The following discussion of our financial condition and results of operations should be read in conjunction with our audited financial statements and related notes included in Part II, Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements, the accuracy of which involves risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us described in Part I, Item 1A "RISK FACTORS".

GENERAL

Global Med is an international medical software company which develops regulated and non-regulated products and services for the healthcare industry. We are a leading provider of blood and laboratory systems and services and our products are deployed in 20 countries and serve over 1,600 transfusion centers, blood banks and laboratories.

Business Strategy

Global Med's goal is to become a global supplier of critical health management information software. We plan to achieve this goal through a combination of organic growth and strategic acquisitions.

Our organic growth strategy for marketing and selling our products and services is two pronged:

1. Direct selling to customers through our internal sales force; and

2. Marketing and selling through Channel Partners that are established in blood donor hospital markets.

In addition to increasing revenues and cash flows through our direct sales efforts and channel partner relationships, we are focused on adding new channel partners and strategic alliances and developing new products and adding enhanced functionality to our existing product mix to attract and maintain customers.

Global Med's acquisition strategy is to purchase companies that sell software products that complement our current product mix, particularly companies focused on critical health management. We may use either equity or debt financing or our cash to make acquisitions.

Overview

Global Med designs, develops, markets and supports information management software products for blood banks, hospitals, centralized transfusion centers and other health care related facilities.

We sell various core products and their related components through our Wyndgate division: SafeTrace, SafeTrace Tx, and our ElDorado product suite. SafeTrace is used by blood centers and hospitals to track blood donations. SafeTrace Tx is used primarily by hospitals and centralized transfusion services to help insure the quality of blood transfused into patient-recipients. Both products are designed to help the users comply with quality and safety standards of the FDA for the collection and management of blood and blood products. ElDorado Donor is intended as a comprehensive blood management software application designed to provide for the information system needs of blood banks and donor centers. Donor Doc is an electronic history questionnaire that assists in the blood donor screening process.

We acquired our Inlog S.A. subsidiary on June 26, 2008 for $10.9 million in a combination of cash and stock. We are also contingently obligated to pay up to $1,481 million in earn out consideration over the next five years. Inlog has been developing, implementing, and supporting its blood bank information management solutions since 1992 and currently supplies over 800 sites in 15 countries with its products. Its product line consists of five primary products:
EdgeBlood (for the donor center market), EdgeTrace (for the hospital transfusion market), EdgeLab (a laboratory information system "LIS"), EdgeCell (cellular therapy for tissue banks, stem cell centers and cord blood centers) and SAPA (a regulatory compliance and document management solution). Inlog recently completed the national installation of its EdgeBlood product in France where all of that country's 2.5 million annual blood donations are transacted through EdgeBlood including blood collections, infectious disease testing, component manufacturing and distribution. In addition to France, Inlog has software applications in Germany, Austria, Belgium, Switzerland, Greece and Monaco, among other countries.

Our eDonor™ product, which we acquired on August 1, 2008 with the acquisition of substantially all of the assets of Blueridge Solutions, L.C., for $3.5 million in cash and the issuance of $1.5 million of our common stock is a web-based donor relationship management system that integrates recruitment, scheduling, retention and fulfillment for blood donation centers of all sizes. As of December 31, 2008, eDonor was in use at 77 sites.

We derive our revenues from the sale of software licenses, annual maintenance fees, implementation fees, consulting fees and other value added support services. Annual maintenance fees represented over 50% of our revenue for the year ended December 31, 2008. Our maintenance services are generally sold under multi-year agreements. As such, they represent a fairly stable recurring revenue source for us as software maintenance tends to be a nondiscretionary expenditure for our customers. The majority of our software is sold under a perpetual license with a one-time license fee. Our software license fee revenue, which represented 21% of our revenue for the year ended December 31, 2008 can fluctuate from period to period based on our customers' buying decisions. In addition, our ability to recognize software license fees can be impacted by contract terms and the application of accounting rules for revenue recognition to contracts that include deliverable and non-deliverable software products, service for modification or customization of our software, acceptance criteria and other contingencies.

We maintain a sales backlog which represents software and services sold under signed contracts, which have not yet been recognized as revenue. As of December 31, 2008, our backlog balance included $3.451 million related to contracted software sales and $6.496 million related to implementation, training, validation and other services. We expect the revenue from our sales backlog will be recognized in 2009 and 2010, with the majority occurring in 2009.

Cost of revenue includes the employee costs and direct expenses of the departments that provide maintenance, implementation, consulting and other value added support services. It also includes third-party software costs when third-party software is bundled with our software solutions. General and administrative expenses include the employee costs and the direct expenses of our executive and support functions, plus other general corporate expenses such as accounting and legal fees and corporate governance costs. Selling and marketing expenses include employee costs, commissions, the direct expenses of our sales and marketing department, plus advertising, marketing and trade show expenses. Research and development includes the employee and direct costs of our research and development department that are incurred prior to new products achieving technological feasibility.

Costs incurred after a new product reaches technological feasibility are capitalized as software development costs and amortized over the life of the product. Software amortization is included in depreciation and amortization.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. As described by the Securities and Exchange Commission, critical accounting estimates and assumptions are those that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and that may have a material impact on the financial condition or operating performance of the company. Based on this definition, we believe the following are our critical accounting policies and estimates.

Revenue Recognition

We recognize revenue in accordance with the American Institute of Certified Public Accountants Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition." Our standard software license agreement provides for an initial fee to use the product in perpetuity up to a maximum number of users. Fees from software licenses are recognized as revenue upon shipment, provided fees are fixed and determinable and collection is probable. Fees from licenses sold together with consulting services are generally recognized upon shipment provided the above criteria have been met, payment of the license fees is not dependent upon the performance of the consulting services and the consulting services are not essential to the functionality of the licensed software. In instances in which the consulting services are not essential to the functionality of the software but payment of the license fee is due at the earlier of the performance of specific consulting services or the passage of time, the license fee is recognized ratably over the anticipated period of performance of the services or ratably over the license fee billing period, whichever is more readily determinable.

For arrangements with multiple elements, we allocate revenue to each element of a transaction based upon its fair value as determined by "vendor specific objective evidence." Vendor specific objective evidence of fair value for all elements of an arrangement is based upon the normal pricing and discounting practices for those products and services when sold separately and for software license updates and product support services, and is additionally measured by the renewal rate offered to the customer. We may modify our pricing practices in the future, which could result in changes in our vendor specific objective evidence of fair value for these undelivered elements. As a result, our future revenue recognition for multi-element arrangements could differ significantly from our historical results.

In those instances in which vendor specific objective evidence exists for the undelivered elements but does not exist for the delivered elements, we use the residual method. Under the residual method, the total fair value of the undelivered elements, as indicated by vendor-specific objective evidence, is recorded as unearned, and the difference between the total arrangement fee and the amount recorded as unearned for the undelivered elements is recognized as revenue related to the delivered elements.

If an arrangement does not qualify for separate accounting of the software license and consulting transactions, then new software license revenue is generally recognized together with the consulting services based on contract accounting using the percentage-of-completion method. Contract accounting is generally applied to arrangements when services include significant modification or customization of the software. Progress towards completion is generally measured based on hours incurred versus projected total hours. The projected costs associated with contract accounting are accrued at rates consistent with the revenue recognized under the percentage of completion method.

For those customer accounts for which revenue has been earned except that collectability of the amount is not deemed reasonably assured, we recognize revenues related to these accounts in the period cash is received.

Certain of our contracts include warranties that provide for refunds of all or a portion of the software license and or other fees in the event that we are unable to provide maintenance services, for which there is a separate fee, for the contractually prescribed period. Contracts with these provisions are accounted for in accordance with the policies above.

We provide consulting services that include implementation, training and the performance of other services to our customers. Revenue from such services is generally recognized ratably over the period during which the applicable service is to be performed. In addition, we may recognize certain implementation revenues based on hourly rates in effect on the contract multiplied by the number of hours completed.

Support agreements generally call for us to provide technical support and software updates, on a "when-and-if-available" basis to customers. Revenue on technical support and software update rights is recognized ratably over the term of the support agreement.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make payments for goods and services. We analyze accounts receivable aging, customer credit-worthiness, and changes in our customer payment trends when evaluating the adequacy of the allowance for doubtful accounts. The allowance is based on a specific review of all significant past-due accounts and on a general reserve analysis. If the financial condition of our customers deteriorates, resulting in an impairment of their ability to make payments, additional allowances may be required.

Allocation of Acquisition Purchase Prices

We allocated the purchase price to acquire Inlog and eDonor to identifiable intangible and tangible assets and liabilities based on their estimated fair values at the date of acquisition with the residual amount allocated to goodwill. Intangible assets include software, customer relationships, trade names and non-compete agreements. The fair value of these assets was estimated based on the discounted future cash flow using management's assumptions about future operating results and cash discount rates. We also used our projections to estimate the useful life of these intangible assets and are amortizing the estimated fair values of intangibles over our estimated useful lives. The use of other assumptions could have produced different results with a corresponding adjustment to intangible assets, amortization expense and goodwill. Goodwill represents the excess of the purchase price over the estimated fair value of the net tangible and intangible assets acquired. Goodwill and trade names are deemed to have an indefinite life and are not amortized but are subject to impairment tests. We will test goodwill for impairment on at least an annual basis using a two-step process based on an evaluation of Inlog and eDonor's estimated fair value using discounted cash flow modeling. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any.

Capitalized Software Costs

We invest substantial capital and human resources to enhance our existing healthcare information products and to develop new products. Costs of research and development, principally the design and development of software prior to the determination of technological feasibility, are expensed as incurred. Once technological feasibility has been established, which we define as a working prototype, we capitalize further development costs which typically consist primarily of coding as capitalized software development costs and amortize such costs over the estimated useful life of the software product. The determination of technological feasibility is inherently subjective, and different interpretations could change the value of capitalized software, amortization expense and research and development costs.

Income Tax Valuation Allowance

At December 31, 2008, we had U.S. state and foreign net operating loss carry forwards available to offset future taxable income in the respective jurisdictions. SFAS 109, Accounting for Income Taxes, requires that valuation reserves be established for deferred tax assets if it is more likely than not that the assets will not be realized. We have provided valuation reserves on our net operating loss carry forwards for the amount of net deferred assets in excess of the net operating loss we expect to utilize in 2009.

YEAR ENDED DECEMBER 31, 2008 COMPARED TO YEAR ENDED DECEMBER 31, 2007

Revenues. Revenues are comprised primarily of license fees, maintenance and usage fees, and implementation and consulting services revenues.

Revenues for the year ended December 31, 2008 increased by $7.290 million or 45.3% to $23.369 million from $16.079 million for the year ended December 31, 2007. Our acquisitions of Inlog and eDonor on June 26, 2008 and August 1, 2008, respectively, accounted for $6.287 million of the increase. Our Wyndgate and PeopleMed revenues increased $1.003 million, or 5.9% over the year ended December 31, 2007.

The table below shows the percentage of our total reported revenues for the period.

                                                2008     2007
                      Maintenance              50.5%    42.7%
                      Consulting services      25.2%    27.9%
                      Software license fees    21.0%    27.0%
                      PeopleMed                 3.3%     2.4%
                      Total revenue             100%     100%

At December 31, 2008, our sales backlog totaled $9.947 million compared to $5.347 million at December 31, 2007. Backlog represents software and services sold under signed contracts, which have not yet been recognized as revenue. The December 31, 2008 backlog balance included $3.451 million related to contracted software sales and $6.496 million related to implementation, training, validation and other services. At December 31, 2007, our backlog included $1.600 million related to contracted software sales and $3.747 million related to implementation, training, validation and other services.

Cost of revenue. Cost of revenues increased $4.254 million or 86.7% to $9.158 million for the year ended December 31, 2008 from $4.904 million for the year ended December 31, 2007. Acquisitions accounted for $2.715 million of the increase. The remaining $1.539 million increase was primarily due to an $852 thousand increase in employee compensation costs and $406 thousand of the increase related to the reallocation of employees from research and development assignments in 2007 to software maintenance and technical support functions in 2008. In addition, the cost of third party software products increased by $216 thousand primarily as a result of additional licenses fees associated with these products, and overhead increased by $81 thousand.

Gross profit. Gross profit increased $3.036 million or 27.2% to $14.211 million for the year ended December 31, 2008 from $11.175 million for the year ended December 31, 2007 with acquisitions accounting for $3.572 million of the increase. While gross profit for 2008 increased over 2007 due to the increase in revenues, our gross profit as a percentage of total revenue declined to 60.8% from 69.5% for the years ended December 31, 2008 and 2007, respectively. The decline in gross margins is mainly attributable to the Inlog acquisition, as Inlog has historically achieved lower gross margins than our Wyndgate division.

General and administrative. General and administrative expenses increased $2.250 million or 68.8% to $5.522 million for the year ended December 31, 2008 compared to $3.272 million for the year ended December 31, 2007, with acquisitions accounting for $1.092 million of the increase. The remaining $1.158 million increase was primarily related to non-recurring legal and accounting expenses of $397 thousand related to start-up activities associated with acquired entities, and $59 thousand in travel expenses related to acquisitions. Other increases include $211 thousand in compensation and benefits related expenses, $89 thousand in hiring expenses, $158 thousand in directors' compensation, $73 thousand in contract services, and $38 thousand in training expenses.

Sales and marketing. For the year ended December 31, 2008, sales and marketing expenses increased $1.231 million or 46.2% to $3.895 million for the year ended December 31, 2008 compared to $2.664 million for the year ended December 31, 2007. Our acquisitions of Inlog and eDonor accounted for $1.099 million of the increase with the remaining increase of $132 thousand comprised primarily by increased advertising, marketing and trade show expenses.

Research and development. Research and development expenses increased $653 thousand or 20.6% to $3.824 million for the year ended December 31, 2008 compared to $3.171 million for the year ended December 31, 2007. The acquisitions of Inlog and eDonor accounted for $1.176 million of the increase, which was partially offset by a $523 thousand, or 16.5%, decrease related to our Wyndgate and PeopleMed business. This decrease related primarily to the allocation of approximately $406 thousand to cost of revenue resulting from the assignment of employees from research and development assignments in 2007 to maintenance and technical support functions in 2008. Other decreases in research and development costs in 2008 included an increase in capitalized software development costs of $110 thousand and a decrease in employee compensation costs of $392 thousand, partially offset by an increase of $348 thousand in consulting services costs and $42 thousand in increased travel expenses primarily associated with acquisitions.

Depreciation and amortization. Depreciation and amortization of software and intangibles costs for the year ended December 31, 2008 and 2007 were $794 thousand and $181 thousand, respectively. Acquisitions accounted for $575 thousand of the increase which primarily represented amortization of purchased software and intangibles.

Income from operations. Our income from operations for the year ended December 31, 2008 was $176 thousand compared to $1.887 million for the year ended December 31, 2007. Our 2008 acquisitions produced a $370 thousand loss from operations, while our Wyndgate and PeopleMed businesses produced operating income of $546 thousand for the year ended December 31, 2008. The decrease in operating income related to our Wyndgate and PeopleMed divisions resulted primarily from acquisition and integration related expenses and an increase in our infrastructure to support 2008 sales activity relating to revenue that will be recognized in 2009 and beyond.

Interest income. Interest income for the years ended December 31, 2008 and 2007 was $115 thousand and $211 thousand, respectively.

Interest expense. Interest expense was $411 thousand and $13 thousand for the years ended December 31, 2008 and 2007, respectively. Interest expense increased as a result of the additional debt associated with financing our Inlog and eDonor acquisitions. Interest expense for 2008 includes $80 thousand in non-cash amortization of imputed interest on non-interest bearing obligations to the Inlog sellers.

Provision for income taxes. We incurred a pre-tax loss of $120 thousand for the year ended December 31, 2008 and recorded a provision for income taxes in the amount of $299 thousand. The income tax expense for 2008 resulted primarily from stock-based compensation expense related to incentive stock options that are not deductible for tax purposes and an increase in the valuation reserve related to unused net operating loss carry forwards in the United States and France. For the year ended December 31, 2007, our pre-tax income was $2.085 million and our provision for income taxes was $107 thousand. Income taxes in 2007 benefited from the reversal of the valuation reserve related to utilization of net operating losses for federal and state taxes.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operations for the year ended December 31, 2008 was $950 thousand. The primary components of the reconciliation of net loss of $419 thousand to net cash in operations included the add back of non-cash charges for depreciation and amortization of $794 thousand, amortization of financing costs of $80 thousand, stock-based compensation of $413 thousand, a provision for bad debt expense of $72 thousand, excess tax benefits from stock options of ($296) thousand, and the deferred income tax benefit of ($102) thousand. These non-cash charges (benefits) were offset by an increase in working capital, net of acquisitions of $1.492 million. The operating cash flows of our Inlog subsidiary are highly seasonal as the majority of its annual maintenance and support fees are billed and collected during the first quarter, while the fourth quarter is characterized by annual cash outflows for taxes and mandated employee-related payments. Consequently, Inlog's cash flows tend to be the highest during the first half of the year and the lowest during the second half of the year. Due to Inlog's significance, our consolidated cash flows from operations are expected to follow this pattern.

Our investing activities resulted in a net cash outflow of $10.037 million for the year ended December 31, 2008, which was principally comprised of $9.471 million for the acquisitions of Inlog and eDonor, net of cash received, $565 thousand for the purchase of property and equipment, $284 thousand for capitalized software development costs, partially offset by proceeds from the sale of marketable securities in the amount of $283 thousand.

Cash provided by financing activities for the year ended December 31, 2008 was $8.930 million, which was comprised of proceeds from long-term debt to fund the acquisitions of Inlog and eDonor of $7.363 million, proceeds from the exercise of stock options and warrants of $1.451 million, and the excess tax benefit of stock options of $296 thousand, partially offset by repayment of long-term debt totaling $180 thousand. Effective March 19, 2009, we amended our loan agreements with Silicon Valley Bank and Partners for Growth II LLP relating to our revolving line of credit, term loan and subordinated term loan in the aggregate gross amount of $7.5 million. The amendments waived our failure to comply with specified loan covenants for the quarter ended December 31, 2008 and modified the liquidity ratio and free cash flow covenants for the remaining term of the agreements. The amendments increased the annual interest rate by 0.5% on our revolving credit line and term loan. In connection with the amendment with our subordinated lender, we agreed to amend the exercise price of the lender's warrant to $0.72 per share and to pay a one-time cash payment of $30,450 and a waiver fee of $2,500.

The net negative effect of foreign exchange rates on changes in cash was $219 thousand.

As of December 31, 2008, we had cash and cash equivalents of $4.472 million. Based on our sales backlog at December 31, 2008, our recent cost reduction measures and our current projections, we believe that our cash reserves and expected positive cash flow from operations will be adequate to meet our operating needs, capital expenditure requirements and contractual obligations at least through 2009. However, worsening general economic conditions or a . . .