**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 March 31, 2006
  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 a large accelerated filer, an
        accelerated filer or a non-accelerated filer. See definition of “accelerated
        filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act).
  Large
                  accelerated filero
              Accelerated
                  Filerx
              Non-accelerated
                  filero
  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
   o Yes  o No
        APPLICABLE ONLY TO CORPORATE ISSUERS:
  As
        of
        April 19, 2006, there were 8,055,000 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 March 31, 2006
                  (Unaudited) and June 30, 2005
              4Condensed
                  Consolidated Statements of Operations and
                  Comprehensive Income (Unaudited) for the Three and Nine Months
                  Ended March
                  31, 2006 and 2005
              5Condensed
                  Consolidated Statements of Cash Flows (Unaudited)
                  for the Nine Months Ended March 31, 2006 and 2005
              6Notes
                  to Unaudited Condensed Consolidated Financial
                  Statements
              7Review
                  Report of Independent Registered Public Accounting
                  Firm
              11**ITEM
                  2.**
              **Management's
                  Discussion and Analysis of Financial Condition and
                  Results of Operations**
              12**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
                  1A.**
              **Risk
                  Factors**
              19**ITEM
                  6.**
              **Exhibits**
              20**Signatures**
              
              21
  3
 *Index*
  **PART
                  I**
              **FINANCIAL
                  INFORMATION******
  **1.**
              **FINANCIAL
                  STATEMENTS**
  **MEDIWARE
        INFORMATION SYSTEMS, INC.**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 **(Amounts
        in thousands except shares)**
 
 **(Unaudited)**
                **March
                  31,**
                **2006**
              
              **June
                  30,**
                **2005****ASSETS**Current
                  AssetsCash
                  and cash equivalents
              
              $
              18,573
              
              $
              14,839Accounts
                  receivable (net of allowance of $739 and $626)
              
              
              8,471
              
              
              8,066Inventories
              
              
              156
              
              
              208Deferred
                  income taxes
              
              
              496
              
              
              452Prepaid
                  expenses and other current assets
              
              
              738
              
              
              739Total
                  current assets
              
              
              28,434
              
              
              24,304Fixed
                  assets, net
              
              
              1,223
              
              
              1,361Capitalized
                  software costs, net
              
              
              19,381
              
              
              19,548Goodwill,
                  net
              
              
              4,029
              
              
              4,203Other
                  long-term assets
              
              
              117
              
              
              117Total
                  Assets
              
              $
              53,184
              
              $
              49,533**LIABILITIES
                  AND SHAREHOLDERS' EQUITY**Current
                  LiabilitiesAccounts
                  payable
              
              $
              1,372
              
              $
              1,742Current
                  portion of note payable
              
              
              25
              
              
              24Advances
                  from customers
              
              
              7,524
              
              
              7,489Accrued
                  expenses and other current liabilities
              
              
              2,703
              
              
              2,132Total
                  current liabilities
              
              
              11,624
              
              
              11,387Note
                  payable
              
              
              11
              
              
              30Deferred
                  income taxes
              
              
              4,072
              
              
              3,578Total
                  liabilities
              
              
              15,707
              
              
              14,995Shareholders'
                  EquityPreferred
                  stock, $.01 par value; authorized 10,000,000Shares;
                  none issuedCommon
                  stock, $.10 par value; authorized 25,000,000Shares;
                  8,053,000 and 7,881,000 shares issued and
              
              
              -
              
              
              -outstanding
                  at March 31, 2006 and June 30, 2005, respectively
              
              
              805
              
              
              788Additional
                  paid-in capital
              
              
              29,546
              
              
              27,932Deferred
                  Compensation
              
              
              (365
              )
              
              -Retained
                  earnings
              
              
              7,526
              
              
              5,759Accumulated
                  other comprehensive income (loss)
              
              
              (35
              )
              
              59Total
                  shareholders' equity
              
              
              37,477
              
              
              34,538Total
                  Liabilities and Shareholders' Equity
              
              $
              53,184
              
              $
              49,533
 
 See
        Notes
        to Unaudited Condensed Consolidated Financial Statements.
 
 4
 *Index*
  **MEDIWARE
        INFORMATION SYSTEMS, INC**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
        INCOME**
 **(Amounts
        in thousands, except earnings per share)**
 
 **(Unaudited)**
                  **Three
                    Months Ended**
                  **March
                    31,**
                
                **(Unaudited)**
                  **Nine
                    Months Ended**
                  **March
                    31,****2006**
                
                **2005**
                
                **2006**
                
                **2005****Revenue**System
                    sales
                
                $
                3,340
                
                $
                3,688
                
                $
                9,487
                
                $
                8,905Services
                
                
                6,628
                
                
                6,193
                
                
                19,277
                
                
                18,682Total
                    revenue
                
                
                9,968
                
                
                9,881
                
                
                28,764
                
                
                27,587**Cost
                    and Expenses**Cost
                    of systems (1)
                
                
                519
                
                
                682
                
                
                1,679
                
                
                1,638Cost
                    of services (1)
                
                
                2,047
                
                
                1,894
                
                
                5,793
                
                
                5,598Amortization
                    of capitalized software costs
                
                
                1,220
                
                
                1,110
                
                
                3,571
                
                
                3,076Software
                    development costs
                
                
                1,170
                
                
                835
                
                
                3,326
                
                
                2,485Selling,
                    general and administrative
                
                
                4,167
                
                
                4,101
                
                
                12,098
                
                
                10,990Total
                    costs and expenses
                
                
                9,123
                
                
                8,622
                
                
                26,467
                
                
                23,787Operating
                    income
                
                
                845
                
                
                1,259
                
                
                2,297
                
                
                3,800Interest
                    and other income
                
                
                173
                
                
                57
                
                
                457
                
                
                177Interest
                    and other expense
                
                
                -
                
                
                (2
                )
                
                (6
                )
                
                (20
                )Income
                    before income taxes
                
                
                1,018
                
                
                1,314
                
                
                2,748
                
                
                3,957Income
                    tax provision
                
                
                (386
                )
                
                (484
                )
                
                (981
                )
                
                (1,535
                )**Net
                    income**
                
                
                632
                
                
                830
                
                
                1,767
                
                
                2,422**Other
                    comprehensive income**Foreign
                    currency translation adjustment
                
                
                17
                
                
                (22
                )
                
                (94
                )
                
                52**Comprehensive
                    income**
                
                $
                649
                
                $
                808
                
                $
                1,673
                
                $
                2,474**Net
                    income per Common Share**Basic
                
                $
                0.08
                
                $
                0.11
                
                $
                0.22
                
                $
                0.31Diluted
                
                $
                0.08
                
                $
                0.10
                
                $
                0.22
                
                $
                0.30Weighted
                    Average Common Shares OutstandingBasic
                
                
                8,048
                
                
                7,853
                
                
                7,991
                
                
                7,795Diluted
                
                
                8,274
                
                
                8,220
                
                
                8,192
                
                
                8,175
 
 (1)
              Excludes
                  amortization of Capitalized Software
                  Costs
 
 See
        Notes
        to Unaudited Condensed Consolidated Financial Statements.
 5
 *Index*
  **MEDIWARE
        INFORMATION SYSTEMS, INC.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(Amounts
        in thousands)**
 **(Unaudited)**
                  **Nine
                    Months Ended**
                  **March
                    31,****2006**
                
                **2005****Cash
                    Flows From Operating Activities**Net
                    income
                
                $
                1,767
                
                $
                2,422Adjustments
                    to reconcile net income to net cash provided by operating
                    activities:Depreciation
                    and amortization
                
                
                4,058
                
                
                3,567Deferred
                    tax provision
                
                
                624
                
                
                1,359Deferred
                    Compensation
                
                
                173
                
                
                183Provision
                    for doubtful accounts
                
                
                324
                
                
                318Changes
                    in operating assets and liabilities:Accounts
                    receivable
                
                
                (729
                )
                
                (66
                )Inventories
                
                
                52
                
                
                14Prepaid
                    expenses and other assets
                
                
                1
                
                
                (121
                )Accounts
                    payable, accrued expenses and advances from customers
                
                
                236
                
                
                491Net
                    cash provided by operating activities
                
                
                6,506
                
                
                8,167**Cash
                    Flows From Investing Activities**Acquisition
                    of fixed assets
                
                
                (349
                )
                
                (559
                )Capitalized
                    software costs
                
                
                (3,404
                )
                
                (4,135
                )Net
                    cash used in investing activities
                
                
                (3,753
                )
                
                (4,694
                )**Cash
                    Flows From Financing Activities**Proceeds
                    from exercise of stock options
                
                
                836
                
                
                710Excess
                    tax benefit from exercise of stock options
                
                
                257
                
                
                -Principal
                    payments on note payable
                
                
                (18
                )
                
                (16
                )Principal
                    payments on note payable to related party
                
                
                -
                
                
                (1,419
                )Net
                    cash provided by (used in) financing activities
                
                
                1,075
                
                
                (725
                )Foreign
                    currency translation adjustments
                
                
                (94
                )
                
                52Net
                    increase in cash and cash equivalents
                
                
                3,734
                
                
                2,800Cash
                    and cash equivalents at beginning of period
                
                
                14,839
                
                
                10,213Cash
                    and cash equivalents at end of period
                
                $
                18,573
                
                $
                13,013**Supplemental
                    disclosures of cash flow information:**Cash
                    paid during the period for:Interest
                
                $
                7
                
                $
                716Income
                    taxes
                
                $
                28
                
                $
                90**Supplemental
                    disclosures of noncash financing activities:**Deferred
                    compensation from issuance of restricted common stock
                
                $
                -
                
                $
                560Deferred
                    compensation related to adoption of SFAS 123R
                
                $
                59
                
                $
                -Deferred
                    compensation related to issuance of stock options
                
                $
                479
                
                $
                -Additional
                    paid-in capital recorded for excess tax benefit from exercise
                    of stock
                    options prior to the adoption of SFAS 123R
                
                $
                -
                
                $
                250Reduction
                    of goodwill recorded for tax benefit of related
                    amortization
                
                $
                174
                
                $
                174
 6
 *Index*
  **MEDIWARE
        INFORMATION SYSTEMS, INC.**
 **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 and nine months ended March 31, 2006
        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 $14,000 and $1,276,000 during the three
        and
        nine months ended March 31, 2005, respectively. There were no system sales
        resulting from such program during the three months ended March 31, 2006.
        There
        were $63,000 in sales of additional proprietary user licenses and related
        third
        party software under the terms of their existing license agreements in the
        nine
        months ended March 31, 2006.
 
 **3.**
              **EARNINGS
                  PER SHARE**
 
 Basic
        earnings per share is computed by dividing net income by the weighted average
        number of common shares, par value $0.10 (“Common Stock”), of Mediware
        outstanding. For the three and nine months ended March 31, 2006 and 2005,
        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**
 
 The
        Company's 2003 Equity Incentive Plan, approved by the shareholders in December
        2003, provides additional compensation incentives for high levels of performance
        and productivity by management, other key employees of the Company, directors,
        and persons who render services to the Company such as consultants, advisors
        or
        independent contractors. In December 2005, the shareholders approved an
        amendment to increase the number of shares that may be issued under such
        plan
        from 1,000,000 to 2,000,000 shares. Shares may be issued as either incentive
        stock options, nonqualified stock options, or restricted common stock. Options
        may be granted for a period of up to ten years. Restricted common stock awards
        may be subject to vesting restrictions and may be forfeited if certain
        performance factors are not maintained. The plan provides that a maximum
        of
        1,700,000 of such shares would be issuable as any combination of options,
        restricted stock and restricted stock unit awards.  The additional 300,000
        shares of common stock would be limited to option awards. As of March 31,
        2006,
        there were 1,260,000 shares available to be issued under this plan.
 
 The
        Company's 2001 Stock Option Plan, approved by the shareholders in January
        2002,
        provides additional compensation incentives for high levels of performance
        and
        productivity by management, other key employees of the Company, directors,
        and
        persons who render services to the Company as consultants, advisors or
        independent contractors. Up to 900,000 shares may be issued and sold under
        such
        plan and may be issued as either incentive stock options to eligible persons
        or
        nonqualified stock options. Options may be granted for a period of up to
        ten
        years, with option prices not less than fair market value on the date of
        grant
        for incentive stock options, not less than 85% of fair market value for
        nonqualified stock options, and not less than 110% of fair market value for
        owners of more than 10% of the Company's outstanding voting stock. As of
        March
        31, 2006 no options were available to be issued under this
        plan.
  7
 *Index*
  The
        Company's Equity Incentive Plan, approved by its shareholders in January
        1992
        and amended in March 2000, provided additional compensation incentives for
        high
        levels of performance and productivity by management and other key employees
        of
        the Company. The combined number of shares issued or available for issuance
        under this plan could not exceed thirty percent of the issued and outstanding
        common stock of the Company and not more than 700,000 shares could have been
        issued as incentive stock options. Options could have been granted for a
        period
        up to ten years, with option prices not less than fair market value on the
        date
        of grant for incentive stock options, not less than 50% of fair market value
        for
        nonqualified stock options, and not less than 110% of fair market value for
        owners of more than 10% of the Company's outstanding voting stock. This plan
        was
        terminated effective January 2002, and no additional options are available
        to be
        issued under this plan.
 
 The
        Company's 1997 Stock Option Plan for Non-Employee Directors, which provided
        compensation to directors for their services without the expenditure of cash,
        was intended to increase ownership interest of the non-employee directors.
        Options granted under this plan were exercisable at 100% of the fair market
        value on the date of grant and were for terms of eight years and vested in
        two
        equal installments during the year issued. Shares granted under this plan
        were
        limited to 500,000. This Plan was terminated effective January 2002, and
        no
        additional options are available to be issued under this plan.
 
 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.
 
 Prior
        to
        adopting SFAS 123R, Mediware accounted for stock-based employee 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.
 
 **Three**
                **Months**
                **Ended
                  March 31,**
                **2005**
              
              **Nine
                  Months**
                **Ended**
                **March
                  31,**
                **2005**Reported
                  net income
              
              $
              830,000
              
              $
              2,422,000Stock-based
                  employee compensation determined under the fair value based method
                  prior
                  to adoption of SFAS 123R, net of related tax effects
              
              
              (265,000
              )
              
              (761,000
              )Pro
                  Forma net income
              
              $
              565,000
              
              $
              1,661,000Income
                  per share:Basic
                  - as reported
              
              $
              0.11
              
              $
              0.31Basic
                  - pro forma
              
              $
              0.07
              
              $
              0.21Diluted
                  - as reported
              
              $
              0.10
              
              $
              0.30Diluted
                  - pro forma
              
              $
              0.07
              
              $
              0.20
 
 Stock
        option compensation expense was $77,000 and $173,000 for the three and nine
        months ended March 31, 2006, respectively. In June 2005, the Company modified
        the terms of 160,000 existing stock options to minimize the impact of SFAS
        123R
        on the Company’s results of operations subsequent to its
        adoption.
  8
 *Index*
  The
        following summarizes the activity of the Company’s stock options for the nine
        months ended March 31, 2006:
  **Shares**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**
              
              **Weighted**
                **Average**
                **Remaining**
                **Contractual**
                **Term**
              
              **Aggregate**
                **Intrinsic**
                **Value**Number
                  of shares under option:Outstanding
                  at July 1, 2005
              
              
              1,354,000
              
              $
              8.81Granted
              
              
              130,000
              
              
              8.22Exercised
              
              
              (172,000
              )
              
              4.85Canceled
                  or expired
              
              
              (106,000
              )
              
              10.54Outstanding
                  at March 31, 2006
              
              
              1,206,000
              
              $
              9.16
              
              
              4.5
              
              $
              966,000Exercisable
                  at March 31, 2006
              
              
              1,050,000
              
              $
              9.27
              
              
              4.6
              
              $
              729,000
 
 The
        total
        intrinsic value of options exercised during the nine months ended March 31,
        2006
        was $676,000.
 
 The
        following summarizes the activity of the Company’s non-vested stock options for
        the nine months ended March 31, 2006.
 
 **Shares**
              
              **Weighted**
                **Average**
                **Fair
                  Value**Nonvested
                  at July 1, 2005
              
              
              78,000
              
              $
              3.92Granted
              
              
              130,000
              
              
              3.69Canceled
                  or expired
              
              
              (3,000
              )
              
              3.63Vested
              
              
              (49,000
              )
              
              3.92Nonvested
                  at March 31, 2006
              
              
              156,000
              
              $
              3.82
 
 As
        of
        March 31, 2006, there was $365,000 of total unrecognized compensation cost
        related to nonvested share-based compensation arrangements granted under
        existing stock option plans. This cost is expected to be recognized over
        a
        weighted-average period of 1.1 years.
 
 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**
                **March
                  31,**
              
              **Nine
                  Months Ended**
                **March
                  31,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Weighted
                  average fair value at date of grant for options granted during
                  the
                  period
              
              
              No
                  grantsduringperiod
              
              $
              5.61
              
              $
              3.69
              
              $
              4.87Risk-free
                  interest rates
              
              
              
              
              
              4.2
              %
              
              4.4
              %
              
              4.4
              %Expected
                  option life in years
              
              
              
              
              
              5.4
              
              
              6.6
              
              
              5.4Expected
                  stock price volatility
              
              
              
              
              
              39
              %
              
              35
              %
              
              37
              %Expected
                  dividend yield
              
              
              
              
              
              -0-
              
              
              -0-
              
              
              -0-
 9
 *Index*
  Under
        SFAS 123R forfeitures are estimated at the time of valuation and reduce expense
        ratably over the vesting period. This estimate is adjusted periodically based
        on
        the extent to which actual forfeitures differ, or are expected to differ,
        from
        the previous estimate. Under SFAS 123 and APB 25, the Company elected to
        account
        for forfeitures when awards were actually forfeited, at which time all previous
        pro forma expense was reversed to reduce pro forma expense for that period.
        As
        of March 31, 2006, the company anticipates all outstanding options will
        vest.
 
 During
        the nine-months March 31, 2006, Mediware entered into agreements with certain
        key employees. Under the terms of these agreements, Mediware granted the
        employees 135,000 restricted shares of Common Stock (the “Performance Shares”).
        The Performance Shares vest in fiscal 2007, 2008 and 2009 only if Mediware
        achieves certain performance goals based on revenue and earnings per share.
        The
        Performance Shares may result in compensation expense in future periods of
        up to
        $1,182,000, the fair value on the date of grant. The probability of achieving
        these performance goals is not currently determinable. Accordingly, Mediware
        has
        not recognized any related compensation expense for the three and nine months
        ended March 31, 2006.
 
 In
        April
        2006, Mediware granted an additional 20,000 restricted shares of Common Stock,
        with an aggregate grant date fair value of $199,000. These shares are subject
        to
        the same vesting restrictions as the Performance Shares described
        above.
 10
 *Index*
  **REVIEW
        REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
        FIRM**
  To
        The
        Board of Directors and Shareholders of
 Mediware
        Information Systems, Inc.
 
 We
        have
        reviewed the accompanying condensed consolidated balance sheet of Mediware
        Information Systems, Inc. and subsidiaries (the "Company") as of March 31,
        2006,
        and the related condensed consolidated statements of operations and
        comprehensive income for the three and nine-month periods ended March 31,
        2006
        and 2005 and the related condensed consolidated statements of cash flows
        for the
        nine-month periods ended March 31, 2006 and 2005. 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
  April
        26,
        2006
  11
 *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. Any statements
        contained herein that are not statements of historical fact may be deemed
        to be
        forward-looking statements within the meaning of Section 21E of the Securities
        Exchange Act. The words “believes,” “anticipates,” “plans,” “seeks,” “expects,”
“intends” and similar expressions identify some of the forward-looking
        statements. Forward-looking statements are not guarantees of performance
        or
        future results and involve risks, uncertainties and assumptions. The factors
        discussed below and in Item 1A of this Report on Form 10-Q, and in Item 1A
        of
        Mediware’s quarterly report on Form 10Q for the quarter ended December 31, 2005
        could cause actual results to differ materially from those indicated by the
        Company’s forward-looking statements. Mediware undertakes no obligation to
        publicly update or revise any forward-looking statements.*
 
 **Overview**
 
 Mediware
        Information Systems, Inc. (including its subsidiaries, “Mediware” or the
“Company”) is a New York corporation incorporated in 1970 with its corporate
        headquarters at 11711 West 79th Street, Lenexa, Kansas. Mediware develops
        and
        sells clinical management information software systems. The Company’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 the Company’s proprietary application
        software, third-party licensed software and third-party computer hardware.
        Each
        system is intended as the “best of breed” for its function within the hospital
        and stand alone blood centers. 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: 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, including
        its United Kingdom subsidiary, JAC, which was previously named the Pharmacy
        Division, operates both in the United States and in the United Kingdom. The
        Operating Room Division has historically been a smaller part of Mediware’s
        operations than the other divisions.
 
 The
        Company believes the healthcare industry has historically under-invested
        in
        information technology, but the Company anticipates that with the continued
        increase in government regulation and concern over clinical outcomes, the
        healthcare industry’s expenditures on clinical information systems will increase
        as they modernize and update their clinical information systems. In fact,
        the
        Leapfrog Group, a consortium of large employers that spends approximately
        $40
        billion annually on healthcare, has called for investment into computerized
        information systems.
 
 President
        George W. Bush has pledged financial support for increased healthcare IT
        standards and incentives to make IT investments for hospitals more appealing.
        Mediware believes but cannot assure that it will benefit if the U.S. healthcare
        industry invests more money in clinical information technology
        systems.
 
 In
        the
        beginning of 2004, the National Health Service (NHS) in England undertook
        a
        historic national program to purchase and update United Kingdom's NHS
        health care IT, which the government has identified as the “Connecting for
        Health” program. This program is designed to develop an integrated clinical
        software solution for hospitals in order to support the modernization of
        patient
        care in England. The NHS has entered into contracts to license software and
        services that total approximately 6.3 billion pounds. In fiscal 2005, JAC
        was
        named as a preferred supplier of pharmacy stock control for a subcontractor
        as
        part of the United Kingdom’s “Connecting for Health” program. Additional sales
        activity has resulted and is expected to continue.
  12
 *Index*
  Competition
        in the market for clinical information systems is intense and takes many
        forms.
        Currently the Company believes the principal competitive factors are the
        functionality of the system, its design and capabilities, site references,
        reputation for ongoing support, the potential for enhancements, price,
“best-of-breed” products compared to enterprise wide products. Also
        key is the strategic position the incumbent, or major healthcare information
        systems vendor, has in the customer site. Different dynamics and competitors,
        however, affect each of the Company’s products and each sale. Additionally, the
        Company believes that software infringement claims, among its competitors
        and
        others, are becoming increasingly common in the software industry and that
        patents, copyrights and other proprietary rights are being used within the
        industry to gain competitive advantages. As a result, costs of litigation
        and
        risk of infringement may increase in the future, especially if competitors
        are
        able to successfully obtain patents for software products.
 
 Since
        October 2005, Mediware has changed and added to its senior management team,
        added marketing infrastructure and implementation personnel. The Company
        added
        vice presidents of human resources and marketing. The former general manager
        of
        our Medication Management Division became executive vice president of business
        development, a new position at the Company. The Company believes that its
        additional management, sales and marketing resources will enable Mediware
        to
        participate in more sales opportunities and broaden Mediware’s potential base of
        customers.
 
 Mediware
        reduced its workforce by approximately 10% on February 17, 2006. The reductions
        primarily effected employees supporting the Company’s sunset, legacy blood bank
        products and various administrative resources whose functions were centralized
        at the Company’s headquarters in Lenexa, Kansas. The aggregate annual base
        salaries for the employees terminated in the reduction in force was
        approximately $1,400,000.
 
 The
        foregoing changes had some impact on the financial results for the quarter
        and
        nine months ended March 31, 2006, but cost savings were not significant due
        to
        the mid-quarter date of terminations as well as severance arrangements. Mediware
        expects these changes will impact future periods as well. Employee compensation
        may be reported in the statements of operations as cost of services, selling,
        general and administrative expense, or as software development costs.
 
 Some
        of
        the cost savings resulting from the foregoing changes are offset by reductions
        in capitalized software rates and increased amortization. Since it has recently
        released several software products, Mediware expects that a greater portion
        of
        development costs will be required to be expensed.
 
 The
        Company will seek, but cannot provide assurance that it will be able, to
        develop
        strategic relationships that are complimentary to its core markets and product
        set, that provide a greater value proposition to the customer than could
        be
        realized without the strategic relationship. The Company’s business strategy
        includes the possibility of growth through acquisitions and other corporate
        transactions. The Company reviews and considers corporate transaction
        possibilities on an ongoing basis, but there can be no assurance that the
        Company will be able to identify or reach mutually agreeable terms with any
        transaction candidate.
 
 The
        Blood
        Bank Division’s current blood transfusion product is HCLLTM. The Company received
        510(k) clearance from the FDA on HCLL in fiscal 2003. During fiscal 2005,
        the
        Company also received 510(k) clearance for its complementary HCLL donor software
        product. In October 2005, the Blood Bank Division officially announced the
        “sunset” of Hemocare® and LifeLineTM, its two legacy blood transfusion products,
        which were originally installed in the early 1980s. The two legacy products
        have
        a large installed base within the transfusion management market and represent
        an
        important opportunity for new sales for the Division. The Company has entered
        into license agreements representing 183 current and new customers to
        replace Mediware’s legacy software with the HCLL software. The software is in
        productive use at approximately 16 sites. The Company anticipates, but cannot
        assure, that the HCLL software will continue to be accepted by the legacy
        product users and the sales of HCLL software will increase as the current
        legacy
        customer base and as new customers adopt the new software.
 
 The
        Medication Management Division’s current WORx® drug therapy software has been
        licensed to over 125 hospital organizations encompassing approximately 250
        hospital sites. The product’s market acceptance encompasses hospitals of all
        sizes, including strategically important multi-site hospitals. The Medication
        Management Division released two new products, MediCOETM and MediMAR® in fiscal
        2004. These products can be fully integrated with WORx and provide a complete
        drug therapy management system with a clinician order entry module (MediCOE)
        and
        nurse point of care administration module (MediMAR). The MediCOE and MediMAR
        products have been installed and are in productive use 2 and 4 separate customer
        sites, respectively.
  13
 *Index*
  The
        Medication Management division is now targeting its large WORx software customer
        base for the sale of the MediCOE and MediMAR products, and the new products
        are
        attracting new potential WORx software customers as well. The sales for the
        Medication Management’s full suite of products are significantly larger in size
        and scope and involve more hospital departments and therefore, substantially
        longer sales and implementation cycles compared to stand-alone WORx sales.
        The
        impact of these changes has been less predictable contract closures and the
        recognition of license software revenue over multiple quarters. The Medication
        Management division expects to benefit from the February “go-live” of its first
        location where the full suite of Medication Management products, WORx, MediMAR
        and MediCOE are all operating.
 
 **Results
        of Operations for the Three Months Ended March 31, 2006 as Compared to the
        Three
        Months Ended March 31, 2005**
 
 Total
        revenue for the third quarter of fiscal 2006 is $9,968,000 compared to
        $9,881,000 in the comparable quarter of fiscal 2005, an increase of $87,000
        or
        0.9% primarily due to increased implementation activity. The Medication
        Management Division (excluding JAC) recorded an increase of $536,000, or
        18.8%,
        to $3,381,000 in the third quarter of fiscal 2006 from $2,845,000 in the
        third
        quarter of fiscal 2005. The Operating Room Division recorded a decrease of
        $248,000, or 36.2%, to $437,000 in the quarter ended compared to $685,000
        in the
        same quarter in fiscal 2005. Revenue in the Blood Bank Division decreased
        $196,000, or 3.8%, to $4,952,000 in the third quarter of fiscal 2006 compared
        to
        $5,148,000 in the same period in fiscal 2005. JAC recorded revenues in the
        current quarter of $1,198,000, which is comparable to $1,203,000 in the same
        period fiscal 2005.
 
 System
        sales, which include proprietary software, third party software and hardware
        revenue, were $3,340,000 in the quarter ended March 31, 2006, a decrease
        of
        $348,000, or 9.4%, from $3,688,000 in the same period in fiscal 2005. System
        sales in the Medication Management Division (excluding JAC) increased $470,000,
        or 56.3%, to $1,305,000 from $835,000. The increase is due to sales of its
        proprietary WORx software and interfaces to existing customers. While there
        were
        no sales of MediMAR or MediCOE during the quarter, Mediware believes its
        investment in marketing and progression through the sales cycle will lead
        to
        MediMAR and MediCOE sales in future quarters. The Operating Room Division
        experienced a decrease in system sales of 63.5%, or $186,000, from $293,000
        to
        $107,000 in the quarter ended March 31, 2006 and 2005, respectively. Mediware
        views the Operating Room division as an emerging business. This quarter’s
        comparative decrease in revenue reflects the fluctuations in a business that
        is
        in the early stages of a focused marketing and business development process.
        System sales for the Blood Bank Division were $1,461,000, a decrease of
        $661,000, or 31.1%, from $2,122,000 in the comparable quarter in fiscal 2005.
        The decrease is the results from the progression of the sunset process.
        Mediware’s proactive legacy customers made the decision to purchase HCLL over
        the past two years. The company expects its remaining legacy customers to
        make a
        licensing decision over the coming quarters in conjunction with their sunset
        dates. The Blood Bank Division is also developing marketing and business
        development efforts focused on expanding market share following the migration
        period. JAC recorded an increase of $29,000, or 6.6%, to $467,000 in the
        third
        quarter of fiscal 2006. The increase reflects additional sales of proprietary
        software as a result of its status in the “Connecting for Health” program in the
        U.K. and interfaces to its existing customers. Mediware believes JAC system
        sales will continue to increase as the program continues to progress. Mediware
        intends to continue investing in sales and marketing across its business
        and
        expects that this additional investment will result in increased sales.
 
 Service
        revenue, which includes recurring software support, implementation and training
        services, increased 7.0%, or $435,000, to $6,628,000 in the third quarter
        of
        fiscal 2006 from $6,193,000. Service revenue in the Medication Management
        Division (excluding JAC) increased $66,000 or 3.3% to $2,076,000 in the third
        quarter of fiscal 2006 from $2,010,000 in the third quarter of fiscal 2005.
        The
        increase is primarily due to implementation services for MediMAR and MediCOE
        software sold in previous quarters. Service revenue for the Blood Bank Division
        increased 15.4%, or $465,000, to $3,491,000 in the third quarter of fiscal
        2006
        compared to $3,026,000 in the third quarter of fiscal 2005. This increase
        in
        service revenue is primarily due to increased implementation activity on
        HCLL
        contracts signed within the last year. Service revenue for JAC decreased
        4.4% or
        $34,000, to $731,000 in the third quarter of fiscal 2006 compared to $765,000
        in
        the third quarter of fiscal 2005. Service revenue in the Operating Room Division
        decreased $62,000 or 15.8% to $330,000 in the third quarter of fiscal 2006
        from
        $392,000 in the third quarter of fiscal 2005. The decrease in service revenue
        is
        primarily due to a decline in ongoing implementation projects. Mediware believes
        that service revenue will continue to increase due to the volume of contracts
        signed within the last year.
  14
 *Index*
  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 decreased $163,000, or 23.9%
        in
        the third quarter of fiscal 2006 due to lower hardware sales in the current
        quarter compared to the same quarter in the prior fiscal year. The gross
        margin,
        excluding amortization of capitalized software costs, on system sales was
        84.5%
        in the third quarter of fiscal 2006 compared to 81.5% 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 $153,000, or 8.1%, in the third 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 the HCLL products. Gross margin on service revenue
        was
        69.1% for the third quarter of fiscal 2006 compared to 69.4% for the third
        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 $110,000, or 9.9%, to $1,220,000 in the
        third
        quarter of fiscal 2006 compared to $1,110,000 in the third 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
        within the prior fiscal year.
 
 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 $335,000 in
        the
        third quarter of fiscal 2006 to $1,170,000 compared to $835,000 in the third
        quarter of fiscal 2005, which represents Mediware’s current focus on design
        efforts for current product enhancements and development work on software
        already released to the market. Expenditures for software development include
        amounts paid for both capitalizable and noncapitalizable development projects.
        Total expenditures for software development were $2,194,000 the third quarter
        of
        fiscal 2006, compared to $2,319,000 the third quarter of fiscal 2005, a decrease
        of $125,000 or 5.4%. This decrease reflects a reduction in development
        expenditures during the current quarter in the Operating Room and Blood Bank
        Divisions, partially offset by increased investment in the Medication Management
        Division for its MediMAR and MediCOE products. Mediware believes that its
        near
        term total investment in product development will remain substantially
        consistent with current levels however the investment may shift between
        divisions due to normal product development life cycles.
 
 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 $66,000 or 1.6%, from $4,101,000 in the third quarter
        of
        fiscal 2005 compared to $4,167,000 in the third quarter of fiscal 2006. This
        increase is primarily due to increases in labor and related benefit costs,
        additional amounts invested at trade shows and increased bad debt costs
        partially offset by reductions in legal and other professional fees.
        Additionally, the Company recognized non-cash stock option compensation expense
        of approximately $75,000 during the third quarter of fiscal 2006 as a result
        of
        adopting required by SFAS 123R effective July 1, 2005.
 
 Net
        income the third quarter of fiscal 2006 was $632,000, a decrease of $198,000
        or
        23.9%, compared to a net income of $830,000 the third quarter of fiscal
        2005.
  15
 *Index*
 
 **Results
        of Operations for the Nine Months Ended March 31, 2006 as Compared to the
        Nine
        Months Ended March 31, 2005**
 
 Total
        revenue for the nine months ended March 31, 2006 is $28,764,000 compared
        to
        $27,587,000 in the comparable period of fiscal 2005, an increase of $1,177,000
        or 4.3%. JAC recorded an increase of $303,000, or 11.0%, to $3,055,000 in
        the
        nine months ended March 31, 2006 compared to $2,752,000 in the same period
        in
        fiscal 2005. The Medication Management Division (excluding JAC) recorded
        a
        decrease of $823,000, or 8.1%, to $9,328,000 in the first nine months of
        fiscal
        2006 from $10,151,000 in the same period in fiscal 2005. The Operating Room
        Division recorded a decrease of $703,000, or 37.1%, to $1,191,000 in the
        nine
        months just ended compared to $1,894,000 in the same period in fiscal 2005.
        Revenue in the Blood Bank Division increased $2,400,000, or 18.8%, to
        $15,190,000 in the nine months ended March 31, 2006 compared to $12,790,000
        in
        the same period in fiscal 2005.
 
 System
        sales, which include proprietary software, third party software and hardware
        revenue, were $9,487,000 for the nine months ended March 31, 2006, an increase
        of $582,000, or 6.5%, from $8,905,000 in the same period in fiscal 2005.
        JAC
        recorded an increase in system sales of $205,000, or 30.2%, to $884,000 for
        the
        nine months ended March 31, 2006, compared to $679,000 in the same period
        in
        fiscal 2005. The increase reflects additional sales activity resulting from
        JAC’s status in the United Kingdom’s “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 $288,000, or 8.0%, to $3,303,000
        for the nine months ended March 31, 2006 from $3,591,000 in the same period
        in
        fiscal 2005. While system sales decreased during the first nine months of
        fiscal
        2006 compared to the same period in fiscal 2005, the division successfully
        closed several contracts for its MediMAR and MediCOE suite of products. The
        decrease in system sales also reflects lower sales of the base WORx system.
        During the first nine months 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 $1,276,000 resulting from this initiative in the nine months ended
        March 31, 2005. Mediware reported system sales of $63,000 as a result of
        this
        initiative for the first nine months of fiscal 2006. Mediware does expect
        these
        sales to continue in future quarters, but at significantly reduced rates.
        The
        Operating Room Division experienced a decrease in system sales of 76.0%,
        or
        $476,000, from $626,000 to $150,000. The decrease results from a completion
        of
        the migration of its customers from its legacy Surgiware system to the new
        Perioperative Solutions system. System sales for the Blood Bank Division
        were
        $5,150,000, an increase of $1,141,000, or 28.5%, from $4,009,000 in the
        comparable period in fiscal 2005. The increase reflects the continued customer
        migration from the Division’s legacy 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 grow through the customer
        migration from the legacy products along with its direct marketing efforts
        to
        new customers.
 
 Service
        revenue, which includes recurring software support, implementation and training
        services, increased 3.2%, or $595,000, to $19,277,000 in the first nine months
        of fiscal 2006 from $18,682,000 in the same period in fiscal 2005. Service
        revenue for JAC increased 4.7%, or $98,000, to $2,171,000 in the nine months
        ended March 31, 2006 compared to $2,073,000 in the same period 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 $535,000 or 8.2%
        to
        $6,025,000 in the first nine months of 2006 from $6,560,000 in the same period
        in fiscal 2005. The decrease in service revenue is primarily due to a decline
        in
        ongoing implementation projects. Service revenue in the Operating Room Division
        decreased $227,000 or 17.9% to $1,041,000 for the nine months ended March
        31,
        2006 from $1,268,000 in the same period in fiscal 2005. The decrease in service
        revenue is primarily due to a decline in ongoing implementation projects.
        Service revenue for the Blood Bank Division increased 14.3%, or $1,259,000,
        to
        $10,040,000 in the nine months ended March 31, 2006 compared to $8,781,000
        in
        the same period 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 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 $41,000, or 2.5%, due to the overall hardware sales
        increase during the nine months ended March 31, 2006. The gross margin,
        excluding amortization of capitalized software costs, on system sales was
        82.3%
        in the first nine months of fiscal 2006 compared to 81.6% in the same period
        in
        fiscal 2005.
  16
 *Index*
  Cost
        of
        services increased $195,000, or 3.5%, in the nine months ended March 31,
        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. Gross margin on service revenue were 69.9% for the nine months
        ended
        March 31, 2006 compared to 70.0% for the same period in 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.
  Amortization
        of capitalized software increased $495,000, or 16.1%, to $3,571,000 in the
        nine
        months ended March 31, 2006 compared to $3,076,000 in the same period in
        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 year.
 
 Software
        development costs increased $841,000 in the nine months ended March 31, 2006
        to
        $3,326,000 compared to $2,485,000 in the same period in fiscal 2005. This
        cost
        increase is impacting Mediware’s net income and results from our focus on new
        enhancement designs and development efforts on software previously released
        to
        the market. Expenditures for software development include amounts paid for
        both
        capitalizable and noncapitalizable development projects. Total expenditures
        for
        software development were $6,730,000 the nine months ended March 31, 2006,
        compared to $6,620,000 the same period in fiscal 2005, an increase of $110,000
        or 1.7%. This increase primarily reflects increased expenditures in the
        Medication Management Division (excluding JAC). Mediware believes that its
        near
        term total investment in product development will remain substantially
        consistent with current levels however the investment may shift between
        divisions due to normal product development life cycles.
 
 SG&A
        expenses increased $1,108,000 or 10.1%, from $10,990,000 in the nine months
        ended March 31, 2005 compared to $12,098,000 in the same period in fiscal
        2006.
        This increase reflects increases in labor and related benefit costs and
        marketing related activities as well as payments of bonuses, recruiting and
        transition costs associated with hiring a new chief executive officer and
        non-cash stock option compensation expense required by SFAS 123R. These
        increases were partially offset by reductions in legal expenses and the
        completion of the amortization of the LifeTrak products which ended in fiscal
        2005.
 
 Net
        income the nine months ended March 31, 2006 was $1,767,000, a decrease of
        $655,000 or 27.0%, compared to a net income of $2,422,000 the same period
        of
        fiscal 2005.
  **Liquidity
        and Capital Resources**
  As
        of
        March 31, 2006, Mediware had cash and cash equivalents of $18,573,000 compared
        to cash and cash equivalents of $14,839,000 at June 30, 2005. Working capital
        was $16,810,000 and $12,917,000 at March 31, 2006 and June 30, 2005,
        respectively. The current ratio was 2.45 to 1 at March 31, 2006 compared
        to 2.1
        to 1 at June 30, 2005.
 
 Cash
        provided by operating activities was $6,506,000 during the first nine months
        of
        fiscal year 2006 compared to $8,167,000 during the same period a year ago.
        The
        decrease in cash provided by operating activities is primarily due to changes
        in
        net income, depreciation and amortization, deferred income taxes and accounts
        receivable.
 
 Cash
        used
        in investing activities was $3,753,000 during the first nine months of fiscal
        year 2006 compared to $4,694,000 during the same period a year ago. The decrease
        primarily relates to Mediware’s recent focus on non-capitalizable software
        development projects. Of the amounts invested, Mediware capitalized $3,404,000
        and $4,135,000 of product development costs during the nine months ended
        March
        31, 2006 and 2005, respectively.
  Cash
        provided by financing activities was $1,075,000 during the first nine months
        of
        fiscal year 2006 compared to cash used by financing activities of $725,000
        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 first
        nine
        months of fiscal 2005.
  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.
  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.
 
 **ITEM4.**
              **CONTROLS
                  AND PROCEDURES**
 
 Mediware’s
        management, under the supervision and with the participation of Mediware’s Chief
        Executive Officer and Chief Financial Officer, has reviewed and evaluated
        the
        effectiveness of Mediware’s disclosure controls and procedures as of the end of
        the quarter covered by this report. Disclosure controls and procedures are
        defined in the Securities Exchange Act as controls and other procedures of
        Mediware designed to ensure that information required to be disclosed by
        Mediware in the reports that it files or submits under the Securities Exchange
        Act is recorded, processed, summarized and reported within the time periods
        specified in the SEC’s rules and forms and include controls and procedures
        designed to ensure that information required to be disclosed by Mediware
        in the
        reports that it files or submits to the SEC is accumulated and communicated
        to
        Mediware’s management, including the CEO and CFO, to allow timely decisions
        regarding required disclosure. Based on the foregoing review and evaluation,
        Mediware’s CEO and CFO have concluded that Mediware’s disclosure controls and
        procedures are effective as of March 31, 2006.
 
 There
        were no material changes’ in Mediware’s internal controls over financial
        reporting that occurred during the three months ended March 31, 2006 that
        have
        materially affected, or are reasonably likely to materially affect, its internal
        controls over financial reporting. Notwithstanding the foregoing, Mediware
        recently reported several management changes including the appointment of
        new
        Blood Bank and Operating Room General Managers andas well as the realignment
        of
        senior management within the Medication Management Division. Additionally,
        the
        Company hired a new Vice-president of Human Resources and a new Vice-President
        of Sales and Marketing. Inherent with changes in management is a change in
        understanding of the control environment, the business processes and internal
        controls. Additionally, during the quarter, Mediware completed the
        implementation of a new accounting software system. This new system provides
        expanded functionality and capabilities and when fully utilized, Mediware
        may
        achieve additional benefits from the system which could impact the company’s
        control environment in the future. To date, Mediware’s use of the system has not
        changed or impacted any of it’s existing internal controls 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**
 
 Except
        as
        noted below and as reported in “Item 3. Legal Proceedings” of our Annual Report
        on Form 10-K for the fiscal year ended June 30, 2005 and our quarterly reports
        on Form 10-Q for fiscal periods following June 30, 2005, we are not currently
        a
        party to any material pending legal proceedings other than routine matters
        incidental to our business and no material developments have occurred in
        any
        proceedings described in such Form 10-K.
  On
        March
        6, 2006, Triad Laboratory Alliance, LLC d/b/a Spectrum Laboratory Network
        filed
        suit against Mediware in the General Court for Justice, Superior Court Division,
        County of Guilford, North Carolina. The Company has requested that the case
        be
        removed from North Carolina state court to the United States District Court
        for
        the Middle District of North Carolina. Spectrum seeks an unspecified amount
        of
        damages (exceeding $300,000) due to, among other things, the alleged breach
        by
        Mediware of certain of its representations and warranties under its license
        agreement and the violation of certain unfair trade practices under North
        Carolina law.
   **ITEM
                  1A.**
              **Risk
                  Factors**
 
 Risks
        and
        uncertainties that, if they were to occur, could materially adversely affect
        our
        business or that could cause our actual results to differ materially from
        the
        results contemplated by the forward-looking statements contained in this
        report
        and other public statements we make were set forth in the “Item 1A - Risk
        Factors” section of the our Quarterly Report on Form 10-Q for the quarter ended
        December 31, 2005 filed on January 31, 2006. There have been material
        changes from the risk factors disclosed in that Form 10-Q as described below
        that, if they were to occur, could materially adversely affect our business
        or
        that could cause our actual results to differ materially from the results
        contemplated by the forward-looking statements contained in this report and
        other public statements we make. Statements contained herein that are not
        statements of historical fact may be deemed to be forward-looking statements
        within the meaning of Section 21E of the Securities Exchange Act. The words
        “believes,” “anticipates,” “plans,” “seeks,” “expects,” “intends” and similar
        expressions identify some of our forward-looking statements. Forward-looking
        statements are not guarantees of performance or future results and involve
        risks, uncertainties and assumptions. We undertake no obligation to publicly
        update or revise any forward-looking statements.
  **The
        new members of our senior management team create special risks for
        us.**
 
 Our
        senior management team has recently undergone significant changes. Our chief
        executive officer, James Burgess, joined Mediware in October 2005. We also
        hired
        in January 2006 Paul O’Toole as general manager for our Operating Room System
        Division. On February 2006, Mary Truvillion was hired as vice president of
        human
        resources, a new position expected to centralize HR functions for the company.
        Also in February 2006, John Van Blaricum was hired as vice president of
        marketing and communications to centralize Mediware’s marketing activities. In
        March 2006, John Damgaard was promoted to general manager of the Blood Bank
        Division after serving as the division’s chief operating officer for the
        preceding three years. Kevin Ketzel, who joined Mediware in October 2005,
        became
        the general manager of our Medication Management Division in April 2006.
        Mr.
        Ketzel’s promotion enabled the planned transition of Mike Crabtree, who led the
        Medication Management division for 5 years, to executive vice president of
        business development, a new position focused on establishing growth oriented
        strategic partnerships. As the new management team gains an understanding
        of our
        business and products and the new roles in the Company are defined, our
        short-term and long-term direction may change and the changes may not improve
        our future results of operations or financial condition.
 
 **If
        we do not manage our strategic changes effectively, our financial performance
        could be harmed.**
 
 We
        have
        recently made strategic changes that have placed, and will continue to place,
        pressures on our management, administrative and operational infrastructure
        as
        well as on our results of operations. Mediware has changed and added to its
        senior management team, added marketing infrastructure and added implementation
        personnel. These employees have limited experience with us and may have a
        limited understanding or our systems and controls. We also reduced our workforce
        by approximately 10% on February 17, 2006. These departed employees possessed
        knowledge of our business, relationships with our customers and other employees
        and skills that were not replaced. These personnel changes may make it more
        difficult for us to ensure that we operate efficiently and effectively.
        Furthermore, we have incurred and will incur expense to hire and train our
        new
        personnel even though their immediate productivity is uncertain and there
        is not
        guarantee that they will have a positive impact on our revenues, operations
        or
        results of operations.
  19
 *Index*
  **ITEM
                  6.**
              **EXHIBITS**
  Exhibit
                  10.1
              Employment
                  Agreement between Mediware Information Systems, Inc. and Kevin
                  Ketzel
                  dated as of April 1, 2006Exhibit
                  10.2
              Employment
                  Agreement between Mediware Information Systems, Inc. and John Damgaard
                  dated March 16, 2006.Exhibit
                  11
              Schedule
                  of Computation of Net Earnings Per ShareExhibit
                  15
              Consent
                  of Independent Registered Public Accounting FirmExhibit
                  31.1
              Rule
                  13a-14(a)/15d-14(a) CertificationExhibit
                  31.2
              Rule
                  13a-14(a)/15d-14(a) CertificationExhibit
                  32.1
              Certification
                  Pursuant to 18 U.S.C. 1350
  20
 *Index*
  **SIGNATURES**
   Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
   MEDIWARE
                  INFORMATION SYSTEMS, INC.(Registrant)May
                  2, 2006
              
              /s/
              JAMES
                  F. BURGESSDate
              
              
              JAMES
                  F. BURGESSPRESIDENT
                  AND CHIEF EXECUTIVE OFFICERMay
                  2, 2006
              
              /s/
              JILL
                  H. SUPPESDate
              
              
              JILL
                  H. SUPPESCHIEF
                  FINANCIAL OFFICER




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