MediCOE software provides clinicians an
efficient, effective method to enter medication orders and manage drug
therapy.  Orders entered in the MediCOE software undergo a prospective
evaluation based on the patient’s current medical profile to identify potential
adverse outcomes.  Potential problems can be identified by the
clinician at order entry and can be corrected or explained at the point of
care.
  25
 Index
  The
MediMAR software, on the other hand, serves as an electronic medication
administration and bedside documentation record.  It produces a
dynamic and complete representation of the patient’s medication profile,
including clinician orders, medication list, allergies, notes and clinical
alerts to increase patient safety. The MediMAR software uses bar code, wireless,
handheld, and other technologies to allow caregivers efficient and accurate
methods to document patient medication administration and provide nurses
additional safety measures at the point of care.
 
 As of
December 31, 2008, the MediCOE and MediMAR products have been licensed for use
in 3 and 18 separate customer sites, respectively.
 
 To expand
the Company’s capabilities and address a new industry mandate, the Company
introduced MediREC in March 2007.  This medication management product
assists in achieving compliance with a recent JCAHO mandate, which requires
hospitals to document all of a patient’s home medications when a patient is
admitted or enters the emergency room, and to reconcile that list with the
medications prescribed in the hospital.  That process must be repeated
each time the patient is transferred within the hospital and again when the
patient is discharged. At December 31, 2008, MediREC was licensed for use at 7
customer sites.
 
 The
Company continues to target its large WORx software customer base and new
customers with the MediCOE and MediMAR products and markets MediREC to this
customer base and new customers as well.  The Company has increased
its focus on behavioral health and other specialty healthcare markets where the
HOS pharmacy software offers an easy to install robust solution and the
integrated features and functionality included in the WORx, MediMAR, MediCOE and
MediREC software products can provide fully integrated medication management
solutions.
 
 Selling
the Company’s full suite of medication management products (WORx, MediMAR,
MediCOE and MediREC) is a complex process involving multiple hospital
departments and, therefore, results in substantially longer sales cycles
compared to stand-alone WORx sales.  This has resulted in less
predictable contract closures and a need to recognize software license revenue
over multiple quarters (in some cases). On the other hand, the HOS software
requires substantially smaller financial commitments from hospitals, specialty
pharmacies, and home infusion facilities and is priced based on a subscription
pricing model.  Consequently, Mediware anticipates that sales of these
products will be more predictable and have shorter sales cycles.  The
MediREC software is also being licensed to customers on a recurring, transaction
basis, and Mediware expects that as the adoption of MediREC increases, the sale
and implementation cycles for MediREC to be shorter than for the full suite of
products.
 
 The
Company generates revenue from medication management software sales,
professional services and post-contract support.  Support contracts
currently account for over half of the revenue from medication management
operations.  As the HOS contribution to the company’s revenue increase
and the sale of MediCOE and MediMAR products increase, the Company expects that
license fee revenue will increase and support revenue will make up a smaller
portion of the Company’s revenue.
 
 The
Company’s medication management products compete against the products of the
other niche competitors’ and some of the largest providers of healthcare
information technology, including Cerner, General Electric, Siemens, Eclipsys
and others.  These competitors often have significantly greater
resources than Mediware, but the Company believes that its products are well
positioned and have functionality that can lead to growth in this competitive
environment.  The medication management products are marketed directly
through the Company’s sales force and other marketing channels, including
reseller agreements with distribution partners and focused sales
channels.
 
 The
Company's United Kingdom operating business is JAC Computer Services, Ltd.
(“JAC”).   JAC markets and provides support for its pharmacy
management and electronic prescribing systems throughout the U.K., Ireland and
South Africa.  JAC includes an installed base of approximately 200
customer sites, representing over 100 National Health Service (“NHS”) acute
hospitals or trusts in the U.K..  JAC’s product offering includes
JAC’s Pharmacy Management System and Electronic Prescribing
module.  The prescribing module is a medication management solution
complete with physician medication order entry and nursing medication
administration.  This module has been installed in approximately 20
U.K. customer sites as of December 31, 2008, and allows hospitals to improve
patient safety relevant to medication management.  The Company’s
Pharmacy Management system product handles medication tracking from ordering and
delivery to dispensing.  The installed base includes approximately 50%
of the trusts within the NHS.
  26
 Index
  In the
beginning of 2004, the NHS in England initiated an historic national program to
purchase healthcare information technology.  The government has
identified that program as the “Connecting for Health” program.  This
program is designed to develop an integrated clinical software solution for
hospitals in order to support the modernization of patient care in
England.  The NHS has entered into contracts to license software and
services, but the program has experienced delays.  JAC has been able
to work with the integrated service providers and the government to position
itself favorably as a provider of software.  In July 2008 JAC was
appointed to the ASCC (Additional Supply Capability and Capacity) framework
contract in both the e-prescribing and pharmacy (stock control)
categories.  Appointment to the ASCC framework provides healthcare
organizations with a contracting vehicle to work directly with JAC to procure
specialist e-prescribing and/or pharmacy stock control services as an
alternative to the national program.  The JAC products are marketed
directly through JAC’s sales force and other marketing channels, including
reseller agreements in South Africa.   JAC recently entered into
a multi-year contract in South Africa under which JAC will license its software
to as many as 40 public sector hospitals for the Provincial Government of the
Western Cape.
   Use of
Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the condensed
consolidated financial statements and related notes to financial statements.
Actual results could differ from those estimates.  The Company’s
significant areas of estimation include determining the allowance for
uncollectible accounts, valuing certain accrued liabilities and determining
whether the carrying value of goodwill and capitalized software development
costs and other intangible assets is impaired.
  Results
of Operations for the Three Months Ended December 31, 2008 as Compared to the
Three Months Ended December 31, 2007
 
 Total
revenue for the second quarter of fiscal 2009 was $10,015,000 compared to
$8,659,000 in the second quarter of fiscal 2008, an increase of $1,356,000, or
16%.  The increase in revenue is primarily due to significant
increases in service revenues associated with both the medication management and
blood management product lines.  Blood management products and
services recorded total revenue of $5,182,000 in the second quarter of fiscal
2009, representing an increase of $629,000, or 14%, compared to $4,553,000 in
the same period of fiscal 2008.  Medication management products and
services (including the results from the recent acquisition of HOS but excluding
JAC) recorded an increase in total revenue of $773,000, or 30%, from $2,552,000
in the second quarter of fiscal 2008 to $3,325,000 in the same period of fiscal
2009.  JAC recorded total revenues of $1,291,000 in the second quarter
of fiscal 2009, representing a decrease of $63,000, or 5%, compared to
$1,354,000 in the same period of fiscal 2008.
 
 System
revenue, which includes proprietary software, third party software, hardware
revenue and subscription revenue, amounted to $2,023,000 for the quarter ended
December 31, 2008, approximately the same amount as the $2,032,000 of system
sales reported in comparable quarter of fiscal 2008.   System
revenue for the blood management products was $991,000 for the second quarter of
fiscal 2009, an increase of $41,000, or 4%, compared to $950,000 in the same
quarter of fiscal 2008.  This increase is primarily due to increased
subscription revenue associated with Blood Center Technology sales, partially
offset by the anticipated decrease in HCLL system sales.  We
anticipate that recurring revenue from Blood Center Technologies will continue
to grow and that our newer BloodSafe and BiologiCare offerings will begin to
contribute more strongly to system revenues in the coming
quarters.   In contrast, we believe that HCLL software sales will
continue to contribute at consistent levels but will not show ongoing strong
growth.  System sales for the medication management products
(including the results from the recent acquisition of HOS but excluding JAC)
decreased from $695,000 in fiscal 2008 to $541,000 in fiscal 2009, representing
a decrease of $154,000, or 22%.  This decrease resulted primarily from
the sale of the WORx and MediREC software to a large, new customer in the second
quarter of fiscal 2008, which was not repeated in the second quarter of fiscal
2009.  JAC recorded system sales of $491,000 for the second quarter of
fiscal 2009, representing an increase of $104,000, or 27%, compared to $387,000
reported for the same period in fiscal 2008.  The Company believes
that JAC is well positioned to continue its growth in the coming
quarters.
  27
 Index
 
 Service
revenue, which includes recurring post contract support revenues, implementation
services and promotional services increased $1,365,000, or 21%, to $7,992,000 in
the second quarter of fiscal 2009 compared to $6,627,000 for the same period in
fiscal 2008.   Service revenue for the blood management products
totaled $4,191,000 for the second quarter of fiscal 2009, representing an
increase of $588,000or 16%, compared to $3,603,000 in the second quarter of
fiscal 2008.  The increase primarily reflects the anticipated increase
in implementation activity related to the implementation of HCLL software
systems, along with an increase in promotional revenue associated with the Blood
Center Technologies products.  Mediware anticipates that service
revenue associated with HCLL will continue to be strong through the remainder
of  fiscal 2009 as we complete the majority of the remaining HCLL
implementation projects.  Service revenue for the medication
management products (including the results of the recent acquisition of HOS but
excluding JAC) increased $927,000, or 50%, to $2,784,000 in the second quarter
of fiscal 2009 compared to $1,857,000 for the same quarter of fiscal
2008.  This increase reflects an increase in upgrade services, as
existing customers upgrade their WORx software systems to a new version of the
software.   We are providing these upgrade services under a
focused upgrade program designed to encourage Customers to upgrade their
software to help ensure that the customers have access to third party drug
information in the WORx software.   We expect upgrade service
revenue to remain strong  for the remainder of the year as a result of
this program.  Service revenue for JAC decreased $167,000, or 17%, to
$800,000 in the second quarter of fiscal 2009 compared to $967,000 in the second
quarter of fiscal 2008.  This decrease is primarily the result of a
reduction in support revenues denominated in U.S. dollars resulting from
the declining foreign currency exchange rates and a decrease in the number of
ongoing implementation projects compared to the same quarter in fiscal
2008.
 
 Cost of
systems includes the cost of computer hardware and sublicensed software
purchased from computer and software manufacturers by Mediware as part of its
complete 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 $282,000, or 41%, to $967,000 in the second quarter of fiscal 2009 as
compared to $685,000 in the same period in fiscal 2008 due to an increase in
third party hardware and software sales resulting primarily from our sale of
Laktrak to an important customer.  Laktrak is a product we resell on behalf
of our Bloodsafe partner.  We anticipate that theese sales will positively
impact our revenue and improve our positioning to introduce Bloodsafe to new
customers.  The gross margin, excluding amortization of capitalized
software costs, on system sales was 52% in the second quarter of fiscal 2009
compared to 66% in the same quarter in fiscal 2008.  The decrease in
gross margin is primarily due to the increase in the amount of third party
software sold during the quarter and the smaller amount of high margin
proprietary system sales during the second quarter of fiscal 2009 compared to
the same period in fiscal 2008.
 
 Cost of
services includes the salaries and direct expenses of client service personnel
and the direct costs associated with providing promotional
services.  Cost of services increased $353,000, or 15%, to $2,651,000
in the second quarter of fiscal 2009 as compared to $2,298,000 in the same
period of fiscal 2008.  The increase in cost of services is primarily
attributed to increases in the number of customer service personnel needed to
facilitate the implementation of the HCLL projects and provide upgrade services
to the existing WORx customers.  Also contributing were the
promotional activities associated with the BCT services.  Gross margin
on service revenue was 67% for the second quarter of fiscal 2009 compared to 65%
for the second quarter of fiscal 2008.  The increase in gross margin
on service revenue was due to a higher utilization of our implementation
team.  Mediware anticipates that gross margins will remain consistent
with the current levels for the remainder of fiscal 2009.
 
 Amortization
of capitalized software increased $86,000 or 6%, to $1,517,000 in the second
quarter of fiscal 2009 compared to $1,431,000 in the second quarter of fiscal
2008.  This increase is primarily due to increased amortization of
capitalized software costs related to recent product releases.  We
expect amortization of capitalized software to remain comparable with its
current levels for the remainder of fiscal 2009, and we anticipate that
amortization costs will decline significantly in fiscal 2010; provided
Mediware's capitalization rates and cash expenditures continue at substantially
the same rate.  At our current level of investment in product
development activities we expect amortization of capitalized software to decline
by approximately $700,000 in fiscal 2010.
 
 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 decreased $81,000,
or 8%, to $882,000 in the second quarter of fiscal 2009 compared to $963,000 in
the second quarter of fiscal 2008.  Expenditures for software
development include amounts paid for both capitalizable and noncapitalizable
development projects.  Total expenditures for software development
were $1,820,000 in the second quarter of fiscal 2009 compared to $1,721,000 in
the second quarter of fiscal 2008, an increase of $99,000, or
6%.  This increase is primarily a result of slightly higher investment
in the blood management products during the quarter and the impact of the recent
acquisition of HOS.  We expect to maintain our current investment
in product development in its blood management and medication management
products in the near term.
  28
 Index
 
 Selling,
general and administrative (“SG&A”) expenses include marketing and sales
salaries, commissions, travel and advertising expenses.  Mediware also
includes 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 $437,000, or 11%, from
$4,092,000 in the second quarter of fiscal 2008 to $3,655,000 in the second
quarter of fiscal 2009.  This decrease is primarily attributable to
the restructuring efforts announced in the first quarter of fiscal 2008 and
lower sales commissions and legal expenses.  This decrease was
partially offset by increases in marketing expense and incremental costs
associated with personnel associated with the recent acquisition of
HOS.
 
 Income
tax expense increased from a benefit of $231,000 in the second quarter of fiscal
2008 to an expense of $143,000 in the same period of fiscal 2009, as a result of
the increase in operating income.
 
 Net
income for the second quarter of fiscal 2009 was $303,000, compared to a net
loss of $337,000 during the second quarter of fiscal 2008, resulting in an
increase of $640,000.  The improvement resulted primarily from an
increase in service revenue and a decrease in SG&A expenses.
   Results
of Operations for the Six Months Ended December 31, 2008 as Compared to the Six
Months Ended December 31, 2007
 
 Total
revenue for the six-month period ended December 31, 2008 was $19,848,000
compared to $19,403,000 in the comparable period of fiscal 2008, an increase of
$445,000 or 2%.  The increase in revenue is largely due to an increase
in medication management and blood management service revenues, partially offset
by a decrease in medication management system sales.   Blood
management products and services recorded total revenue of $10,218,000 during
the six-month period of fiscal 2009, representing an increase of $990,000 or 11%
compared to $9,228,000 in the same period of fiscal 2008.  Medication
management products and services (including the results from the recent
acquisition of HOS but excluding JAC) recorded a decrease in total revenue of
$855,000, or 12% from $7,310,000 in the first six months of fiscal 2008 to
$6,455,000 in the same period of fiscal 2009.  JAC recorded total
revenues of $2,759,000 during fiscal 2009, representing an increase of $303,000
or 12%, compared to $2,456,000 in the same period of fiscal 2008.
 
 System
sales revenue amounted to $4,452,000 for the six months ended December 31, 2008,
a decrease of $1,770,000 or 28%, from $6,222,000 in the same period in fiscal
2008.  System sales for the blood management products were $2,331,000
for the first six months of fiscal 2009, an increase of $227,000 or 11%,
compared to $2,104,000 in the same period of fiscal 2008.  System
sales for the medication management products (including the results from the
recent acquisition of HOS  but excluding JAC) decreased from
$3,499,000 in the first six months of fiscal 2008 to $1,088,000 in the same
period of fiscal 2009, representing a decrease of $2,411,000, or
69%.  This decrease reflects a decrease in MediMAR sales revenue due
to the signing of a significant MediMAR contract during the first quarter of
fiscal 2008 and, to a lesser extent, a decrease in WORx revenue and MediREC
revenue.  JAC recorded system sales of $1,033,000 for the first
six-month period of fiscal 2009, representing an increase of $420,00, or 68%,
compared to $613,000 reported for the same period in fiscal 2008.
 
 Service
revenue increased $2,215,000, or 17%, to $15,396,000 in the first six months of
fiscal 2009 compared to $13,181,000 for the same period in fiscal
2008.  Service revenue for the blood management products totaled
$7,887,000 for the first six-month period of fiscal 2009 representing an
increase of $763,000, or 11%, compared to $7,124,000 in the same period of
fiscal 2008 primarily reflecting an anticipated increase in implementation
activity for the HCLL software systems.  Service revenue for the
medication management products (including the results from the recent
acquisition of HOS but excluding JAC) increased $1,556,000 or 41% to $5,367,000
in the first six months of fiscal 2009 compared to $3,811,000 for the same
period of fiscal 2008.  This increase is a result of an increase in
system implementations for WORx upgrades in 2009 as compared to the same period
in fiscal 2008.  Service revenue for JAC decreased $117,000, or 6%, to
$1,726,000 in the six-month period of fiscal 2009 compared to $1,843,000 in the
same period of fiscal 2008.  This decrease is primarily the result of
a reduction in support revenues denominated in U.S. dollars resulting from the
declining foreign currency exchange rates, offset in part by an increase in
training revenues related to new sales.
  29
 Index
  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 $333,000, or 24%, to $1,707,000
during the first six months of fiscal 2009 as compared to $1,374,000 in the same
period in fiscal 2008.  The gross margin, excluding amortization of
capitalized software costs, on system sales was 62% in the six-month period of
fiscal 2009 compared to 78% in the same period in fiscal
2008.   The decrease in gross margin is primarily due to an
increase in the amount of third party hardware sold during the six months and
the smaller amount of high margin proprietary system sales during the first six
months of fiscal 2009 compared to the same period is fiscal 2008.
 
 Cost of
services increased $794,000, or 18%, to $5,308,000 during the first six months
of fiscal 2009 as compared to $4,514,000 in the same period of fiscal
2008.  The increase in cost of services is primarily attributed to an
increase in the number customer service personnel needed to facilitate the
implementation of HCLL projects and to provide upgrade services to existing WORx
customers.  Gross margin on service revenue remained consistent at 66%
for the six months of fiscal 2009 compared to 66% for the same period last
year.
 
 Amortization
of capitalized software increased $132,000, or 5%, to $3,003,000 in the first
six months of fiscal 2009 compared to $2,871,000 in fiscal 2008.  This
increase is primarily due to increased amortization of capitalized software
costs related to recent releases of the HCLL and WORx products.
 
 Software
development costs decreased $188,000, or 10%, to $1,758,000 in fiscal 2009
compared to $1,946,000 in the same period of fiscal 2008. Expenditures for
software development include amounts paid for both capitalizable and
noncapitalizable development projects.  Total expenditures for
software development were $3,700,000 in the first six-month period of fiscal
2009 compared to $3,632,000 in the same period of fiscal 2008, an increase of
$68,000, or 2%.  This increase is primarily a result of higher
investment in the blood management products during the first six-months of
fiscal 2009 and the impact of the recent acquisition of HOS.
 
 SG&A
expenses include marketing and sales salaries, commissions, travel and
advertising expenses.  Mediware also includes 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 $1,159,000 from $8,676,000 in the first six months of fiscal 2008 to
$7,517,000 in the same period of fiscal 2009.  The decrease in
SG&A expenses is primarily attributable to the restructuring efforts
announced during the first quarter of fiscal 2008 and decreases in sales
commissions, professional fees, medical and recruitment expenses.
 
 Income
tax expense decreased $116,000, from $401,000 during the first six months of
fiscal 2008 to $285,000 in the same period of fiscal 2009.  In
conjunction with this decrease, the effective tax rate decreased from 76.1% for
the six months ending December 31, 2007 to 35.3% in the same period of fiscal
2008.  The decrease 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.
 
 Net
income during the first six months of fiscal 2009 was $521,000, compared to net
income of $126,000 during the same period of fiscal 2008, resulting in an
increase of net income of $395,000.
  Liquidity
and Capital Resources
  As of
December 31, 2008, Mediware had cash and cash equivalents of $18,631,000
compared to $22,741,000 at June 30, 2008.  Working capital was
$16,578,000 and $18,995,000 at December 31, 2008 and June 30, 2008,
respectively.  The current ratio was 2.4 to 1 at December 31, 2008
compared to 2.5 to 1 at June 30, 2008.  The Company does not have any
material capital lease obligations, purchase obligations or long-term
liabilities.
 
 Cash
provided by operating activities was $2,692,000 during the first six months of
fiscal year 2009 compared to $5,995,000 during the same period a year
ago.  The decrease in cash provided by operating activities is
primarily due to exceptional collections on accounts receivable in the first six
months of fiscal 2008 resulting in comparably slower collections of
our accounts receivable and a reduction in deferred tax liabilities partially
offset by an increase in net income.
  30
 Index
 
 Cash used
in investing activities was $6,045,000 during the first six months
of  fiscal 2009 compared to $7,825,000 during the same period a year
ago.  The decrease in cash used in investing activities is primarily
attributable to decreased acquisition costs.  During the first six
months of fiscal 2009, Mediware paid an initial purchase price of $3,483,000 for
the assets of HOS and another $314,000 as final payment for the IMS
acquisition.  In the fiscal 2008 period, the Company paid $5,501,000
as the initial purchase price for the IMS business.
 
 Cash used
in financing activities was $127,000 during the first six months of fiscal 2009
compared to $4,000 during the same period a year ago.  The cash used
for financing activities in the 2009 period is attributable to stock repurchases
under our Share Repurchase Program.  There were no stock repurchases
during the fiscal 2008 period.
 
 We
currently use cash flow from operations to fund our capital expenditures and to
support our working capital requirements.  We expect that future cash
requirements will principally be for capital expenditures, working capital
requirements, any additional stock repurchases and other strategic
initiatives.
 
 We
believe that our existing cash balances and cash flow from operations will be
sufficient to meet our projected capital expenditures, working capital,
repurchase of shares, and other cash requirements at least through the end of
fiscal 2009.
 
 Our
liquidity is influenced by our ability to perform on a “Best of Suite”
basis in a competitive industry.  Factors that may affect liquidity
include our ability to penetrate the market for our products, maintain or
reduce the length of the selling cycle, and collect cash from clients as systems
are licensed or implemented.  Exclusive of activities involving any
future acquisitions of products or companies that complement or augment our
existing line of products or any additional stock repurchases, we believe that
current available funds and cash generated from operations will provide
sufficient liquidity to meet operating requirements for the foreseeable
future.  We continue to review our long-term cash
needs.  Currently, there are no plans for additional outside
financing, except that Mediware is considering establishing a new line of credit
or an alternative source of financing that we may access upon
demand.
  31
 Index
 
 ITEM 3.
              QUANTITATIVE AND
      QUALITATIVE DISCLOSURES ABOUT MARKET
  RISK
 
 Mediware
is subject to market risks from interest rates due to the fluctuating rates paid
on its cash equivalent balances and foreign currency fluctuations due to the
operations of JAC. Mediware has observed increased volatility in market rates as
overall economic conditions have deteriorated.  To date, Mediware has
not entered into any derivative financial instruments or engaged in other
hedging transactions to reduce its exposure to such risks.
   Interest
Rate Risk
 
 Mediware
is exposed to the impact of interest rate changes because of its substantial
cash equivalent balances.  These balances are not held for trading
purposes.
 
 Balance
      at
                    December
      31, 2008
                    ($
      in 000)
                  
                  
                  Effective
                    Interest
      Rate at
                    December
      31, 2008
                  
                  
                  Effect
      of 1% Change
                    ($
      in 000)Cash
      Equivalents
                  
                  $
                  18,631
                  
                  
                  
                  2.6
                  %
                  
                  $
                  186
 
 At
December 31, 2008, a 1% decrease in the current per annum interest rate for our
cash equivalents each would result in $186,000 less interest income during the
next fiscal year.  The foregoing calculation assumes an instantaneous
one percentage point decrease in the rates of all of our cash equivalents and
that the equivalents balance is the amount outstanding as of December 31,
2008.  The calculation, therefore, does not account for any
differences in the market rates upon which the interest rates of our equivalents
is based, or other possible actions, such as reinvestment in higher yielding
instruments, that we might take in response to any rate decrease.
 
 
 Concentrations
of Credit Risk
 
 Mediware
maintains its cash and cash equivalents with financial institutions with high
credit ratings.  At this time, the Company maintains deposits in
federally insured financial institutions in excess of federally insured (FDIC)
limits.  However management believes that the Company is not exposed
to significant credit risk.  The Company has not experienced any
losses to its cash and cash equivalents.
 
 
 Foreign
Currency Exchange Rate Risk
 
 Operating
in international markets involves exposure to the possibility of volatile
movements in foreign exchange rates. The currencies in each of the countries in
which JAC operates affect:
 
 ●
              the
      results of Mediware’s international operations reported in United States
      dollars; and
 
 ●
              the
      value of the net assets of JAC reported in United States
      dollars.
 
 These
exposures may impact future earnings or cash flows. Revenue from JAC represented
approximately 13% and 16% of Mediware’s consolidated revenue for the
three-months ended December 31, 2008 and 2007, respectively, and 14% and 13% for
the six-months ended December 31, 2008 and 2007, respectively. The economic
impact of foreign exchange rate movements is complex because such changes are
often linked to variability in real growth, inflation, interest rates,
governmental actions and other factors. These changes, if material, could cause
Mediware to adjust its financing and operating strategies. Therefore, to isolate
the effect of changes in currency does not accurately portray the effect of
these other important economic factors. As foreign exchange rates change,
translation of the income statements of JAC into U.S. dollars affects
year-over-year comparability of operating results.  Assets and
liabilities for JAC are matched in the local currency, which reduces the need
for dollar conversion. Any foreign currency impact on translating assets and
liabilities into dollars is included as a component of stockholders’
equity.  Our net income for the three and six-months ended December
31, 2008 was negatively impacted by a $31,000 and $67,000 foreign currency
movement, respectively, and was positively impacted by a $1,000 foreign currency
movement, respectively, for the three-months and six-months ended December 31,
2007.  These foreign currency adjustments are primarily due to the
currency valuation of the British pound against the United States
dollar.
  32
 Index
 
 ITEM 4.
              CONTROLS AND
      PROCEDURES
 
 Mediware’s
management, under the supervision and with the participation of Mediware’s Chief
Executive Officer and Chief Financial Officer, has reviewed and evaluated the
effectiveness of Mediware’s disclosure controls and procedures as of the end of
the quarter covered by this report.  Disclosure controls and
procedures are defined in the Securities Exchange Act as controls and other
procedures of Mediware designed to ensure that information required to be
disclosed by Mediware in the reports that it files or submits under the
Securities Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms and include controls and
procedures designed to ensure that information required to be disclosed by
Mediware in the reports that it files or submits to the SEC is accumulated and
communicated to Mediware’s management, including the CEO and CFO, to allow
timely decisions regarding required disclosure.  Based on the
foregoing review and evaluation, Mediware’s CEO and CFO have concluded that
Mediware’s disclosure controls and procedures are effective as of December 31,
2008.
 
 There
were no material changes in Mediware’s internal controls over financial
reporting that occurred during the three and six-months ended December 31, 2008
that have materially affected, or are reasonably likely to materially affect,
its internal controls over financial reporting.
 
 
 PART
      II
              OTHER INFORMATION
 
 
 ITEM 1.
              LEGAL
      PROCEEDINGS
 
 On March
6, 2006, Triad Laboratory Alliance, LLC d/b/a Spectrum Laboratory Network
(“Spectrum”) filed suit against Mediware in the General Court for Justice,
Superior Court Division, County of Guilford, North Carolina. The case was
subsequently removed from North Carolina state court to the United States
District Court for the Middle District of North Carolina. Spectrum sought an
unspecified amount of damages (exceeding $300,000) due to, among other things,
Mediware’s alleged misrepresentations and breaches of warranties under its
license agreement and the alleged violation of the North Carolina unfair trade
practices statute.  Mediware filed a counterclaim alleging, among
other things, breach of contract and misappropriation by Spectrum of Mediware’s
intellectual property.  In November 2008, the parties entered
into a settlement agreement and mutual releases of claims by the parties against
each other, with no material adverse impact on the Company.
 
 On August
16, 2006, Mediware filed a lawsuit against Korchek Technologies, LLC (“Korchek”)
in the United States District Court for the Eastern District of New York
alleging breach of contract and tortous interference with Mediware's contractual
relationships with certain customers.  On September 28, 2006, Korchek
filed an answer to Mediware's lawsuit denying any wrongdoing and filed a
counterclaim. The counterclaim seeks unspecified damages and alleges, among
other things, that Mediware has improperly interfered with Korchek’s prospective
business relationships; disparaged Korchek, its president and its products and
improperly induced Korchek’s customers to breach their contractual relationship
with Korchek.  In September 2008, the parties entered into a
settlement agreement and mutual releases of claims by the parties against each
other.
 
 In
addition to the foregoing, Mediware from time to time becomes involved in
routine litigation incidental to the conduct of its business, including
employment disputes and litigation alleging product defects, intellectual
property infringements, violations of law and breaches of contract and
warranties.  Mediware believes that such routine litigation, if
adversely determined, would not have a material adverse effect on its
consolidated financial position, results of operations or cash
flows.
 
 
 Item
      1A.
              RISK FACTORS
  You
should carefully consider the risk factors disclosed in our Annual Report on
Form 10-K for the year ended June 30, 2008 and Quarterly Report on Form 10-Q for
the quarter ended September 30, 2008 included under Item 1A “Risk Factors” in
addition to the other information set forth in this report (including the risk
factors identified below). The risks described in our Annual Report on Form 10-K
and our Quarterly Reports on Form 10-Q are not the only risks facing our
Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
  33
 Index
  We
have recently consummated a strategic acquisition and may pursue additional
strategic acquisitions, investments, and relationships in the future, and we may
not be able to successfully manage our operations if we fail to successfully
integrate acquired businesses and technologies, which could adversely affect our
operating results.
 
 As part
of our business strategy, we may seek and complete strategic business
acquisitions that that are complementary to our business. On November 20, 2008,
we acquired substantially all of the assets of HOS, a company that provides
medication management solutions to the small hospital, specialty pharmacy and
home infusion markets. Acquisitions, such as our acquisition of the business of
HOS, have inherent risks which may have a material adverse effect on our
business, financial condition, operating results or prospects, including, but
not limited to, the following:
 
 ·
              failure to successfully integrate
      the business and financial operations, services, intellectual property,
      solutions or personnel of the acquired
  business
 
 ·
              diversion of management’s
      attention from other business
concerns
 
 ·
              failure to achieve projected
      synergies and performance
targets
 
 ·
              loss of customers or key
      personnel of the acquired
business
 
 ·
              possibility that the due
      diligence process in any such acquisition may not completely identify
      material issues associated with product quality, product architecture,
      product development, intellectual property issues, key personnel issues or
      legal and financial contingencies,
and
 
 ·
              a possible write-off of software
      development costs and amortization of expenses related to intangible
      assets.
 
 If we
fail to successfully integrate HOS or other acquired businesses or fail to
implement our business strategies with respect to these acquisitions, we may not
be able to achieve projected results or support the amount of consideration paid
for such acquired businesses.
 
 
 ITEM 2.
              UNREGISTERED SALES
      OF EQUITY SECURITIES AND USE OF
  PROCEEDS
 
 In
February 2008, the Board of Directors of the Company authorized Mediware to
repurchase up to $4,000,000 of its Common Stock, at times and prices as the
President and Chief Executive Officer or the Chief Financial Officer of the
Company shall determine to be appropriate (the “Share Repurchase
Program”).  In October 2008, the Board of Directors expanded the Share
Repurchase Program by $3,318,000, bringing the total amount authorized under the
Share Repurchase Program to $7,318,000.  The program has no expiration
date, and Mediware has no obligation to purchase shares under the Share
Repurchase Program.
 
 As of
December 31, 2008, the Company has repurchased a total of 577,000 shares of
Common Stock at a cost of $3,445,000 under the Share Repurchase Program,
including 28,000 shares of Common Stock purchased at a cost of $127,000 during
the three and six months ended December 31, 2008.  As of December 31,
2008, the Company is authorized to purchase up to an additional $3,873,000 of
Common Stock under the Share Repurchase Program.
  34
 Index
  The
following table lists Mediware’s share repurchases during the second quarter of
fiscal 2009:
 
 Period
                  Total
      Number ofShares Purchased
                  Average
      PricePaid Per Share
                  Total
      Number of Shares
                    Purchased as Part ofPublicly AnnouncedProgram
                  Maximum Dollar Value ofShares That May
      Yet
                    Be Purchased Underthe ProgramNovember
      2009
                  28,000
                  $4.54
                  577,000
                  $
      3,873,000Total
                  28,000
                  $4.54
                  577,000
                  $   3,873,000
 
 
 ITEM 4.
              SUBMISSION OF
      MATTERS TO A VOTE OF SECURITY
HOLDERS
 
 (a)
              We
      held our annual stockholders’ meeting on December 4,
  2008.
 
 (b)
              At
      our annual shareholders’ meeting we voted on a proposal to elect Philip
      Coelho, T. Kelly Mann and Ira Nordlicht for three-year terms as Class II
      directors;
 
 (c)
              We
      voted on two proposals at the annual shareholders’ meeting: the election
      of directors and the ratification of Eisner LLP, as independent registered
      public accounting firm for the Company for the year ending June 30,
      2009.
 
 (1)
      Election of DirectorsFor
                            
                            Withhold
                            
                            AbstainPhilip
      Coelho
                            
                            7,169,871
                            
                            426,890
                            
                            -T.
      Kelly Mann
                            
                            7,016,612
                            
                            580,149
                            
                            -Ira
      Nordlicht
                            
                            7,169,871
                            
                            426,890
                            
                            -(2)
      Proposal to ratify selection of Eisner LLP as independent registered
      public accounting firm for theCompany
      for the year ending June 30, 2009.For
                            
                            Against
                            
                            AbstainEisner
      LLP
                            
                            7,566,995
                            
                            7,410
                            
                            22,356
  35
 Index
  ITEM
      6.
              EXHIBITS
  Exhibit 11
                      Schedule
      of Computation of Net Earnings Per ShareExhibit 15
                      Consent
      of Independent Registered Public Accounting FirmExhibit 31.1
                      Rule
      13a-14(a)/15d-14(a) CertificationExhibit 31.2
                      Rule
      13a-14(a)/15d-14(a) CertificationExhibit 32.1
                      Certification
      Pursuant to 18 U.S.C.
1350
  36
 Index
  SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
   MEDIWARE
      INFORMATION SYSTEMS, INC.(Registrant)February 3, 2009
                                                /s/
                                                T. KELLY MANNDate
                                                
                                                
                                                T.
      KELLY MANNPRESIDENT
      AND CHIEF EXECUTIVE
OFFICER
   February 3, 2009
                                                    /s/
                                                    MARK B. WILLIAMSDate
                                                    
                                                    
                                                    MARK
      B. WILLIAMSCHIEF
      FINANCIAL
OFFICER