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 March 31, 2008
  OR
  oTRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the
transition period from
to
  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)
  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.   xYes       
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
              xNon-accelerated
      filer
              o
              
              Smaller
      reporting company
              o(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).  oYes     
xNo
   APPLICABLE
ONLY TO CORPORATE ISSUERS:
   As of May
1, 2008, there were 7,609,000 shares of Common Stock, $0.10 par value, of the
registrant outstanding.
  
 1
  MEDIWARE
INFORMATION SYSTEMS, INC.
  INDEX
  PagePART
      I
              
              Financial
      InformationITEM
      1.
              
              Financial
      StatementsCondensed Consolidated Balance Sheets as of March 31, 2008
      (Unaudited) and June 30, 2007
              3Condensed Consolidated Statements of Operations and
      Comprehensive Income (Unaudited) for the Three and Nine Months Ended March
      31, 2008 and 2007
              4Condensed Consolidated Statements of Cash Flows (Unaudited) for
      the Nine Months Ended March 31, 2008 and 2007
              5Notes to Unaudited Condensed Consolidated Financial
      Statements
              6Review Report of Independent Registered Public Accounting
      Firm
              19ITEM
      2.
              
              Management's Discussion and Analysis of Financial Condition and
      Results of Operations
              20ITEM
      3.
              
              Quantitative and Qualitative Disclosures About Market
      Risk
              29ITEM
      4.
              
              Controls and Procedures
              30PART
      II
              
              Other
      InformationITEM
      1.
              
              Legal Proceedings
              30ITEM
      1A.
              
              Risk Factors
              31ITEM
      2.
              
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              31ITEM
      6.
              
              Exhibits
              32Signatures
              
              
              33
  2
 Index
  PART
I     FINANCIAL INFORMATION
  1.      FINANCIAL
STATEMENTS
  MEDIWARE INFORMATION SYSTEMS, INC.
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (Amounts
in thousands except shares)
 
 (Unaudited)March
      31,
              
              
              June
      30,2008
              
              
              2007ASSETSCurrent
      AssetsCash
      and cash equivalents
              
              $
              20,766
              
              
              $
              22,789Accounts
      receivable (net of allowance of $850 and $1,079)
              
              
              9,447
              
              
              
              11,481Inventories
              
              
              97
              
              
              
              196Deferred
      income taxes
              
              
              815
              
              
              
              957Prepaid
      expenses and other current assets
              
              
              942
              
              
              
              843Total
      current assets
              
              
              32,067
              
              
              
              36,266Fixed
      assets, net
              
              
              1,929
              
              
              
              1,210Capitalized
      software costs, net
              
              
              16,238
              
              
              
              18,005Goodwill,
      net
              
              
              7,067
              
              
              
              3,739Other
      intangible assets, net
              
              
              1,453
              
              
              
              -Other
      long-term assets
              
              
              35
              
              
              
              100Total
      Assets
              
              $
              58,789
              
              
              $
              59,320LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesAccounts
      payable
              
              $
              1,296
              
              
              $
              1,171Current
      portion of note payable
              
              
              -
              
              
              
              4Advances
      from customers
              
              
              8,921
              
              
              
              7,246Accrued
      expenses and other current liabilities
              
              
              3,571
              
              
              
              3,511Total
      current liabilities
              
              
              13,788
              
              
              
              11,932Deferred
      income taxes
              
              
              5,413
              
              
              
              5,357Total
      liabilities
              
              
              19,201
              
              
              
              17,289Stockholders'
      EquityPreferred
      stock, $.01 par value; authorized 10,000,000 shares; none
      issued
              
              
              -
              
              
              
              -Common
      stock, $.10 par value; authorized 25,000,000 shares; 8,158,000 and
      8,151,000 shares issued as of March 31, 2008 and June 30, 2007,
      respectively
              
              
              816
              
              
              
              815Additional
      paid-in capital
              
              
              31,129
              
              
              
              30,690Treasury
      stock, 549,000 shares at March 31, 2008
              
              
              (3,318
              )
              
              
              -Retained
      earnings
              
              
              10,855
              
              
              
              10,413Accumulated
      other comprehensive income
              
              
              106
              
              
              
              113Total
      stockholders' equity
              
              
              39,588
              
              
              
              42,031Total
      Liabilities and Stockholders' Equity
              
              $
              58,789
              
              
              $
              59,320
 
 See Notes
to Unaudited Condensed Consolidated Financial Statements.
  3
 Index
  MEDIWARE INFORMATION SYSTEMS, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 (Amounts
in thousands, except earnings per share)
 
 (Unaudited)
                Three
      months ended
                March
      31,
              
              
              (Unaudited)
                Nine
      Months ended
                March
      31,2008
              
              
              2007
              
              
              2008
              
              
              2007RevenueSystem
      sales
              
              $
              2,659
              
              
              $
              4,887
              
              
              $
              8,881
              
              
              $
              12,100Services
              
              
              7,180
              
              
              
              6,170
              
              
              
              20,361
              
              
              
              18,694Total
      revenue
              
              
              9,839
              
              
              
              11,057
              
              
              
              29,242
              
              
              
              30,794Cost
      and ExpensesCost
      of systems (1)
              
              
              835
              
              
              
              802
              
              
              
              2,209
              
              
              
              2,133Cost
      of services
              
              
              2,364
              
              
              
              2,198
              
              
              
              6,878
              
              
              
              6,118Amortization
      of capitalized software costs
              
              
              1,441
              
              
              
              1,354
              
              
              
              4,312
              
              
              
              3,982Software
      development costs
              
              
              1,035
              
              
              
              999
              
              
              
              2,981
              
              
              
              2,983Selling
      general and administrative
              
              
              3,852
              
              
              
              4,729
              
              
              
              12,528
              
              
              
              13,408Total
      costs and expenses
              
              
              9,527
              
              
              
              10,082
              
              
              
              28,908
              
              
              
              28,624Operating
      income
              
              
              312
              
              
              
              975
              
              
              
              334
              
              
              
              2,170Interest
      and other income
              
              
              195
              
              
              
              250
              
              
              
              734
              
              
              
              735Interest
      and other (expense)
              
              
              (7
              )
              
              
              6
              
              
              
              (41
              )
              
              
              52Income
      before income taxes
              
              
              500
              
              
              
              1,231
              
              
              
              1,027
              
              
              
              2,957Income
      tax expense
              
              
              (184
              )
              
              
              (400
              )
              
              
              (585
              )
              
              
              (1,057
              )Net
      income
              
              
              316
              
              
              
              831
              
              
              
              442
              
              
              
              1,900Other
      comprehensive incomeForeign
      currency translation adjustment
              
              
              (1
              )
              
              
              64
              
              
              
              (7
              )
              
              
              92Comprehensive
      income
              
              $
              315
              
              
              $
              895
              
              
              $
              435
              
              
              $
              1,992Net
      income per Common ShareBasic
              
              $
              0.04
              
              
              $
              0.10
              
              
              $
              0.05
              
              
              $
              0.23Diluted
              
              $
              0.04
              
              
              $
              0.10
              
              
              $
              0.05
              
              
              $
              0.23Weighted
      Average Common Shares OutstandingBasic
              
              
              7,918
              
              
              
              8,122
              
              
              
              8,076
              
              
              
              8,110Diluted
              
              
              8,273
              
              
              
              8,440
              
              
              
              8,411
              
              
              
              8,391
 
 (1)
Excludes amortization of capitalized software costs
  See Notes
to Unaudited Condensed Consolidated Financial Statements.
  4
 Index
  MEDIWARE INFORMATION SYSTEMS, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Amounts
in thousands)
  (Unaudited)Nine
      Months EndedMarch
      31,2008
              
              
              2007Cash
      Flows From Operating ActivitiesNet
      income
              
              $
              442
              
              
              $
              1,900Adjustments
      to reconcile net income, to net cash provided by operating
      activities:Depreciation
      and amortization
              
              
              4,900
              
              
              
              4,435Loss
      on write-off of fixed assets
              
              
              11
              
              
              
              -Stock
      based compensation expense
              
              
              493
              
              
              
              200Deferred
      tax provision
              
              
              372
              
              
              
              926Excess
      tax benefit from exercise of stock options
              
              
              -
              
              
              
              (35
              )Provision
      for doubtful accounts
              
              
              31
              
              
              
              327Changes
      in operating assets and liabilities, net of effect of
      acquisition:Accounts
      receivable
              
              
              2,504
              
              
              
              (4,667
              )Inventories
              
              
              99
              
              
              
              35Prepaid
      expenses and other assets
              
              
              (27
              )
              
              
              (210
              )Accounts
      payable, accrued expenses and advances from customers
              
              
              1,722
              
              
              
              2,364Net
      cash provided by operating activities
              
              
              10,547
              
              
              
              5,275Cash
      Flows From Investing ActivitiesAcquisition
      of fixed assets
              
              
              (1,171
              )
              
              
              (446
              )Capitalized
      software costs
              
              
              (2,546
              )
              
              
              (3,040
              )Acquisition
      of business
              
              
              (5,524
              )
              
              
              -Net
      cash used in investing activities
              
              
              (9,241
              )
              
              
              (3,486
              )Cash
      Flows From Financing ActivitiesProceeds
      from exercise of stock options
              
              
              -
              
              
              
              439Excess
      tax benefit from exercise of stock options
              
              
              -
              
              
              
              35Repurchase
      of common stock
              
              
              (3,318
              )
              
              
              -Principal
      payments on note payable
              
              
              (4
              )
              
              
              (18
              )Net
      cash provided by (used in) financing activities
              
              
              (3,322
              )
              
              
              456Foreign
      currency translation adjustments
              
              
              (7
              )
              
              
              92Net
      (decrease) increase in cash and cash equivalents
              
              
              (2,023
              )
              
              
              2,337Cash
      at beginning of period
              
              
              22,789
              
              
              
              18,996Cash
      at end of period
              
              $
              20,766
              
              
              $
              21,333Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
      on notes payable
              
              $
              -
              
              
              $
              1Income
      taxes paid (received)
              
              $
              154
              
              
              $
              (49
              )
  5
 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, 2007, included in Mediware's Annual Report filed on Form
10-K for such fiscal year.
 
 The
results of operations for the three and nine months ended March 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 nine months ended March 31, 2008 and
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 approved a share repurchase
program, authorizing Mediware to repurchase up to $4.0 million 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 program has no expiration date, and Mediware has no
obligation to purchase shares under the program.  Pursuant to the
program, Mediware repurchased 549,000 shares at a cost of $3,318,000 during the
quarter ended March 31, 2008.
 
 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 uses 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
 
 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 leading 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 which
supported donor recruitment, call centers, customer service, hospital services,
sales and prospecting.   Following the acquisition, the Company
began to provide 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.
  6
 Index
 
 The
acquired IMS assets generate revenue through subscription sales of web-based
applications and by providing professional and promotional services to its
customers.  Subscription revenues are recognized evenly over the
subscription period.  Service revenues are recognized as the service is
rendered.  Promotional revenues are recognized as the promotional goods and
services are rendered.
 
 The
purchase price paid for the assets of IMS consists of an initial purchase price
of $5,458,000 paid in cash at the closing, plus contingent consideration up to
$575,000 based upon the achievement of certain revenue
milestones.  The purchase price is also subject to a working capital
adjustment.  The Company incurred $66,000 of legal and accounting fees
related to this transaction which have been included in the purchase
price.  The Company expects to finalize the purchase price, including
all contingent consideration, by October 2008.  The results of the IMS
acquisition are included in the accompanying condensed consolidated financial
statements from the date of acquisition.
 
 The
Company has accounted for the acquisition of IMS as the purchase of a business
under U.S. Generally Accepted Accounting Principles.  The assets and
liabilities of IMS 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:
 
 Purchase
      Price
                AllocationAccounts
      receivable
              
              $
              501,000Fixed
      assets
              
              
              35,000Intangible
      assets subject to amortization
              
              
              1,564,000Goodwill
              
              
              3,502,000Other
      long-term assets
              
              
              7,000Accounts
      payable
              
              
              (50,000
              )Customer
      advances
              
              
              (35,000
              )Total
      Purchase Price
              
              $
              5,524,000
 
 The
excess of the purchase price over the fair value of net tangible assets acquired
was allocated to specific intangible asset categories and goodwill as
follows:
 
 Amount
                Assigned
              
              
              Weighted
                Average
                Amortization
                Period
              
              
              Risk-Adjusted
                Discount
      Rate
                Used
      in Purchase Price
                AllocationAmortizable
      Intangible AssetsPurchased
      technology
              
              $
              473,000
              
              
              5.0
      years
              
              
              25.9%Customer
      relationships
              
              
              1,056,000
              
              
              7.0
      years
              
              
              25.9%Non-compete
      agreements
              
              
              35,000
              
              
              1.5
      years
              
              
              24.0%$
              1,564,000
              
              
              6.3
      yearsGoodwill
              
              $
              3,502,000
 
 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.
  7
 Index
 
 The
Company valued the purchased technology using the relief from royalty method,
which is considered an income approach.  The underlying principal of
the relief from royalty method is that the value of purchased technology can be
estimated by determining the cost savings the company achieves by not having to
license the software and pay royalties.  This method requires the use
of certain estimates, including forecasted sales, royalty rates and discount
rates.  Based on this methodology the Company assigned the value of
purchased technology at $473,000.  The Company is amortizing this
amount over its estimated useful life of 5 years.
 
 The
Company valued the customer relationships using 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 $1,056,000.  The Company is
amortizing this amount over its estimated useful life of 7 years.
 
 The
Company valued the non-compete agreements using an 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 $35,000.  The
Company is amortizing this amount over its estimated useful life of 1.5
years.
 
 Goodwill
is expected to be deductible for tax purposes.
 
 5.
GOODWILL AND OTHER INTANGIBLE ASSETS
 
 Goodwill
 
 The
change in the carrying amount of our goodwill during the nine months ended March
31, 2008 is as follows (in thousands):
 
 Carrying
      amount as of June 30, 2007
              
              $
              3,739,000Increase
      from acquisition of business
              
              
              3,502,000Tax
      benefit of amortization
              
              
              (174,000
              )Carrying
      amount as of March 31, 2008
              
              $
              7,067,000
 
 
 Other
Intangible Assets
 
 Gross
      Carrying
                Amount
              
              
              Accumulated
                Amortization
              
              
              Net
      Carrying Amount
              
              
              Weighted
      Average
                Useful
      Life
                (in
      years)Purchased
      technology
              
              $
              473,000
              
              
              $
              (39,000
              )
              
              $
              434,000
              
              
              
              5.0Customer
      relationships
              
              
              1,056,000
              
              
              
              (63,000
              )
              
              
              993,000
              
              
              
              7.0Non-compete
      agreements
              
              
              35,000
              
              
              
              (9,000
              )
              
              
              26,000
              
              
              
              1.5$
              1,564,000
              
              
              $
              (111,000
              )
              
              $
              1,453,000
  8
 Index
 
 Amortization
expense for other intangible assets amounted to $67,000 and $111,000 for the
three and nine months ended March 31, 2008, respectively.  The
following represents the expected amortization in future periods:
 
 Fiscal
                Year
              
              Expected
                Amortization2008
              
              $
              68,0002009
              
              
              270,0002010
              
              
              249,0002011
              
              
              249,0002012
              
              
              249,000Thereafter
              
              
              368,000$
              1,453,000
 
 6.     STOCK
BASED COMPENSATION
 
 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 March 31, 2008, there were 1,052,000 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 March 31, 2008 no options were available to be issued
under this Plan.
 
 The
Company's 1997 Stock Option Plan for Non-Employee Directors, which provided
compensation to directors for their services without the expenditure of cash,
was intended to increase ownership interest of the non-employee directors.
Options granted under this plan were exercisable at 100% of the fair market
value on the date of grant and were for terms of eight years and vested in two
equal installments during the year issued. Shares granted under this plan were
limited to 500,000. This Plan was terminated effective January 2002, and no
additional options are available to be issued under this Plan.
  9
 Index
  The
Company's Equity Incentive Plan, approved by its shareholders in January 1992
and amended in March 2000, provided additional compensation incentives for high
levels of performance and productivity by management and other key employees of
the Company. The combined number of shares issued or available for issuance
under this plan could not exceed thirty percent of the issued and outstanding
Common Stock of the Company and not more than 700,000 shares could have been
issued as incentive stock options. Options could have been granted for a period
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 50% 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. This plan was
terminated effective January 2002, and no additional options are available to be
issued under this Plan.
 
 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 $189,000 and $53,000 for the three months ended March 31, 2008 and 2007,
respectively, and $440,000 and $200,000 for the nine months ended March 31, 2008
and 2007, respectively.
 
 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
      March 31,
              
              For
      the Nine Months
                Ended
      March 31,2008
              
              2007
              
              2008
              
              2007Risk-free
      interest rates
              2.7%
      - 2.8%
              
              No
      Options
              
              2.7%
      - 4.8%
              
              4.5%
      - 4.6%Expected
      option life in years
              2 -
      3
              
              Granted
              
              1 –
      5
              
              2 -
      3Expected
      stock price volatility
              35%
      - 41%
              
              
              
              34%
      - 41%
              
              36%
      - 37%Expected
      dividend yield
              -
              
              
              
              -
              
              -
 
 The
risk-free interest 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.
  10
 Index
 
 The
following table sets forth summarized information concerning the Company's stock
options as of March 31, 2008:
 
 Shares
              
              
              Weighted
      Average Exercise Price
              
              
              Weighted
      Average Remaining Contractual Term
              
              
              Aggregate
      Intrinsic ValueOutstanding
      at June 30, 2007
              
              
              1,022,000
              
              
              $
              8.97Granted
              
              
              227,000
              
              
              $
              6.90Exercised
              
              
              -
              
              
              
              -Forfeited
      or expired
              
              
              (202,000
              )
              
              $
              9.03Outstanding
      at March 31, 2008
              
              
              1,047,000
              
              
              $
              8.50
              
              
              
              4.0
              
              
              $
              333,000Expected
      to vest at March 31, 2008
              
              
              1,047,000
              
              
              $
              8.50
              
              
              
              4.0
              
              
              $
              333,000Options
      exercisable at March 31, 2008
              
              
              832,000
              
              
              $
              8.93
              
              
              
              3.1
              
              
              $
              333,000
 
 The
strike price of the options is determined based on the average trading price of
the Company’s shares on the grant date.
 
 Cash
received from options exercised under all stock-based payment arrangements for
the nine months ended March 31, 2007 was $439,000.  The excess tax
benefit realized for the tax deductions related to option exercises of the
share-based payment arrangements totaled $35,000 for the nine months ended March
31, 2007.  The aggregate intrinsic value of options exercised during
the nine months ended March 31, 2007 was $93,000.  There were no
options exercised during the nine months ended March 31,
2008.  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 nine
months ended March 31, 2008 and 2007 was $2.15 and $2.30 per option,
respectively.  The Company recorded $58,000 and $53,000 of
compensation expense for stock option plans for the three months ended March 31,
2008 and 2007, respectively,and $127,000 and
$200,000 for the nine months ended March 31, 2008 and 2007,
respectively.
 
 Estimated
future stock-based compensation expense relating to stock options is as
follows:
 
 Fiscal Years Ending June
30,
              
              Future
                Stock
      Option
                Compensation
                Expense2008
              
              $
              65,0002009
              
              
              166,0002010
              
              
              85,0002011
              
              
              37,0002012
              
              
              9,000Total
      estimated future stock-based compensation expense
              
              $
              362,000
  11
 Index
 
 A summary
of the status of the Company’s nonvested options as of March 31, 2008, and
changes during the nine months ended March 31, 2008, is presented
below:
 
 Nonvested
      Options
              
              Shares
              
              
              Weighted
      Average
                Grant
      Date
                Fair
      ValueNonvested
      at June 30, 2007
              
              
              -
              
              
              $
              -Granted
              
              
              227,000
              
              
              
              2.15Canceled
      or expired
              
              
              -
              
              
              
              -Vested
              
              
              (12,000
              )
              
              
              0.40Nonvested
      at March 31, 2008
              
              
              215,000
              
              
              $
              2.25
 
 As of
March 31, 2008, there was $362,000 of total unrecognized compensation cost
related to nonvested options granted under existing stock option
plans.  The total fair value of stock options vested during the nine
months ended March 31, 2008 was $5,000.
 
 The
following table presents information relating to stock options at March 31,
2008:
 
 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
              
              
              
              163,000
              
              
              $
              3.61
              
              
              1.5
              
              
              
              163,000
              
              
              $
              3.61$4.50
      - $ 7.49
              
              
              
              280,000
              
              
              $
              6.84
              
              
              5.9
              
              
              
              65,000
              
              
              $
              6.74$7.50
      - $ 8.99
              
              
              
              134,000
              
              
              $
              8.11
              
              
              2.4
              
              
              
              134,000
              
              
              $
              8.11$9.00
      - $ 10.49
              
              
              
              203,000
              
              
              $
              10.14
              
              
              4.4
              
              
              
              203,000
              
              
              $
              10.14$10.50
      - $11.99
              
              
              
              95,000
              
              
              $
              10.89
              
              
              2.2
              
              
              
              95,000
              
              
              $
              10.89$12.00
      - $13.49
              
              
              
              117,000
              
              
              $
              12.45
              
              
              5.2
              
              
              
              117,000
              
              
              $
              12.45$13.50
      - $14.99
              
              
              
              45,000
              
              
              $
              13.74
              
              
              5.9
              
              
              
              45,000
              
              
              $
              13.74$15.00+
              
              
              
              10,000
              
              
              $
              15.00
              
              
              0.6
              
              
              
              10,000
              
              
              $
              15.001,047,000
              
              
              
              
              
              
              
              
              
              
              
              832,000
 
 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.  During the nine months ended March 31, 2008, 125,000 of
these Performance Shares were canceled due to the resignation of certain key
employees.  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.
  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 30,000 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.  For the three months and nine months ended March 31,
2008, the Company recorded $16,000 and $79,000 respectively, of compensation
expense related to the Time-Based Shares, including a benefit of $18,000 related
to the forfeiture of 5,000 unvested Time-Based Shares during the second quarter
of fiscal 2008.  The Time-Based Shares will result in compensation
expense in future periods of up to $53,000, representing the fair value on the
date of the grant less the amount of compensation expense already
recorded.
 
 In July
2007, each member of the Company’s Board of Directors was granted $10,000 of
restricted Common Stock (the “Director Shares”) as part of their compensation
for serving on the Company’s Board of Directors during fiscal
2008.  The number of shares granted was determined based upon the fair
market value of the company’s stock on January 1, 2008.  As a result,
a total of 10,000 Director Shares were granted to the
directors.  These shares vest on June 30, 2008 based upon the
director’s continued service on the Company’s Board of Directors.  For
the three and nine months ended March 31, 2008, the Company recorded $18,000 and
$53,000 respectively, of compensation expense related to these
shares.  These shares will result in compensation expense in future
periods of up to $17,000, representing the fair value of the shares 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 goals.  For
the three months ended and nine months ended March 31, 2008, the Company
recorded $115,000 and $234,000 respectively, of compensation expense related to
the Enhanced Performance Shares.  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 $1,223,000,
representing the fair value on the date of the grant less the amount of
compensation expense already recorded.  This amount includes $305,000
of unrecognized time-based compensation expense related to the continued
employment of the key employees.
 
 Estimated
future stock-based compensation expense to be charged to operations is as
follows:
 
 Fiscal Years Ending June
30,
              
              Time-Based
      Shares
              
              
              
              Director
      Shares
              
              
              Enhanced
      Performance Shares (Time-Based Portion)
              
              
              Total2008
              
              $
              13,000
              
              
              $
              17,000
              
              
              $
              78,000
              
              
              $
              108,0002009
              
              
              31,000
              
              
              
              -
              
              
              
              154,000
              
              
              
              185,0002010
              
              
              8,000
              
              
              
              -
              
              
              
              67,000
              
              
              
              75,0002011
              
              
              1,000
              
              
              
              -
              
              
              
              6,000
              
              
              
              7,000Total
      estimated future stock-based compensation expense
              
              $
              53,000
              
              
              $
              17,000
              
              
              $
              305,000
              
              
              $
              375,000
  13
 Index
  A summary
of the status of the Company’s nonvested restricted Common Stock as of March 31,
2008, and changes during the nine months ended March 31, 2008, is presented
below:
 
 Performance
      Shares
              
              
              Weighted
      Average
                Grant
      Date
                Fair
      Value
              
              
              Enhanced
      Performance Shares
              
              
              Weighted
      Average
                Grant
      Date
                Fair
      Value
              
              
              Time-Based
      Shares
              
              
              Weighted
      Average
                Grant
      Date
                Fair
      Value
              
              
              Director
                Shares
              
              
              Weighted
      Average
                Grant
      Date
                Fair
      ValueNonvested
      at June 30, 2007
              
              
              200,000
              
              
              $
              8.80
              
              
              
              -
              
              
              $
              -
              
              
              
              22,000
              
              
              $
              8.50
              
              
              
              -
              
              
              $
              -Granted
              
              
              -
              
              
              $
              -
              
              
              
              220,000
              
              
              $
              6.62
              
              
              
              5,000
              
              
              $
              6.21
              
              
              
              10,000
              
              
              $
              6.65Canceled
      or expired
              
              
              (125,000
              )
              
              $
              8.48
              
              
              
              -
              
              
              $
              -
              
              
              
              (5,000
              )
              
              $
              8.50
              
              
              
              -
              
              
              $
              -Vested
              
              
              -
              
              
              $
              -
              
              
              
              -
              
              
              $
              -
              
              
              
              (7,000
              )
              
              $
              8.50
              
              
              
              -
              
              
              $
              -Nonvested
      at March 31, 2008
              
              
              75,000
              
              
              $
              9.32
              
              
              
              220,000
              
              
              $
              6.62
              
              
              
              15,000
              
              
              $
              7.74
              
              
              
              10,000
              
              
              $
              6.65
 
 The fair
value of the nonvested 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 on
January 1 of each year, pursuant to the directors' compensation
plan.
  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.  Effective July 1, 2007, the
Company adopted FASB Interpretation No. 48, “Accounting for Uncertainties in
Income Taxes – an interpretation of FASB Statement No. 109”, (“FIN
48”).  There was no impact to the Company’s results of operations and
financial position upon adoption.  At June 30, 2007, the Company had
unrecognized tax benefits of $100,000, which included estimated interest and
penalties.   The Company intends to classify any future expenses
for income tax-related interest and penalties as a component of income
taxes.
 
 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, 2004.
 
 During
the nine months ended March 31, 2008, 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.
  14
 Index
  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 is as follows (in
thousands):
 
 For
      the Three Months Ended March 31,
              
              
              For
      the Nine Months Ended March 31,2008
              
              
              2007
              
              
              2008
              
              
              2007Medication
      Management Systems
              
              $
              4,517
              
              
              $
              4,350
              
              
              $
              14,283
              
              
              $
              11,728Blood
      Management Systems
              
              
              5,119
              
              
              
              6,427
              
              
              
              14,347
              
              
              
              18,133Perioperative
      Management Systems
              
              
              203
              
              
              
              280
              
              
              
              612
              
              
              
              933Total
              
              $
              9,839
              
              
              $
              11,057
              
              
              $
              29,242
              
              
              $
              30,794
 
 Selected
financial information by geographic area is as follows (in
thousands):
 
 For
      the Three Months Ended March 31,
              
              
              For
      the Nine Months Ended March 31,2008
              
              
              2007
              
              
              2008
              
              
              2007Revenue
      from Unaffiliated Customers:United
      States
              
              $
              8,174
              
              
              $
              9,765
              
              
              $
              25,121
              
              
              $
              27,566United
      Kingdom
              
              
              1,665
              
              
              
              1,292
              
              
              
              4,121
              
              
              
              3,228Total
              
              $
              9,839
              
              
              $
              11,057
              
              
              $
              29,242
              
              
              $
              30,794Net
      Income (Loss):United
      States
              
              $
              35
              
              
              $
              609
              
              
              $
              42
              
              
              $
              1,651United
      Kingdom
              
              
              281
              
              
              
              222
              
              
              
              400
              
              
              
              249Total
              
              $
              316
              
              
              $
              831
              
              
              $
              442
              
              
              $
              1,900
 
 March
      31,2008
              
              
              2007Identifiable
      Assets:United
      States
              
              $
              52,960
              
              
              $
              55,506United
      Kingdom
              
              
              5,829
              
              
              
              4,314Total
              
              $
              58,789
              
              
              $
              59,820
  9.     EXIT
ACTIVITIES
 
 In July
2007, the Company announced the consolidation of its three business units into a
single operating unit.  The consolidation of operations and
elimination of redundant business functions is intended to reduce costs and
lower corporate overhead and to accelerate the growth of the Company’s two
primary businesses, blood and medication management.  In conjunction
with this restructuring, the Company closed an office and reduced its workforce
by approximately 20 employees.  In addition, the Company no longer
intends to invest in the growth of its perioperative management
systems.
  15
 Index
  Costs to
be incurred in connection with this exit activity comprise one-time benefits to
employees who were involuntarily terminated, costs related to the early
termination of certain contracts, and costs of consolidating
facilities.  Management had not finalized or communicated the plan of
termination associated with the restructuring as of June 30, 2007, therefore the
Company did not incur an exit activity liability in its June 30, 2007
consolidated financial statements.  The following table provides a
reconciliation of the beginning and ending balances of the exit activity
liability:
 
 Employee
      Termination Benefits
              
              
              Contract
      Termination Costs
              
              
              Facilities
      Consolidation Costs
              
              
              TotalBalance,
      June 30, 2007
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -Additional
      expense incurred
              
              
              273,000
              
              
              
              7,000
              
              
              
              97,000
              
              
              
              377,000Amounts
      paid
              
              
              (273,000
              )
              
              
              (7,000
              )
              
              
              (97,000
              )
              
              
              (377,000
              )Balance,
      March 31, 2008
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
 
 The
Company recorded all expenses related to exit activity costs as Selling, General
and Administrative expenses in the accompanying financial statements for the
nine months ended March 31, 2008.
 
 The
following table provides a reconciliation of beginning and ending balances of
the exit activity liability by business units:
 
 Medication
      Management
              
              
              Perioperative
      Management
              
              
              TotalBalance,
      June 30, 2007
              
              $
              -
              
              
              $
              -
              
              
              $
              -Additional
      expense incurred
              
              
              268,000
              
              
              
              109,000
              
              
              
              377,000Amounts
      paid
              
              
              (268,000
              )
              
              
              (109,000
              )
              
              
              (377,000
              )Balance,
      March 31, 2008
              
              $
              -
              
              
              $
              -
              
              
              $
              -
  10.     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 seeks 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 July 2007, the parties agreed to enter into
binding arbitration.  The lawsuits have been stayed while the case is
proceeding through the arbitration process.
 
 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
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.
  16
 Index
  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.
 
 11.    RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
 
 In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS 161”).  SFAS 161 is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity's financial position, financial
performance, and cash flows.  The provisions of SFAS 161 are effective
for our third quarter of fiscal 2009.  The Company is currently
evaluating the impact of the provisions of SFAS 161, but we do not anticipate
that the provisions of SFAS 161 will have a material impact on our financial
statements.
 
 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
fiscal years beginning 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 on its results of
operations and financial condition.
  In June
2007, the FASB ratified Emerging Issues Task Force (EITF) 07-3, Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Use in Future Research and
Development Activities(EITF 07-3). EITF 07-3 requires that
nonrefundable advance payments for goods or services that will be used or
rendered for future research and development activities be deferred and
capitalized and recognized as an expense as the goods are delivered or the
related services are performed. EITF 07-3 is effective, on a prospective
basis, for fiscal years beginning after December 15, 2007. The Company is
currently evaluating the impact of the pending adoption of EITF 07-3 on its
results of operations and financial condition.
 
 In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”).  Under this
standard, the Company may elect to report financial instruments and certain
other items at fair value on a contract-by-contract basis with changes in value
reported in earnings.  Any such election is
irrevocable.  SFAS 159 is effective for fiscal years beginning after
November 15, 2007.  Management is currently assessing the potential
impact of SFAS 159 on the Company’s financial condition and results of
operations.
  17
 Index
  In
September 2006, the FSAB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”).  SFAS 157 establishes a common definition for fair value
to be applied to U.S. GAAP guidance requiring use of fair value, establishes a
framework for measuring fair value, and expands disclosure about such fair value
measurements.  SFAS 157 is effective for fiscal years beginning after
November 15, 2007.  In February 2008, the FASB issued a final Staff
Position to allow a one-year deferral of adoption of SFAS 157 for nonfinancial
assets and nonfinancial liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis.  The FASB
amended SFAS 157 to exclude FASB Statement No. 13 and its related interpretive
accounting pronouncements that address leasing transactions.  The
Company is currently evaluating the expected impact on its financial statements
of adopting SFAS 157.
  18
 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 March 31, 2008,
and the related condensed consolidated statements of operations and
comprehensive income for the three-month and nine-month periods ended March 31,
2008 and 2007, and cash flows for the nine month periods ended March 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, 2007, 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
11, 2007, 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, 2007 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
  April 30,
2008
  19
 Index
  ITEM2.
              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, 2007 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.
 
 Mediware
develops, markets, licenses, implements and supports clinical management
information solutions.  The Company's solutions are primarily designed
to create an automated “closed loop” clinical system for the management of
medication and blood in hospitals, blood and plasma centers, and long-term care
and behavioral health facilities.  The Company’s solutions typically
consist of the Company's proprietary application software, third-party licensed
software and third-party hardware.  Mediware sells implementation,
training, and annual software support services with software
systems.  The Company also maintains a perioperative management
software product used by hospitals in the United
States.   Mediware provides annual software support services to
its perioperative software customers, but on July 20, 2007, Mediware announced
that it stopped actively marketing its perioperative management products and
does not expect to market these products in fiscal year 2008.
 
 Mediware
markets its blood 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.  All other operations are in the United
States.
 
 Market
Positioning
 
 Mediware’s
products have been designed to address significant clinical issues in the
healthcare industry.   Traditional healthcare environments
include collections of disparate information systems and manual processes used
by clinicians throughout the care process.  The result is reduced
efficiency and increased safety risks due to the potential for human error and
delayed access to patient information and records as patients progress through
the continuum of care. When dealing with blood or medications, errors and delays
can often result in tragic consequences.   The Company’s products
address these clinical issues with “suites” of applications that provide
clinicians one data environment for the information relating to the prescribing,
preparation, and administration of drug and/or blood therapies.  The
Company’s two primary product lines, Blood Management and Medication Management
solutions, manage each step of the therapeutic process, including: ordering,
fulfillment, administration, and documentation.  Mediware’s products
offer care providers a “closed loop” process for blood and medication
therapies.  The Company believes this closed loop process
differentiates it from the industry’s catalog and “best of breed”
vendors.  The process-centric integrated data environments provided by
Mediware’s blood and medication management solutions seamlessly extend the
discipline and controls of the pharmacy and blood bank to patient units,
operating room suites, donation centers, and other venues where adverse events
occur.
  20
 Index
 
 On July
20, 2007, Mediware announced the consolidation of its three business divisions
into a single operating unit to eliminate redundant business functions, improve
efficiencies and lower operating costs.  The Company expects the
consolidation to permit more investment in the blood and medication management
product lines and to accelerate the growth of the Company's closed loop blood
and medication management product lines without negatively impacting the
delivery of its services.  At the same time, the Company also
announced its intention to stop actively marketing its perioperative management
products to focus resources on enhancing and expanding its strategic product
direction.
 
 In
October 2007, the Company acquired substantially all the assets of Integrated
Marketing Solutions, LLC, a Maryland limited liability company (“IMS”), which
provides software products and services targeting blood and plasma donation
centers in North America and Europe.
 
 The
Healthcare Information Systems Industry
 
 The
healthcare industry in the United States is highly fragmented, complex, and
inefficient. Comparatively, the healthcare industry has invested less in
information technology than many other industries. 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 made
insufficient progress.  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 health care 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 and professional
studies have highlighted patient safety errors and influenced governmental
activity.
 
 The
Company anticipates that the continued increase in government regulation, public
and competitive pressure regarding errors occurring in hospitals, and new health
threats, will increase the industry’s expenditures on clinical information
systems.  Mediware believes that its product strategy and offerings
provide an alternative to monolithic solutions architectures of disparate
systems and can play a role in moving healthcare IT standards forward to deliver
significant results for 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, ability to install, process redesign
capabilities, reputation, software platform, the potential for enhancements,
price, departmental versus enterprise sales and salesmanship.  Also
key 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 Management
Products
 
 The
Company supplies information and management software systems to blood and plasma
donor and transfusion centers.  Hospitals and blood and plasma centers
face pressures to manage blood and plasma inventory and improve the safety of
the blood and plasma 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 user-friendly blood
management software systems are intended to help hospitals and blood and plasma
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 and the productivity of blood and plasma center personnel through
the use of user-defined truth tables and automatic linking to donors' historical
records, among other features.  Donor recruitment programs may also be
enhanced though Mediware’s donor software by making tele-recruiters more
productive.
  21
 Index
  The
Company’s current blood transfusion product is HCLLTM.  During
fiscal 2005, the Company received 510(k) clearance for its complementary HCLL
donor software product for use in hospital-based donor centers.  HCLL
Transfusion and HCLL Donor are clinical applications that address 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
identified as a key to controlling the rising cost of blood
products.  The HCLL software is already in productive use at nearly
150 sites.
 
 The
Company also provides large complex blood centers tools for donor targeting,
donor recruitment,  donation management, unit testing, blood component
manufacturing, inventory control and distribution through its LifeTrakâ
software.  LifeTrak software can operate in multiple operating
environments enabling each customer to configure hardware according to its own
needs and budgetary constraints.  The Unix-based LifeTrak software
system is more suitable for larger complex customer donor sites, while the HCLL
Donor system is generally a more cost effective solution for hospitals and
smaller donor centers.
 
 The
Company continues to concentrate on increasing the number of users and licensees
of its HCLL and LifeTrak software, with a focus on large sophisticated
healthcare institutions that are best positioned to take advantage of the robust
functionality and enterprise-level capabilities in the software.
 
 The
Company is also looking to new products and markets to continue its
growth.  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
physical 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 system or operate
on a stand-alone basis.  Additionally, the Company believes it is
positioned to benefit from the emerging biologics market, which includes, among
other things, bone, tissue and cord blood stem cells.  The Company
expects the biologics markets to become subject to regulatory
scrutiny.  As a result, the Company is developing software products
that address the management of non-blood biologics, and is planning a product
launch in June 2008.
 
 Following
its October 2007 acquisition of substantially all the assets of IMS, the Company
began to provide 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, which include Recruit
Trak (sm), Donor Trak (sm), Drive Trak (sm), Coordinator Trak (sm), and Quality
Trak (sm), facilitate blood and plasma donor centers’ donors recruitment and
retention, improve blood drives, and enable hospitals with electronic tools to
order, ship and track products.  The Company recently announced plans
to integrate this new suite of products with the LifeTrak donor management
product.  The new suite of products will deliver an integrated
software solution for blood centers that is intended to improve efficiency
throughout the entire process from blood donor recruitment to hospital
distribution.  Mediware recently announced that the first blood center
customer has already agreed to implement this integrated product
suite.
 
 In
addition to its sale of software, the Company generates revenue from
professional services and post-contract support.  These ongoing
service and support contracts have recently accounted for over 75% of revenue
from blood management operations and the support services are recurring in
nature.
 
 The blood
management products are marketed primarily through the Company’s direct sales
force.  Additionally, the Company is working to develop complementary
reseller relationships for products.
  22
 Index
  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 banksystems. The LIS vendors
are much larger companies with greater technical, marketing, financial and other
resources than the Company.  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.
 
 Medication Management
Products
 
 The
Company supplies medication management solutions to hospitals, mental health
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 WORxâ, a core pharmacy
information system designed to manage inpatient and outpatient pharmacy
operations.  WORx has features and functions designed to help improve
patient safety and manage pharmacy operations effectively.  The WORx
software is in use at over 175 customer sites.  The product's market
acceptance encompasses hospitals of all sizes, including multi-facility
healthcare systems.
 
 In fiscal
2004, the Company released two new medication management products, 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.  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 and notes or 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.  The MediCOE and MediMAR products have been installed
and are in productive use in three and six separate customer sites,
respectively.
 
 In March
2007, the Company introduced MediREC, a new medication management
tool.  This new product assists in achieving compliance with a recent
mandate by the Joint Commission on Accreditation of Healthcare Organizations,
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.
 
 The
Company continues to target its large WORx software customer base and new
customers with the MediCOE and MediMAR products and has begun marketing MediREC
to this customer base and new customers as well.  The Company is also
beginning to increase its focus on behavioral health and other specialty
healthcare markets where the integrated features and functionality included in
the WORx, MediMAR, MediCOE and MediREC software products can provide a fully
integrated medication management solution.
 
 The
Company is also investigating a hosted version of its medication management
products.  This would allow for the medication management software to
be remotely hosted for customers that have smaller IT departments or are not as
well positioned to complete an implementation or full-roll out of medication
management system components.  Mediware believes this approach could
provide a broader market for its products, including smaller acute care
hospitals and behavioral health facilities.
 
 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).
  23
 Index
  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 sales 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.  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 over 250 customer
sites, representing over 90 National Health Service acute hospitals or
trusts.  JAC’s product offering includes JAC’s Pharmacy Management
System and Electronic Prescribing module.
 
 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 is impaired.
 
 Results
of Operations for the Three Months Ended March 31, 2008 as Compared to the Three
Months Ended March 31, 2007
 
 Total
revenue for the third quarter of fiscal 2008 was $9,839,000 compared to
$11,057,000 in the comparable quarter of fiscal 2007, a decrease of $1,218,000,
or 11%.  The decrease in revenue is largely due to a decline in blood
management system sales.  Blood management products and services,
including revenue from the recently acquired IMS products and services, recorded
total revenue of $5,119,000 in the third quarter of fiscal 2008, representing a
decrease of $1,308,000, or 20%, compared to $6,427,000 in the same period of
fiscal 2007.  Medication management products and services (excluding
JAC) recorded a decrease in total revenue of $206,000, or 7% from $3,058,000 in
the third quarter of fiscal 2007 to $2,852,000 in the same period of fiscal
2008.  JAC recorded total revenues of $1,665,000 in the third quarter
of fiscal 2008, representing an increase of $373,000, or 29%, compared to
$1,292,000 in the same period of fiscal 2007.  Perioperative
management revenue declined from $280,000 during the third fiscal quarter 2007
to $203,000 during the same quarter 2008, the result of management’s intention
to stop actively marketing its perioperative management products.
 
 System
revenue, which includes proprietary software, third party software, hardware
revenue and subscription revenue, amounted to $2,659,000 for the quarter ended
March 31, 2008, a decrease of $2,228,000, or 46%, from $4,887,000 in the same
period in fiscal 2007.   System revenue for the blood management
products, including subscription revenue from the recently acquired IMS
products, were $1,101,000 for the third quarter of fiscal 2008, a decrease of
$2,328,000, or 68%, compared to $3,429,000 in the same quarter of fiscal
2007.  This decrease is consistent with Mediware’s stated expectation
of lower system sales in fiscal 2008 due to the completion of the Hemocare and
LifeLine sunset program in June 2007.  The Company expects that its
new blood management offerings, BloodSafe and BiologiCare, will have a positive
impact on system sales in fiscal 2009.  System sales for the
medication management products (excluding JAC) decreased from $1,037,000 in
fiscal 2007 to $852,000 in fiscal 2008, representing a decrease of $185,000, or
18%.  This decrease reflects a decline in WORx and MediMAR sales,
partially offset by a modest increase in MediREC
sales.   JAC recorded system sales of $706,000 for the third
quarter of fiscal 2008, representing an increase of $307,000, or 77%, compared
to $399,000 reported for the same period in fiscal 2007.  The Company
believes that ongoing delays and changes to the Connecting for Health Program in
the United Kingdom are creating opportunities for JAC to increase near term
revenues.  Perioperative management system revenue declined from
$22,000 during the third fiscal quarter 2007 to no revenue during the same
quarter 2008, the result of management’s intention to stop actively marketing
its perioperative management products.
  24
 Index
  Service
revenue, which includes recurring post contract support revenues, implementation
services and promotional services increased $1,010,000, or 16%, to $7,180,000 in
the third quarter of fiscal 2008 compared to $6,170,000 for the same period in
fiscal 2007.   Service revenue for the blood management products,
including promotional revenue from the recently acquired IMS products, totaled
$4,018,000 for the third quarter of fiscal 2008, representing an increase of
$1,020,000, or 34%, compared to $2,998,000 in the third quarter of fiscal
2007.  This increase primarily reflects an increase in implementation
activity for the HCLL software systems, which were licensed as part of the
sunset program.  Mediware anticipates that service revenue will
continue to be strong throughout fiscal 2008 and fiscal 2009 as the Company
provides services on HCLL implementation projects.  Service revenue
for the medication management products (excluding JAC) decreased $21,000, or 1%,
to $2,000,000 in the third quarter of fiscal 2008 compared to $2,021,000 for the
same quarter of fiscal 2007.  This decrease is primarily a result of
fewer implementation projects in the third quarter of fiscal 2008 as compared to
the same period in fiscal 2007.  Mediware recently announced a program
to encourage its medication management customers to upgrade their WORx software
systems to the most recent version of the software prior to December 31,
2008.  As a result, Mediware expects an increase in service fees in
the fourth quarter of fiscal 2008 and in fiscal 2009 as the Company assists its
customers with the upgrade.  Service revenue for JAC increased
$66,000, or 7%, to $959,000 in the third quarter of fiscal 2008 compared to
$893,000 in the third quarter of fiscal 2007.  This increase is
primarily a result of an increase in the number of ongoing implementation
projects compared to the same quarter in fiscal 2007.  Perioperative
management service revenue declined from $258,000 during the third fiscal
quarter 2007 to $203,000 during the same quarter 2008, the result of
management’s intention to stop actively marketing its perioperative management
products.
 
 Cost of
systems includes the cost of computer hardware and sublicensed software
purchased from computer and software manufacturers by 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 $33,000, or 4%, to $835,000 in the third quarter of fiscal 2008 as
compared to $802,000 in the same period in fiscal 2007 due to an increase in
third party system sales.  The gross margin, excluding amortization of
capitalized software costs, on system sales was 69% in the third quarter of
fiscal 2008 compared to 84% in the same quarter in fiscal 2007.  The
decrease in gross margin is primarily due to the decline in high margin
proprietary system sales during the third quarter of fiscal 2008 compared to the
same period in fiscal 2007.
 
 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 $166,000, or 8%, to $2,364,000
in the third quarter of fiscal 2008 as compared to $2,198,000 in the same period
of fiscal 2007.  The increase in cost of services is primarily
attributed to increases in customer service personnel to facilitate the
implementation of new HCLL projects and the promotional activities associated
with the IMS services.  Gross margin on service revenue was 67% for
the third quarter of fiscal 2008 compared to 64% for the second quarter of
fiscal 2007.  The Company believes, but cannot assure, that cost of
services as a percentage of service revenue will remain consistent with its
current rate, as the Company continues to implement the HCLL software and begins
to assist customers with the anticipated implementation of the WORx software
upgrade.
 
 Amortization
of capitalized software increased $87,000, or 6%, to $1,441,000 in the third
quarter of fiscal 2008 compared to $1,354,000 in the third quarter of fiscal
2007.  This increase is primarily due to increased amortization of
capitalized software costs related to recent releases of the HCLL and MediMAR
products.  Mediware expects amortization to continue to increase
during fiscal 2008 as new software releases occur.
 
 Software
development costs include the non-capitalizable portions of salaries,
consulting, documentation, office and other direct expenses incurred in product
development activities.  Software development costs increased $36,000,
or 4%, to $1,035,000 in the third quarter of fiscal 2008 compared to $999,000 in
the third quarter of fiscal 2007.  Expenditures for software
development include amounts paid for both capitalizable and noncapitalizable
development projects.  Total expenditures for software development
were $1,895,000 in the third quarter of fiscal 2008 compared to $2,054,000 in
the third quarter of fiscal 2007, resulting in a decrease of $159,000, or
8%.  This decrease is primarily a result of efficiencies gained from
the operational restructuring announced in July 2007, along with the delayed
hiring of developers.  The Company expects to maintain its current
investment in product development in its blood management and medication
management products in the near term.
  25
 Index
  Selling,
general and administrative (“SG&A”) expenses include marketing and sales
salaries, commissions, travel and advertising expenses.  Also included
is bad debt expense; legal, accounting and professional fees; salaries and bonus
expenses; utilities, rent, communications and other office expenses; stock-based
compensation expenses and other related direct administrative
expenses.  SG&A expenses decreased $877,000, or 19%, from
$4,729,000 in the third quarter of fiscal 2007 to $3,852,000 in the third
quarter of fiscal 2008.  This decrease is primarily due to cost
savings associated with the operational restructuring announced during the first
quarter of fiscal 2008, along with lower sales commissions, bad debt and legal
expenses.  This decrease was partially offset by increases in
stock-based compensation expense, employee benefit costs and incremental costs
associated with personnel in the acquired IMS business.
 
 Income
tax expense decreased $216,000, from $400,000 in the third quarter of fiscal
2007 to $184,000 in the same period of fiscal 2008, primarily related to the
reduction in operating income.  In conjunction with this decrease, the
effective tax rate increased from 33% for the three months ending March 31, 2007
to 37% in the same period of fiscal 2008. During the fourth quarter of fiscal
2008, the Company expects to exhaust its net operating losses for federal income
tax purposes. As a result, the Company expects to begin paying federal income
taxes during fiscal 2009.
 
 Net
income for the third quarter of fiscal 2008 was $316,000, compared to net income
of $831,000 during the third quarter of fiscal 2007, resulting in a decrease of
$515,000 or 62%.  An increase in service revenue and a decrease in
SG&A expenses in the third quarter of fiscal 2008 compared to the third
quarter of fiscal 2007 were not sufficient to offset the quarterly decrease
in system sales.
 
 Results
of Operations for the Nine Months Ended March 31, 2008 as Compared to the Nine
Months Ended March 31, 2007
 
 Total
revenue for the nine-month period ended March 31, 2008 was $29,242,000 compared
to $30,794,000 in the comparable period of fiscal 2007, a decrease of
$1,552,000, or 5%.  The decrease in revenue is largely due to a
decline in blood management system sales, partially offset by an increase in
medication management system sales and blood management service
revenue.  Blood management products and services, including revenue
from the recently acquired IMS products and services,  recorded total
revenue of $14,347,000 during the nine-month period of fiscal 2008, representing
a decrease of $3,786,000, or 21%, compared to $18,133,000 in the same period of
fiscal 2007.  Medication management products and services (excluding
JAC operations) recorded an increase in total revenue of $1,662,000, or 20% from
$8,500,000 in the first nine months of fiscal 2007 to $10,162,000 in the same
period of fiscal 2008.  JAC recorded total revenues of $4,121,000
during fiscal 2008, representing an increase of $893,000, or 28%, compared to
$3,228,000 in the same period of fiscal 2007.  Perioperative
management revenue declined from $933,000 during the third fiscal quarter 2007
to $612,000 during the same quarter 2008, the result of management’s intention
to stop actively marketing its perioperative management products.
 
 System
revenue amounted to $8,881,000 for the nine months ended March 31, 2008, a
decrease of $3,219,000, or 27%, from $12,100,000 in the same period in fiscal
2007.  System revenue for the blood management products were
$3,205,000 for the first nine months of fiscal 2008, a decrease of $5,519,000,
or 63%, compared to $8,724,000 in the same period of fiscal
2007.  This decrease is consistent with Mediware’s stated expectation
of lower system sales in fiscal 2008 due to the completion of the Hemocare and
LifeLine sunset program in June 2007.  System sales for the medication
management products (excluding JAC) increased from $2,453,000 in fiscal 2007 to
$4,351,000 in fiscal 2008, representing an increase of $1,898,000, or
77%.  This increase reflects an increase in MediMAR revenue due to the
signing of a significant MediMAR contract during the first quarter of fiscal
2008 and, to a significantly lesser extent, an increase in MediREC
revenue.   JAC recorded system sales of $1,319,000 for the first
nine-month period of fiscal 2008, representing an increase of $476,000, or 56%,
compared to $843,000 reported for the same period in fiscal
2007.  Perioperative management system revenue declined from $80,000
during the third fiscal quarter 2007 to $6,000 during the same quarter 2008, the
result of management’s intention to stop actively marketing its perioperative
management products.
  26
 Index
  Service
revenue increased $1,667,000, or 9%, to $20,361,000 in the first nine months of
fiscal 2008 compared to $18,694,000 for the same period in fiscal
2007.  Service revenue for the blood management products totaled
$11,142,000 for the first nine-month period of fiscal 2008, representing an
increase of $1,733,000, or 18%, compared to $9,409,000 in the same period of
fiscal 2007.  This increase primarily reflects an increase in
implementation activity for the HCLL software systems, which were licensed as
part of the sunset program.  Service revenue for the medication
management products (excluding JAC) decreased $236,000, or 4%, to $5,811,000 in
fiscal 2008 compared to $6,047,000 for the same period of fiscal
2007.  This decrease is a result of fewer ongoing implementations in
2008 as compared to the same period in fiscal 2007.  Perioperative
management service revenue declined from $855,000 during the third fiscal
quarter 2007 to $606,000 during the same quarter 2008, the result of
management’s intention to stop actively marketing its perioperative management
products.
 
 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 $76,000, or 4%, to $2,209,000
during the first nine months of fiscal 2008 as compared to $2,133,000 in the
same period in fiscal 2007.  The gross margin, excluding amortization
of capitalized software costs, on system sales was 75% in the nine-month period
of fiscal 2008 compared to 82% in the same period in fiscal
2007.   The decrease in gross margin is primarily due to the
decline in high margin proprietary system sales during the first nine months of
fiscal 2008 compared to the same period is fiscal 2007.
 
 Cost of
services increased $760,000, or 12%, to $6,878,000 during the first nine months
of fiscal 2008 as compared to $6,118,000 in the same period of fiscal
2007.  The increase in cost of services is primarily attributed to
increases in customer service personnel to facilitate the implementation of new
HCLL projects and the promotional activities associated with the IMS
services.  Gross margin on service revenue was 66% for the six months
of fiscal 2008 compared to 67% for the same period last year.  The
Company believes, but cannot assure, that cost of services as a percentage of
service revenue in fiscal 2008 will remain consistent with its current rate as
the Company continues to implement the HCLL software and begins to assist
customers with the anticipated implementation of the WORx software
upgrade.
 
 Amortization
of capitalized software increased $330,000, or 8%, to $4,312,000 in the first
nine months of fiscal 2008 compared to $3,982,000 in fiscal
2007.  This increase is primarily due to increased amortization of
capitalized software costs related to recent releases of its
products.
 
 Software
development costs decreased $2,000, to $2,981,000 in fiscal 2008 compared the
same period of fiscal 2007. Expenditures for software development include
amounts paid for both capitalizable and noncapitalizable development
projects.  Total expenditures for software development were $5,527,000
in the nine-month period of fiscal 2008 compared to $6,023,000 in the same
period 2007, a decrease of $496,000, or 8%.  This decrease is
primarily a result of efficiencies gained from the operational restructuring
announced in July 2007, along with the delayed hiring of
developers.
 
 SG&A
expenses include marketing and sales salaries, commissions, travel and
advertising expenses.  Also included is bad debt expense; legal,
accounting and professional fees; salaries and bonus expenses; utilities, rent,
communications and other office expenses; stock-based compensation expenses and
other related direct administrative expenses.   SG&A expenses
decreased $880,000, from $13,408,000 in the first nine months of fiscal 2007 to
$12,528,000 in the same period of fiscal 2008.  This decrease is
primarily due to cost savings associated with the operational restructuring
announced during the first quarter of fiscal 2008, along with lower sales
commissions, bad debt expense and management bonuses.  This decrease
was partially offset by increases in stock-based compensation expense, employee
benefit costs and incremental costs associated with personnel in the acquired
IMS business.
 
 Income
tax expense decreased $472,000, from $1,057,000 during the first nine months of
fiscal 2007 to $585,000 in the same period of fiscal 2008, primarily due to the
reduction in operating income.  In conjunction with this decrease, the
effective tax rate increased from 36% for the nine months ending March 31, 2007
to 57% in the same period of fiscal 2008.  The increase in the
effective tax rate is primarily attributable to a $225,000 non-cash write-off of
certain deferred tax assets relating to fully vested non-qualified stock options
that were forfeited as a result of the departure of certain employees during the
first quarter of fiscal 2008. During the fourth quarter of fiscal 2008, the
Company expects to exhaust its net operating losses for federal income tax
purposes. As a result, the Company expects to begin paying federal income taxes
during fiscal 2009.
  27
 Index
  Net
income during the first nine months of fiscal 2008 was $442,000, compared to net
income of $1,900,000 during the same period of fiscal 2007, resulting in a
decrease of net income of $1,458,000 or 77%.  An increase in service
revenue and a decrease in SG&A expenses in the first nine months of fiscal
2008 compared to the first nine months of fiscal 2007 were not sufficient to
offset the substantial decrease in system sales between the nine-month
periods.
  Liquidity
and Capital Resources
  As of
March 31, 2008, Mediware had cash and cash equivalents of $20,766,000 compared
to $22,789,000 at June 30, 2007.  Working capital was $18,279,000 and
$24,334,000 at March 31, 2008 and June 30, 2007, respectively.  The
current ratio was 2.3 to 1 at March 31, 2008 compared to 3.0 to 1 at June 30,
2007.  The reduction in the current ratio is primarily attributable to
the acquisition of IMS during the second quarter of fiscal 2008 and the
repurchase of the Company’s Common Stock during the third quarter of fiscal
2008.  The Company does not have any material capital lease
obligations, purchase obligations or long-term liabilities.
 
 Cash
provided by operating activities was $10,547,000 during the first nine months of
fiscal year 2008 compared to $5,275,000 during the same period a year
ago.  The increase in cash provided by operating activities is
primarily due to improved collections of our accounts receivable, partially
offset by a decrease in net income and changes in accounts payable, accrued
expenses and advances from customers.
 
 Cash used
in investing activities was $9,241,000 during the first nine months of fiscal
year 2008 compared to $3,486,000 during the same period a year
ago.  The increase in cash used in investing activities primarily
relates to the acquisition of IMS in October 2007.  Also contributing
to the increase was an increase in capital expenditures, partially offset by a
decrease in capitalized software costs for the period.
 
 Cash used
in financing activities was $3,322,000 during the first nine months of fiscal
year 2008 compared to cash provided by financing activities of $456,000 during
the same period a year ago.  The cash used for financing activities in
2008 is primarily attributable to treasury stock repurchased during the third
quarter of fiscal 2008.  The cash used for financing activities during
the first nine months of fiscal year 2007 was primarily the result of proceeds
received from stock option exercises during fiscal 2007.
 
 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 2008.
 
 The
Company’s liquidity is influenced by its ability to perform on a “Best of Suite”
basis in a competitive industry.  Factors that may affect liquidity
are the Company’s ability to penetrate the market for its products, maintain or
reduce the length of the selling cycle, and collect cash from clients as systems
are implemented.  Exclusive of activities involving any future
acquisitions of products or companies that complement or augment the Company’s
existing line of products or any additional stock repurchases, the Company
believes that current available funds and cash generated from operations will
provide sufficient liquidity to meet operating requirements for the foreseeable
future.  The Company continues to review its long-term cash
needs.  Currently, there are no plans for additional outside
financing, except that Mediware is considering establishing a new line of
credit.
  28
 Index
 
 ITEM3.
              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.  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
                March
      31, 2008
                ($
      in 000)
              
              
              Effective
                Interest
      Rate at
                March
      31, 2008
              
              
              Effect
      of 1% Change
                ($
      in 000)Cash
      Equivalents
              
              $
              20,766
              
              
              
              3.6
              %
              
              $
              208
 
 At March
31, 2008, a 1% decrease in the current per annum interest rate for our cash
equivalents each would result in $208,000 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 March 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.
 
 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 14% and 10% of Mediware’s consolidated revenue for the nine months
ended March 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 revenue results for the
three months ended March 31, 2008 were negatively impacted by a $1,000 foreign
currency movement, and were positively impacted by a $64,000 foreign currency
movement for the three-months ended March 31, 2007. Our revenue results for the
nine months ended March 31, 2008 were negatively impacted by a $7,000 foreign
currency movement, and were positively impacted by a $92,000 foreign currency
movement for the nine months ended March 31, 2007.  These foreign
currency adjustments are primarily due to the currency valuation of the British
pound against the United States dollar.
  29
 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 March 31,
2008.
 
 There
were no material changes in Mediware’s internal controls over financial
reporting that occurred during the three months ended March 31, 2008 that have
materially affected, or are reasonably likely to materially affect, its internal
controls over financial reporting.
  PART
      II
              OTHER
      INFORMATION
 
 ITEM1.
              LEGAL
      PROCEEDINGS
 
 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.
  30
 Index
  Item1A.
              RISK
      FACTORS
 
 Risks and
uncertainties that, if they were to occur, could materially adversely affect our
business or that could cause our actual results to differ materially from the
results contemplated by the forward-looking statements contained in this report
and other public statements we make were set forth in the “Item 1A - Risk
Factors” section of our Annual Report on Form 10-K for the year ended June 30,
2007 and as updated by our subsequent Quarterly Reports on Form 10-Q. There have
been no material changes from the risk factors disclosed in that Form 10-K and
the subsequent Form 10-Qs.
 
 ITEM2.
              UNREGISTERED SALES OF EQUITY
      SECURITIES AND USE OF
PROCEEDS
 
 The Board
of Directors approved a share repurchase program on February 6, 2008,
authorizing Mediware to purchase up to $4.0 million of its Common Stock, at
times and prices that the President and Chief Executive Officer or Chief
Financial Officer of the Company determine to be appropriate.  The
program has no expiration date, and Mediware has no obligation to purchase
shares under the program.  From inception through March 31, 2008,
549,342 shares were repurchased and placed in treasury under this
program.   The following table lists Mediware’s share repurchases
during the third quarter of fiscal 2008:
 
 Period
              
              Total
      Number of
                Shares
      Purchased
              
              Average
      Price
                Paid
      Per Share
              
              Total
      Number of Shares
                Purchased
      as Part of
                Publicly
      Announced
                Program
              
              Maximum Dollar Value ofShares That May
      Yet
                Be
      Purchased Under
                the
      ProgramFebruary
      2008
              
              189,842
              
              $5.73
              
              189,842
              
              $
      2,911,000March
      2008
              
              359,500
              
              $6.20
              
              549,342
              
              $   682,000Total
              
              549,342
              
              $6.04
              
              549,342
              
              $   682,000
  31
 Index
  ITEM6.
              EXHIBITS
 
 Exhibit
      3
              
              By-Laws
      of Mediware Information Systems, Inc. (Restated as of March 18, 2008),
      Incorporated by reference to Exhibit 3.1 to Current Report of Form 8-K
      filed March 20, 2008.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
  32
 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)May 6,
      2008
                
                /s/   T.
      KELLY MANNDate
                
                T.
      KELLY MANNPRESIDENT
      AND CHIEF EXECUTIVE OFFICERMay 6,
      2008
                
                /s/   MARK
      B. WILLIAMSDate
                
                MARK
      B. WILLIAMSCHIEF
      FINANCIAL OFFICER
   33