**UNITED
        STATES SECURITIES AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-Q**
  x
                **QUARTERLY
                    REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                    ACT OF
                    1934**
  For
        the
        quarterly period ended September 30, 2005
  OR
  o
                **TRANSITION
                    REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                    ACT OF
                    1934**
  For
        the
        transition period from  to
  Commission
        file number: ** 1-10768
  **MEDIWARE
        INFORMATION SYSTEMS, INC.**
 (Exact
        name of registrant as specified in its charter)
  **New
                  York**
              
              **11-2209324****(State
                  or other jurisdiction of**
                **incorporation
                  or organization)**
              
              **(I.R.S.
                  Employer Identification No.)****11711
                  West 79th Street****Lenexa,
                  Kansas**
              
              **66214****(Address
                  of principal executive offices)**
              
              **(Zip
                  Code)**
  **** ****
 **(Registrant's
        telephone number, including area code):**   **(913)
        307-1000** ****
  **(Former
        name, former address and former fiscal year, if changed since last
        report)**
  1
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days. x Yes o No
  Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in Rule
        12b-2 of the Exchange Act). x Yes o No
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). o Yes x No
  As
        of
        October 14, 2005, there were 7,988,000 shares of Common Stock, $0.10 par
        value,
        of the registrant outstanding.
  2
 
 **MEDIWARE
        INFORMATION SYSTEMS, INC.**
  **INDEX**
  **Page****PART
                    I**
                **Financial
                    Information****ITEM
                    1.**
                **Financial
                    Statements**Condensed
                    Consolidated Balance Sheets as of September 30, 2005
                    (Unaudited) and June 30, 2005
                4Condensed
                    Consolidated Statements of Operations and
                    Comprehensive Income (Unaudited) for the Three Months Ended September
                    30,
                    2005 and 2004
                5Condensed
                    Consolidated Statements of Cash Flows (Unaudited) for
                    the Three Months Ended September 30, 2005 and 2004
                6Notes
                    to Unaudited Condensed Consolidated Financial
                    Statements
                7Review
                    Report of Independent Registered Public Accounting
                    Firm
                9**ITEM
                    2.**
                **Management's
                    Discussion and Analysis of Financial Condition and
                    Results of Operations**
                10**ITEM
                    3.**
                **Quantitative
                    and Qualitative Disclosures About Market
                    Risk**
                18**ITEM
                    4.**
                **Controls
                    and Procedures**
                18**PART
                    II**
                **Other
                    Information****ITEM
                    1.**
                **Legal
                    Proceedings**
                19**ITEM
                    6.**
                **Exhibits**
                19**Signatures**
                
                20
 3
 *Index*
  **PART
                  I**
              **FINANCIAL
                  INFORMATION******
  **1.**
              **FINANCIAL
                  STATEMENTS**
  **MEDIWARE
        INFORMATION SYSTEMS, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 **(Amounts
        in thousands except shares)**
  September
                    30, 2005 (Unaudited)
                
                June
                    30, 2005**ASSETS**Current
                    AssetsCash
                    and cash equivalents
                
                $
                17,573
                
                $
                14,839Accounts
                    receivable (net of allowance of $740 and $626)
                
                
                8,427
                
                
                8,211Inventories
                
                
                178
                
                
                208Deferred
                    income taxes
                
                
                576
                
                
                452Prepaid
                    expenses and other current assets
                
                
                1,247
                
                
                985Total
                    current assets
                
                
                28,001
                
                
                24,695Fixed
                    assets, net
                
                
                1,387
                
                
                1,361Capitalized
                    software costs, net
                
                
                19,590
                
                
                19,548Goodwill,
                    net
                
                
                4,145
                
                
                4,203Other
                    long-term assets
                
                
                117
                
                
                117Total
                    Assets
                
                $
                53,240
                
                $
                49,924**LIABILITIES
                    AND STOCKHOLDERS' EQUITY**Current
                    LiabilitiesAccounts
                    payable
                
                $
                1,682
                
                $
                1,742Current
                    portion of note payable
                
                
                24
                
                
                24Advances
                    from customers
                
                
                9,037
                
                
                7,880Accrued
                    expenses and other current liabilities
                
                
                2,917
                
                
                2,132Total
                    current liabilities
                
                
                13,660
                
                
                11,778Note
                    payable
                
                
                24
                
                
                30Deferred
                    income taxes
                
                
                3,829
                
                
                3,578Total
                    liabilities
                
                
                17,513
                
                
                15,386Stockholders'
                    EquityPreferred
                    stock, $.01 par value; authorized 10,000,000 Shares; none
                    issuedCommon
                    stock, $.10 par value; authorized 25,000,000 Shares; 7,978,000
                    and
                    7,881,000 shares issued and outstanding at September 30, 2005
                    and June 30,
                    2005, respectively
                
                
                798
                
                
                788Additional
                    paid-in capital
                
                
                28,480
                
                
                27,932Retained
                    earnings
                
                
                6,496
                
                
                5,759Accumulated
                    other comprehensive income (loss)
                
                
                (47
                )
                
                59Total
                    stockholders' equity
                
                
                35,727
                
                
                34,538Total
                    Liabilities and Stockholders' Equity
                
                $
                53,240
                
                $
                49,924
 
 See
        Notes
        to Unaudited Condensed Consolidated Financial Statements.
  4
 *Index*
  **MEDIWARE
        INFORMATION SYSTEMS, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
        INCOME**
 **(Amounts
        in thousands, except earnings per share)**
 
 Three
                  Months Ended September 30,
                (Unaudited)2005
              
              2004**Revenue**System
                  sales
              
              $
              3,180
              
              $
              2,541Services
              
              
              6,228
              
              
              5,939Total
                  revenue
              
              
              9,408
              
              
              8,480**Cost
                  and Expenses**Cost
                  of systems (1)
              
              
              531
              
              
              450Cost
                  of services (1)
              
              
              1,867
              
              
              1,859Amortization
                  of capitalized software costs
              
              
              1,141
              
              
              958Software
                  development costs
              
              
              1,111
              
              
              867Selling,
                  general and administrative
              
              
              3,689
              
              
              3,314Total
                  costs and expenses
              
              
              8,339
              
              
              7,448Operating
                  income
              
              
              1,069
              
              
              1,032Interest
                  and other income
              
              
              126
              
              
              67Interest
                  and other expense
              
              
              (4
              )
              
              (14
              )Income
                  before income taxes
              
              
              1,191
              
              
              1,085Income
                  tax provision
              
              
              (454
              )
              
              (442
              )**Net
                  income**
              
              
              737
              
              
              643**Other
                  comprehensive income**Foreign
                  currency translation adjustment
              
              
              (106
              )
              
              (4
              )**Comprehensive
                  income**
              
              $
              631
              
              $
              639**Net
                  income per Common Share**Basic
              
              $
              0.09
              
              $
              0.08Diluted
              
              $
              0.09
              
              $
              0.08Weighted
                  Average Common Shares OutstandingBasic
              
              
              7,930
              
              
              7,719Diluted
              
              
              8,136
              
              
              8,120(1)
                  Excludes amortization of Capitalized Software Costs
 
 See
        Notes
        to Unaudited Condensed Consolidated Financial Statements.
  5
 *Index*
  **MEDIWARE
        INFORMATION SYSTEMS, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(Amounts
        in thousands)**
  Three
                    Months Ended September 30,
                  (Unaudited)2005
                
                2004**Cash
                    Flows From Operating Activities**Net
                    income
                
                $
                737
                
                $
                643Adjustments
                    to reconcile net income, to net cash provided by operating
                    activities:Depreciation
                    and amortization
                
                
                1,297
                
                
                1,223Stock
                    option compensation expense
                
                
                17
                
                
                -Deferred
                    tax provision
                
                
                398
                
                
                410Deferred
                    compensation
                
                
                -
                
                
                25Provision
                    for doubtful accounts
                
                
                134
                
                
                132Changes
                    in operating assets and liabilities:Accounts
                    receivable
                
                
                (350
                )
                
                (1,312
                )Inventories
                
                
                30
                
                
                (17
                )Prepaid
                    expenses and other assets
                
                
                (262
                )
                
                27Accounts
                    payable, accrued expenses and advances from customers
                
                
                1,882
                
                
                977Net
                    cash provided by operating activities
                
                
                3,883
                
                
                2,108**Cash
                    Flows From Investing Activities**Acquisition
                    of fixed assets
                
                
                (181
                )
                
                (169
                )Capitalized
                    software costs
                
                
                (1,184
                )
                
                (1,286
                )Net
                    cash used in investing activities
                
                
                (1,365
                )
                
                (1,455
                )**Cash
                    Flows From Financing Activities**Proceeds
                    from exercise of stock options
                
                
                328
                
                
                569Principal
                    payments on note payable
                
                
                (6
                )
                
                (5
                )Principal
                    payments on note payable to related party
                
                
                -
                
                
                (1,419
                )Net
                    cash provided by (used in) financing activities
                
                
                322
                
                
                (855
                )Foreign
                    currency translation adjustments
                
                
                (106
                )
                
                (4
                )Net
                    increase (decrease) in cash and cash equivalents
                
                
                2,734
                
                
                (206
                )Cash
                    and cash equivalents at beginning of period
                
                
                14,839
                
                
                10,213Cash
                    and cash equivalents at end of period
                
                $
                17,573
                
                $
                10,007**Supplemental
                    disclosures of cash flow information:**Cash
                    paid during the period for:Interest
                
                $
                1
                
                $
                715Income
                    taxes
                
                $
                9
                
                $
                3**Supplemental
                    disclosures of noncash financing activities:**Unearned
                    compensation from issuance of restricted common stock
                
                
                -
                
                $
                252Additional
                    paid-in capital recorded for tax benefit from exercise of stock
                    options
                
                $
                213
                
                $
                246Reduction
                    of goodwill recorded for tax benefit of related
                    amortization
                
                $
                58
                
                $
                58
 6
 *Index*
  **MEDIWARE
        INFORMATION SYSTEMS, INC. AND SUBSIDIARIES**
 **NOTES
        TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
  
 **1.**
              **FINANCIAL
                  STATEMENTS**
 
 In
        the
        opinion of management, the accompanying unaudited, condensed, consolidated
        financial statements contain all adjustments necessary to present fairly
        the
        financial position of Mediware and its results of operations and cash flows
        for
        the interim periods presented. Such financial statements have been condensed
        in
        accordance with the applicable regulations of the Securities and Exchange
        Commission and, therefore, do not include all disclosures required by accounting
        principles generally accepted in the United States of America. These financial
        statements should be read in conjunction with Mediware's audited financial
        statements for the year ended June 30, 2005 included in Mediware's Annual
        Report
        filed on Form 10-K for such year.
 
 The
        results of operations for the three months ended September 30, 2005 are not
        necessarily indicative of the results to be expected for the entire fiscal
        year.
 
 Certain
        prior year amounts have been reclassified to conform with the current
        presentation.
 
 **2.**
              **SYSTEM
                  SALES**
 
 In
        July
        2004, Mediware initiated a program to monitor customer usage, which resulted
        in
        the sale of additional proprietary user licenses and related third party
        software under the terms of their existing license agreements. As a result,
        Mediware recognized system sales of $1,186,000 during the three months ended
        September 30, 2004. There were no system sales resulting from such program
        during the three-months ended September 30, 2005.
 
 **3.**
              **EARNINGS
                  PER SHARE**
 
 Basic
        earnings per share is computed by dividing the net income the weighted average
        number of common shares, par value $0.10 (“Common Stock”), of Mediware
        outstanding. For the three months ended September 30, 2005 and 2004, the
        dilutive effect of Common Stock equivalents is included in the calculation
        of
        diluted earnings per share using the treasury stock method.
 
 **4.**
              **STOCK
                  BASED COMPENSATION PLANS**
 
 Commencing
        July 1, 2005, Mediware adopted Statement of Financial Accounting Standard
        No.
        123R, “Share Based Payment” (“SFAS 123R”), which requires all share-based
        payments, including grants of stock options, to be recognized in the income
        statement as an operating expense, based on their fair values. Mediware recorded
        $17,000 of related compensation expense for the three-months ended September
        30,
        2005.
 
 Prior
        to
        adopting SFAS 123R, Mediware accounted for stock-based compensation under
        Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
        Employees.” Mediware has applied the modified prospective method in adopting
        SFAS 123R.  Accordingly, periods prior to adoption have not been
        restated.  The
        following table illustrates the effect on net income and earnings per share
        if
        the fair value based method had been applied to the prior
        period.
  7
 *Index*
  Three
                  Months Ended
                September
                  30, 2004Reported
                  net income
              
              $
              643,000Stock-based
                  employee compensation determined under the fair value based method,
                  net of
                  related tax effects
              
              
              (242,000
              )Pro
                  forma net income
              
              $
              401,000Income
                  per share:Basic
                  - as reported
              
              $
              0.08Basic
                  - pro forma
              
              $
              0.05Diluted
                  - as reported
              
              $
              0.08Diluted
                  - pro forma
              
              $
              0.05
  In
        October 2005, Mediware entered into an employment agreement with the new
        Chief
        Executive Officer of Mediware. Under the terms of this agreement, Mediware
        granted the officer 100,000 restricted shares (the “Performance Shares”) of
        Common Stock. The Performance Shares vest in fiscal 2007, 2008 and 2009 only
        if
        Mediware achieves certain performance goals. At the time the Performance
        Shares
        vest, Mediware will calculate and record compensation expense in accordance
        with
        SFAS 123R.
 
 Mediware
        uses the Black-Scholes option pricing model to determine the weighted average
        fair value of options. The fair value of options at date of grant and the
        assumptions utilized to determine such values are indicated in the following
        table:
 
 Three
                  Months Ended
                September
                  30,2005
              
              2004Risk-free
                  interest rates
              4.20%
              
              4.30%Expected
                  option life in years
              5-6
              
              5Expected
                  stock price volatility
              35%
              
              83%Expected
                  dividend yield
              -0-
              
              -0-
  8
 *Index*
  **REVIEW
        REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
        The
        Board of Directors and Stockholders of
 Mediware
        Information Systems, Inc.
 
 
 We
        have
        reviewed the accompanying condensed consolidated balance sheet of Mediware
        Information Systems, Inc. and Subsidiaries (the "Company") as of September
        30,
        2005, and the related condensed consolidated statements of operations and
        comprehensive income, and cash flows for the three month periods ended September
        30, 2005 and 2004. These interim condensed consolidated financial statements
        are
        the responsibility of the Company's management.
 
 We
        conducted our reviews in accordance with standards established by the Public
        Company Accounting Oversight Board (United States). A review of interim
        financial information consists principally of applying analytical procedures
        to
        financial data and making inquiries of persons responsible for financial
        and
        accounting matters. It is substantially less in scope than an audit conducted
        in
        accordance with the standards of the Public Company Accounting Oversight
        Board
        (United States), the objective of which is the expression of an opinion
        regarding the financial statements taken as a whole. Accordingly, we do not
        express such an opinion.
 
 Based
        on
        our reviews, we are not aware of any material modifications that should be
        made
        to the accompanying interim condensed consolidated financial statements in
        order
        for them to be in conformity with accounting principles generally accepted
        in
        the United States of America.
 
 We
        have
        previously audited, in accordance with the standards of the Public Company
        Accounting Oversight Board (United States), the consolidated balance sheet
        of
        the Company as of June 30, 2005, and the related consolidated statements
        of
        operations and comprehensive income, stockholders' equity, and cash flows
        for
        the year then ended (not presented herein); and in our report dated
        August 5, 2005, we expressed an unqualified opinion on those consolidated
        financial statements. In our opinion, the information set forth in the
        accompanying condensed consolidated balance sheet as of June 30, 2005
        is
        fairly stated in all material respects in relation to the consolidated balance
        sheet from which it has been derived.
 
 
 Eisner
        LLP
 New
        York,
        New York
 October
        20, 2005
  9
 *Index*
  **ITEM
                  2.**
              **MANAGEMENT'S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                  RESULTS
                  OF OPERATIONS**
  **Forward-Looking
        Statements**
  *This
        report on Form 10-Q contains “forward-looking” statements. For this purpose, any
        statements contained herein that are not statements of historical fact may
        be
        deemed to be forward-looking statements.  Without limiting the foregoing,
        the words “believes,”“expects,”“expected,”“anticipates,”“will increase,”“will
        provide,”“will continue” and similar expressions are intended to identify
        forward-looking statements. Forward-looking statements are not guarantees
        of
        performance or future results and involve risks, uncertainties and assumptions.
        The factors discussed below under the caption “Factors that may Affect Future
        Results,” and elsewhere in the report, could cause actual results to differ
        materially from those indicated by forward-looking statements made herein
        and
        presented elsewhere from time to time. Other unforeseen factors not identified
        herein could also have such an effect. Mediware undertakes no obligation
        to
        publicly update or revise any forward-looking statements.*
 
 Mediware
        Information Systems, Inc. (including its subsidiaries, “Mediware”) develops,
        markets, licenses, implements and supports clinical management information
        software systems. Mediware's software systems are designed to automate three
        separate clinical operations within the hospital environment: medication
        management, including the hospital pharmacy; blood bank (and stand alone
        blood
        centers); and the surgical suite. Each software system typically consists
        of
        Mediware's proprietary application software, third-party licensed software
        and
        third-party computer hardware. Mediware sells implementation, training, and
        annual software support services with each software system.
 
 Mediware
        is organized into three operating divisions that correspond with the software
        systems it markets. Each division markets distinct product lines: Medication
        Management Systems, Blood Bank Systems and Operating Room Systems. The Blood
        Bank and Operating Room Divisions operate primarily in the United States.
        The
        Medication Management Division, which was previously named the Pharmacy
        Division, operates both in the United States and in the United Kingdom.
        Mediware's United Kingdom operating business is referred to herein as
        JAC.
 
 **Results
        of Operations for the Three Months Ended September 30, 2005 as Compared to
        the
        Three Months Ended September 30, 2004**
 
 Total
        revenue for the first quarter of fiscal 2006 is $9,408,000 compared to
        $8,480,000 in the comparable quarter of fiscal 2005, an increase of $928,000
        or
        10.9%. The Operating Room Division recorded a decrease of $150,000, or 27.6%,
        to
        $394,000 in the quarter just ended compared to $544,000 in the same quarter
        in
        fiscal 2005. JAC recorded an increase of $94,000, or 11.9%, to $886,000 in
        the
        most recent quarter compared to $792,000 in fiscal 2005. The Medication
        Management Division (excluding JAC) recorded a decrease of $765,000, or 20.2%,
        to $3,014,000 in the first quarter of fiscal 2006 from $3,779,000 in the
        first
        quarter of fiscal 2005. Revenue in the Blood Bank Division increased $1,749,000,
        or 52.0%, to $5,114,000 in the first quarter of fiscal 2006 compared to
        $3,365,000 in the same period in fiscal 2005.
 
 System
        sales, which include proprietary software, third party software and hardware
        revenue, were $3,180,000 in the quarter ended September 30, 2005, an increase
        of
        $639,000, or 25.1%, from $2,541,000 in the same period in fiscal 2005. The
        Operating Room Division experienced a decrease in system sales of 92.6%,
        or
        $126,000, from $136,000 to $10,000. The decrease reflects the near completion
        of
        the Division’s heritage customer migration to Perioperative Solutions. JAC
        recorded an increase of $37,000, or 26.2%, to $178,000 in the first quarter
        of
        fiscal 2006. The increase reflects additional sales activity resulting from
        JAC
        being named, as described in Mediware’s Annual Report on Form 10-K for the
        fiscal year ended June 30, 2005, as a preferred supplier of pharmacy
        stock
        control for a subcontractor as part of the United Kingdom’s new national program
        for information technologies, which the government has identified as the
        “Connecting for Health” program. Mediware believes, but cannot give any
        assurance, that system sales will continue to increase as JAC is able to
        establish itself as part of the program. System sales in the Medication
        Management Division decreased $625,000, or 37.1%, to $1,058,000 from $1,683,000.
        The decrease reflects lower sales of the base WORx system. During the first
        quarter of fiscal 2005, Mediware commenced an initiative to sell additional
        proprietary user licenses and related third-party software licenses to certain
        customers, based on their current usage levels, pursuant to the terms of
        customers’ existing license agreements. Mediware reported system sales of
        $1,186,000 resulting from this initiative in the first quarter of fiscal
        2005.
        During the first quarter of fiscal 2006, Mediware did not report any system
        sales as a result of this initiative. Mediware does, however, expect these
        sales
        to continue in future quarters, but at significantly reduced rates. System
        sales
        for the Blood Bank Division were $1,934,000, an increase of $1,353,000, or
        232.9%, from $581,000 in the comparable quarter in fiscal 2005. The increase
        reflects the continued customer migration from the Division’s heritage products
        to the HCLL software, the Division’s next generation blood transfusion system.
        Mediware believes, but cannot give any assurance, that HCLL system sales
        will
        continue to grow through the customer migration from the heritage products
        along
        with its direct marketing efforts to new customers.
  10
 *Index*
  During
        fiscal 2005, the Medication Management Division met two significant milestones
        as it migrates from a WORx stand-alone base sale to an integrated medication
        management sale. The Division made an early adopter sale of its integrated
        medication management solution, and the Division gained separate reference
        sites
        for both the MediCOE and MediMAR products. While Mediware has identified
        a
        significant number of sales opportunities for the combined WORx, MediMAR
        and
        MediCOE solution, Mediware believes that a fully referencable site, utilizing
        all three integrated products, is necessary to achieve the expected product
        acceptance and contract closure rates.
 
 Service
        revenue, which includes recurring software support, implementation and training
        services, increased 4.9%, or $289,000, to $6,228,000 in the first quarter
        of
        fiscal 2006 from $5,939,000. Service revenue in the Operating Room Division
        decreased $24,000 or 5.9% to $384,000 in the first quarter of fiscal 2006
        from
        $408,000 in the first quarter of fiscal 2005. The decrease in service revenue
        is
        primarily due to a decline in ongoing implementation projects. Service revenue
        for JAC increased 8.8%, or $57,000, to $708,000 in the first quarter of fiscal
        2006 compared to $651,000 in the first quarter of fiscal 2005. This increase
        in
        service revenue is primarily due to increased implementation activity on
        contracts signed within the last fiscal year. Service revenue in the Medication
        Management Division (excluding JAC) decreased $140,000 or 6.7% to $1,956,000
        in
        the first quarter of fiscal 2006 from $2,096,000 in the first quarter of
        fiscal
        2005. The decrease in service revenue is primarily due to lower utilization
        rates on a specific contract and a decline in ongoing implementation projects.
        Service revenue for the Blood Bank Division increased 14.2%, or $396,000,
        to
        $3,180,000 in the first quarter of fiscal 2006 compared to $2,784,000 in
        the
        first quarter of fiscal 2005. This increase in service revenue is primarily
        due
        to increased rates on renewing support contracts with existing customers
        as well
        as increased implementation activity on HCLL contracts signed within the
        last
        year. ****
 
 Cost
        of
        systems includes the cost of computer hardware and sublicensed software
        purchased from computer and software manufacturers by Mediware as part of
        its
        complete system offering. These costs can vary as the mix of revenue varies
        between high margin proprietary software and lower margin computer hardware
        and
        sublicensed software components. Cost of systems increased $81,000, or 18.0%,
        due to the overall hardware sales increase during the first quarter of fiscal
        2006. The gross margin, excluding amortization of capitalized software costs,
        on
        system sales was 83.3% in the first quarter of fiscal 2006 compared to 82.3%
        in
        the same quarter in fiscal 2005.
 
 Cost
        of
        services includes the salaries of client service personnel and communications
        expenses along with direct expenses of the client service departments. Cost
        of
        services increased $8,000, or 0.4%, in the first quarter of 2006 over the
        same
        period in the previous year. The increase in cost of services is primarily
        attributed to increases in implementation personnel as Mediware increased
        staff
        levels for the rollout of its new MediMAR, MediCOE and HCLL products. Despite
        the increase in cost of services, gross margin on service revenue improved
        to
        70.0% for the first quarter of fiscal 2006 compared to 68.7% for the first
        quarter of fiscal 2005. Mediware 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 $183,000, or 19.1%, to $1,141,000 in the
        first
        quarter of fiscal 2006 compared to $958,000 in the first quarter of fiscal
        2005.
        This increase is primarily due to increased amortization of capitalized software
        costs related to the HCLL and MediMAR products released by Mediware during
        prior
        fiscal years.
  11
 *Index*
  Software
        development costs include the non-capitalizable portions of salaries,
        consulting, documentation, office and other direct expenses incurred in product
        development activities. Software development costs increased $244,000 in
        the
        first quarter of fiscal 2006 to $1,111,000 compared to $867,000 in the first
        quarter of fiscal 2005, which represents Mediware’s focus on functional
        improvements and new enhancement designs. Expenditures for software development
        include amounts paid for both capitalizable and noncapitalizable development
        projects. Total expenditures for software development were $2,295,000 the
        first
        quarter of fiscal 2006, compared to $2,153,000 the first quarter of fiscal
        2005,
        an increase of $142,000 or 6.6%. This increase primarily reflects increased
        expenditures in the Medication Management Division (excluding JAC). Mediware
        expects continued product development investment 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 including costs associated
        with Sarbanes-Oxley; 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 $375,000 or 11.3%, from $3,314,000 the first quarter of
        fiscal 2005 compared to $3,689,000 in the first quarter of fiscal 2006. This
        increase reflects increased sales commissions, additional investment in the
        marketing activities for HCLL, MediMAR and MediCOE, and increased bonus
        accruals. Mediware anticipates that SG&A costs will increase in the near
        term related to costs associated with the hiring of a new chief executive
        officer and the impact of stock option compensation expense required by SFAS
        123R, which became effective for Mediware beginning in fiscal
        2006. Additionally, Mediware anticipates, but can not assure, that
        marketing costs will continue to increase.
 
 Net
        income the first quarter of fiscal 2006 was $737,000, an increase of $94,000
        or
        14.6%, compared to a net income of $643,000 the first quarter of fiscal 2005.
  **Liquidity
        and Capital Resources**
  As
        of
        September 30, 2005, Mediware had cash and cash equivalents of $17,573,000
        compared to cash and cash equivalents of $14,839,000 at June 30, 2005. Working
        capital was $14,341,000 and $12,917,000 at September 30, 2005 and June 30,
        2005,
        respectively. The current ratio was 2.0 to 1 at September 30, 2005 compared
        to
        2.1 to 1 at June 30, 2005.
 
 Cash
        provided by operating activities was $3,883,000 during the first three months
        of
        fiscal year 2006 compared to $2,108,000 during the same period a year ago.
        The
        increased cash provided by operating activities is primarily due to continued
        improvement in accounts receivable collections and the change in accounts
        payable, accrued expenses and advances from customers.
 
 Cash
        used
        in investing activities was $1,365,000 during the first three months of fiscal
        year 2006 compared to $1,455,000 during the same period a year ago. The decrease
        primarily relates to Mediware’s investment in software development projects. Of
        the amounts invested, Mediware capitalized $1,184,000 and $1,286,000 of product
        development costs during the three months ended September 30, 2005 and 2004,
        respectively.
  Cash
        provided by financing activities was $322,000 during the first three months
        of
        fiscal year 2006 compared to cash used by financing activities of $855,000
        during the same period a year ago. Mediware repaid its note payable and accrued
        interest to a related party in the amount of $1,419,000 during the period
        ended
        September 30, 2004.
  Mediware's
        liquidity is influenced by its ability to perform on a "best of breed" basis
        in
        a competitive industry. Factors that may affect liquidity are Mediware'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 Mediware's existing line of products,
        Mediware believes that current available funds and cash generated from
        operations will provide sufficient liquidity to meet operating requirements
        for
        the foreseeable future. Mediware continues to review its long-term cash needs.
        Currently, there are no plans for additional outside financing, except that
        Mediware may consider establishing a new line of credit.
  12
 *Index*
 
 **Factors
        that may affect Future Results**
 
 This
        Report on Form 10-Q contains forward-looking statements. For this purpose,
        any
        statements contained herein that are not statements of historical fact may
        be
        deemed to be forward-looking statements within
        the meaning of Section 21E of the Securities Exchange Act .
        Without
        limiting the foregoing, the words "believes," "anticipates," "plans," "seeks,"
        "expects," "intends" and similar expressions are intended to identify
        forward-looking statements. Forward-looking statements are not guarantees
        of
        performance or future results and involve risks, uncertainties and assumptions.
        The factors discussed below and elsewhere in this Report on Form 10-Q, could
        cause actual results to differ materially from those indicated by
        forward-looking statements made herein and presented elsewhere from time
        to
        time. Other
        unforeseen factors not identified herein could also have such an effect. Mediware
        undertakes no obligation to publicly update or revise any forward-looking
        statements.
 
 **Key
        Personnel**
 
 To
        remain competitive, Mediware must attract, motivate and retain highly skilled
        managerial, sales, marketing, consulting and technical personnel. Competition
        for such personnel is intense. Mediware’s failure to attract qualified personnel
        could have a material adverse effect on Mediware’s results
        of operations or financial condition .
 
 Mediware’s
        current chief executive officer was hired in October 2005. If the new chief
        executive officer is unable to lead Mediware as expected or is unable to
        retain
        Mediware’s other key management personnel, Mediware’s results
        of operations or financial condition could be adversely affected.
 
 **Fluctuations
        in Quarterly Operating Results** ****
 
 Mediware's
        revenue and results of operations can fluctuate substantially from quarter
        to
        quarter. System sales in any quarter depend substantially upon Mediware's
        sales
        performance and customers’ budgeting and buying practices. System sales in any
        quarter may fluctuate due to contract activity, demand for Mediware's products
        and services, lengthy and complex sales cycles, and the customers’ internal
        budgets for new technology systems and technical resources to deploy them.
        Additionally, the terms of a final contract may materially affect Mediware's
        ability to recognize anticipated quarterly revenue. Factors that impact contract
        terms and quarterly revenue include 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 may be available, Mediware could incur substantial costs
        if it
        is required to adapt its products to alternative third-party software products.
  13
 *Index*
  **Dependence
        on Third Party Marketing Relationships** ****
 
 Mediware's
        continued growth could be impacted by its ability to build and maintain strong
        marketing partnerships. Mediware believes its marketing and sales efforts
        can be
        significantly enhanced by these relationships. If Mediware is not able to
        enhance its current relationships or develop new relationships, Mediware
        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
        and
        could have a material adverse effect on Mediware’s business, results of
        operations or financial condition.
 
 Many
        hospitals are consolidating and forming (or becoming part of) integrated
        healthcare delivery networks ("IHDNs"). Additionally, hospitals have the
        option
        to select a single-vendor, enterprise-wide solution that automates all functions
        of the hospital, called a Hospital Information Support System (“HISS”). The
        formation of IHDNs and HISS oriented purchasing might reduce the number of
        discrete prospects Mediware may target on a “best-of-breed” basis and could
        provide more negotiating leverage to Mediware's prospective customers. These
        events could result in a reduction of selling prices, an increase in the
        length
        of the sales cycle, or other situations that could negatively affect Mediware.
 
 **Significant
        Competition** ****
 
 The
        market for healthcare information systems is extremely competitive. Some
        of
        Mediware'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 Mediware. Many of Mediware'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. Mediware's ability to maintain a positive stance in all of
        the
        above areas will affect its ability to compete successfully.
 
 **Product
        Acceptance**
 
 Mediware’s
        strategy in all three of its operating divisions includes licensing of new
        products to customers, which requires customer acceptance of its newly developed
        and released products. While Mediware believes that each of its new products
        is
        positioned to succeed in the market place, there is no assurance that customers
        will accept or adopt the products to the extent that Mediware expects. If
        Mediware customers do not accept the new products as expected, Mediware’s
        results could be materially and adversely affected.
 
 **New
        Technologies**
 
 There
        is
        a risk that technology not currently in the mainstream will quickly enter
        the
        market and disrupt Mediware’s existing business and Mediware’s customers’ need
        for its products. Mediware is working diligently to be innovative and to
        ensure
        that its products remain state-of-the-art, but new technologies in the
        marketplace could adversely affect Mediware.
  14
 *Index*
  **New
        Product Development**
 
 Mediware’s
        strategy relies on the continuing development of new software products. Mediware
        currently intends to continue investing in research and development and new
        products. While Mediware expects that this investment will produce advantages
        and new products and markets, there can be no assurance that advantages and
        new
        products of the research and development will be realized. In addition,
        development of new products is a complex and difficult process. As a result,
        Mediware, like other software companies, may encounter difficulties or delays
        in
        the development, implementation and market acceptance of new
        products.
 
 **Government
        Regulation**
 
 The
        hospitals that comprise the primary market for Mediware'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.
 
 Mediware'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 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 Mediware's blood
        bank
        information system operations; however, the legislation expanded the
        jurisdiction of the FDA and Mediware remains unable to predict the effect
        of any
        resulting applicable future regulation. If any of Mediware's existing products
        or future products become subject to Congressional or governmental agency
        efforts to establish or expand governmental agency jurisdiction, compliance
        would likely be costly and time-consuming. However, Mediware believes it
        could
        have a competitive advantage if the FDA regulations apply to cord blood stem
        cells, tissue or other biologic products.
  In
        fiscal
        2003, Mediware received its initial HCLL 510(k) product clearance from the
        FDA.
        This clearance opened the way for Mediware to begin marketing HCLL. All FDA
        regulated products are required to obtain additional 510(k) clearance as
        new
        functionality is added.
 
 Mediware
        has dedicated substantial time and resources to comply with applicable
        guidelines and regulations. The FDA enforces compliance by such actions as
        recalls, seizures, injunctions, civil fines and criminal prosecutions.
        Unsatisfactory compliance and the inability to timely remedy any non-compliance,
        resulting in any of the above actions, would likely have a material adverse
        effect on Mediware's business, financial condition and results of operations.
 
 **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 has 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 were also 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 Mediware is not
        a
        Covered Entity, most of Mediware’s customers are Covered Entities. As Covered
        Entities, Mediware’s customers are required to flow down certain of their
        obligations under HIPAA to their service providers. Accordingly, Mediware
        has
        been required to adopt different and or additional procedures. In addition,
        Mediware 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. Mediware may be required
        to
        invest in its products and procedures to maintain compliance and Mediware
        is
        subject to contractual requirements arising from HIPAA that increase Mediware’s
        liability and risks associated with the handling of individual protected
        health
        information. In addition, many states have passed or are evaluating local
        versions of HIPAA.
  15
 *Index*
  **Product
        Related Liabilities**
 
 All
        of
        Mediware'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 Mediware’s
        exposure. Mediware 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 Mediware. Although
        no
        claims have been brought against Mediware 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 Mediware, could have a material adverse
        effect
        upon Mediware's business, results of operations or financial condition.
 
 **System
        Errors and Warranties**
 
 Despite
        testing by Mediware, software products as complex as those offered by Mediware
        and used in a wide range of clinical and health information systems settings
        contain a number of errors or "bugs", especially early in their product life
        cycle. Mediware'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 in which the systems are installed.
        Due to
        these factors, the discovery of defects or errors could 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
        Mediware's business, results of operations or financial condition.
 
 **Limited
        Protection of Intellectual Property and Proprietary Rights; Proprietary
        Technology May Be Subjected to Infringement Claims** .
 
 Mediware
        relies upon a combination of trade secret, copyright and trademark laws,
        license
        and marketing agreements, and nondisclosure agreements to protect its
        proprietary information. Generally, Mediware has not historically filed patent
        applications or copyrights covering its software technology. As a result,
        Mediware may not be able to protect against the misappropriation of its
        intellectual property.
 
 Mediware
        does not believe its software products or the third-party software products
        Mediware offers under sublicense agreements, Company trademarks or other
        Company
        proprietary rights infringe the intellectual property rights of third parties.
        However, there can be no assurance that third parties, including creators
        of
        open-source code, will not assert infringement claims against Mediware in
        the
        future with respect to current or future software products or that any such
        assertion may not require Mediware to modify its products, enter into royalty
        arrangements; payout damage awards or result in costly
        litigation.
  16
 *Index*
  **Fluctuations
        in Stock Price**
 
 The
        trading price of Mediware’s common stock may fluctuate significantly from time
        to time. Generally, Mediware’s common stock has relatively low trading volume
        which can cause transactions in a relatively small number of shares to
        significantly impact the price of the stock. Other factors that can cause
        Mediware’s common stock price to fluctuate include, but are not limited to:
        quarterly variations in operating results, changes in expectations or estimates
        of securities analysts, action by governmental or regulatory bodies, the
        exercising of a large number of options, and changes in the securities markets
        in general.
  17
 *Index*
  **ITEM
                  3.**
              **QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK**
  Mediware
        does not currently have any material exposure to foreign currency transaction
        gains or losses. However, Mediware does have some exposure to foreign currency
        rate fluctuations arising from sales made to customers in the United Kingdom.
        These transactions are made by Mediware's U.K.-based, wholly owned subsidiary
        which transacts business in the local functional currency. To date, Mediware
        has
        not entered into any derivative financial instrument to manage foreign currency
        risk and is currently not evaluating the future use of any such financial
        instruments.
  **ITEM
                  4.**
              **CONTROLS
                  AND PROCEDURES**
  Mediware's
        management, under the supervision and with the participation of Mediware’s Chief
        Executive Officer and Chief Financial Officer, has reviewed and evaluated
        the
        effectiveness of Mediware's disclosure controls and procedures as of the
        end of
        the quarter covered by this report. Disclosure controls and procedures are
        defined in the Securities Exchange Act as controls and other procedures of
        Mediware designed to ensure that information required to be disclosed by
        Mediware in the reports that it files or submits under the Securities Exchange
        Act is recorded, processed, summarized and reported within the time periods
        specified in the SEC’s rules and forms and include controls and procedures
        designed to ensure that information required to be disclosed by Mediware
        in the
        reports that it files or submits to the SEC is accumulated and communicated
        to
        Mediware’s management, including the CEO and CFO, to allow timely decisions
        regarding required disclosure. Based on the foregoing review and evaluation,
        Mediware’s CEO and CFO have concluded that Mediware’s disclosure controls and
        procedures are effective as of September 30, 2005.
  There
        were no changes in Mediware’s internal controls over financial reporting that
        occurred during the three months ended September 30, 2005 that have materially
        affected, or are reasonably likely to materially affect, its internal controls
        over financial reporting. Notwithstanding the foregoing, Mediware implemented
        additional controls, policies and procedures during the quarter ended September
        30, 2005 and will continue to enhance its internal control structure, as
        appropriate, on a continuing basis. Mediware believes that a control system,
        no
        matter how well designed and operated, cannot provide absolute assurance
        that
        the objectives of the control system are met, and no evaluation of controls
        can
        provide absolute assurance that all control issues and instances of fraud,
        if
        any, within any company have been detected.
  18
 *Index*
  **PART
                  II**
              **OTHER
                  INFORMATION**
  **ITEM
                  1.**
              **LEGAL
                  PROCEEDINGS**
  On
        August
        10, 2005, the District Court of Clay County Missouri dismissed all claims
        filed
        by Michelle D. Wright-Starns against Mediware. Ms. Wright-Starns, a former
        employee, had claimed in her suit that Mediware breached her employment contract
        and owed her unpaid vacation. Ms. Wright-Starns claims had totaled approximately
        $223,000. Ms. Wright-Starns has indicated she will appeal.
  On
        June
        9, 2005, Mediware filed a breach of contract action in the United States
        District Court for the Eastern District of North Carolina, for approximately
        $285,000 against WakeMed, a hospital corporation based in North Carolina.
        Mediware alleges that WakeMed has breached its payment and related obligations
        under its software license agreement for software licensed from Mediware.
        On
        June 17, 2005, Mediware removed from North Carolina state court to the Eastern
        District Court a suit filed by WakeMed on June 8, 2005. These two actions
        were
        consolidated into a single action in the United States District Court for
        the
        Eastern District of North Carolina.   WakeMed has sought repayment
        of all
        of its license fees totaling $395,000 alleging that Mediware violated its
        representations and warranties and a North Carolina consumer protection statute
        that could require Mediware to pay treble damages.
  **ITEM
                  6.**
              **EXHIBITS**
  Exhibit
                  10
              
              Employment
                  Agreement of Robert Tysall-BlayExhibit
                  11
              
              Schedule
                  of Computation of Net Earnings Per ShareExhibit
                  15
              
              Consent
                  of Independent Registered Public Accounting FirmExhibit
                  31.1
              
              Rule
                  13a-14(a)/15d-14(a) CertificationExhibit
                  31.2
              
              Rule
                  13a-14(a)/15d-14(a) CertificationExhibit
                  32.1
              
              Certification
                  Pursuant to 18 U.S.C. 1350
 19
 *Index*
  **SIGNATURES**
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
   MEDIWARE
                  INFORMATION SYSTEMS, INC.(Registrant)October
                  25, 2005
              
              /s/   JAMES
                  F.
                  BURGESSDate
              
              JAMES
                  F. BURGESSPRESIDENT
                  AND CHIEF EXECUTIVE OFFICEROctober
                  25, 2005
              
              /s/   JILL
                  H.
                  SUPPESDate
              
              JILL
                  H. SUPPESCHIEF
                  FINANCIAL OFFICER
  20