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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 (Mark One)

MEDIWARE INFORMATION SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (913) 307-1000

Securities registered pursuant to Section 12(b) of the Act: None

PART I

Item 1. Business.

Overview

Mediware Information Systems, Inc. and its subsidiaries ("Mediware" or the "Company") develop, implement and support clinical management information systems marketed to the healthcare industry. The Company's systems are designed to automate three clinical departments within the hospital environment: the blood bank, the pharmacy and the surgical suite, along with stand-alone blood centers. A system typically consists of the Company's proprietary application software, third-party licensed software and third-party computer hardware, as well as implementation services, training, and annual software support. The business is organized into three operating divisions marketing three distinct product lines: Pharmacy Systems, Blood Bank Systems and Operating Room Systems. The Blood Bank and Operating Room Divisions operate primarily in the United States. The Pharmacy Division operates both in the United States and in the United Kingdom.

The Company's systems are installed in over 1,100 hospital departments and blood centers including some of the industry's most prestigious institutions. The Company's products are designed to improve the availability of clinical information while enabling health care facilities to decrease the expenses associated with managing the clinical departments. These benefits are of critical importance to clinical administrators who face increasing financial and regulatory pressures. The Company believes that it has the largest number of systems installed in the "best of breed" pharmacy and blood bank systems markets, and that these products have gained their leadership position because of rich functionality, ease of integration and excellent customer service. These core competencies have influenced some of the most prestigious health care facilities in North America to purchase the Company's systems.

Mediware is a New York corporation incorporated in 1970. The Company's cornerstone product, Hemocareâ , was originally designed in 1981 and is one of North America's leading blood bank information systems in the markets it serves, either as a "stand-alone" system or as part of an integrated "Lab/Blood Bank" system.

The Operating Room Division, formed in April 1998, grew from the expansion of its Surgiware^TM product center. The Surgiware system, licensed in September 1990 from Intellimed Incorporated, was marketed through fiscal 1999. In fiscal 1999, the Company introduced a new operating room product, Perioperative Case Management for Windows ("PCMWinä "), which was renamed Perioperative Solutionsä in fiscal 2002. Perioperative Solutions is an n-tiered Microsoft Windows 2000-based client server application that provides the full functionality necessary to manage an operating room and associated departments.

In September 1998 the Company acquired Informedics, Inc., which develops and markets a line of computer software applications designed for hospital blood bank and blood centers.

In November 1999 the Company expanded its Blood Bank Division with the acquisition of LifeTrakâ from Carter BloodCare ("Carter"). LifeTrak is a comprehensive system for managing donor, laboratory and distribution for the blood center.

In July 2001 the Company entered into an intellectual property agreement with Ortho Clinical Diagnostics, Inc. ("Ortho"), which allowed the Company to market an integrated testing module that was developed as part of the LifeTrak product but held on an exclusive basis by Ortho until 2003. On January 1, 2003, Carter transferred title of the integrated testing module to the Company on a non-exclusive basis.

In February 2003, the Company received 510(k) clearance from the Food and Drug Administration ("FDA") on its next generation transfusion management system HCLLä .. The Company is now actively introducing HCLL to its current customers and new customers and expects that customers will benefit from the state-of-the-art functionality offered by HCLL. In April 2004, the Company received additional 510(k) clearance from the FDA for additional enhancements to the HCLL product.

The Company's Corporate Transaction Strategy

In order to broaden product offerings, capture market share, improve profitability and capitalize on the consolidation trend in the hospital clinical information system industry, the Company's business strategy includes growth through acquisitions and other corporate transactions. The Company reviews and considers corporate transaction possibilities on an ongoing basis, but there can be no assurance that the Company will be able to identify or reach mutually agreeable terms with any transaction candidate.

The Company also seeks (but cannot provide assurance that it will be able) to develop strategic partnerships that are complimentary to its core markets and product set, mutually beneficial to both parties and that provide a greater value proposition to the customer than could be realized without the strategic relationship.

The Healthcare Information Systems Industry

The healthcare delivery industry in the United States is highly fragmented, complex, and inefficient. Advances in medical technology directly dealing with human disease and injury have resulted in significant breakthroughs and progress. Physicians, nurses and other caregivers are given leading edge diagnostic and therapeutic technologies. However, the information systems supporting the management and clinical processes of these complex healthcare organizations have made insufficient progress. A substantial portion of clinical workflow still depends upon manual paper-based systems interfaced with various automated systems. Historically, the healthcare industry has invested relatively less in information technology than some other industries.

As a result of the above, this industry is economically inefficient and produces significant variances in medical outcomes. In February 2001, the FDA published a report entitled "Doing What Counts for Patient Safety; Federal Actions to Reduce Medical Errors and Their Impact." This report enumerated the high level of human error in healthcare and underscored the potential tainting of the U.S. blood supply. In November of 1999 the Institute of Medicine released a report called "To Err Is Human: Building a Safer Health System," indicating that medical error is one of the top ten causes of death in the United States. This report indicated that up to 96,000 lives may be lost each year as a result of medical error. Mediware believes it can play an important role in addressing these issues, with its clinically focused management information systems. The Company's products are designed to help improve efficiencies, reduce error and improve quality of care.

In 1996, Congress passed legislation that impacted healthcare information management. The Healthcare Information Portability and Accountability Act ("HIPAA") required the Department of Health and Human Services ("HHS") to enact standards for information sharing, security and patient confidentiality. The Company believes these regulations are having an important impact on the health care industry and are encouraging healthcare organizations to consider new advanced management information systems that address the needs of HIPAA and other state regulations.

The Company believes the healthcare industry has significantly under-invested in information technology. However, the Company anticipates that with the continued increase in government regulation and concern over clinical outcomes, the healthcare industry's expenditures on clinical information systems will increase as they modernize and update their clinical information systems. In fact, the Leapfrog Group, a consortium of large employers that spends $40 billion annually on healthcare, has called for investment into computerized information systems. Recently, President George W. Bush pledged financial support for increased healthcare IT standards and incentives to make IT investments for hospitals more appealing. He also announced his support for a national health IT coordinator who would report directly to the Secretary of Health and Human Services, Mr. Tommy Thompson. Mediware believes that its products will play a significant role in moving healthcare IT standards forward.

The Company believes that in addition to healthcare industry evolution and the impact of regulatory developments, which will drive the need for improved management information systems, specific potential health threats such as the variant Creutzfeldt-Jakob (mad cow) virus and patient medication safety will require organizations to re-examine their ability to track and analyze patients, donors, procedures and outcomes. Mediware's "best of breed" solutions, which integrate operating and clinical systems, are targeted to substantially facilitate solutions to these healthcare industry issues.

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, reputation for ongoing support, the potential for enhancements, price, best-of-breed vs. 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. These factors are discussed in the following analysis of each respective product line.

Blood Bank Division

The Blood Bank Division is a supplier of information and management systems to blood donor and transfusion centers. During fiscal 2004, the Company received an updated 510(k) clearance from the FDA on its next generation blood transfusion product - HCLL. Management started marketing HCLL to new and existing customers, with the first shipment in June 2003. Earlier this year, the first sites have "gone live" with HCLL. HCLL is a windows-based, n-tier client server clinical transfusion medical system, which is designed to provide the transfusion marketplace with state of the art technology. This system is designed to be user intuitive, scalable, and supports product management, resource management, quality control and testing. This system includes advanced data mining and data management intelligence capabilities, which can be utilized by small hospitals, large medical centers, multi-facility enterprises and central transfusion services.

Mediware's user-friendly blood bank systems software is intended to address these issues. This software is designed to reduce costs through automatic report production, decreased paperwork, and automated billing. The Company's products can improve blood supply safety and the productivity of blood center personnel through the use of user-defined truth tables and automatic linking to donors' historical records, among other features. Donor recruitment programs are enhanced though LifeTrak donor software by making tele-recruiters more productive.

Mediware competes primarily with vendors of laboratory information systems ("LIS") providing a blood bank subsystem as a part of their laboratory product, as well as other companies that market stand-alone blood bank systems. The LIS vendors are much larger companies with greater technical, marketing, financial and other resources than the Company. The Company believes that the 510(k) clearance process is sufficiently onerous to discourage many potential new entrants into this market segment.

The Company is continuing to explore the expansion of its e-commerce solution to integrate the flow of information from the supply of blood facilities to the transfusion of blood. The Company's plans include the expansion of its Application Service Provider ("ASP") Model which assisted with the testing of over 2.7 million units of blood during 2004. In an ASP Model, clinical management applications and data are processed at a central location and distributed along with local expert services to customers via a secure connection. The ASP Model has the advantage of reducing distribution and support costs along with increasing the potential of improved supply chain management over the distribution and use of blood products. The Company's current plan is to include expert services such as regulatory advice as part of its ASP offerings.

In addition to the initial sale of the Company's blood bank systems, revenues are generated from post-contract support, averaging approximately 21% annually of the system's original selling price. These maintenance contracts currently account for over 50% of this Division's revenues and are recurring in nature. As customers transition from the Division's heritage products to HCLL, management believes that systems revenues will represent more than 50% of the Division's total revenue.

The Blood Bank Division markets its products primarily through a direct sales force consisting of a National Sales Director, five Regional Sales Representatives and four Clinical Consultants who perform on-site demonstrations of the products. Additionally, the Company is in the process of developing reseller relationships for certain of its ancillary products. The Blood Bank Division will continuously review (and adjust as appropriate) its distribution model as new products and services obtain 510(k) clearance.

The Company believes that it has an excellent service reputation with over 500 healthcare organizations that are Blood Bank Division customers, many of which have multiple facilities. Mediware anticipates that its installed Blood Bank customer base will provide an excellent market for its new products.

Pharmacy Division

In May 1990 the Company acquired Digimedics, one of the country's leading vendors of information systems for hospital pharmacies. The Digimedics pharmacy information system, based on the UNIX operating system, the "C" programming language and the Unify relational database management system, was a leading competitor in the market. In June 1996, the Company acquired certain assets of the Pharmakon (U.S.-based) and JAC (U.K.-based) Divisions of Information Handling Services Group. Pharmakon, which was available on a variety of minicomputer and mainframe hardware platforms, was also a leading competitive offering in the pharmacy systems market. The Company believes that it has a strong customer service reputation with the installed base of hospitals that are Pharmacy Division customers.

In November 1997 the Pharmacy Division introduced the WORxâ drug therapy management system. This system is an n-tiered, object oriented Windows-based client/server pharmacy system. As a result of its Windows user interface, advanced underlying systems integration architecture and user-friendly design, WORx is positioned to be the hub for drug therapy management. This includes integration with automated drug dispensing cabinets manufactured by Pyxis Inc., a Division of Cardinal Health, Inc., and Omnicell Technologies, Inc. and interfaces to other pharmacy dispensing devices such as the AHI RxOBOT produced by a Division of McKesson HBOC, Inc. WORx Universal, released in June 1999, provides access to clinical data via the Internet/intranet using a standard web browser on multiple platforms, including hand-held and wireless devices.

Since its introduction, WORx has been sold to over 125 hospital organizations encompassing over 250 hospital sites. The product's market acceptance encompasses hospitals of all sizes, including strategically important multi-site hospitals. The Pharmacy Division has developed features and functions designed to help improve patient safety and manage pharmacy operations effectively. The Company has implemented a bi-directional orders interface between WORx and major Health Information Systems ("HIS") vendors. This interface allows WORx to populate the HIS systems with complete, accurate, and up-to-the-minute patient medication profiles. In addition, this interface allows pharmacists to effectively manage medication orders input into third party systems by nurses and other healthcare professionals. This interface provides a valuable utility for assuring medication orders are interpreted and dispensed correctly.

Other important developments include a sophisticated inventory management module, designed to assist pharmacy managers in their effort to control drug therapy costs and an ambulatory care module that is fully integrated with the WORx inpatient modules. The inventory management module has been designed to meet the challenges of inventory control, purchasing, receiving, and contract administration in a hospital setting. The inventory management module uses bar code and Electronic Data Interchange technologies to simplify processes.

The product focus of the Pharmacy Division is strengthening the Company's market share position and ensuring patient safety. The Pharmacy Division recently released two new products, MediCOE^TM and MediMAR^TM. These products are fully integrated with WORx and provide a complete drug therapy management system with a physician order entry module (MediCOE) and nurse point of care administration module (MediMAR). MediMAR provides wireless point of care medication administration transaction processing to insure the five rights of patient safety. In addition, the product provides other clinical features to nursing including pain management and nursing documentation. MediCOE enables physicians or other appropriate clinicians to enter medication orders using a remote PC, a handheld wireless device or offsite via web-based connectivity. The orders are integrated with the patient's medical profile which includes laboratory, prescription and allergy information. MediCOE alerts physicians to a ny adverse effect that may occur due to the patient's medical history, thus making a significant contribution to patient safety. Both MediCOE and MediMAR are targeted for the Company's installed Pharmacy customer base and are expected to attract new customers as well.

The Pharmacy Division markets directly through a sales force which consists of a National Sales Manager, five Regional Sales Representatives covering territories in the United States and Canada and one Sales Representative who sells into our existing customer base. Two Clinical Consultants with extensive experience as clinical pharmacists and pharmacy technicians provide technical sales support. Other marketing channels utilized by the Pharmacy Division include reseller agreements with a number of distribution partners.

Operating Room Division

In September 1990 the Company licensed the Surgiware system from Intellimed Incorporated for use in surgical suites. Surgiware, a comprehensive information system for managing the human resources, facilities, equipment and supplies required for surgery, was replaced as the Company's primary Operating Room software in fiscal 1999 by PCMWin.

In fiscal year 1999, the Company introduced PCMWin. PCMWin's name was changed in 2002 to Perioperative Solutions, reflecting its broadening scope of functionality for the entire perioperative department. Perioperative Solutions is based on an n-tiered Microsoft Windows-based client server application that provides the full functionality necessary to manage an operating room and its associated departments while supporting and documenting the entire perioperative clinical event, providing information that is crucial for compliance with insurance and regulatory reporting, and identifying potential conflicts and opportunities for improvement throughout the entire process.

Perioperative Solutions includes Scheduling, Case Preference Management, Credentialing, Inventory Management, Perioperative Charting, Status Board, Reporting, PS Trackerä for executive and operational analysis, PS Clinical Intelligenceä to automate the maintenance of preference cards, PS Bar Code Scanning, and HL7 standard interfaces. The benefits of a fully implemented system include:

   -- Increased utilization rate of operating rooms;
   -- Increased productivity from efficient management of staff and equipment;
   -- Improvement in inventory management;
   -- Increased patient billings as a result of real time capture of information; and
   -- Increased management intelligence through data mining.

Development activities are focused upon adding features and functions along with the addition of new modules. Functionality to support customers with multiple hospitals or surgical centers has recently been added with enhancements scheduled for upcoming releases. The Pre-Assessment module will manage all of the activity that is necessary prior to the patient arriving in the operating room. This includes documenting clinical assessments and pre-admission testing. PS Tracker and PS Clinical Intelligence were upgraded during fiscal 2004 and will continue to be expanded in scope. PS Tracker is a powerful and user-friendly data analysis tool, which has been designed so that operating room management, physicians, and hospital administrators can effectively gain managerial intelligence through data mining of the comprehensive database created by Perioperative Solutions. PS Clinical Intelligence addresses one of the most pressing issues with operating room information systems, keeping the thousands of surgeon- specific preferences up to date. It automates this process, improving accuracy while saving time. The Company filed for and received a patent on its PS Clinical Intelligence technology in January 2003.

The Operating Room Division markets on a direct sales basis utilizing one direct Sales Representative. It is also pursuing several strategic reseller arrangements.

JAC

Research and Development

Expenditures for software development include amounts paid for both capitalizable and noncapitalizable development projects. Expenditures for software development for fiscal 2004, 2003, and 2002 were $8,875,000, $7,972,000 and $8,191,000, respectively. Of the total expenditures during 2004, 2003 and 2002, $5,804,000, $5,215,000 and $4,922,000, respectively, were capitalized. The Company plans to continue to commit substantial resources to the development of its products.

Employees

As of June 30, 2004, the Company had 201 full-time employees of which 182 are employed domestically. The Company employs 22 individuals in the area of sales and marketing, 81 in customer support, 61 in product development and 37 in administration. None of the Company's employees are covered by collective bargaining agreements nor are they members of any union. The Company believes that its employee relations are good.

The Company also relies on the services of a number of consultants to supplement its employee base. The number of consultants varies from time to time based on the Company's needs and the various stages of its development projects. At June 30, 2004, there were 17 consultants working on various projects.

Seasonality

The Company's operations are not subject to seasonal fluctuations.

Geographic Information

(Dollars in thousands)
                                           2004            2003            2002
                                         -------         -------         -------

Revenues
  United States                          $33,569         $29,998         $27,858
  United Kingdom                           3,085           2,985           2,227
                                         -------         -------         -------
     Total                               $36,654         $32,983         $30,085
                                         =======         =======         =======

Long-lived assets
  United States                          $23,981         $22,531         $20,478
  United Kingdom                             440             459             456
                                         -------         -------         -------
     Total                               $24,421         $22,990         $20,934
                                         =======         =======         =======

Backlog

At June 30, 2004, the Company had an approximate backlog of $17,365,000, of which approximately $1,743,000 related to contracted software and hardware sales and approximately $15,622,000 related to implementation, training and deferred support and maintenance services. Software sales and services backlog consist of products and services sold under signed contracts, which have not yet been recognized as revenues. At June 30, 2003, the Company had an approximate backlog of $13,500,000, of which approximately $1,500,000 related to contracted software and hardware sales and approximately $12,000,000 related to implementation, training and deferred support and maintenance services.

Item 2. Properties.

The Company's corporate headquarters are located in Lenexa, Kansas, where it occupies approximately 18,000 square feet of leased space. The Company also leases office space in Melville, New York (14,000 square feet), Scotts Valley, California (9,000 square feet), Dallas, Texas (5,000 square feet), Chicago, Illinois (15,000 square feet) and Portland, Oregon (5,000 square feet). The Company's United Kingdom operations are headquartered in Basildon, Essex where it occupies leased space totaling approximately 4,000 square feet.

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company's common stock is traded on the NASDAQ Small Cap Market under the symbol MEDW and on the Pacific Stock Exchange under the symbol MEDW.

The following table sets forth the high and low sales prices for the Company's common stock for each quarterly period of the fiscal years ended June 30, 2004 and 2003, as reported by NASDAQ.

                                       2004                       2003
                               ------------------           ----------------
                                  High       Low             High       Low
                                 ------   -------           ------     -----
First Quarter                   $15.100   $ 9.760          $ 8.980    $7.000
Second Quarter                  $17.310   $13.600          $ 9.200    $6.500
Third Quarter                   $18.200   $13.150          $11.300    $7.760
Fourth Quarter                  $18.030   $11.200          $11.000    $9.250

As of August 26, 2004, there were approximately 245 shareholders of record of the Company's common stock. To date, the Company has not paid dividends to its shareholders. Management currently intends to use any earnings to finance the development and continued expansion of the Company's business. The Company may review the benefits of paying dividends in the future.

Item 6. Selected Financial Data.

(In thousands, except per share data)


Statements of Operations Data
For the years ended June 30,                   2004        2003        2002        2001        2000
                                             --------    --------    --------    --------    --------

Revenues
  System sales                               $12,421     $ 12,564    $ 11,541    $  8,674    $  8,294
  Services                                    24,233       20,419      18,544      17,485      18,412
                                             --------    --------    --------    --------    --------
  Total revenues                              36,654       32,983      30,085      26,159      26,706
                                             --------    --------    --------    --------    --------
Cost of sales
  Cost of systems (1)                          2,392        2,487       2,885       2,501       2,626
  Cost of services (1)                         7,331        6,263       5,588       6,176       6,829
                                             --------    --------    --------    --------    --------
   Total cost of sales                         9,723        8,750       8,473       8,677       9,455
                                             --------    --------    --------    --------    --------
   Gross profit (1)                           26,931       24,233      21,612      17,482      17,251

Amortization of capitalized software           3,710        2,199       1,844       1,611       1,305
Software development costs                     3,071        2,757       3,269       3,498       3,830
Selling, general and administrative           14,507       12,939      12,072      13,455      13,730
Proceeds from settlement                                     (614)
Net interest and other (income) expense         (235)         (56)        (3)         (25)        (77)
                                             --------    --------    --------    --------    --------
Earnings before income taxes                   5,878        7,008       4,430      (1,057)     (1,537)


Income tax (expense) benefit                  (2,271)      (2,619)     (1,799)        308         589
                                             --------    --------    --------    --------    --------
Net earnings (loss)                          $ 3,607      $ 4,389     $ 2,631    $   (749)   $   (948)
                                             ========    ========    ========    ========    ========
Earnings per common share
  Basic                                      $  0.48     $   0.60     $  0.36    $  (0.10)   $  (0.14)
                                             ========    ========    ========    ========    ========
  Diluted                                    $  0.44     $   0.56     $  0.35    $  (0.10)   $  (0.14)
                                             ========    ========    ========    ========    ========

Weighted average common shares outstanding
  Basic                                        7,463        7,300       7,228       7,162       6,627
  Diluted                                      8,174        7,844       7,611       7,162       6,627

Balance Sheet Data
  As of June 30,

  Cash and cash equivalents                 $ 10,213     $  7,525    $  3,228    $  2,343    $  3,634
  Working capital                              9,783        4,241        (718)     (3,025)       (952)
  Total assets                                46,202       38,806      32,188      29,459      29,051
  Debt                                         1,494        1,387       1,352       1,303       1,236
  Common stock and APIC                       27,193       24,735      24,104      23,907      23,473
  Retained Earnings (Accumulated deficit)      2,823         (784)     (5,173)     (7,804)     (7,055)
  Total shareholders' equity                  30,065       23,935      18,864      16,047      16,394


(1) Excludes amortization of capitalized software costs

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

Certain statements in this Annual Report on Form 10-K may constitute "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995, as the same may be amended from time to time and in releases made by the SEC from time to time. Such forward-looking statements are not based on historical facts and involve known and unknown risks, uncertainties and other factors, which may cause the actual results of the Company to be materially different from any future results expressed or implied by such forward-looking statements. The following discussion sets forth certain factors the Company believes could cause actual results to differ materially from those contemplated by these forward-looking statements. The Company disclaims any obligation to update its forward-looking statements.

Revenue Recognition

The Company derives revenue from licensing its proprietary applications software and sub-licensed software, sale of computer hardware and the services performed related to the installation, training, consultation and ongoing support of the software. License fee revenues are generally recognized when evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable. Revenue from the sale of hardware is generally recognized upon shipment. Fees for installation, training and consultation are recognized as the services are provided. If the Company enters into arrangements with a client requiring significant customization of the software or services that are essential to the functionality of the software, the Company recognizes revenue derived from the sale of licensed software, sub-licensed software and services over the period the services are performed, in accordance with the American Institute of Certified Public Accountants Statement of Po sition 97-2, "Software Revenue Recognition." Support and maintenance fees, typically sold on an annual renewal basis, are recognized ratably over the period of the support contract.

Goodwill

System sales, which include proprietary software, third party software and hardware revenues, were $12,421,000 in fiscal 2004, a decrease of $143,000, or 1.1%, from $12,564,000 in fiscal 2003. The Company's Operating Room Division experienced an increase in system sales of 12.8%, or $88,000, from $690,000 to $778,000. The increase reflects the continued marketing efforts by the Division of its Perioperative Solutions product. The JAC Division recorded a decrease of $543,000, or 42.5%, to $734,000 in fiscal 2004. The decrease reflects less migration activity during fiscal 2004 as the Division approaches completion of its installed customer base migration. System sales in the Pharmacy Division decreased $1,869,000, or 22.3%, to $6,528,000 from $8,397,000. The decrease in Pharmacy Division system sales is primarily due to two significant Integrated Delivery Network contracts signed during the first quarter of fiscal 2003. During fiscal 2004, the Pharmacy Division continued to market and sell its WORx product. Additionally, the Division successfully released and subsequently signed its initial contracts for both its MediCOE and MediMAR products. MediCOE allows clinicians to enter medication orders and manage drug therapy directly into the WORx product using internet technology while MediMAR helps close the patient safety loop related to the delivery of drugs within the hospital. System sales for the Blood Bank Division were $4,381,000, an increase of $2,181,000, or 99.1%, from $2,200,000 in fiscal 2003. The increase reflects the early adoption of the new transfusion blood bank software solution, HCLL, which received FDA clearance in the last quarter of fiscal 2003. This early adoption phase represents new customers along with the initial migration of several customers from the heritage systems. Management believes, but cannot give any assurance, that system sales of Perioperative Solutions, MediCOE, MediMAR and HCLL will continue to increase as a result of continued marketing efforts and market a cceptance of these products by the Company

Service revenues, which include recurring software support, implementation and training services increased 18.7%, or $3,814,000, to $24,233,000 in fiscal 2004 from $20,419,000 in fiscal 2003. All Divisions contributed to the Company's increased service revenue levels as implementation and installation services of related system sales were performed during fiscal 2004. Additionally, the increase is related to annual escalation rates in current customer support contracts and the addition of new customers into the Company's installed base. In fiscal 2004, the Operating Room Division recorded service revenues of $1,695,000, an increase of $486,000, or 40.2%, as compared to fiscal 2003. The JAC Division contributed $2,350,000 in total service revenues, an increase of $642,000, or 37.6%, over fiscal year 2003. Service revenues in the Pharmacy Division increased $660,000 or 7.8% to $9,118,000 in fiscal 2004 from $8,458,000 in fiscal 2003. The Blood Bank Division's service revenues increas ed $2,026,000, or 22.4%, to $11,070,000 from $9,044,000.

Costs of systems include the cost of computer hardware and sublicensed software purchased from computer and software manufacturers by the Company as part of its complete system offering. These costs can vary as the mix of revenues varies between high margin proprietary software and lower margin computer hardware and sublicensed software components. Cost of systems decreased $95,000, or 3.8%, during fiscal 2004 due to the overall increase in proprietary software sales during fiscal 2004 as compared to fiscal 2003. An increase in proprietary software sales also resulted in an improved gross margin percentage. The gross margin percentage, excluding amortization of capitalized software costs, on system sales improved to 80.7% in fiscal 2004 from 80.2% in 2003.

Costs of services include the salaries of client service personnel and communications expenses along with direct expenses of the client service departments. Cost of services increased $1,068,000, or 17.1%, in 2004 over the previous year. Despite the increase in cost of services, gross margin on service revenues remained relatively consistent at 69.7% in fiscal 2004 compared to 69.3% in fiscal 2003. The increase in service costs is primarily a result of the Company's efforts to maintain a high level of customer satisfaction using currently installed products. Additionally, the Company has increased service staff levels in anticipation of the operational impact related to increased HCLL, MediMAR, and MediCOE system sales in the Blood Bank and Pharmacy Divisions. Management believes, but cannot assure, that cost of services as a percentage of service revenue will remain consistent with its current utilization rates which are defined as the percentage of billed hours to worked hours of i ts service personnel.

Amortization of capitalized software increased $1,511,000, or 68.7%, to $3,710,000 in fiscal 2004 compared to $2,199,000 in fiscal 2003. This increase is primarily due to increased amortization of capitalized software costs related to the HCLL product, which reached commercialization in the fourth quarter of fiscal 2003 as well as amortization of capitalized software costs related to the MediCOE and MediMAR products released by the Pharmacy Division during fiscal year 2004.

Software development costs include salaries, consulting, documentation, office and other direct expenses incurred in product development activities. Software development costs increased $314,000 in fiscal 2004 to $3,071,000 compared to $2,757,000 in fiscal 2003. Expenditures for software development include amounts paid for both capitalizable and noncapitalizable development projects. Total expenditures for software development were $8,875,000 in fiscal 2004, compared to $7,972,000 in fiscal 2003, an increase of $903,000 or 11.3%. This increase primarily reflects increases of $1,251,000 and $193,000 in expenditures in the Pharmacy Division and the JAC Division, respectively, partially offset by decreases of $199,000 and $341,000 in the Blood Bank Division and Operating Room Division, respectively. The increased software development expenditures in the Pharmacy Division reflect continued investment in the MediCOE and MediMAR development projects. Management expects continued product development investme nt in all of its Divisions.

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 for corporate, divisional, financial and administrative staffs; utilities, rent, communications and other office expenses; and other related direct administrative expenses. SG&A expenses increased $1,568,000 or 12.1%, from $12,939,000 in fiscal 2003 to $14,507,000 in fiscal 2004. The increase primarily reflects increased legal expense related to customer contracting, general business issues and employment issues; marketing expenses for the Company's new products, and a rise in general business and medical insurance expenses. Management anticipates, but cannot assure, a continued rise in SG&A expenses as it continues to enhance the Company's resources and infrastructure to support anticipated growth trends.

As discussed in "Material Changes in Results of Operations: fiscal 2003 vs. fiscal 2002," during fiscal 2003, the Company received $614,000 related to the class action settlement of In re First DataBank Direct Antitrust Litigation.

Net income for fiscal year 2004 was $3,607,000 compared to a net income for fiscal year 2003 of $4,389,000 which included approximately $614,000 of pre-tax proceeds related to a settlement. Earnings before interest, income taxes, depreciation and amortization were $10,533,000 and $10,372,000 for fiscal year 2004 and 2003, respectively.

Reconciliation of Net Income to EBITDA

(Dollars in thousands)

                                           2004            2003
                                         -------         -------
Net Income                               $ 3,607         $ 4,389
Interest and other, net                     (235)            (56)
Income tax provision                       2,271           2,619
Depreciation and amortization              4,890           3,420
                                         -------         -------
     EBITDA                              $10,533         $10,372
                                         =======         =======

Costs of systems include the cost of computer hardware and sublicensed software purchased from computer and software manufacturers by the Company as part of its complete system offering. These costs can vary as the mix of revenues varies between high margin proprietary software and lower margin computer hardware and sublicensed software components. Cost of systems decreased $398,000, or 13.8%, during fiscal 2003 due to the overall increase in proprietary software sales compared to hardware sales during fiscal 2003 as compared to fiscal 2002. An increase in proprietary software sales also resulted in an improved gross margin percentage. The gross margin percentage, excluding amortization of capitalized software costs, on system sales improved to 80.2% in fiscal 2003 from 75.0% in 2002.

Costs of services include the salaries of client service personnel and communications expenses along with direct expenses of the client service departments. Cost of services increased $675,000, or 12.1%, in 2003 over the previous year. Despite the increase in cost of services, gross margin on service revenues remained relatively consistent at 69.3% in fiscal 2003 compared to 69.9% in fiscal 2002. The increase in service costs is primarily a result of the Company's efforts to maintain a high level of customer satisfaction using currently installed products along with preparation for the operational impact from the marketing of its new products in the Pharmacy and Blood Bank Divisions. Management believes, but cannot assure, that cost of services as a percentage of service revenue will remain consistent with its current utilization rates which are defined as the percentage of billed hours to worked hours of its service personnel.

Amortization of capitalized software increased $355,000, or 19.2%, to $2,199,000 in fiscal 2003 compared to $1,844,000 in fiscal 2002. This increase is primarily due to increased amortization of capitalized software costs related to the new transfusion product, which reached commercialization in the fourth quarter of fiscal 2003.

Software development costs include salaries, consulting, documentation, office and other related expenses incurred in product development activities. Software development costs decreased $512,000 in fiscal 2003 to $2,757,000 compared to $3,269,000 in fiscal 2002. Expenditures for software development include amounts paid for both capitalizable and noncapitalizable development projects. Total expenditures for software development were $7,972,000 in fiscal 2003, compared to $8,191,000 in fiscal 2002, a decrease of $219,000 or 2.7%. Management expects to continue investing in development activities in all of its Divisions.

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 for corporate, divisional, financial and administrative staffs; utilities, rent, communications and other office expenses; and other related direct administrative expenses. SG&A expenses increased $867,000, or 7.2%, from $12,072,000 in fiscal 2002 to $12,939,000 in fiscal 2003. As a percentage of sales, SG&A costs continued to decrease from 40.1% in fiscal 2002 to 39.2% in fiscal 2003. Management believes, but cannot assure, that SG&A expenses, other than commissions, will continue to decrease as a percentage of revenue as the Company continues the transition from a development to a marketing focus strategy. As reported in fiscal 2002, the Company noted technical deficiencies in its 401(k) employee benefit plan subsequent to the 1 998 Amendment (See footnote 9 to the financial statements). The Company has voluntarily corrected the deficiencies and believes, but cannot assure, that it will not incur any significant penalties or other costs related to the deficiencies.

During fiscal 2003, the Company received $614,000 related to the class action settlement of In re First DataBank Direct Antitrust Litigation (the "Class Action"). This amount excludes professional, legal fees, and other Company borne expenses associated with this action all of which have been fully expensed. The Class Action had been brought on behalf of persons who purchased electronic drug information databases containing clinical, pricing, or other information on prescription or non-prescription pharmaceutical drugs or services, products or software related thereto (collectively, the "Drug Information Databases") directly from First DataBank, Inc. ("FDB") in the United States. The Class Action alleged violations of the antitrust laws with respect to the pricing of the Drug Information Databases. As a purchaser of Drug Information Databases from FDB, the Company was entitled to participate in the court-approved settlement. This settlement represents partial reimbursement o f prior period operating costs. The Company had no such settlement in fiscal 2002.

Net income for fiscal year 2003 was $4,389,000 compared to a net income for fiscal year 2002 of $2,631,000.

Liquidity and Capital Resources at June 30, 2004 and 2003

As of June 30, 2004, the Company had cash and cash equivalents of $10,213,000 and working capital of $9,783,000, compared to cash and cash equivalents of $7,525,000 and a working capital of $4,241,000 at June 30, 2003. The current ratio at June 30, 2004 was 1.82:1 compared to 1.37:1 at June 30, 2003. Cash provided by operating activities was $7,896,000 and $9,698,000 for the fiscal years ended June 30, 2004 and 2003, respectively. The decreased cash provided by operating activities in fiscal 2004 was primarily due to the reduction in net earnings and an increase in accounts receivable. This was partially offset by increases in accrued expenses and depreciation and amortization, and decreased deferred income tax charges.

As of June 30, 2004, accounts receivable increased $3,042,000 to $10,222,000 from $7,180,000 at fiscal year end 2003, and advances from customers increased $521,000 to $7,428,000 from $6,907,000 at fiscal year end 2003. The increase in advances from customers is due to the expanded customer base related to the industry acceptance of the Pharmacy Division's WORx product and an emphasis on selling support services with annual renewals. Days sales outstanding was 102 and 79 at fiscal year end June 30, 2004 and 2003, respectively. This increase is a result of longer collection cycles. The principal uses of cash for investing activities during the fiscal years ended June 30, 2004 and 2003 included purchases of fixed assets and investments in product development. During fiscal 2004, the Company spent $733,000 on fixed assets including equipment and software as part of routine improvements and replacements to its internal systems, compared to $687,000 for fiscal 2003. The Company capitalized new product devel opment of $5,804,000 and $5,215,000 for fiscal years 2004 and 2003, respectively. The investments in product development were related to the Company's ongoing efforts to enhance its products for the Blood Bank, Pharmacy and Operating Room Divisions. The Company plans to continue to review market expansion opportunities through internal development and/or the acquisition of products/companies that complement or augment the existing line of products.

The Company received $1,188,000 and $450,000 in fiscal 2004 and 2003 upon the exercise of stock options. The Company received proceeds of $89,000 from the issuance of a note payable, and made principal payments of $13,000 on the note payable during fiscal 2004.

The Company's liquidity is influenced by its ability to perform on a "best of breed" basis in a competitive industry that is currently impacted by consolidations of healthcare information system providers. The 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, management 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 the Company may consider establishing a new line of credit.

The Company owed $1,418,000 to the Chairman of the Board of Directors of the Company, which accrued interest at 1/4% over prime per annum. The interest rate at June 30, 2004 was 4.25%. On October 11, 2000, the original note plus accrued interest was changed from a demand note to a long-term note collateralized by the trade accounts receivable of Digimedics and due September 30, 2002, and subsequently amended to September 30, 2005. On August 20, 2004 the Company repaid all outstanding principal and accrued interest on this note.

In October 2000, Fratelli Auriana, Inc. ("Fratelli Auriana"), an entity controlled by the Chairman of the Board of the Company, committed to loan the Company up to $2,000,000, to be drawn in multiples of $250,000, as needed by the Company, subject to the terms described as follows. The Chairman has agreed to provide funds to Fratelli Auriana should any be necessary to ensure that Fratelli Auriana meets this obligation to the Company. Interest at the rate of prime plus 1/4% will be charged on any outstanding balance and must be paid quarterly. Any principal and interest outstanding must be paid by September 30, 2004. Any money borrowed may be prepaid without penalty on three days notice. Any principal and interest outstanding will become immediately due and payable upon a change of control of the Company, as defined in agreements between Fratelli Auriana and the Company. The loan will be secured by all of the assets of the Company. The Company paid no origination or facility fees. The Compan y does not intend to renew the credit facility.

Tabular Disclosure of Contractual Obligations
The Company's contractual obligations at June 30, 2004 for long-term debt are as follows:

2005                                 $   22,000
2006                                  1,443,000
2007                                     25,000
2008                                      4,000
                                     ----------
                                     $1,494,000
                                     ==========

2005                                 $1,244,000
2006                                    916,000
2007                                    751,000
2008                                    139,000
                                     ----------
                                     $3,050,000
                                     ==========

New Accounting Pronouncements

In December 2002, the Emerging Issues Task Force ("EITF") reached a consensus on EITF No. 00-21, "Revenue Arrangements with Multiple Deliverables." This issue addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. In some arrangements, the different revenue-generating activities (deliverables) are sufficiently separable and there exists sufficient evidence of their fair values to separately account for some or all of the deliverables (that is, there are separate units of accounting). In other arrangements, some or all of the deliverables are not independently functional, or there is not sufficient evidence of their fair values to account for them separately. This issue addresses when and, if so, how an arrangement involving multiple deliverables should be divided into separate units of accounting. This issue does not change otherwise applicable revenue recogniti on criteria. The guidance in this issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of this accounting standard did not have a significant impact on our financial position, results of operations and cash flows

Mediware's revenues and results of operations can fluctuate substantially from quarter to quarter. System sales revenues in any quarter depend substantially upon Mediware's sales performance and the customer's budgeting and buying practices. System sales in any quarter may fluctuate due to contract activity, demand for the Company's products and services, lengthy and complex sales cycles, and the customer's internal budgets for new technology systems and technical resources to deploy them. Additionally, the terms of a final contract may materially affect the Company's ability to recognize anticipated quarterly revenues. Factors include, but are not limited to, the following:

- --  Systems contracts may include both currently deliverable and non-deliverable software products.
- --  Customer needs for services that include significant modifications, customization or complex
     interfaces that could delay product delivery or acceptance.
- --  Customer specific acceptance criteria.
- --  Payment terms that are long term or depend upon contingencies.

Reliance on Third Party Software

Mediware licenses various third-party software products that it incorporates into its own software products. These products may include operating systems, relational database management systems, knowledge/clinical databases and other key systems. The termination by any third-party vendor of Mediware's licenses to use these products, or a significant change to a relied upon product, could have a material adverse effect on Mediware's operations. Changes that could have a material adverse effect include, for example, the third-party products becoming inoperable, features and functions becoming unavailable, product performance being materially reduced, or unfavorable pricing changes. Although alternate software products are available, Mediware could incur substantial costs if it is required to adapt its products to alternative third-party software products.

Dependence on Third Party Marketing Relationships

Mediware's continued growth depends on its ability to build and maintain strong marketing partnerships. The Company believes its marketing and sales efforts are enhanced by these relationships. Mediware has had marketing partnerships with certain laboratory or hospital information system software vendors who also are competitors of Mediware. Laboratory and hospital information system software vendors are responding to the growing demand within the market to offer more fully integrated solutions to hospitals. Given this dynamic, these vendors may choose to either develop stronger partnering relationships with clinical software providers like Mediware or decide to develop their own solutions. In the event that these marketing relationships are discontinued, the Company could experience a material adverse effect on its business, results of operations or financial condition.

Changes in the Healthcare Industry

The healthcare industry is heavily regulated by various governmental and regulatory bodies. The decisions made and initiatives promulgated by these bodies may significantly influence operations of hospitals and healthcare organizations. Their influence affects purchasing and investment decisions by hospitals, which could impact negotiations with the Company.

Many hospitals are consolidating and forming (or becoming part of) integrated healthcare delivery networks ("IHDNs"). The formation of IHDNs might reduce the number of discrete prospects the Company may target and could provide more negotiating leverage to the Company's prospective customers. These events, if they occurred, could result in a reduction of selling prices, an increase in the length of the sales cycle, or other situations that could negatively affect the Company.

Significant Competition

The market for healthcare information systems is extremely competitive. Some of the Company's competitors are Siemens AG, McKesson Corporation, Eclypsis Corporation, Misys PLC, Global Med Technologies, Inc., SCC Soft Computer, Cerner Corporation and GE Healthcare, each of which offer products that compete with certain offerings of the Company. Many of the Company's competitors have greater financial, technical, product development, sales and marketing resources. A number of factors determine success or failure in this market, including the functionality of the software, the quality of client references, the underlying technical architecture, the financial stability of the software provider, the ongoing support of the system, and the quality and quantity of the sales organization. The Company's ability to maintain a positive stance in all of the above areas will affect its ability to compete successfully.

Managing Growth

Mediware's ability to manage future growth is partly dependent on the ability to recruit, train and retain employees that possess industry-specific expertise. The Company has experienced significant growth in service-related revenues, customer base and product development activity. The Company plans to continue to invest heavily in new product development in all Divisions. Mediware's success will partially depend upon its ability to recruit, manage and maintain appropriate staffing levels of technical and industry expertise to meet customer needs and service new sales. The market for such personnel is highly competitive, making it difficult to adjust staffing timely in reaction to fluctuations in sales activity.

Government Regulation

The hospitals that comprise the primary market for the Company's products must comply with various federal, state and local statutes and regulations. The adequacy of blood bank information management and record keeping products are subject to regulation, inspection and review by the FDA.

The Company's blood bank products are regulated as medical devices by the FDA. Blood bank software vendors are also subject to the FDA's Quality Systems Regulations ("QSR"). Although Mediware is continually updating and improving its internal quality system to ensure compliance with new federal rules and guidelines, Mediware cannot predict whether it will be fully in compliance with these guidelines or any future guidelines, regulations or inspection procedures. Non-compliance with any such guidelines, regulations or procedures could have a material adverse effect on the operations of clinical information system vendors of blood bank information systems, including Mediware.

The FDA Modernization Act of 1997 was enacted on November 21, 1997 and became effective on February 20, 1998. Under this legislation, the FDA is directed to consider the extent to which reliance on post-market controls could expedite the pre-market notification review process and the classification of devices. The legislation also requires the FDA to ensure that Good Manufacturing Practices conform, to the extent practicable, to internationally recognized standards for medical devices. Neither of these provisions appears on its face to contemplate regulation which would have a material adverse effect on the Company's blood bank information system operations; however, the legislation expanded the jurisdiction of the FDA and the Company remains unable to predict the effect of any resulting applicable future regulation. If any of the Company's existing products or future products become subject to Congressional or governmental agency efforts to establish or expand governmental agency jurisdiction, complianc e would likely be costly and time-consuming. However, the Company believes it could have a competitive advantage if the FDA regulations apply to cord blood stem cells, tissue or other biologic products.

During fiscal 2003, Mediware's Hemocare registered facility was inspected by the FDA. The inspection noted that several customers used an outdated Hemocare version. In a mutually agreed upon initiative with the FDA, Mediware issued corrective action to assist its customers with their upgrade to Hemocare version 6.1. This action is currently ongoing with approximately 85% of Hemocare customers now upgraded.

New Regulations Relating to Patient Confidentiality

The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") mandates significant changes in the legal and regulatory environment governing the provision of health benefits, the delivery of and payment for healthcare services, and the security and confidentiality of individually identifiable, protected health information in written, electronic or oral formats. The Department of Health and Human Services adopted final rules implementing HIPAA. The final rules include standards for the security of electronic health information and the privacy of a patient's medical records and became effective on February 20, 2003 and April 14, 2003, respectively. Most healthcare providers, healthcare clearinghouses and health plans ("Covered Entities") are required to comply. Covered Entities are required to comply with the standards for security by April 21, 2005 and have been required to comply with the standards for privacy since April 14, 2003. Although the C ompany is not a Covered Entity, most of the Company's customers are Covered Entities. As Covered Entities, the Company's customers are required to flow down certain of their obligations under HIPAA to their service providers. Accordingly, the Company has been required to adopt different and or additional procedures. In addition, the Company has had increased legal expenses associated with negotiating agreements with existing and new customers to implement the new HIPAA obligations. In light of the new obligations under HIPAA, Covered Entities may be required or may choose to reevaluate their technology solutions. The Company may be required to invest in its products and procedures to maintain compliance. In addition, many states have passed or are evaluating local versions of HIPAA. The Company believes, but cannot assure, that HIPAA will not materially affect the business, results of operations or financial condition of the Company.

Product Related Liabilities

All of the Company's products provide data for use by healthcare providers in patient care settings. Mediware's license agreements generally contain provisions to limit exposure to product related claims. These provisions, however, may not be enforceable in some jurisdictions or may not adequately limit the Company's exposure. The Company maintains product liability insurance at an amount it believes adequate for its intended purpose, however, there can be no assurances that the insurance will cover a claim brought against the Company. Although no claims have been brought against the Company to date for injuries related to the use of its products, there is a risk that such claims could be pursued. A successful claim brought against the Company, not covered by insurance or greater than the insured limits, could have a material adverse effect upon the Company's business, results of operations or financial condition.

System Errors and Warranties

Despite testing by Mediware, software products as complex as those offered by the Company and used in a wide range of clinical and health information systems settings are likely to contain a number of errors or "bugs", especially early in their product life cycle. The Company's products are clinical information systems used in patient care settings where a low tolerance for bugs exists. Testing of products is difficult due to the wide range of environments the systems are installed in. Due to these factors, there is no assurance that the discovery of defects or errors will not cause delays in product delivery, poor client references, payment disputes, contract cancellations, or additional expenses and payments to rectify problems. Any of these factors may delay acceptance of products, which could have a material adverse effect upon the Company's business, results of operations or financial condition.

Limited Protection of Intellectual Property and Proprietary Rights; Proprietary Technology May Be Subjected to Infringement Claims.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The Company does not currently have any material exposure to foreign currency transaction gains or losses. However, the Company does have some exposure to foreign currency rate fluctuations arising from sales made to customers in the United Kingdom. These transactions are made by the Company's U.K.-based, wholly owned subsidiary which transacts business in the local functional currency. To date, the Company has not entered into any derivative financial instruments to manage foreign currency risk and is currently not evaluating the future use of any such financial instruments.

Item 8. Financial Statements and Supplemental Data.

The Financial Statements and Notes required by this Item are included in this Report starting on page 32.

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

None

Item 9A. Controls and Procedures.

The Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") have reviewed and evaluated the effectiveness of the Company's diclosure controls and procedures (as defined in Rules 240.13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within ninety days prior to the filing date of this annual report. Based on that review and evaluation, which included inquiries made to certain other employees of the Company, the CEO and CFO have concluded that the Company's current disclosure controls and procedures, as designed and implemented, are reasonably adequate to ensure that they are provided with material information relating to the Company required to be disclosed in the reports the Company files or submits under the Exchange Act. There have not been any significant changes in the Company's internal controls or in other factors that co uld significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses identified, and therefore no corrective actions were taken.

Item 10. Directors and Executive Officers of the Registrant.

The information concerning the Company's executive officers required by this item is incorporated by reference to the Company's Proxy Statement under the heading "Executive Officers." The information concerning the Company's directors required by this item is incorporated by reference to the Company's Proxy Statement under the heading "Election of Directors." Information concerning the Company's officers', directors' and 10% shareholders' required compliance with Section 16(a) of the Exchange Act is incorporated by reference to the Company's Proxy Statement under the heading "Section 16(a) Beneficial Ownership Reporting Compliance."

Item 11. Executive Compensation.

The information required by this item is incorporated by reference to the Company's Proxy Statement under the heading "Executive Compensation."

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item is incorporated by reference to the Company's Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management."

Item 13. Certain Relationships and Related Transactions.

The information required by this item is incorporated by reference to the Company's Proxy Statement under the heading "Certain Relationships and Related Transactions".

Item 15. Exhibits and Financial Statement Schedules.


(a) The following documents are filed as part of this Report:

    1. Consolidated Financial Statements:

       Report of Independent Registered Public Accounting Firm

       Consolidated Balance Sheets at June 30, 2004 and 2003

       Consolidated Statements of Operations and Comprehensive Income for the years ended
       June 30, 2004, 2003, and 2002

       Consolidated Statements of Stockholders' Equity for the years ended June 30, 2004, 2003 and 2002

       Consolidated Statements of Cash Flows for the years ended June 30, 2004, 2003 and 2002

Date:  August 31, 2004                  BY: /s/ GEORGE J. BARRY

                                        ----------------------------
                                             GEORGE J. BARRY
                                             President and
                                             Chief Executive Officer

        Signature                         Title                       Date
        ---------                         -----                       ----

  /s/ GEORGE J. BARRY           President, Chief                   August 31, 2004
- ------------------------        Executive Officer & Director
   GEORGE J. BARRY              (Principal Executive Officer)

  /s/ JILL H. SUPPES            Chief Financial Officer            August 31, 2004
- ------------------------        (Principal Accounting Officer)
   JILL H. SUPPES

 /s/ LAWRENCE AURIANA           Chairman of the Board              August 31, 2004
- ------------------------
LAWRENCE AURIANA

 /s/ JONATHAN CHURCHILL         Director                           August 31, 2004
- ------------------------
JONATHAN CHURCHILL

 /s/ ROGER CLARK                Director                           August 31, 2004
- ------------------------
ROGER CLARK

 /s/ JOSEPH DELARIO             Director                           August 31, 2004
- ------------------------
JOSEPH DELARIO

 /s/ PHILIP COELHO              Director                           August 31, 2004
- ------------------------
PHILIP COELHO

[Signatures continued on next page]




 /s/ DR. JOHN GORMAN            Director                           August 31, 2004
- ------------------------
DR. JOHN GORMAN

 /s/ WALTER KOWSH, JR.          Director                           August 31, 2004
- -------------------------
WALTER KOWSH, JR.

/s/ROBERT SANVILLE              Director                           August 31, 2004
- -------------------------
ROBERT SANVILLE

 /s/ HANS UTSCH                 Director                           August 31, 2004
- -------------------------
HANS UTSCH

 /s/ DR. CLINTON WEIMAN         Director                           August 31, 2004
- -------------------------
DR. CLINTON WEIMAN

Eisner LLP
New York, New York
August 6, 2004,
with respect to Note 6 and Note 16, August 20, 2004

MEDIWARE INFORMATION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except shares)

                                                                                        
                                                                            June 30,    June 30,
                                                                              2004        2003
                                                                           --------    --------
ASSETS
Current Assets
  Cash and cash equivalents                                               $ 10,213     $  7,525
  Accounts receivable (net of allowance of $657 and $557)                   10,222        7,180
  Inventories                                                                  227          246
  Deferred tax asset - current portion                                         347          319
  Prepaid expenses and other current assets                                    772          546
                                                                          --------      -------
     Total current assets                                                   21,781       15,816

Fixed assets, net                                                            1,221        1,212
Capitalized software costs, net                                             18,495       16,401
Goodwill, net                                                                4,435        4,667
Purchased technology, net                                                      135          591
Other long-term assets                                                         135          119
                                                                            -------     -------
       Total Assets                                                       $ 46,202     $ 38,806
                                                                          ========     ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
  Accounts payable                                                            1,219       1,995
  Current portion of note payable                                                22           -
  Advances from customers                                                     7,428       6,907
  Accrued expenses and other current liabilities                              3,329       2,673
                                                                           --------    --------
     Total current liabilities                                               11,998      11,575

Notes payable and accrued interest payable to a related party                 1,418       1,387
Note payable                                                                     54           -
Deferred tax liabilities                                                      2,667       1,909
                                                                           --------    --------
     Total liabilities                                                       16,137      14,871
                                                                           --------    --------

Stockholders' Equity
  Preferred stock, $.01 par value; authorized 10,000,000
    shares; none issued
  Common stock, $.10 par value; authorized 25,000,000
    shares; 7,664,000 and 7,358,000 shares issued and
    outstanding in 2004 and 2003, respectively                                  766         736
  Additional paid-in capital                                                 26,427      23,999
  Retained earnings (accumulated deficit)                                     2,823        (784)
  Accumulated other comprehensive gain (loss)                                    49         (16)
                                                                           --------    --------
     Total stockholders' equity                                              30,065      23,935
                                                                           --------    --------
     Total Liabilities and Stockholders' Equity                            $ 46,202    $ 38,806
                                                                           ========    ========

MEDIWARE INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the Years Ended June 30,
(Amounts in thousands, except earnings per share)

                                              2004            2003           2002
                                            --------        --------       --------
Revenue
  System sales                               $12,421         $12,564       $ 11,541
  Services                                    24,233          20,419         18,544
                                            --------        --------       --------
     Total revenue                            36,654          32,983         30,085
                                            --------        --------       --------
Cost and Expenses
  Cost of systems (1)                          2,392           2,487          2,885
  Cost of services (1)                         7,331           6,263          5,588
  Amortization of capitalized software         3,710           2,199          1,844
  Software development costs                   3,071           2,757          3,269
  Selling, general and administrative         14,507          12,939         12,072
  Proceeds from settlement                         -            (614)             -
                                            --------        --------       --------
     Total costs and expenses                 31,011          26,031         25,658
                                            --------        --------       --------
     Operating income                          5,643           6,952          4,427

Interest and other income                        280             131             85
Interest and other expense                       (45)            (75)           (82)
                                            --------         --------       --------
Income before income taxes                     5,878           7,008          4,430
Income tax provision                          (2,271)         (2,619)        (1,799)
                                            --------        --------       --------

     Net income                                3,607           4,389          2,631


Other comprehensive income(loss)
  Foreign currency translation adjustment         65              51            (11)
                                            --------        --------       --------

     Comprehensive income                  $   3,672         $ 4,440       $  2,620
                                            ========        ========       ========

Net income per Common Share
  Basic                                    $   0.48        $   0.60       $   0.36
  Diluted                                  $   0.44        $   0.56       $   0.35

Weighted Average Common Shares Outstanding
  Basic                                       7,463           7,300          7,228
  Diluted                                     8,174           7,844          7,611

 (1) Excludes amortization of Capitalized Software Costs

MEDIWARE INFORMATION SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended June 30, 2004, 2003 and 2002
(Amounts in thousands)

                                                                        Retained    Accumulated
                                                     Common Stock      Additional     Earnings       Other
                                                --------------------     Paid-In    Accumulated  Comprehensive
                                                 Shares      Amount      Capital     (Deficit)    Income(Loss)   Total
                                                --------    --------    ---------- -----------   -------------  -------


     Balance at July 1, 2001                       7,207    $    721    $ 23,186     $ (7,804)    $     (56)   $ 16,047
                                                --------    --------    --------     --------      --------    --------

Exercise of stock options                             52           5         107                                    112
Disgorged profits                                                             10                                     10
Tax benefit from exercise of stock options                                    75                                     75
Foreign currency translation adjustment                                                                 (11)        (11)
Net income                                                                              2,631                     2,631
                                                --------    --------    --------     --------      --------    --------
     Balance at June 30, 2002                      7,259    $    726    $ 23,378     $ (5,173)    $     (67)   $ 18,864
                                                --------     -------    --------     --------      --------    --------

Exercise of stock options                             99          10         440                                    450
Tax benefit from exercise of stock options                                   181                                    181
Foreign currency translation adjustment                                                                  51          51
Net income                                                                              4,389                     4,389
                                                --------    --------    --------     --------      --------    --------
     Balance at June 30, 2003                      7,358    $    736    $ 23,999     $   (784)    $     (16)   $ 23,935
                                                --------    --------    --------     --------      --------    --------

Exercise of stock options                            306          30       1,158                                  1,188
Tax benefit from exercise of stock options                                 1,270                                  1,270
Foreign currency translation adjustment                                                                  65          65
Net income                                                                              3,607                     3,607
                                                --------    --------    --------     --------      --------    --------
     Balance at June 30, 2004                      7,664    $    766    $ 26,427     $  2,823     $      49    $ 30,065
                                                ========    ========    ========     ========      ========    ========

MEDIWARE INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years ended June 30,
(Amounts in thousands)

                                                            2004        2003        2002
                                                          -------     -------     -------
Cash Flows From Operating Activities
  Net income                                             $  3,607    $  4,389    $  2,631
  Adjustments to reconcile net income, to
   net cash provided by operating activities:
     Depreciation and amortization                           4,890      3,420       3,047
     Deferred tax provision                                    962      2,408       1,712
     Loss on disposal of fixed assets                           -          19           -
     Tax benefit from exercise of stock options              1,270        181          75
     Provision for doubtful accounts                           100        197         316
  Changes in operating assets and liabilities:
     Accounts receivable                                    (3,142)      (508)     (1,299)
     Inventories                                                19        (24)         21
     Prepaid and other assets                                 (242)       (22)       (274)
     Accounts payable, accrued expenses and
        advances from customers                                432       (362)        (87)
                                                           -------     ------     -------
  Net cash provided by operating activities                  7,896      9,698       6,142
                                                           -------     -------    -------

Cash Flows From Investing Activities
  Acquisition of fixed assets                                (733)       (687)       (121)
  Capitalized software costs                               (5,804)     (5,215)     (4,922)
  Acquisition of purchased technology                          -           -         (325)
                                                          -------     -------     -------
  Net cash used in investing activities                    (6,537)     (5,902)     (5,368)
                                                          -------     -------     -------

Cash Flows From Financing Activities
  Proceeds from exercise of stock options                   1,188         450         112
  Proceeds from issuance of note payable                       89          -           -
  Principal payments on note payable                          (13)         -           -
  Other                                                        -           -           10
                                                          -------     -------     -------
  Net cash provided by financing activities                 1,264         450         122
                                                          -------     -------     -------
  Foreign currency translation adjustments                     65          51         (11)
                                                          -------     -------     -------

  Net increase in cash and cash equivalents                 2,688       4,297          885
  Cash at beginning of year                                 7,525       3,228        2,343
                                                          -------     -------      -------
  Cash at end of year                                     $10,213     $ 7,525      $ 3,228
                                                          =======     =======      =======
Supplemental disclosures of cash flow information:
  Cash paid during the period for:
    Income taxes                                          $   149     $    74      $    -
    Interest on note payable                              $     3     $     -      $    -

Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Mediware Information Systems, Inc. and its wholly owned subsidiaries Digimedics Corporation ("Digimedics"), Informedics, Inc. ("Informedics") and Digimedics' wholly owned subsidiary J.A.C. Computer Services Limited ("JAC"). All significant inter-company transactions and balances have been eliminated in consolidation.

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 consolidated financial statements and related notes to financial statements. Actual results could differ from those estimates. The Company uses estimates to determine whether any impairment to the carrying value of goodwill or capitalized software is necessary.

Revenue Recognition
The Company derives revenue from licensing its proprietary applications software and sub-licensed software, sale of computer hardware and the services performed related to the installation, training, consultation and ongoing support of the software. License fee revenues are generally recognized when evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable, and collectibility is probable. Revenue from the sale of hardware is generally recognized upon shipment. Fees for installation, training and consultation are recognized as the services are provided. If the Company enters into arrangements with a client requiring significant customization of the software or services that are essential to the functionality of the software, the Company recognizes revenue derived from the sale of licensed software, sub-licensed software and services over the period the services are performed, in accordance with the American Institute of Certified Public Accountants Stat ement of Position 97-2, "Software Revenue Recognition." Support and maintenance fees, typically sold on an annual renewal basis, are recognized ratably over the period of the support contract.

Cash and Cash Equivalents
Cash equivalents include time deposits with maturities of three months or less when purchased.

Inventory
Inventory consists primarily of computer hardware and third-party software licenses held for resale and is valued at the lower of cost or market. Cost is determined based on the specific identification method. Inventory consists of the following at June 30:

Fixed Assets
Furniture, equipment and leasehold improvements are valued at cost. Depreciation for furniture and equipment is provided on the straight-line method over their estimated useful lives. Leasehold improvements are amortized over their estimated useful lives or the remaining lease period, whichever is shorter.

Capitalized Software Costs
Capitalized computer software costs consist of expenses incurred in creating and developing computer software products. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Software to be Sold, Leased or Otherwise Marketed," once technological feasibility has been established, the costs associated with software development are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized costs are amortized based on estimated current and future revenue for each product with an annual minimum equal to the straight-line amortization over the estimated economic life of five to seven years of the software. Amortization expense for the years ended June 30, 2004, 2003 and 2002 was $3,710,000, $2,199,000 and $1,844,000, respectively.

 (In thousands)
                                              2004        2003        2002
                                            -------     -------     -------
     Capitalized software costs
     Beginning of year                     $ 27,072    $ 21,857    $ 16,935
     Additions                                5,804       5,215       4,922
                                            -------     -------     -------
                                             32,876      27,072      21,857
     Less accumulated amortization           14,381      10,671       8,472
                                            -------     -------     -------
                                           $ 18,495    $ 16,401    $ 13,385
                                            =======     =======     =======

Goodwill
Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible assets of businesses acquired. These business acquisitions include Digimedics Corporation ("Digimedics") in May 1990, Informedics, Inc. ("Informedics") in September 1998 and certain assets of Information Handling Services Group, including the U.S.-based Pharmakon Division ("Pharmakon") and the U.K.-based JAC Computer Services, Ltd. ("JAC") in June 1996. Costs allocated to goodwill in the Informedics acquisition totaled $944,000 and was being amortized over twelve years using the straight-line method. All other goodwill was being amortized using the straight-line method over twenty years. Amortization expense was $0 in 2004, 2003 and 2002, respectively. Accumulated amortization for goodwill was $2,336,000 at June 30, 2004 and 2003. Goodwill is reduced by the subsequent recognition of tax benefit.

Prior to July 1, 2001, the Company periodically assessed whether goodwill and other intangible assets were impaired as required by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Other Long-Lived Assets to be Disposed Of." Commencing July 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," and evaluates for impairment utilizing undiscounted projected cash flows. As of June 30, 2004, management believes that no such impairment has occurred.

Software Products Acquired and Purchased Technology
As a part of the acquisition of Informedics in September 1998, the Company obtained certain software products as well as technologies under development. A portion of the acquisition price of Informedics was allocated to software products based on the net present value of the projected income stream over the expected economic life of the specific products, which the Company expects to continue to market. This amount, totaling $498,000, is being amortized over 5 years using the straight-line method. Purchased technology costs of $1,541,000 related to the acquisition of rights to LifeTrak, a comprehensive donor blood center software package, from Carter BloodCare in November 1999 are being amortized over 5 years. In July 2001, the Company entered into an intellectual property agreement with Ortho Clinical Diagnostics, Inc. to purchase for $325,000 the rights to market an integrated testing module that was developed as part of the LifeTrak product. The Company is amortizing that purchase over the remaining life of LifeTrak. Amortization costs for purchased technology charged to operations were
$456,000, $505,000 and $505,000 during fiscal years 2004, 2003 and 2002, respectively.

Foreign Currency Translations
The functional currency for the Company's JAC subsidiary is the British pound. The translation to U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date. Revenue and expense accounts are translated using the average exchange rate during the period. The net gain (loss) resulting from these foreign currency translations are reported as comprehensive income (loss). Amounts credited to comprehensive income were $65,000 and $51,000 in 2004 and 2003, respectively, and amounts charged to comprehensive loss were $11,000 in 2002.

Income Taxes
Income taxes are accounted for under the asset and liability method in accordance with SFAS No. 109, "Accounting for Income Taxes." Accordingly, the provision for income taxes includes deferred income tax resulting from items reported in different periods for income tax and financial statement purposes. Deferred tax assets and liabilities represent the expected future tax consequences of the 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 enacted tax rates in effect at the balance sheet date. The resulting asset or liability is adjusted to reflect enacted changes in tax law.

Earnings Per Common Share
Basic earnings per share is computed by dividing the income available to common shareholders by the average number of common shares outstanding. Diluted earnings per share includes the dilutive effect, if any, from the potential exercise of stock options using the treasury stock method. The weighted average shares outstanding used in the calculations of earnings per share were as follows (in thousands):

                                                   2004     2003     2002
                                                  -----    -----    -----
Shares outstanding, beginning                     7,358    7,259    7,207
Weighted average shares issued                      105       41       21
                                                  -----    -----    -----
Weighted average shares outstanding -
  Basic                                           7,463    7,300    7,228
Effect of dilutive securities
  (stock options)                                   711      544      383
                                                  -----    -----    -----
Weighted average shares outstanding - diluted     8,174    7,844    7,611
                                                  =====    =====    =====

                                                   2004     2003     2002
                                                  -----    -----    -----
Stock Options                                        75       98      490
                                                              

Fair Value of Financial Instruments
The Company estimates its fair value disclosures for financial instruments, using the following methods and assumptions. Cash, accounts receivable, accounts payable and accrued expenses approximate their fair value due to their relatively short maturity. Fixed-rate long-term obligations are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. At June 30, 2004 and 2003, the fair value of the Company's long-term obligations approximated its carrying value.

Stock Based Compensation
The Company accounts for stock-based employee and outside directors' compensation under APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", which was released in December 2002 as an amendment of SFAS No. 123. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all awards:

                                                                Estimated
                                      2004          2003       Useful Life
                                     ------        ------      -----------

Computers and office equipment      $5,747        $5,200        3-5 Years
Furniture and fixtures                 964           848         5 Years
Leasehold improvements                 233           163        5-7 Years
                                    ------        ------
                                     6,944         6,211
Less accumulated depreciation        5,723         4,999
                                    ------        ------
                                    $1,221        $1,212
                                    ======        ======

5. ACCRUED EXPENSES AND LIABILITIES
Accrued expenses and other current liabilities consist of the following:

 (In thousands)
                                                        2004          2003
                                                       ------        ------
     Payroll and related benefits                      $1,516        $1,366
     Accounting, legal and other professional fees        377           316
     Contract labor                                       170            40
     Royalties                                            246           306
     Accrued rent                                         161           128
     Other                                                859           517
                                                       ------        ------
                                                       $3,329        $2,673
                                                       ======        ======

6. NOTES PAYABLE
The Company owed $1,418,000 to the Chairman of the Board of Directors of the Company, which accrued interest at 1/4% over prime per annum. The interest rate at June 30, 2004 was 4.25%. On October 11, 2000, the original note plus accrued interest was changed from a demand note to a long-term note collateralized by the trade accounts receivable of Digimedics and due September 30, 2002, and subsequently amended to September 30, 2005. On August 20, 2004 the Company repaid all outstanding principal and accrued interest on this note.

In October 2000, Fratelli Auriana, Inc. ("Fratelli Auriana"), an entity controlled by the Chairman of the Board of the Company, committed to loan the Company up to $2,000,000, to be drawn in multiples of $250,000, as needed by the Company, subject to the terms described as follows. The Chairman has agreed to provide funds to Fratelli Auriana should any be necessary to ensure that Fratelli Auriana meets this obligation to the Company. Interest at the rate of prime plus 1/4% will be charged on any outstanding balance and must be paid quarterly. Any principal and interest outstanding must be paid by September 30, 2004. Any money borrowed may be prepaid without penalty on three days notice. Any principal and interest outstanding will become immediately due and payable upon a change of control of the Company, as defined in agreements between Fratelli Auriana and the Company. The loan will be secured by all of the assets of the Company. The Company paid no origination or facility fees. The Compan y does not intend to renew the credit facility.

In November 2003, the Company entered into a note payable agreement in the amount of $100,000. The note is secured by certain furniture and equipment and is payable in monthly installments of $2,222 through August 2007. The note does not bear interest, and the related implied discount of $11,000 is being amortized over the life of the agreement.

2005                                 $   22
2006                                  1,443
2007                                     25
2008                                      4
                                     ------
                                     $1,494
                                     ======

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. 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 June 30, 2004 no options were available to be issued under this Plan.

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'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.

The following table sets forth summarized information concerning the Company's stock options as of June 30:

                                      2004                  2003                  2002
                            ---------------------   -------------------   -------------------
                                         Weighted              Weighted              Weighted
                                          Average               Average               Average
                                         Exercise              Exercise              Exercise
                              Shares       Price     Shares      Price     Shares      Price
                            ----------   --------   --------   --------   --------   --------
Options outstanding at
beginning of year            1,182,000     $5.23   1,141,000     $4.36     971,000     $4.28

Granted                        174,000     11.65     270,000      8.32     453,000      4.07
Exercised                     (306,000)     3.88     (99,000)     4.55     (52,000)     2.14
Cancelled                            -        -     (130,000)     4.53    (231,000)     3.81
                            ----------     -----    --------     -----    --------     -----
Options outstanding at
end of year                  1,050,000     $6.71   1,182,000     $5.23   1,141,000     $4.36
                            ==========     =====    ========     =====    ========     =====
Options exercisable at
end of year                    729,000     $5.62     697,000     $4.77     472,000     $5.15
                            ==========     =====    ========     =====    ========     =====

The following table presents information relating to stock options at June 30, 2004:

              Options Outstanding                         Options Exercisable
- ----------------------------------------------   ----------------------------------------
                                                   Weighted
                                  Weighted          Average                  Weighted
    Range of                       Average         Remaining                  Average
Exercise Prices       Shares    Exercise Price   Life in Years   Shares    Exercise Price
- ---------------     ---------   --------------   -------------   -------   --------------
$ 1.00 - $ 2.99       190,000      $ 2.68            1.6         190,000       $ 2.68
$ 3.00 - $ 5.99       233,000      $ 3.60            5.4         179,000       $ 3.45
$ 6.00 - $ 8.99       377,000      $ 7.63            4.7         271,000       $ 7.51
$ 9.00 - $11.99       175,000      $10.22            5.9          89,000       $10.49
$12.00 - $14.77        75,000      $13.72            6.0              -           -

                    ---------                                  ---------
                    1,050,000                                    729,000
                    =========                                  =========

                                             2004      2003      2002
                                            -----     -----     -----
Current:
  State                                     $  86     $   -     $   -
  Foreign                                     (47)       30        12
                                            -----     -----     -----
                                               39        30        12
                                            -----     -----     -----
Deferred:
  Federal                                     861     2,157     1,455
  State                                       101       251       257
                                            -----     -----     -----
                                              962     2,408     1,712
                                            -----     -----     -----
Stock option income tax benefit             1,270       181        75
                                            -----     -----     -----
                                           $2,271    $2,619    $1,799
                                            =====     =====     =====

                                                   2004         2003
                                                 -------      -------
Deferred tax asset:
  Net operating loss carryforwards              $  4,140      $ 4,151
  Business tax credit carryforwards                  300          300
  Valuation reserves and accruals
    deductible in different periods                  347          319
  Depreciation and amortization                     (194)        (265)
  Alternative minimum tax                            115          137

Deferred tax liability:
  Software cost capitalization                    (7,028)      (6,232)
                                                  ------       ------
Net deferred tax liability                      $ (2,320)     $(1,590)
                                                  ======      =======

                                                 2004        2003         2002
                                                ------      ------       ------

    Federal income tax at statutory rate       $ 1,999     $ 2,383      $ 1,506
    State income tax                               235         199          253
    Foreign tax (benefit)                          (47)         37           40
    Other, including non-deductible expenses        84           -            -
                                                ------     -------      -------
                                               $ 2,271     $ 2,619      $ 1,799
                                                ======      ======       ======

2005                                 $1,244
2006                                    916
2007                                    751
2008                                    139
                                     ------
                                     $3,050
                                     ======

                                                2004         2003         2002
                                              --------     --------     --------
Revenues from Unaffiliated Customers
   United States                              $ 33,569     $ 29,998     $ 27,858
   United Kingdom                                3,085        2,985        2,227
                                              --------     --------     --------
         Total                                $ 36,654     $ 32,983     $ 30,085
                                              ========     ========     ========
Net Income
  United States                               $  3,772     $  4,262     $  2,609
  United Kingdom                                  (165)         127           22
                                              --------     --------     --------
         Total                                $  3,607     $  4,389     $  2,631
                                              ========     ========     ========

Identifiable Assets
   United States                              $ 43,612     $ 36,228     $ 30,039
   United Kingdom                                2,590        2,578        2,149
                                              --------     --------     --------
         Total                                $ 46,202     $ 38,806     $ 32,188
                                              ========     ========     ========

15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for fiscal 2004 and 2003 is as follows (table in thousands, except per share amounts)

(1) Gross profit is calculated as revenue less cost of systems and cost of services.

THIS EMPLOYMENT AGREEMENT (hereinafter "this Agreement") is made this June 5, 2004 between Mediware Information Systems, Inc., (hereinafter "the Company") and Michael L. Crabtree (hereinafter "the Executive").

WHEREAS, the Company desires to continue to employ the Executive as the President of its Worldwide Pharmacy Division, and the Executive desires to continue being so employed by the Company, on the terms and conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements herein set forth, the Company and the Executive hereby agree as follows:

1. Employment. The Company hereby agrees to employ the Executive, and the Executive hereby agrees to serve as President of the Worldwide Pharmacy Division of the Company. The Executive agrees to perform such services customary to such office as shall from time to time be assigned to him by the President and Chief Executive Officer. The Executive further agrees to use his best efforts to promote the interests of the Company and to devote his full business time and energies to the business and affairs of the Company.

2. Term of Employment. The employment hereunder shall be for a term of two years, commencing on the date hereof and ending on the third anniversary of the date hereof (the "'Expiration Date"), unless terminated earlier pursuant to Paragraph 4 of this Agreement (the "Term of Employment"). This Agreement shall automatically renew for successive terms of one (1) year (each a "Renewal Term") commencing on the first day immediately following the Expiration Date, unless such renewal is objected to by (i) the Company by giving prior written notice more than ninety (90) days and less than one hundred and twenty (120) days prior to the scheduled Expiration Date; or (ii) the Executive by giving prior written notice at least one hundred eighty days prior to the scheduled Expiration Date. In the event of a renewal, the last day of each successive Renewal Term shall be deemed the Expiration Date.

3. Compensation and Other Related Matters.

(a) Salary. As compensation for services rendered hereunder, the Executive shall receive an Annual Base Salary of two hundred fifteen thousand dollars ($215,000.00), which salary shall be paid in accordance with the Company's then prevailing payroll practices for its officers and shall be subject to review annually by the Board of Directors.

(b) Bonus. During the term of this Agreement, and in the Board of Directors' sole discretion, the Executive shall be eligible to receive an Annual Bonus of up to 50% of Annual Base Salary, payable at the time of the conclusion of the annual audit. The amount of the Annual Bonus payable to the Executive will be based upon Executive meeting performance criteria established by the President and Chief Executive Officer. If the Executive leaves the Company for any reason in the middle of a year, the Annual Bonus for that year will be pro-rated in the same manner, except if Executive resigns without Good Reason as described in Paragraph 4(d), below, or is terminated for Cause pursuant to Paragraph 5(c), below, in which case no Annual Bonus will be paid.

(c) Performance Bonus. In addition to the Bonus set out in Section (b) above, Executive shall be eligible to receive a performance bonus based on the performance of the Company's Worldwide Pharmacy Division during the first six months of the Company's fiscal 2005 year. The amount of this bonus will be determined by the CEO and will not exceed $90,000.

(d) Stock Options. Subject to the approval of the Company's Board of Directors, the Executive shall be granted an additional thirty thousand (30,000)] non-qualified options (the "'Options") to purchase shares of the Company's Common Stock, par value $.10 per share, (the "Stock") under the Company's Equity Incentive Plan. The Options shall be subject to the terms of the Equity Incentive Plan and the Executive's Non-Qualified Stock Option Agreement (the "Option Agreement"), attached hereto as Exhibit "'A". Subject to the Option Agreement (which shall govern the Options in the event of any conflict between this Agreement and the Option Agreement), the Company and the Executive agree as follows:

(i) Vesting. Subject to continued employment of the Executive, the Options shall vest and become exercisable as follows: Fifteen thousand (15,000) Options shall become exercisable on the first anniversary of the commencement of the Term of Employment; and Fifteen thousand (15,000) Options shall become exercisable on the second anniversary date of the commencement of the Term of Employment. In addition, upon an acquisition or sale of the Company, as defined in Paragraph 5(f), below, any remaining unexercisable Options shall become exercisable immediately.

(ii) Exercise. The Options shall be exercisable at a price equal to the fair market value of the Stock on the day the Term of Employment commences. The fair market value of the Stock shall equal the average of the high and low market sale prices on such day as reported by NASDAQ. The Options shall be exercisable for five years from the commencement of the Term of Employment.

(d) Other Benefits. The fringe benefits, perquisites and other benefits of employment, including three (3) weeks vacation, to be provided to the Executive shall be equivalent to such benefits and perquisites as are provided to other senior executives of the Company as amended from time to time.

(e) Expenses. The Company shall pay the Executive's reasonable expenses (including legal expenses) incurred in the negotiation of this Agreement upon the submission by the Executive of unpaid invoices for such expenses to the Company.

(f) Reimbursement. Subject to policies established from time to time by the Company, the Company shall reimburse Executive for the reasonable expenses incurred by him in connection with the performance of his duties hereunder, including but not limited to, travel expenses and entertainment expenses, for which the Executive shall account to the Company in a manner sufficient to conform to Internal Revenue Service requirements.

4. Termination.

(a) Disability. If, as a result of the incapacity of the Executive due to physical or mental illness, the Executive is unable to perform substantially and continuously the duties assigned to him hereunder, with or without a reasonable accommodation, for a period of three (3) consecutive months or for a non-consecutive period of nine (9) months during the Term of Employment, the Company may terminate his employment for "Disability" upon thirty (30) days prior written notice to the Executive.

(b) Death. The Executive's employment shall terminate immediately upon the death of the Executive.

(c) Cause. The Company shall be entitled to terminate the Executive's employment for "Cause." Termination by the Company of the employment of the Executive for "Cause" shall mean termination based upon (i) the willful failure by the Executive to follow directions communicated to him by the President and Chief Executive Officer; (ii) the willful engaging by the Executive in conduct which is materially injurious to the Company, monetarily or otherwise; (iii) a conviction of, a plea of nolo contendere, a guilty plea or confession by the Executive to an act of fraud, misappropriation or embezzlement or to a felony; (iv) the Executive's habitual drunkenness or use of illegal substances; (v) a material breach by the Executive of this Agreement; or (vi) an act of gross neglect or gross misconduct which the Company deems in good faith to be good and sufficient cause.

(d) Termination Without Cause. The Company shall have the right to terminate the Executive's employment without cause at any time upon ninety (90) days prior written notice, and the Executive shall have the right to terminate the Executive's employment without cause at any time upon one hundred eighty (180) days prior written notice.

5. Compensation Upon Termination or During Disability

(a) Disability. During any period that the Executive fails to perform his full-time duties with the Company for a three month period as a result of incapacity due to physical or mental illness (the "Disability Period"), the Executive shall continue to receive his Annual Base Salary at the rate set forth in Paragraph 3(a) of this Agreement, less any compensation payable to the Executive under the applicable disability insurance plan of the Company during the Disability Period, until this Agreement is terminated pursuant to Paragraph 4(a) hereof. Thereafter, or in the event the Executive's employment shall be terminated by reason of his death, the Executive's benefits shall be determined under the Company's insurance and other compensation programs then in effect in accordance with the terms of such programs and the Company shall have no further obligation to the Executive under this Agreement.

(b) Death. In the event of the Executive's death, the Executive's beneficiary shall be entitled to receive the Executive's Annual Base Salary at the rate set forth in Paragraph 3(a) of this Agreement until the date of his death. Thereafter, the Company shall have no further obligation to the Executive or the Executive's beneficiary under this Agreement.

(c) Cause. If the Executive's employment shall be terminated by the Company for "Cause" as defined in Paragraph 4(c) of this Agreement, the Company shall continue to pay the Executive his Annual Base Salary at the rate set forth in Paragraph 3(a) of this Agreement through the date of termination of the Executive's employment. Thereafter, the Company shall have no further obligation to the Executive under this Agreement.

(d) Termination Without Cause by the Company. If the Company voluntarily terminates the Executive's employment with the Company pursuant to Paragraph 4(d) of this Agreement, the Company shall continue to pay the Executive Executive's Annual Salary during the three month notice period provided for in Paragraph 4(d) at the rate in effect as of the day immediately preceding the commencement of the notice period, payable in equal installments consistent with the Company's normal salary payment cycles then in effect. Until the earlier of the end of the three month notice period or the commencement of the provision of health benefits to the Executive by a successor employer, the Executive will continue to receive the same coverage of health insurance as immediately before the date of the termination, at the expense of the Company. Thereafter, the Executive acknowledges that the Company shall have no further obligation to the Executive under this Agreement.

(e) Acquisition or Sale of Company. If a third party described in Paragraph 5(f) of this Agreement terminates the Executive due to "an acquisition or sale of the Company", as described in Paragraph 5(f) below, the Company shall pay the Executive an amount equal to six months of Executive's Annual Base Salary at the rate in effect at the date of termination of the Executive's employment during the period of the Executive's employment, payable in six equal monthly installments. Until the earlier of the end of the six month period immediately following the termination of employment, or the commencement of the provision of health benefits to the Executive by a successor employer, the Executive will continue to receive the same coverage of health insurance as immediately before the date of the termination, at the expense of the Company. Thereafter, the Executive acknowledges that the Company shall have no further obligation to the Executive under this Agreement. Notwithstan ding the foregoing, if in conjunction with an acquisition or sale of the Company to a third party, the third party (i) requests that the Executive continue to provide services to the Company or such third party after the closing of the acquisition or sale of the Company and (ii) agrees to pay the Executive compensation for the Executive's services at a rate at least equal to the Executive's compensation in effect as of the date immediately preceding the date on which the acquisition or sale of the Company is consummated, the Executive must provide such services for at least forty-five (45) days, unless the third party terminates Executive's services without Cause prior to the end of such forty-five (45) day period. If the Executive fails to fulfill the requirement of the preceding sentence for any reason, then the Executive will not be eligible for payments under this Paragraph 5(e). On the other hand, if the Executive does fulfill such requirement and the Executive's employment is subsequently terminated, then the Executive will be entitled to receive the payments described in this Paragraph 5(e). Payments under this Paragraph 5(e) are intended to be in lieu of the payments the Executive would otherwise be entitled to under Paragraph 5(d).

(f) Definition. For purposes hereof, "an acquisition or sale of the Company" to or by "a third party" shall mean the occurrence of any transaction or series of transactions which within a six (6) month period result in (I) greater than fifty percent (50%) of the then outstanding shares of Common Stock of the Company (for cash, property including, without limitation, stock in any corporation or other third party legal entity, indebtedness or any combination thereof) have been redeemed by the Company or purchased by a third party not previously affiliated with the Company, or exchanged for shares in any other corporation or other third party legal entity not previously affiliated with the Company, or any combination of such redemption, purchase or exchange, (II) greater than fifty percent (50%) in book value of the Company's gross assets are acquired by a third party not previously affiliated with the Company (for cash, property including, without limitat ion, stock in any corporation whether or not unaffiliated with the Company, indebtedness of any person or any combination thereof), or (III) the Company is merged or consolidated with another private or public corporation or other third party legal entity and the former holders of shares of Common Stock of the Company own less than 25% of the voting power of the acquiring, resulting or surviving corporation or other third party legal entity. For the purposes hereof a director or officer of the Company shall be considered "affiliated with the Company."

(g) Termination Without Cause by the Executive. If the Employee voluntarily resigns his employment with the Company pursuant to Paragraph 4(d) of this Agreement, the Company shall pay the Executive an amount equal to three (3) months of the Executive's Annual Base Salary at highest rate in effect during the period of the Executive's employment, in three (3) equal monthly installments, and shall provide health insurance for such three month period. After the last of such payments, the Executive acknowledges that the Company shall have no further obligation to the Executive under this Agreement.

6. Confidentiality and Restrictive Covenants.

(a) The Executive acknowledges that:

(i) the business in which the Company is engaged is intensely competitive and his employment by the Company will require that he have continual access to and knowledge of confidential information of the Company, including, but not limited to, the nature and scope of its products, the object and source code offered, marketed or under development by the Company or under consideration by the Company for development, acquisition, or marketing by the Company and the documentation prepared or to be prepared for use by the Company (and the phrase "by the Company" shall include other vendors, licensees or and resellers and value-added resellers of the Company's products or proposed product) and the Company's plans for creation, acquisition, improvement or disposition of products or software, expansion plans, financial status and plans, products, improvements, formulas, designs or styles, method of distribution, lists of remarketing and value-added and other resellers customer list s and contact lists, product development plans, rules and regulations, personnel information and trade secrets of the Company, all of which are of vital importance to the success of the Company's business, provided that Confidential Information will not include information which has become publicly known otherwise than through a breach by Executive of the provisions of this Agreement (collectively, "Confidential Information");

(ii) the direct or indirect disclosure of any Confidential Information would place the Company at a serious competitive disadvantage and would do serious damage, financial and otherwise, to the Company's business;

(iii) by his training, experience and expertise, the Executive's services to the Company will be special and unique; and

(iv) if the Executive leaves the Company's employ to work for a competitive business, in any capacity, it would cause the Company irreparable harm.

(b) Covenant Against Disclosure. The Executive therefore covenants and agrees that all Confidential Information relating to the business products and services of the Company, any subsidiary, affiliate, seller or reseller, value-added vendor or customer shall be and remain the sole property and confidential business information of the Company, free of any rights of the Executive. The Executive further agrees not to make any use of the confidential information except in the performance of his duties hereunder and not to disclose the information to third parties, without the prior written consent of the Company. The obligations of the Executive under this Paragraph 6 shall survive any termination of this Agreement. The Executive agrees that, upon any termination of his employment with the Company, all Confidential Information in his possession, directly or indirectly, that is in written or other tangible or readable form (together with all duplicates thereof) will forthwith be retur ned to the Company and will not be retained by the Executive or furnished to any third party, either by sample, facsimile, film, audio or video cassette, electronic data, verbal communication or any other means of communication.

(c) Non-competition. The Executive agrees that, during the Term of Employment and for a period of one (1) year following the date of termination of the Executive's employment with the Company, the Executive will not, directly or indirectly, be engaged in any business, as an owner, employee, manager, consultant, or otherwise, which competes with the hospital pharmacy information systems business conducted by the Company or any of its subsidiaries or affiliates, in the United States, Canada and the UK and any other area where such business is being conducted on the date the Executive's employment is terminated hereunder; provided, however, that the foregoing is not intended to prevent executive from providing services as an employee or consultant to any business, even if the business to which such services are provided has a division or other unit engaged in the pharmacy information systems business, so long as Executive's employment and/or services are unrelated to such company's hospital pharmacy information systems business and Executive continues to abide by all provisions of this Agreement regarding the protection of the Company's confidential information and trade secrets.

(d) Further Covenant. Until the date which is one (1) year after the date of the termination of the Executive's employment hereunder for any reason, the Executive will not, directly or indirectly, take any of the following actions, and, to the extent the Executive owns, manages, operates, controls, is employed by or participates in the ownership, management, operation or control of, or is connected in any manner with, any business of the type and character engaged in and competitive with that conducted by the Company or any of its subsidiaries or affiliates during the period of the Executive's employment, the Executive will use his best efforts to ensure that such business does not take any of the following actions:

(i) persuade or attempt to persuade any customer of the Company or any seller, reseller or value-added vendor of the Company or of its products to cease doing business with the Company or any of its subsidiaries or affiliates, or to reduce the amount of business it does with the Company or any of its subsidiaries or affiliates;

(ii) solicit for himself or any entity the business of (A) any customer of the Company or any of its subsidiaries or affiliates, or (B) any seller, reseller or-value-added vendor of the Company, or of its products, or (C) solicit any business from a customer which was a customer of the Company or any of its subsidiaries or affiliates within six months prior to the termination of the Executive's employment; and

(iii) persuade or attempt to persuade any employee of the Company or any of its subsidiaries or affiliates or any individual who was an employee of the Company or any of its subsidiaries or affiliates, at any time during the six-month period prior to the Executive's termination of employment, to leave the employ of the Company or any of its subsidiaries or affiliates.

7. Intellectual Property. The Executive hereby agrees that any and all (i) software, object code, source code, and documentation, (ii) any improvements, inventions, discoveries, formulae, processes, methods, know-how, confidential data, patents, trade secrets, (iii) Food and Drug Administrative ("FDA") applications seeking approval by the FDA, information contained in the Forms 510-k of the FDA and approvals from FDA, and (iv) other proprietary information made, developed or created by the Executive (whether at the request or suggestion of the Company or otherwise, whether alone or in conjunction with others, and whether during regular working hours of work or otherwise) during the period of his employment with the Company, which may be directly or indirectly useful in, or relate to, the business being carried out by the Company or any of its subsidiaries or affiliates, shall be promptly and fully disclosed by the Executive to the Board of Directors and shall be the Com pany's exclusive property as against the Executive, and the Executive shall promptly deliver to the Board of Directors of the Company all papers, drawings, models, data and other material relating to any invention made, developed or created by him as aforesaid.

The Executive shall, upon the Company's request and without any payment therefor, execute any documents necessary or advisable in the opinion of the Company's counsel to direct issuance of patents, copyrights and FDA applications or approvals of the Company with respect to such inventions or work product or improvements or enhancements as are to be the Company's exclusive property as against the Executive under this Paragraph 7 or to vest in the Company title to such inventions as against the Executive, the expense of securing any such patent or copyright, to be borne by the Company.

8. Breach by Employee. Both parties recognize that the services to be rendered under this Agreement by the Executive are special, unique and extraordinary in character, and that in the event of a breach by Employee of the terms and conditions of the Agreement to be performed by him, then the Company shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, either in law or in equity, to enforce the specific performance thereof by the Executive. Without limiting the generality of the foregoing, the parties acknowledge that a breach by the Executive of his obligations under Paragraph 6 or 7 would cause the Company irreparable harm, that no adequate remedy at law would be available in respect thereof and that therefore the Company would be entitled to injunctive relief with respect thereto.

9. Arbitration. Without precluding acting to obtain specific performance and/or injunctive relief pursuant to Paragraph 8 above, in the event of any dispute between the parties hereto arising out of or relating to this Agreement or the employment relationship, including, without limitation, any statutory claims of discrimination, between the Company and the Executive (except any dispute with respect to Paragraphs 6 and 7 hereof), such dispute shall be settled by arbitration in Nassau County or New York County, State of New York, or in Wyandotte County or the City of Kansas City, State of Kansas, in accordance with the National Rules for the Resolution of Employment Disputes then in effect of the American Arbitration Association. The parties hereto agree that the arbitral panel shall also be empowered to grant injunctive relief to a party, which may be included in any award. Judgment upon the award rendered, including injunctive relief, may be entered in any court having jurisdict ion thereof. Notwithstanding anything herein to the contrary, if any dispute arises between the parties under Paragraphs 6 or 7, neither the Executive nor the Company shall be required to arbitrate such dispute or claim, but each party shall have the right to institute judicial proceedings in any court of competent jurisdiction with respect to such dispute or claim. If such judicial proceedings are instituted, the parties agree that such proceedings shall not be stayed or delayed pending the outcome of any arbitration proceeding hereunder.

10. Miscellaneous.

(a) Successors; Binding Agreement. This Agreement and the obligations of the Company hereunder and all rights of the Executive hereunder shall inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns, provided, however, that the duties of the Executive hereunder are personal to the Executive and may not be delegated or assigned by him.

(b) Notice. All notices of termination and other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered by hand, delivered by an express delivery (one day service), delivered by telefax and confirmed by express mail or one day express delivery service, or mailed by United States registered mail, return receipt requested, addressed as follows:

or to such other address as either party may designate by notice to the other, which notice shall be deemed to have been given upon receipt.

(c) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Kansas without regard to the conflict of law rules thereof.

(d) Waivers. The waiver of either party hereto of any right hereunder or of any failure to perform or breach by the other party hereto shall not be deemed a waiver of any other right hereunder or of any other failure or breach by the other party hereto, whether of the same or a similar nature or otherwise. No waiver shall be deemed to have occurred unless set forth in writing executed by or on behalf of the waiving party. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived.

(e) Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall otherwise remain in full force and effect. Moreover, if any one or more of the provisions contained in this Agreement is held to be excessively broad as to duration, scope or activity, such provisions shall be construed by limiting and reducing them so as to be enforceable to the maximum extent compatible with applicable law.

(f) Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument.

(g) Entire Agreement. This Agreement sets forth the entire agreement and understanding of the parties in respect of the subject matter contained herein, and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of either party in respect of said subject matter.

(h) Headings Descriptive. The headings of the several paragraphs of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any of this Agreement.

(i) Capacity. The Executive represents and warrants that he is not a party to any agreement that would prohibit him from entering into this Agreement or performing fully his obligations hereunder.

IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first written above.

THIS EMPLOYMENT AGREEMENT (hereinafter "this Agreement") is made effective as of the 16th day of August 2004 between Mediware Information Systems, Inc., (hereinafter "the Company") and Frank Poggio (hereinafter "the Executive").

WHEREAS, the Company desires to employ the Executive as its Vice President and General Manager of the Blood Bank Division, and the Executive desires to be so employed by the Company, on the terms and conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements herein set forth, the Company and the Executive hereby agree as follows:

1. Employment. The Company hereby agrees to employ the Executive, and the Executive hereby agrees to serve as the Vice President and General Manager of the Blood Bank Division. The Executive agrees to perform such services customary to such office as shall from time to time be assigned to him by the President and Chief Executive Officer. The Executive further agrees to use his best efforts to promote the interests of the Company and to devote his full business time and energies to the business and affairs of the Company.

2. Term of Employment. The employment hereunder shall be for a term of three years, commencing on the date hereof and ending on the third anniversary of such date (the "Expiration Date"), unless terminated earlier pursuant to Paragraph 4 of this Agreement (the "Term of Employment"). THIS AGREEMENT SHALL AUTOMATICALLY RENEW FOR SUCCESSIVE TERMS OF ONE YEAR (EACH A "RENEWAL TERM") COMMENCING ON THE FIRST DAY IMMEDIATELY FOLLOWING THE EXPIRATION DATE, UNLESS SUCH RENEWAL IS OBJECTED TO BY EITHER THE COMPANY OR THE EXECUTIVE BY GIVING PRIOR WRITTEN NOTICE MORE THAN 90 DAYS AND LESS THAN 120 DAYS PRIOR TO THE SCHEDULED EXPIRATION DATE. In the event of such renewal, the last day of each successive Renewal Term shall be deemed the Expiration Date.

3. Compensation and Other Related Matters.

(a) Salary. As compensation for services rendered hereunder, the Executive shall receive an Annual Base Salary of $180,000.00, which salary shall be paid in accordance with the Company's then prevailing payroll practices for its executives and shall be subject to review annually by the Board of Directors.

(b) Bonus. The Executive shall receive a bonus of 50% of his Annual Base Salary per annum for achieving the objectives established by the Company within thirty days after the date of this Agreement and as updated annually during the term of the Agreement. If the Executive leaves the Company for any reason in the middle of a year, the Annual Bonus for that year will be pro-rated in accordance with the actual number of days the Executive was employed during that year, except if Executive resigns without cause as described in Paragraph 4(d) below, or is terminated for Cause pursuant to Paragraph 5(c), below, in which case no Annual Bonus will be paid.

(c) Stock Options. The Executive shall be granted 75,000 incentive stock options (the "Options") to purchase shares of the Company's Common Stock, par value $.10 per share (the "Stock"), under a Company stock option plan. The Options shall be subject to the terms of the applicable Company stock option plan and the Executive's stock option agreement (the "Option Agreement"). In addition to the terms set forth in the Option Agreement (provided that this Agreement shall govern the Options in the event of any conflict between this Agreement and the Option Agreement), the Company and the Executive agree as follows:

(i) Vesting. Subject to continued employment of the Executive, the Options shall vest and become exercisable as follows: 25,000 Options shall become exercisable on the first anniversary of the commencement of the Term of Employment; 25,000 Options shall become exercisable on the second anniversary date of the commencement of the Term of Employment; and 25,000 Options shall become exercisable on the third anniversary date of the commencement of the Term of Employment. In addition, upon an acquisition or sale of the Company, as defined in Paragraph 5(f), below, any remaining unexercisable Options shall become exercisable immediately.

(ii) Exercise. The Options shall be exercisable at a price equal to the fair market value of the Stock on the day the Term of Employment commences. The fair market value of the Stock shall equal the average of the high and low market sale prices on such day as reported by NASDAQ. The Options shall be exercisable for five years from the commencement of the Term of Employment.

(d) Other Benefits. The fringe benefits, perquisites and other benefits of employment, including three weeks vacation (and additional time-off as may be approved by the chief executive officer from time to time), to be provided to the Executive shall be equivalent to such benefits and perquisites as are provided to other senior executives of the Company as amended from time to time.

(e) Reimbursement. Subject to policies established from time to time by the Company, the Company shall reimburse the Executive for the reasonable expenses incurred by him in connection with the performance of his duties hereunder, including but not limited to, travel expenses and entertainment expenses, for which the Executive shall account to the Company in a manner sufficient to conform to Internal Revenue Service requirements.

(f) Relocation Expenses. The Executive intends to relocate his family to the Chicago, Illinois metropolitan area, within six months of the date hereof, which is where the Executive will be officed during the term of this Agreement. Prior to that date, Executive may work from both the St. Louis, Missouri metropolitan area and the Company's Oak Brook, Illinois offices. The Company will reimburse the Executive for the reasonable out-of-pocket expenses, not to exceed $25,000 in the aggregate, of such move, which cost shall be grossed up to compensate the Executive for any federal, state or local taxes so incurred by the Executive, including the cost of packing, insurance and transportation of Executive's household goods and the storage of such goods for up to 12 months from the date of pick up, but shall not reimburse Executive's for transaction fees, realty fees or taxes associated with the sale or purchase of the Executive's homes.

4. Termination.

(a) Disability. If, as a result of the incapacity of the Executive due to physical or mental illness, the Executive is unable to perform substantially and continuously the duties assigned to him hereunder, with or without a reasonable accommodation, for a period of three (3) consecutive months or for a non-consecutive period of 9 months during the Term of Employment, the Company may terminate his employment for "Disability" upon 30 days prior written notice to the Executive.

(b) Death. The Executive's employment shall terminate immediately upon the death of the Executive.

(c) Cause. The Company shall be entitled to terminate the Executive's employment for "Cause" at any time immediately upon delivery of written notice or for no Cause at any time upon 90 days prior written notice. Termination by the Company of the employment of the Executive for "Cause" shall mean termination based upon (i) the willful failure by the Executive to follow lawful directions communicated to him by the President and Chief Executive Officer; (ii) the willful engaging by the Executive in conduct which is materially injurious to the Company, monetarily or otherwise; (iii) a conviction of, a plea of nolo contendere, a guilty plea or confession by the Executive to an act of fraud, misappropriation or embezzlement or to a felony; (iv) the Executive's habitual drunkenness or use of illegal substances; (v) a material breach by the Executive of this Agreement; or (vi) an act of gross neglect or gross misconduct in the performance of Executive's job, d uties or obligations to the Company which the Company deems in good faith to be good and sufficient cause.

(d) Termination Without Cause. The Company and the Employee shall each have the right to terminate the Executive's employment without cause at any time upon 90 days prior written notice. The giving of notice by either party pursuant to Section 2 to prevent the renewal of this Agreement shall not be deemed a termination of Executive's employment without cause.

5. Compensation Upon Termination or During Disability

(a) Disability. During any period that the Executive fails to perform his full-time duties with the Company for a three month period as a result of incapacity due to physical or mental illness (the "Disability Period"), the Executive shall continue to receive his Annual Base Salary at the rate set forth in Paragraph 3(a) of this Agreement, less any compensation payable to the Executive under the applicable disability insurance plan of the Company during the Disability Period, until this Agreement is terminated pursuant to Paragraph 4 hereof. Thereafter, or in the event the Executive's employment shall be terminated by reason of his death, the Executive's benefits shall be determined under the Company's insurance and other compensation programs then in effect in accordance with the terms of such programs and the Company shall have no further obligation to the Executive under this Agreement.

(b) Death. In the event of the Executive's death, the Executive's beneficiary shall be entitled to receive the Executive's Annual Base Salary at the rate set forth in Paragraph 3(a) of this Agreement until the date of his death. Thereafter, the Company shall have no further obligation to the Executive or the Executive's beneficiary under this Agreement.

(c) Cause. If the Executive's employment shall be terminated by the Company for "Cause" as defined in Paragraph 4 of this Agreement, the Company shall continue to pay the Executive his Annual Base Salary at the rate set forth in Paragraph 3(a) of this Agreement through the date of termination of the Executive's employment. Thereafter, the Company shall have no further obligation to the Executive under this Agreement.

(d) Termination Without Cause by the Company. If the Company voluntarily terminates the Executive's employment with the Company pursuant to Paragraph 4 of this Agreement, the Company shall continue to pay the Executive Executive's Annual Salary during the 90-day notice period provided for in Paragraph 4 at the rate in effect as of the day immediately preceding the commencement of the notice period, payable in equal installments consistent with the Company's normal salary payment cycles then in effect. Until the earlier of the end of the three month notice period or the commencement of the provision of health benefits to the Executive by a successor employer, the Executive will continue to receive the same coverage of health insurance as immediately before the date of the termination, at the expense of the Company. Thereafter, the Executive acknowledges that the Company shall have no further obligation to the Executive under this Agreement.

(e) Acquisition or Sale of Company. If a third party described in Paragraph 5(f) of this Agreement terminates the Executive due to "an acquisition or sale of the Company", as described in Paragraph 5(f) below, the Company shall pay the Executive an amount equal to six months of Executive's Annual Base Salary at the rate in effect at the date of termination of the Executive's employment during the period of the Executive's employment, payable in six equal monthly installments. Until the earlier of the end of the six-month period immediately following the termination of employment, or the commencement of the provision of health benefits to the Executive by a successor employer, the Executive will continue to receive the same coverage of health insurance as immediately before the date of the termination, at the expense of the Company. Thereafter, the Executive acknowledges that the Company shall have no further obligation to the Executive under this Agreement. Notwithsta nding the foregoing, if in conjunction with an acquisition or sale of the Company to a third party, the third party (i) requests that the Executive continue to provide services to the Company or such third party after the closing of the acquisition or sale of the Company and (ii) agrees to pay the Executive compensation for the Executive's services at a rate at least equal to the Executive's compensation in effect as of the date immediately preceding the date on which the acquisition or sale of the Company is consummated, the Executive must provide such services for at least 90 days, unless the third party terminates Executive's services without Cause prior to the end of such 90-day period. If the Executive fails to fulfill the requirement of the preceding sentence for any reason, then the Executive will not be eligible for payments under this Paragraph 5(e). On the other hand, if the Executive does fulfill such requirement and the Executive's employment is subsequently terminated within the six month peri od following the acquisition or sale of the Company, then the Executive will be entitled to receive the payments described in this Paragraph 5(e). Payments under this Paragraph 5(e) are intended to be in lieu of the payments the Executive would otherwise be entitled to under Paragraph 5(d), which will not apply in the case of an acquisition or sale of the Company. Notwithstanding the foregoing, if substantially all of the assets of the blood bank division are sold as reasonably determined by the CEO, and the Executive, as a consequence, is terminated by Mediware without cause or transferred to the acquiring third party, then the Executive shall be subject to the terms set forth in this paragraph as if "an acquisition or sale of the Company" had occurred.

(f) Definition. For purposes hereof, "an acquisition or sale of the Company" to or by "a third party" shall mean the occurrence of any transaction or series of transactions which within a six month period result in (I) greater than 50% of the then outstanding shares of Common Stock of the Company (for cash, property including, without limitation, stock in any corporation or other third party legal entity, indebtedness or any combination thereof) have been redeemed by the Company or purchased by a third party not previously affiliated with the Company, or exchanged for shares in any other corporation or other third party legal entity not previously affiliated with the Company, or any combination of such redemption, purchase or exchange, (II) greater than 50% in book value of the Company's gross assets are acquired by a third party not previously affiliated with the Company (for cash, property including, without limitation, stock in any corporation whethe r or not unaffiliated with the Company, indebtedness of any person or any combination thereof), or (III) the Company is merged or consolidated with another private or public corporation or other third party legal entity and the former holders of shares of Common Stock of the Company own less than 25% of the voting power of the acquiring, resulting or surviving corporation or other third party legal entity. For the purposes hereof any director or officer of the Company and entity controlled by any of them shall be considered "affiliated with the Company."

(g) Termination Without Cause by the Executive. If the Executive terminates his employment without cause, the Company shall pay the Executive an amount equal to three (3) months of the Executive's Annual Base Salary at highest rate in effect during the period of the Executive's employment, in three (3) equal monthly installments, and shall provide health insurance for such three month period. After the last of such payments, the Executive acknowledges that the Company shall have no further obligation to the Executive under this Agreement.

6. Confidentiality and Restrictive Covenants.

(a) The Executive acknowledges that:

(i) the business in which the Company is engaged is intensely competitive and his employment by the Company will require that he have continual access to and knowledge of confidential information of the Company. Executive's access may include but shall not be limited to, the nature and scope of its products, the object and source code offered, marketed or under development by the Company or under consideration by the Company for development, acquisition, or marketing by the Company and the documentation prepared or to be prepared for use by the Company (and the phrase "by the Company" shall include other vendors, licensees or and resellers and value-added resellers of the Company's products or proposed product) and the Company's plans for creation, acquisition, improvement or disposition of products or software, expansion plans, financial status and plans, products, improvements, formulas, designs or styles, method of distribution, lists of remarketing and value-added and other resellers customer lists and contact lists, product development plans, rules and regulations, personnel information and trade secrets of the Company, all of which are of vital importance to the success of the Company's business, provided that Confidential Information will not include information which has become publicly known otherwise than through a breach by Executive of the provisions of this Agreement (collectively, "Confidential Information");

(ii) the direct or indirect disclosure of any Confidential Information would place the Company at a serious competitive disadvantage and would do serious damage, financial and otherwise, to the Company's business;

(iii) by his training, experience and expertise, the Executive's services to the Company will be special and unique;

(iv) the Company has developed relationships with its customers over a substantial period of time and such relationships generally have a substantial duration;

(v) it would be a breach of this Agreement for the Executive to disclose to the Company or use in the Company's business any trade secrets or other information that the Executive received from a third party and is required to keep confidential or is not permitted to disclose to Mediware;

(vi) acquiring customers in the Company's business is time consuming, difficult and costly; and

(vii) if the Executive leaves the Company's employ to work for a competitive business, in any capacity, it would cause the Company irreparable harm.

(b) Covenant Against Disclosure. The Executive therefore covenants and agrees that all Confidential Information relating to the business products and services of the Company, any subsidiary, affiliate, seller or reseller, value-added vendor or customer shall be and remain the sole property and confidential business information of the Company, free of any rights of the Executive. The Executive further agrees not to make any use of the confidential information except in the performance of his duties hereunder and not to disclose the information to third parties, without the prior written consent of the Company. The obligations of the Executive under this Paragraph 6 shall survive any termination of this Agreement. The Executive agrees that, upon any termination of his employment with the Company, all Confidential Information in his possession, directly or indirectly, that is in written or other tangible or readable form (together with all duplicates thereof) will forthwith be retur ned to the Company and will not be retained by the Executive or furnished to any third party, either by sample, facsimile, film, audio or video cassette, electronic data, verbal communication or any other means of communication.

(c) Non-competition. The Executive agrees that, during the Term of Employment and for a period of one year following the date of termination of the Executive's employment with the Company (unless Executive's employment is terminated by the Company pursuant to Section 4(d), in which event Executive's obligations under this subsection (c) shall only continue for so long as the Company pays Executive pursuant to Section 5(d), or is terminated by the Company by giving notice pursuant to Section 2 to prevent the renewal of this Agreement, in which event Executive's obligations under this subsection (c) shall not continue following the termination of Executive's employment with the Company), the Executive will not, directly or indirectly, own, manage, operate, control or participate in the ownership, management or control of, or be connected as an officer, employee, partner, director, or otherwise with, or have any financial interest in, or aid or assist anyone else in the condu ct of, any entity or business which competes with any business conducted by the Company or any of its subsidiaries or affiliates, in the United States, Canada or the UK or any other area where such business is being conducted on the date the Executive's employment is terminated hereunder. Notwithstanding the foregoing the Executive's ownership of securities of a public company engaged in competition with the Company not in excess of five percent of any class of such securities shall not be considered a breach of the covenants set forth in this Paragraph 6. Notwithstanding the foregoing in this subsection (c), when the Executive's employment with the Company terminates, the Executive may immediately begin acting as a consultant for or on behalf of healthcare organizations or vendors or for other businesses; provided that the Executive does not provide any guidance, information, services, consultation or other assistance of any kind (including, technical, business, market-related, industry-related or oth erwise) relating to blood banking software, pharmacy software, operating room software or other products or services that are provided by Mediware during the term of his employment. Executive further agrees not to disparage Mediware in any way.

(d) Further Covenant. Until the date which is one year after the date of the termination of the Executive's employment hereunder for any reason, the Executive will not, directly or indirectly, take any of the following actions, and, to the extent the Executive owns, manages, operates, controls, is employed by or participates in the ownership, management, operation or control of, or is connected in any manner with, any business of the type and character engaged in and competitive with that conducted by the Company or any of its subsidiaries or affiliates during the period of the Executive's employment, the Executive will use his full business efforts to ensure that such business does not take any of the following actions:

(i) persuade or attempt to persuade any customer of the Company or any seller, reseller or value-added vendor of the Company or of its products to cease doing business with the Company or any of its subsidiaries or affiliates, or to reduce the amount of business it does with the Company or any of its subsidiaries or affiliates;

(ii) solicit for himself or any entity the business of (A) any customer of the Company or any of its subsidiaries or affiliates, or (B) any seller, reseller or-value-added vendor of the Company, or of its products, or (C) solicit any business from a customer which was a customer of the Company or any of its subsidiaries or affiliates within six months prior to the termination of the Executive's employment; provided that when the Executive's employment with the Company terminates, the Executive may, make the solicitations described in this subsection (ii) for the sole purpose of providing consulting services to healthcare organizations or vendors or for other businesses so long as the Executive does not provide any guidance, information, services, consultation or other assistance of any kind (including, technical, business, market-related, industry-related or otherwise) relating to blood banking software, pharmacy software, operating room software or other products or services that are p rovided by Mediware during the term of his employment; and

(iii) persuade or attempt to persuade any employee of the Company or any of its subsidiaries or affiliates or any individual who was an employee of the Company or any of its subsidiaries or affiliates, at any time during the six-month period prior to the Executive's termination of employment, to leave the employ of the Company or any of its subsidiaries or affiliates.

7. Intellectual Property. The Executive hereby agrees that any and all (i) software, object code, source code, and documentation, (ii) any improvements, inventions, discoveries, formulae, processes, methods, know-how, confidential data, patents, trade secrets, (iii) Food and Drug Administration ("FDA") applications seeking approval by the FDA, information contained in the Forms 510-k of the FDA and approvals from FDA, and (iv) other proprietary information made, developed or created by the Executive (whether at the request or suggestion of the Company or otherwise, whether alone or in conjunction with others, and whether during regular working hours of work or otherwise) during the period of his employment with the Company, which may be directly or indirectly useful in, or relate to, the business being carried out by the Company or any of its subsidiaries or affiliates, shall be promptly and fully disclosed by the Executive and shall be the Company's exclusive property as against the Executive, and the Executive shall promptly deliver to the Board of Directors of the Company all papers, drawings, models, data and other material relating to any invention made, developed or created by him as aforesaid.

The Executive hereby acknowledges that the Executive is hereby notified by the Company that, pursuant to Illinois law, the agreements set forth in this Paragraph 7 do not apply to any invention for which no equipment, supplies, facilities, or trade secret information of the Company was used and which was developed entirely on his own time, unless: (a) the invention relates (i) to the business of the Company or (ii) to the Company's actual or demonstrably anticipated research or development; or (b) the invention results from any work performed by the Executive for the Company.

The Executive shall, upon the Company's request and without any payment therefor, execute any documents necessary or advisable in the opinion of the Company's counsel to direct issuance of patents, copyrights and FDA applications or approvals of the Company with respect to such inventions or work product or improvements or enhancements as are to be the Company's exclusive property as against the Executive under this Paragraph 7 or to vest in the Company title to such inventions as against the Executive, the expense of securing any such patent or copyright, to be borne by the Company.

8. Breach by Employee. Both parties recognize that the services to be rendered under this Agreement by the Executive are special, unique and extraordinary in character, and that in the event of a breach by Employee of the terms and conditions of the Agreement to be performed by him, then the Company shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, either in law or in equity, to enforce the specific performance thereof by the Executive. Without limiting the generality of the foregoing, the parties acknowledge that a breach by the Executive of his obligations under Paragraph 6 or 7 would cause the Company irreparable harm, that no adequate remedy at law would be available in respect thereof and that therefore the Company would be entitled to injunctive relief with respect thereto.

9. Arbitration. Without precluding acting to obtain specific performance and/or injunctive relief pursuant to Paragraph 8 above, in the event of any dispute between the parties hereto arising out of or relating to this Agreement or the employment relationship, including, without limitation, any statutory claims of discrimination, between the Company and the Executive (except any dispute with respect to Paragraphs 6 and 7 hereof), such dispute shall be settled by arbitration in City of Chicago, State of Illinois, in accordance with the National Rules for the Resolution of Employment Disputes then in effect of the American Arbitration Association. The parties hereto agree that the arbitral panel shall also be empowered to grant injunctive relief to a party, which may be included in any award. Judgment upon the award rendered, including injunctive relief, may be entered in any court having jurisdiction thereof. Notwithstanding anything herein to the contrary, if any dispute arises between the parties under Paragraphs 6 or 7, neither the Executive nor the Company shall be required to arbitrate such dispute or claim, but each party shall have the right to institute judicial proceedings in any court of competent jurisdiction with respect to such dispute or claim. If such judicial proceedings are instituted, the parties agree that such proceedings shall not be stayed or delayed pending the outcome of any arbitration proceeding hereunder.

10. Miscellaneous.

(a) Successors; Binding Agreement. This Agreement and the obligations of the Company hereunder and all rights of the Executive hereunder shall inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns, provided, however, that the duties of the Executive hereunder are personal to the Executive and may not be delegated or assigned by him.

(b) Notice. All notices of termination and other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered by hand, delivered by an express delivery (one day service), delivered by telefax and confirmed by express mail or one day express delivery service, or mailed by United States registered mail, return receipt requested, addressed as follows:

or to such other address as either party may designate by notice to the other, which notice shall be deemed to have been given upon receipt.

(c) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois without regard to the conflict of law rules thereof.

(d) Waivers. The waiver of either party hereto of any right hereunder or of any failure to perform or breach by the other party hereto shall not be deemed a waiver of any other right hereunder or of any other failure or breach by the other party hereto, whether of the same or a similar nature or otherwise. No waiver shall be deemed to have occurred unless set forth in writing executed by or on behalf of the waiving party. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived.

(e) Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall otherwise remain in full force and effect. Moreover, if any one or more of the provisions contained in this Agreement is held to be excessively broad as to duration, scope or activity, such provisions shall be construed by limiting and reducing them so as to be enforceable to the maximum extent compatible with applicable law.

(f) Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument.

(g) Entire Agreement. This Agreement and the Option Agreement set forth the entire agreement and understanding of the parties in respect of the subject matter contained herein, and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of either party in respect of said subject matter.

(h) Headings Descriptive. The headings of the several paragraphs of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any of this Agreement.

(i) Capacity. The Executive represents and warrants that he is not a party to any agreement that would prohibit him from entering into this Agreement or performing fully his obligations hereunder.

IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first written above.

                                             Years Ended June 30,
                                       -----------------------------------------
                                           2004           2003           2002
                                       -----------    -----------    -----------

Basic income per share

  Net income                         $   3,607,000    $ 4,389,000    $ 2,631,000

  Weighted-average shares:
    Outstanding                          7,463,000      7,300,000      7,228,000
                                       -----------    -----------    -----------

    Basic income per share           $        0.48    $      0.60   $       0.36
                                       ===========    ===========    ===========


Diluted income per share

  Net income                         $   3,607,000    $ 4,389,000   $  2,631,000

  Weighted-average shares:
    Outstanding                          7,463,000      7,300,000      7,228,000
    Options                                711,000        544,000        383,000

                                       -----------    -----------    -----------
                                         8,174,000      7,844,000      7,611,000
                                       -----------    -----------    -----------
    Diluted income per share         $        0.44    $      0.56   $       0.35
                                       ===========    ===========    ===========