<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                              --------------------
                                    FORM 10-Q
                              --------------------

(Mark One)

    X      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
---------  THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter ended March 31, 2000

_________  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: 000-21240
                         -------------------------------

                              NEOWARE SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)




            Delaware                                     23-2705700
 (State or other jurisdiction of               (IRS Employer Identification No.)
  incorporation or organization)

                                400 Feheley Drive
                       King of Prussia, Pennsylvania 19406
                    (Address of principal executive offices)

                                 (610) 277-8300
               (Registrant's telephone number including area code)

                   ------------------------------------------


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.

                              Yes  X  No
                                  ---   ---

As of May 1, 2000, there were outstanding 10,275,163 shares of the Registrant's
Common Stock.


<PAGE>

                              NEOWARE SYSTEMS, INC.

                                      INDEX


PART I.  FINANCIAL INFORMATION                                        Page
                                                                     Number
Item 1. Unaudited Consolidated Financial Statements:

            Consolidated Balance Sheets as of
            March 31, 2000 and June 30, 1999                            3

            Consolidated Statements of Operations for the
            Three and Nine Months Ended March 31, 2000 and 1999         4

            Consolidated Statements of Cash Flows for the
            Nine Months Ended March 31, 2000 and 1999                   5

            Notes to Consolidated Financial Statements                  6

Item 2. Management's Discussion and Analysis of Financial
            Condition and Results of Operations                         8


PART II. OTHER INFORMATION

Item 1. Legal Proceedings                                              11
Item 2. Changes in Securities and Use of Proceeds                      11
Item 6. Exhibits and Reports on Form 8-K                               12

        Signatures                                                     13



                                       2
<PAGE>
                              NEOWARE SYSTEMS, INC.

                           CONSOLIDATED BALANCE SHEETS

                                   (Unaudited)

ASSETS
                                             March 31, 2000      June 30, 1999
                                             --------------      -------------
CURRENT ASSETS:
Cash and cash equivalents                      $ 9,092,028        $ 1,470,906
Accounts receivable, net                         1,770,594          2,586,693
Inventories                                        981,206          1,324,424
Prepaid expenses and other                          49,435            264,322
Note receivable                                    700,000                  -
                                              ------------        -----------
Total current assets                            12,593,263          5,646,345
                                              ------------        -----------

Property and equipment, net                        283,898            438,367
Note receivable                                          -            700,000
Capitalized and purchased software, net            393,283            541,185
                                              ------------        -----------
                                              $ 13,270,444        $ 7,325,897
                                              ============        ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Line of credit                                           -        $   143,000
Accounts payable                              $  1,049,136          1,654,926
Accrued expenses                                   823,056          1,106,388
Deferred revenue                                   286,198            319,672
                                              ------------        -----------
Total current liabilities                        2,158,390          3,223,986
                                              ------------        -----------

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock                                          -                  -
Common stock                                         8,781              6,285
Additional paid-in capital                      18,807,385         10,178,358
Retained earnings                               (7,704,112)        (6,082,732)
                                              ------------        -----------
Total stockholders' equity                      11,112,054          4,101,911
                                              ------------        -----------
                                              $ 13,270,444        $ 7,325,897
                                              ============        ===========


   The accompanying notes are an integral part of these financial statements.

                                       3
<PAGE>
                              NEOWARE SYSTEMS, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                   (Unaudited)
<TABLE>
<CAPTION>
                                              Three Months Ended                         Nine Months Ended
                                            March 31,     March 31,                 March 31,         March 31,
                                              2000          1999                      2000              1999
                                          -----------    ----------                -----------       -----------
<S>                                       <C>           <C>                       <C>               <C>
Net Revenues                              $2,520,727     $2,437,877                $ 7,840,093       $ 7,844,285
Cost of revenues                           2,131,923      1,888,222                  6,312,377         6,955,669
                                          ----------     ----------                -----------       -----------
Gross profit                                 388,804        549,655                  1,527,716           888,616
                                          ----------     ----------                -----------       -----------

OPERATING EXPENSES:

Sales and Marketing                          359,448        313,819                    980,069         1,244,345
Research and development                     138,860        161,001                    480,065           571,301
General and administrative                   454,232        458,028                  1,329,921         1,551,519
Acquisition costs                             39,942              -                    445,987                 -
                                          ----------     ----------                -----------       -----------
Operating expenses                           992,482        932,848                  3,236,042         3,367,165
                                          ----------     ----------                -----------       -----------

Operating (loss) income                     (603,678)      (383,193)                (1,708,326)       (2,478,549)

Gain on sale of equity investment                  -              -                          -           406,930
Interest income (expense), net                40,183         18,507                     86,946            13,610
                                          ----------     ----------                -----------       -----------
Net (loss) income                         $ (563,495)    $ (364,686)               $(1,621,380)      $(2,058,009)
                                          ==========     ==========                ===========       ===========

Basic and diluted loss per share          $    (0.08)    $    (0.06)               $     (0.25)      $     (0.33)
                                          ==========     ==========                ===========       ===========

Weighted average number of
Shares used in basic and diluted
Earnings per share computation             6,872,634      6,285,772                  6,493,581         6,281,543
                                          ==========     ==========                ===========       ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       4

<PAGE>
                              NEOWARE SYSTEMS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                       Nine Months Ended
                                                                                  March 31,            March 31,
                                                                                    2000                 1999
                                                                                -------------        -------------
<S>                                                                           <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income                                                              $  (1,621,380)        $  (2,058,009)

Adjustments to reconcile net (loss) income to net cash provided by
       (used in) operating activities:
            Depreciation and amortization                                            434,340               561,744
            Amortization of deferred compensation                                          -                17,368
            Gain on sale of equity investment                                              -              (406,930)
            Provision for inventory obsolescence                                     130,000               800,000

Changes in operating assets and liabilities-
       (Increase) decrease in:
            Accounts receivable                                                      816,099             3,580,837
            Inventories                                                              213,218               795,095
            Recoverable income taxes                                                       -             1,121,554
            Prepaid expenses and other                                               214,887              (127,617)
       Increase (decrease) in:
            Accounts payable                                                        (605,790)           (1,047,276)
            Accrued expenses                                                        (283,332)               (5,249)
            Deferred revenue                                                         (33,474)               82,143
                                                                               -------------         -------------
Net cash (used in) provided by operating activities                                 (735,432)            3,313,660
                                                                               -------------         -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
       Proceeds from sale of equity investment                                             -               406,930
       Purchases of property and equipment                                            (7,339)              (21,500)
       Capitalized software                                                         (124,630)             (162,909)
                                                                               -------------         -------------
Net cash (used in) provided by investing activities                                 (131,969)              222,521
                                                                               -------------         -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
       Borrowings under line of credit                                              (143,000)           (2,901,000)
       Sale of common stock                                                                -                24,327
       Exercise of stock options                                                     264,757                     -
       Exercise of warrants                                                        8,366,766                     -
                                                                               -------------         -------------
Net cash (used in) provided by financing activities                                8,488,523            (2,876,673)
                                                                               -------------         -------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                   7,621,122               659,508
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                     1,470,906             1,302,984
                                                                               -------------         -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                       $   9,092,028         $   1,962,492
                                                                               =============         =============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest                                                         $      14,372         $      59,028
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       5
<PAGE>
                              NEOWARE SYSTEMS, INC.

              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Neoware Systems,
Inc. and Subsidiaries (the "Company") have been prepared in conformity with
generally accepted accounting principles. The interim financial information,
while unaudited, reflects all normal recurring adjustments which are, in the
opinion of management, necessary to present a fair statement of financial
position and operating results for the interim periods presented. The results of
operations for the nine month period ended March 31, 2000 are not necessarily
indicative of results expected for the full year. These financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission.

2. REVENUE RECOGNITION AND MAJOR CUSTOMERS

Product revenue is recognized at the time of title transfer, which ordinarily
occurs at the time of shipment. From time to time, customers request delayed
shipment, usually because of customer scheduling for systems integration and/or
lack of storage space at customers' facility during the implementation. In such
"bill and hold" transactions, the Company recognizes revenues when the following
conditions are met: the equipment is complete, ready for shipment and segregated
from other inventory; the Company has no further significant performance
obligations in connection with the completion of the transaction; the commitment
and delivery schedule is fixed; the customer requested the transaction be
completed on this basis; and the risks of ownership have passed to the customer.
Revenues recognized from "bill and hold" transactions for products which had not
shipped by March 31, 2000 and 1999 were approximately $164,000 and $403,000,
respectively. There were no accounts receivable relating to "bill and hold"
transactions at both March 31, 2000 and 1999. Service contract revenue is
recognized ratably over the contract period. Product warranty costs and an
allowance for sales returns are accrued at the time revenues are recognized.

Net revenues from one customer amounted to 11.3% of total net revenues for the
three months ended March 31, 2000 and, as of March 31, 2000, the Company had
receivables from this customer of approximately $204,000. No customer accounted
for 10% or more of total net revenues for the nine months ended March 31, 2000
and 1999. Net revenues from one customer amounted to 12% of total revenues for
the three months ended March 31, 1999.

3. INVENTORIES

Inventories are stated at the lower of cost or market (first-in, first-out
method) and consisted of the following:

                                                  March 31,         June 30,
                                                    2000              1999
                                                ------------       -----------
Purchased components and subassemblies          $    487,952       $   732,026
Work-in-process                                       91,721           129,972
Finished goods                                       401,533           462,426
                                                ------------       -----------
                                                $    981,205       $ 1,324,424
                                                ============       ===========

During the three months ended March 31, 2000, the Company made a decision to
terminate the engineering and manufacturing of its proprietary hardware and has
transitioned to become a software and services company with system sales based
upon installing its software products onto standard platforms. In connection
with this transition, the Company recorded a charge of $165,000 for the
reduction in carrying value of certain inventory to the lower of cost or market
value and for the acceleration of depreciation of customized test equipment no
longer required for manufacturing of custom hardware platforms. The charge is
recorded as a component of cost of sales in the accompanying consolidated
statements of operations for the three and nine month periods ended March 31,
2000.

                                       6
<PAGE>

During the nine months ended March 31, 1999, the Company entered into an
agreement to outsource a significant portion of its custom manufacturing and
fulfillment services. In December 1998, the Company recorded a charge of
$800,000 to reduce the carrying value of certain inventory to the lower of cost
or market value. The charge is recorded as a component of cost of revenues in
the accompanying consolidated statement of operations for the nine months ended
March 31, 1999.

4. NOTE RECEIVABLE

In October 1997, the Company merged Information Technology Consulting, Inc., a
wholly-owned subsidiary, into Broadreach Consulting, Inc. in exchange for a 2%
stock interest in Broadreach and the reimbursement of $1,000,000 of expenses
incurred by the Company in connection with its efforts to make certain
acquisitions in the information technology consulting and staffing field. Of the
total reimbursement, $300,000 was paid in cash and the remaining $700,000 under
a note which is due on the earlier of three years or upon the completion of the
initial public offering of Broadreach. The note bears interest at 8% per year.

In December 1998, the Company sold its 2% interest in Broadreach for $406,930,
which is included as a gain on sale of equity investment in the accompanying
consolidated statement of operations for the nine months ended March 31, 1999.

5. LINE OF CREDIT

The Company has a line of credit agreement with a bank that provides for
borrowings up to $2,000,000 subject to certain limitations, as defined. The line
of credit matures on June 30, 2000. Borrowings under the credit agreement bear
interest at the bank's prime rate plus 2.00% (11% at March 31, 2000). The line
of credit is collateralized by substantially all of the assets of the Company
and requires the Company to maintain certain financial ratios and meet other
financial conditions, as defined. The Company has agreed to maintain cash
collateral equal to the amount outstanding under the line from time to time.

6. EARNINGS PER SHARE

The Company applies SFAS No. 128, "Earnings per Share", which requires dual
presentation of basic and diluted earnings per share (EPS) for complex capital
structures on the face of the statement of operations. Basic EPS is computed by
dividing income (loss) by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution from the
exercise or conversion of securities into common stock, such as stock options.
For the three and nine month periods ended March 31, 2000 and 1999, there were
no dilutive effects of stock options or warrants as the Company incurred net
losses. Options and warrants to purchase 4,424,888 shares of Common Stock at
prices ranging from $.84 to $7.13 per share were outstanding at March 31, 2000.

7. ACQUISITION COSTS

During the three and nine month periods ended March 31, 2000, the Company
incurred costs of $39,942 and $445,987, respectively, relating to a definitive
agreement dated October 7, 1999 to acquire certain assets, assume certain
liabilities and acquire the business of MTX, Inc. of Raleigh, North Carolina. On
January 31, 2000, the Company exercised its right to terminate the agreement.

                                       7
<PAGE>


Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations.

Introduction

The Company provides the software and infrastructure to allow the wide-scale
deployment of information appliances in business environments. Neoware's
software and management tools are designed to power a new generation of smart
devices that bring the benefits of open, industry-standard technologies to a
wide variety of proprietary business devices. Neoware's products are designed to
run local applications for specific vertical markets, plus allow access to Linux
servers, the Internet and Windows-based applications running on multi-user
Windows servers. Neoware's infrastructure software powers and manages
information appliances, which are designed as alternatives to proprietary
devices and general-purpose personal computers, offering the cost benefits of
industry-standard hardware and software, easier installation, as well as lower
up-front and administrative costs.

During the quarter ended March 31, 2000, the Company announced the reduction in
the exercise price of its outstanding warrants and extended the expiration date
of the warrants to April 14, 2000. A total of approximately $14 million was
raised as a result of the exercise of these warrants (of which approximately
$8.4 million was received as of March 31, 2000) and the Company intends to
utilize this capital to begin to aggressively pursue a growth strategy in the
information appliance marketplace. The Company intends to seek additional
financing, if necessary, and strategic partnerships in order to capitalize upon
these new product opportunities.

Results of Operations

The following table sets forth, for the periods indicated, certain items from
the Company's unaudited consolidated statements of operations as a percentage of
net revenues.
<TABLE>
<CAPTION>
                                                  Three Months Ended                Nine Months Ended
                                                        March 31,                          March 31,
                                                2000              1999             2000            1999
                                                ----              ----             ----            ----
<S>                                           <C>               <C>              <C>             <C>
Gross Profit                                    15.4%             22.6%            19.5%           11.3%

Operating expenses:
    Sales and marketing                         14.2              12.9             12.5            15.9
    Research and development                     5.5               6.6              6.1             7.3
    General and administrative                  18.0              18.8             17.0            19.7
    Acquisition costs                            1.6                 -              5.7               -
                                               -----             -----            -----           -----

Operating loss                                 (23.9)            (15.7)           (21.8)          (31.6)
Gain on sale of equity investment                  -                 -                -             5.2
Interest income (expense), net                   1.5               0.7              1.1             0.2
                                               -----             -----            -----           -----

Loss before taxes                              (22.4)            (15.0)           (20.7)          (26.2)
Income taxes                                       -                 -                -               -
                                               -----             -----            -----           -----
Net loss                                       (22.4)%           (15.0)%          (20.7)%         (26.2)%
                                               =====             =====            =====           =====

</TABLE>
Net revenues for the three and nine months ended March 31, 2000 amounted to
$2,520,727 and $7,840,093, respectively, compared to $2,437,877 and $7,844,285
for the comparable periods in the prior fiscal year. Although not a factor for
the periods reported, the Company's revenues can be subject to significant
variances because of fluctuations in the timing of receipt of large orders.

                                       8
<PAGE>
The Company's gross profit as a percentage of net revenues for the three and
nine month periods ended March 31, 2000, before the provision of $165,000 for
the write-down of certain inventory and fixed assets associated with its
transition from a proprietary hardware manufacturer, was 21.9% and 22.6%,
respectively. For the nine months ended March 31, 1999, the Company's gross
profit, before the provision of $800,000 for inventory obsolescence recorded in
December 1998, was 21.5% compared to 19.5% for the current year. The variations
in gross profit percentages, after the adjustments described above, are
attributable to product mix. The Company anticipates that its gross margin
percentage may vary from quarter to quarter depending on the relationship of
fixed overhead to total revenue and the mix of business, including the mix of
hardware and software revenues. The gross profit percentage may also vary in
response to competitive market conditions as well as periodic fluctuations in
the cost of memory and other significant components. The market in which the
Company competes remains very competitive and although the Company intends to
continue its efforts to reduce the cost of its products, there can be no
certainty that the Company will not be required to reduce prices of its products
without compensating reductions in the cost to produce its products in order to
increase its market share or to meet competitors' price reductions.

Sales and marketing expenses amounted to $359,448 and $980,069 for the three and
nine month periods ended March 31, 2000 as compared to $313,819 and $1,244,345,
respectively, for the prior year. The increase for the three months ended March
31, 2000 over the prior year is attributable to the addition of personnel and
the increase in professional costs associated with the beginning of the
Company's implementation of its growth strategy. The decrease for the nine
months ended March 31, 2000 in relation to the prior year is a result of the
impact of the reduction in personnel which was implemented during the nine
months ended March 31, 1999 due to the slower than anticipated expansion of the
thin client computer market at that time. In order to successfully increase its
revenues, the Company must hire additional marketing and sales personnel which
may be difficult due to competition for employees with such skills.

Research and development expenses for the three and nine month periods ended
March 31, 2000 decreased to $138,860 and $480,065, respectively, as compared to
$161,001 and $571,301, respectively, in the prior year primarily as a result of
reductions in staffing (including the elimination of all hardware engineering
staff during the three months ended March 31, 2000) and in the use of outside
consultants and services. In conjunction with the implementation of its growth
strategy, it is anticipated that research and development costs will increase
significantly in future quarters primarily as a result of hiring additional
software engineers. Competition for employees with thes skills is severe and the
Company may have difficulty attracting suitably qualified personnel.

General and administrative expenses decreased to $454,232 and $1,329,921 for the
three and nine month periods ended March 31, 2000, respectively, as compared to
$458,028 and $1,551,519 in the prior year. The decrease for the current nine
months compared to the prior year is due primarily to a reduction in
professional fees and personnel costs. During the three and nine month periods
ended March 31, 2000, the Company incurred costs of $39,942 and $445,987,
relating to a definitive agreement dated October 7, 1999 to acquire certain
assets, assume certain liabilities and acquire the business of MTX, Inc. of
Raleigh, North Carolina. On January 31, 2000, in connection with announcing its
new Linux-based product strategy, the Company exercised its right to terminate
the agreement. The Company expects that general and administrative expenses will
increase in the future as a result of the need to add personnel to support the
Company's growth strategy.

The Company realized net interest income of $40,183 and $86,946 for the three
and nine month periods ended March 31, 2000, respectively, as compared to net
interest income of $18,507 and $13,610 in the prior year. The increase in
interest income was primarily due to cash received from the exercise of the
Company's warrants and the investment of such funds in interest bearing accounts
combined with decreased borrowings under the Company's line of credit.

No income tax benefit was recognized in the 2000 or 1999 periods as a result of
the net operating losses incurred during the periods as there is no assurance at
this time that the benefit of the net operating loss carryforwards will be
realized.

                                       9
<PAGE>
The increase in the Company's net loss for the three months ended March 31, 2000
compared to the prior year is primarily attributable to the charge of $165,000
described above. The net loss for the nine months ended March 31, 2000 includes
the MTX acquisition costs of $445,987 and the charge of $165,000. The net loss
for nine months ended March 31, 1999 includes the inventory writedown of
$800,000 offset by a gain on sale of equity investment of $406,930. The decrease
in net loss for the nine months ended March 31, 2000 compared to the prior year,
after taking these items into account, is primarily attributable to the
reduction in operating expenses described above. The Company expects to incur
increased sales and marketing, research and development, and general and
administrative expenses relating to its growth strategy. As a result, the
Company will need to generate significant increases in revenues to achieve
profitability. There are no assurances that the Company will achieve
profitability in the future or, if it does, whether it will be able to sustain
it.

Liquidity and Capital Resources

At March 31, 2000, the Company had net working capital of $10,434,873 composed
primarily of cash and cash equivalents, accounts receivable, inventory and a
note receivable. The Company's principal sources of liquidity include $9,092,028
of cash and cash equivalents. The Company also has a line of credit facility of
$2,000,000 which is secured by a first lien security interest on all tangible
and intangible personal property of the Company and separate pledges of
investment property owned by Neoware Investments, Inc. and Neoware Licensing,
Inc., each of which is a wholly-owned subsidiary of the Company. The facility
agreement also provides that borrowings under the line will be based on the
amount of eligible accounts receivable, as defined. Interest on the line of
credit facility accrues at the bank's prime rate plus two percent (2%), with
interest payable monthly, and all principal and interest due and payable on June
30, 2000. The Company has agreed to maintain cash collateral equal to the amount
outstanding under the line from time to time.

Cash and cash equivalents increased by $7,621,122 during the nine months ended
March 31, 2000, primarily as a result of exercises of the Company's warrants.

The Company used cash from operations of $735,432 for the nine months ended
March 31, 2000 primarily as a result of the net loss for the period. The Company
generated cash from operations of $3,313,660 for the nine months ended March 31,
1999, which included a reduction in accounts receivable of $3,580,837,
recoverable income taxes of $1,121,554 and a gain of $406,930 on the sale of the
equity investment in Broadreach offset by the net loss for the period and a
reduction in accounts payable of $1,047,276. Cash flow from operations can vary
significantly from quarter to quarter depending on the timing of payments from,
and shipments to, large customers.

The Company expects to fund current operations and other cash expenditures
through the use of available cash, cash from operations, funds available under
the credit facility and possible new debt and equity sources. The Company
intends to seek additional financing, if necessary, and strategic partnerships
in order to capitalize upon new product opportunities relating to information
appliance devices. The Company may not be able to obtain financing or it may not
be available on terms acceptable to the Company. If the Company is not able to
obtain sufficient financing, it may not be able to successfully implement its
growth strategy. However, the Company must achieve profitable operations in
order to provide adequate funding for the long term.

Year 2000 Matter

The Year 2000 matter related to whether computer hardware and software would
properly recognize date sensitive information referring to the Year 2000. During
calendar year 2000, the Company has not experienced any significant Year 2000
problems with its information systems hardware, application software, equipment
or operating systems. The Company also has not experienced any significant Year
2000 complications regarding any of its suppliers, customers or other business
partners. Since latent Year 2000 related problems may arise in the future, the
Company will continue to monitor the Year 2000 compliance of its operating
systems and equipment.

                                       10
<PAGE>
Forward-Looking Statements

Certain statements under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, and relate to
the development of the Company's products and future operating results that are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those in such forward-looking statements. Forward-looking
statements include statements regarding the Company's new product and market
strategy, the development of the Company's new Windows-based and Linux-based
products, anticipated purchases by customers, future margins and margin trends,
future revenues and operating losses, the Company's competitive position, lower
cost of ownership and easier installation of the Company's systems, anticipated
growth of the information appliance markets, any potential problems relating to
Year 2000 matters and the Company's plan to seek financing and strategic
partnerships. The words "believe," "expect," intend," "anticipate," variations
of such words, and similar expressions identify forward-looking statements, but
their absence does not mean that the statement is not forward-looking. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict. Factors that
could affect the Company's actual results include the Company's ability to
obtain financing and strategic partnerships, to add qualified personnel, to
successfully develop and market its products, including its new Windows-based
and Linux-based products, to lower its costs, to market its products to OEM
customers, the Company's reliance on Microsoft's actions relating to Windows CE,
Windows NT and Windows 2000, customers' acceptance of Neoware's products,
pricing pressures, rapid technological changes in the industry, growth of the
information appliance and thin client computer markets and increased
competition. Additional factors which could affect the Company's actual results
include quarterly fluctuations in operating results, general economic conditions
affecting the demand for computer products, the timing of significant orders,
failure to reduce product costs or maintain quality, delays in the receipt of
key components, seasonal patterns of spending by customers and the outcome of
various litigation. The Company does not undertake to update any forward-looking
statements made herein.

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

On March 11, 1998, a complaint, naming as defendants the Company, its Chairman,
and its former CFO, was filed as a purported class action on behalf of
purchasers of the Company's common stock during the period from June 15, 1996
through August 15, 1997. The complaint alleged, among other things, that the
defendants made misrepresentations related to plans for various potential
acquisitions by a subsidiary of the Company and a spin-off. An amended complaint
was subsequently filed which added claims on behalf of a second purported class
-- purchasers of the Company's stock from November 13, 1997 through May 1, 1998
-- related to the Company's announcement, on April 30, 1998, that it would be
restating certain financial results previously reported for the first two
quarters of fiscal year 1998. Thereafter, four separate purported securities
class actions were filed.

During October 1999, an agreement in principle to settle all of the foregoing
litigation was reached and the parties subsequently have executed and filed with
the Court a definitive settlement agreement. The settlement agreement is subject
to approval by the Court and a hearing in that regard is scheduled for July 14,
2000.

Management believes that this settlement will not have a material adverse effect
on the Company's financial position or results of operation.

Item 2. Changes in Securities and Use of Proceeds

         Effective February 14, 2000, the Company amended the terms of its
         publicly traded Common Stock Purchase Warrants to reduce the exercise
         price to $3.75 and to extend the expiration date from March 25, 2000 to
         April 14, 2000. Upon the termination of the exercise period, 3,725,853
         warrants had been exercised subsequent to the reduction of the exercise
         price, from which the Company derived gross proceeds of approximately
         $14 million, with the balance of approximately 2 million warrants
         expiring unexercised.



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<PAGE>

Item 6.  Exhibits and Reports on Form 8-K

         (a)   Exhibits:

               10.1  Employment Agreement, dated February 14, 2000, between the
                     Company and Michael G. Kantrowitz

               10.2  1995 Stock Option Plan (as amended through February 28,
                     2000)

               10.3  Separation Agreement, dated February 14, 2000, between the
                     Company and Edward C. Callahan, Jr.

         (b)   Report on Form 8-K:

               On February 25, 2000, the Company filed a Form 8-K reporting
               the appointment of Michael G. Kantrowitz as President and CEO
               of the Company replacing Edward C. Callahan, Jr. The Company
               also announced that it reduced the exercise price of its
               warrants from $5.50 to $3.75 and extended the expiration date
               of the warrants from March 25, 2000 to April 14, 2000.

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<PAGE>


                                   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 thereunder duly authorized.


                                 NEOWARE SYSTEMS, INC.



Date: May 15, 2000               By: /s/ MICHAEL G. KANTROWITZ
                                 -----------------------------
                                     Michael G. Kantrowitz,
                                     President and Chief Executive Officer



Date: May 15, 2000               By: /s/ VINCENT T. DOLAN
                                 -------------------------------
                                     Vincent T. Dolan
                                     Chief Financial Officer
                                     (Principal Accounting Officer and
                                     Principal Financial Officer)



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