<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 December 31, 2001

             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 February 7, 2002, there were 11,251,989 outstanding 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:
            December 31, 2001 and June 30, 2001                             3

            Consolidated Statements of Operations:
            Three and Six Months Ended December 31, 2001 and 2000           4

            Consolidated Statements of Cash Flows:
            Six Months Ended December 31, 2001 and 2000                     5

            Notes to Consolidated Financial Statements                      6

Item 2. Management's Discussion and Analysis of Financial
            Condition and Results of Operations                             9

PART II.

Item 1. Legal Proceedings                                                  17

Item 2. Changes in Securities and Use of Proceeds                          17

Item 4. Submission of Matters to a Vote of Security Holders                18

Item 6. Exhibits and Reports on Form 8-K                                   18

Signatures                                                                 19



















<PAGE>

                              NEOWARE SYSTEMS, INC.
                           CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)




ASSETS                                             December 31,         June
                                                           2001        30, 2001
                                                   ------------    ------------
CURRENT ASSETS:
Cash and cash equivalents                          $ 11,120,344    $ 11,712,535
Marketable securities                                   336,667         366,667
Accounts receivable, net                              4,749,534       3,502,013
Inventories                                             373,030         458,736
Prepaid expenses and other                              304,000         369,529
Notes receivable                                         26,072          26,072
                                                   ------------    ------------
Total current assets                                 16,909,647      16,435,552

Property and equipment, net                             652,015         199,397
Goodwill and other intangibles                        5,392,573       2,024,453
Notes receivable                                         21,549          52,193
Capitalized and purchased software, net                  62,513          77,247
                                                   ------------    ------------
                                                   $ 23,038,297    $ 18,788,842
                                                   ============    ============

LIABILITIES AND STOCKHOLDERS'  EQUITY
CURRENT LIABILITIES:
Accounts payable                                   $  1,993,471    $    935,943
Accrued expenses                                      1,415,179       1,473,718
Capital lease obligations                                87,632            --
Deferred revenue                                        284,506         289,278
                                                   ------------    ------------
Total current liabilities                             3,780,788       2,698,939
                                                   ------------    ------------

Capital lease obligations, non-current portion          293,581            --

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Preferred stock                                            --              --
Common stock                                             10,924          10,280
Additional paid-in capital                           26,556,384      24,524,567
Treasury stock                                         (100,000)       (100,000)
Accumulated other comprehensive income                   37,990          66,667
Retained earnings (deficit)                          (7,541,370)     (8,411,611)
                                                   ------------    ------------
Total stockholders' equity                           18,963,928      16,089,903
                                                   ------------    ------------
                                                   $ 23,038,297    $ 18,788,842
                                                   ============    ============


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


<PAGE>



                              NEOWARE SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)


<TABLE>
<CAPTION>

                                                 Three Months Ended           Six Months Ended
                                          ---------------------------    ---------------------------
                                          December 31,   December 31,    December 31,   December 31,
                                              2001           2000            2001           2000
                                          ------------   ------------    ------------   ------------

<S>                                       <C>            <C>             <C>            <C>
Net revenues                              $  6,595,133   $  3,389,070    $ 11,859,862   $  7,422,407
Cost of revenues                             3,740,254      2,388,884       6,800,843      5,250,640
                                          ------------   ------------    ------------   ------------
Gross profit                                 2,854,879      1,000,186       5,059,019      2,171,767
                                          ------------   ------------    ------------   ------------

OPERATING EXPENSES:
Sales and marketing                          1,315,246        761,500       2,525,354      1,475,776
Research and development                       343,985        195,723         674,851        360,550
General and administrative                     668,827        529,135       1,184,274      1,048,846
Acquisition costs                                 --             --              --          161,038
                                          ------------   ------------    ------------   ------------
Total operating expenses                     2,328,058      1,486,358       4,384,479      3,046,210
                                          ------------   ------------    ------------   ------------

Operating income (loss)                        526,821       (486,172)        674,540       (874,443)

Interest income, net                            83,747        209,646         195,701        410,371
                                          ------------   ------------    ------------   ------------

Net income (loss)                         $    610,568   $   (276,526)   $    870,241   $   (464,072)
                                          ============   ============    ============   ============


Basic income (loss) per share             $       0.06   $      (0.03)   $       0.08   $      (0.05)
                                          ============   ============    ============   ============

Diluted income (loss) per share           $       0.06   $      (0.03)   $       0.08   $      (0.05)
                                          ============   ============    ============   ============
Weighted average number of shares used
in basic earnings per share computation     10,376,892     10,275,652      10,275,409
                                                                                          10,279,762
                                          ============   ============    ============   ============

Weighted average number of shares used
in diluted earnings per share               10,884,693     10,275,652      10,742,097     10,275,409
computation
                                          ============   ============    ============   ============

</TABLE>






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


<PAGE>



                              NEOWARE SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
<TABLE>
<CAPTION>


                                                                   Six Months Ended       Six Months Ended
                                                                     December 31,           December 31,
                                                                         2001                   2000
                                                                   ----------------       ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                   <C>                  <C>
Net income (loss)                                                     $    870,241         $   (464,072)
Adjustments to reconcile net income (loss) to
      net cash provided by (used in) operating activities-
            Depreciation and amortization                                  161,567              172,544

Changes in operating assets and liabilities-
      (Increase) decrease in:
            Accounts receivable                                           (894,266)             387,596
            Inventories                                                     89,655               63,393
            Prepaid expenses and other                                     191,159                2,824
      Increase (decrease) in:
            Accounts payable                                              (104,631)            (826,288)
            Accrued expenses                                              (177,523)             132,314
            Deferred revenue                                              (181,072)             (68,414)
                                                                      ------------         ------------
Net cash used in operating activities                                      (44,870)            (600,103)


CASH FLOWS FROM INVESTING ACTIVITIES:
      Purchases of property and equipment                                  (50,413)             (40,505)
      Purchase of ACTIV-e Solutions                                       (146,956)                --
      Increase in intangible assets                                        (12,421)                --
      Purchase of treasury stock                                              --               (100,000)
      Capitalized software                                                    --                (36,996)
Net cash used in investing activities                                     (209,790)            (177,501)

CASH FLOWS FROM FINANCING ACTIVITIES:
      Repayments of assumed bank debt                                     (388,216)                --
      Decrease (increase) in notes receivable                               30,644             (100,314)
      Repayments of capital leases                                          (6,533)                --
      Exercise of stock options                                             26,574                  859

                                                                      ------------         ------------
Net cash used in financing activities                                     (337,531)             (99,455)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                          (592,191)            (877,059)
                                                                      ------------         ------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                          11,712,535           13,831,792
                                                                      ------------         ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                              $ 11,120,344         $ 12,954,733
                                                                      ============         ============
SUPPLEMENTAL DISCLOSURES:
      Cash paid for interest                                          $      4,189         $      4,735
                                                                      ============         ============
</TABLE>

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




<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 six month period ended December 31, 2001 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. NEW ACCOUNTING PRONOUNCEMENTS
   -----------------------------

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations".
SFAS No. 141 eliminates the use of the pooling-of-interests method of accounting
for business combinations and establishes the purchase method of accounting as
the only acceptable method for all business combinations initiated after June
30, 2001.

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This statement modifies existing generally accepted accounting
principles related to the amortization and impairment of goodwill and other
intangible assets. Upon adoption of the new standard, goodwill, including
goodwill associated with equity method investments, will no longer be amortized.
For the six months ended December 31, 2001, there was no goodwill amortization.
In addition, goodwill, other than goodwill associated with equity method
investments, must be assessed at least annually for impairment using a
fair-value based approach. The Company adopted the provisions of this statement
effective July 1, 2001. Impairment losses that arise due to the initial
application of this statement are to be reported as a cumulative effect of a
change in accounting principle.

3. ACQUISITION

On December 4, 2001, the Company acquired all of the assets and assumed
substantially all of the liabilities of Telcom Assistance Center Corporation,
d/b/a ACTIV-e Solutions, a full service Information Technology consulting
company in the server-based computing marketplace. The acquisition was accounted
for by using the purchase method of accounting. The purchase price was payable
in cash of $75,000 and 619,101 shares of the Company's newly issued common stock
with a market value of $3.24 per share at the date of acquisition. In addition,
the Company assumed net liabilities, exclusive of cash acquired of $9,974, of
approximately $1,275,376. Subject to the satisfaction of certain contingencies,
an additional 100,000 shares of the Company's common stock were to be issued as
additional consideration. Aggregate costs of the acquisition amounted to
$3,428,219 (including transaction costs of approximately $81,930) which amount
is equal to the excess of the purchase price over the value of net assets
acquired. Management is currently in the process of allocating the purchase
price to specific intangibles as required under SFAS 141, "Business
Combinations". The results of operations of ACTIV-e Solutions have been included
in the accompanying statement of operations from the date of the acquisition.


                                       6
<PAGE>


The following is a breakdown of the assets and liabilities assumed in connection
with the ACTIV-e acquisition:

                  Accounts receivable              $   353,255
                  Prepaids and other                   128,256
                  Property and equipment               476,518
                  Bank debt                           (388,216)
                  Accounts payable                  (1,162,159)
                  Accrued expenses                    (118,984)
                  Capital leases                      (387,746)
                  Deferred revenue                    (176,300)
                                                   -----------
                  Net liabilities assumed          $(1,275,376)
                                                   -----------

Resale of the shares issued in connection with the ACTIV-e transaction is
subject to registration or the availability of an exemption from registration.
The agreement provides for limitations on the number of shares which may be sold
under a registration statement within the first year after effectiveness of the
registration statement. It is anticipated that a registration statement will be
filed by April 3, 2002.

4. MARKETABLE SECURITIES
   ---------------------

The Company's marketable equity securities have been classified as
"available-for-sale" under the provisions of SFAS115, "Accounting for Certain
Investments in Debt and Equity Securities" and are reported at estimated fair
value, with the accumulated other comprehensive income (unrealized gains and
losses), reported as a separate component of stockholders' equity. Accumulated
other comprehensive income reported in stockholders' equity was $37,990 at
December 31, 2001 and $66,667 at June 30, 2001. The Company owned 333,334 shares
of Boundless Corporation common stock at December 31, 2001, which shares have
been classified as current, available-for-sale securities. Comprehensive income
for the three and six months ended December 31, 2001 was $589,691 and $841,564,
respectively, consisting of net income, the change in unrealized gain or loss on
marketable securities and the cumulative currency translation gains or losses
during the period.

5. REVENUE RECOGNITION AND MAJOR CUSTOMERS
   ---------------------------------------

The Company's products include both a hardware and software component. In
accordance with Statement of Position No. 97-2 "Software Revenue Recognition"
("SOP 97-2"), software revenue recognition is followed for products or services
where a software element exists, unless the software is incidental to the
product being sold. The software has been deemed to be essential to the
functionality of the hardware and, therefore, SOP 97-2 has been followed for
revenue recognition. Revenue is recognized on product sales when a formal
arrangement exists, delivery of the product has occurred or title has
transferred, the fee is fixed or determinable and collectibility is probable.
Revenue related to post contract services is recognized with the initial sale as
the fee is included with the initial licensing fee, post-contract services are
for one year or less, the estimated cost of providing such services during the
arrangement is deemed insignificant, and unspecified upgrades/enhancements
offered during the period historically have been and are expected to continue to
be minimal and infrequent. Product warranty costs and an allowance for sales
returns are accrued at the time revenues are recognized.

From time to time, customers request delayed shipment, usually because of
customer scheduling for systems integration and lack of storage space at a
customer's 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 December 31, 2001 and 2000 were $271,600 and $43,000, respectively. Accounts
receivable relating to "bill and hold" transactions were $271,600 and $43,000 at
December 31, 2001 and 2000, respectively.

                                       7
<PAGE>

Net revenues from one customer were 22.6% and 12.6% of total net revenues for
the three months and six ended December 31, 2001, respectively. At December 31,
2001, the Company had receivables from this customer of $1,118,443. Net revenues
from two other customers were 12.5% and 11.4% of total net revenues for the
three months ended December 31, 2000 and net revenues from one of these
customers were 16.7% of total net revenues for the six months ended December 31,
2000.

6. INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method and consisted of the following:

                                               December 31,      June 30,
                                                   2001            2001
                                               ------------      --------

Purchased components and subassemblies           $132,678        $167,730
Finished goods                                    240,352         291,006
                                                 --------        --------
                                                 $373,030        $458,736
                                                 --------        --------

7. LINE OF CREDIT
   --------------

During fiscal 1999, the Company entered into a line of credit agreement with a
bank which provides for borrowing up to $2,000,000 subject to certain
limitations, as defined. The line of credit matures on December 31, 2002.
Borrowings under the credit agreement bear interest at the bank's prime rate
plus 1/2% (5.25% at December 31, 2001). At December 31, 2001 and June 30, 2001,
there was $2,000,000 available for borrowing under the line. During the six
months ended December 31, 2001, there were no borrowings under the line.

The line of credit is collateralized by substantially all of the assets of the
Company. The line of credit agreement requires the Company to maintain certain
financial ratios and meet other financial conditions, as defined.

8. EARNINGS PER SHARE
   ------------------

The Company applies SFAS No. 128, "Earnings per Share." SFAS 128 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.
The following table sets forth the computation of basic and diluted earnings per
share:






                                       8
<PAGE>






<TABLE>
<CAPTION>


                                        For the three months ended     For the six months ended
                                               December 31,                  December 31,
                                       ---------------------------    ---------------------------
                                           2001           2000            2001           2000
                                       ------------   ------------    ------------   ------------

<S>                                    <C>            <C>             <C>            <C>
Net income (loss)                      $    610,568   $   (276,526)   $    870,241   $   (464,072)
                                       ============   ============    ============   ============

Weighted average shares outstanding:
   Basic                                 10,376,892     10,275,652      10,279,762     10,275,409
   Employee stock options                   507,801           --           462,335           --
                                       ------------   ------------    ------------   ------------
   Diluted                               10,884,693     10,275,652      10,742,097     10,275,409

Earnings (loss) per common share:
   Basic                               $       0.06   $      (0.03)   $       0.08   $      (0.05)
                                       ============   ============    ============   ============
   Diluted                             $       0.06   $      (0.03)   $       0.08   $      (0.05)
                                       ============   ============    ============   ============

</TABLE>

For the six months ended December 31, 2001, an aggregate of 999,506 stock
options were excluded from the calculation of dilutive earnings per share
because their inclusion would have been anti-dilutive.

9. SUBSEQUENT EVENT

On January 8, 2002, the Company entered into a worldwide alliance with IBM
Corporation under which the Company will be the preferred provider of thin
client appliance products to IBM and its customers. In addition, the Company
licensed from IBM the intellectual property associated with its thin client
appliance products. As consideration for these agreements, the Company issued
375,000 newly issued shares of its common stock with a fair market value of
$6.26 per share to IBM.

Resale of the shares issued in connection with the IBM transactions is subject
to registration or the availability of an exemption from registration. The
agreements provide for limitations on the number of shares which may be sold
within the first fifteen months of issuance. It is anticipated that a
registration statement will be filed by April 3, 2002.

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

Introduction

The Company provides software, services and solutions to enable Appliance
Computing, a new Internet-based computing architecture targeted at business
customers that is designed to be simpler and easier than traditional PC-based
computing. The Company's software and management tools power and manage a new
generation of smart computing appliances that utilize the benefits of open,
industry-standard technologies to create new alternatives to personal computers
used in business and a wide variety of proprietary business devices. The
Company's Capio and Eon products are thin client computing appliances, which are
cost-effective alternatives to personal computers used by businesses, and
powerful replacements for green-screen terminals. Used in conjunction with
Citrix MetaFrame or Microsoft Terminal Services, the Company's computing
appliances allow users to run Windows-based applications from a server, plus
connect to mainframes, midrange systems and the Internet. Unlike personal
computers, computing appliances can be centrally managed and remotely
configured, which greatly simplifies administration. Because of this, computing
appliances can save up to 80 percent of the total cost of ownership of networked
personal computers, resulting in significant cost savings for enterprise
customers.


                                       9
<PAGE>



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>

                                   For the Three Months Ended      For the Six Months Ended
                                            December 31,                 December 31,
                                   ---------------------------     -------------------------
                                       2001           2000           2001             2000
                                     --------       -------        ---------        --------

<S>                                      <C>            <C>             <C>             <C>
Gross profit                             43.3%          29.5%           42.7%           29.3%
Operating expenses
     Sales and marketing                 19.9           22.5            21.3            19.9
     Research and development             5.2            5.8             5.7             4.9
     General and administrative          10.2           15.6            10.0            14.1
     Acquisition costs                    -              -               -               2.2
                                     --------       -------        ---------        --------
Operating income (loss)                   8.0         (14.4)             5.7           (11.8)

Interest income, net                      1.3            6.2             1.6             5.5
                                     --------       --------       ---------        --------
Net income (loss)                         9.3%          (8.2)%           7.3%           (6.3)%
                                     --------       --------       ---------        --------
</TABLE>

Net revenues for the three and six months ended December 31, 2001 increased to
$6,595,133 and $11,859,862 from $3,389,070 and $7,422,407 for the comparable
periods in the prior fiscal year. The increase in net revenues was primarily
attributable to increased sales of the Company's Eon computing appliance
products and from the introduction of the Capio product line acquired in June
2001. Included in net revenues for the three and six months ended December 31,
2001 are net revenues of approximately $428,000 as a result of the acquisition
of ACTIV-e Solutions on December 4, 2001. On January 8, 2002, the Company
entered into a worldwide alliance with IBM Corporation under which the Company
will be the preferred provider of thin client appliance products to IBM and its
customers.

The Company's gross profit as a percentage of net revenues for the three and six
month periods ended December 31, 2001 increased to 43.3% and 42.7% compared to
29.5% and 29.3% for the comparable periods of the prior fiscal year. The
increase is primarily attributable to the cost benefits of the operating model
adopted by the Company during the latter part of the fiscal year ended June 30,
2000 which eliminated proprietary hardware design and engineering costs. The
increase is also attributable to reductions in the purchase costs of components
and third party license fees and a favorable mix of products sold. In addition,
fixed overhead costs represented a lower percentage of revenue during the three
and six month periods ended December 31, 2001 than in the prior fiscal year.

Operating expenses for the three and six month periods ended December 31, 2001
declined to 35.3% and 37.0% of net revenues, from 43.9% and 41.1% in the
comparable periods of the prior fiscal year as a result of increased sales.
Operating expenses for the three and six month periods ended December 31, 2001
were $2,328,058 and $4,384,479, an increase of 56.6% and 43.9% from operating
expenses of $1,486,358 and $3,046,210 in the comparable periods of the prior
fiscal year as a result of the Company's execution of its growth strategy. These
operating expenses are broken down as follows:

         Sales and marketing expenses for the three and six month periods ended
December 31, 2001 were 19.9% and 21.3% of net revenues, compared to 22.5% and
19.9% for the comparable periods in the prior fiscal year. Sales and marketing
expenses for the three and six month periods ended December 31, 2001 were
$1,315,246 and $2,525,354, an increase of 72.7% and 71.1% from $761,500 and
$1,475,776 in the comparable periods in the prior fiscal year. These increases
reflect additional sales and marketing personnel, including the opening of
additional domestic and international sales offices, additional sales and
marketing personnel as a result of the acquisitions of the Capio product line
and Activ-e Solutions, increased marketing activities and higher commissions due
to increased sales.

                                       10
<PAGE>

         Research and development expenses for the three and six month periods
ended December 31, 2001 were $343,985 and $674,851, an increase of 75.8% and
87.2% from $195,723 and $360,550 in the comparable periods in the prior year
primarily as a result of an increase in personnel dedicated to software
development activities resulting from the Company's growth strategy.

         General and administrative expenses for the three and six month periods
ended December 31, 2001 were 10.2% and 15.6% of net revenues, from 10.0% and
14.1% for the comparable periods of the prior fiscal year. General and
administrative expenses for the three and six month periods ended December 31,
2001 were $668,827 and $1,184,274, an increase of 26.4% and 12.9% from $529,135
and $1,048,846 in the comparable periods in the prior fiscal year due to
increased staffing and personnel costs as a result of the Company's growth
strategy.

         Acquisition costs for the six month period ended December 31, 2000
amounted to $161,038 or 2.2% of net revenues and consisted primarily of
professional service fees incurred in connection with a proposed acquisition
that was not consummated.

Net interest income for the three and six month periods ended December 31, 2001
was $83,747 and $195,701 , a decrease of 60.1% and 52.3% from $209,646 and
$410,371 in the comparable periods in the prior fiscal year. The decrease was
due primarily to lower interest rates and a slightly lower amount invested
primarily as a result of the Company's use of cash for acquisitions.

No income tax expense was recognized in the three and six month periods ended
December 31, 2001 due to the availability of net operating loss carryforwards.
No income tax benefit was recognized in the three and six month periods ended
December 31, 2000 as there was no assurance that the benefit of the net
operating loss carryforwards would be realized.

For the three and six month periods ended December 31, 2001, the Company had net
income of $610,568 and $870,241 as compared to net losses of $276,526 and
$464,072 for the comparable periods in the prior year primarily as a result of
increased revenues and gross margin, offset by an increase in operating expenses
and reduced interest income.

Liquidity and Capital Resources

As of December 31, 2001, the Company had net working capital of $13,128,859
composed primarily of cash and cash equivalents, marketable securities and
accounts receivable. The Company's principal sources of liquidity include
$11,457,011 of cash, cash equivalents and marketable securities and a $2,000,000
bank line of credit facility with First Union National Bank, all of which was
available as of December 31, 2001. The facility 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 requires the Company to
maintain certain financial ratios and meet other financial conditions, as
defined. Interest on the line of credit facility accrues at the bank's prime
rate plus one-half percent with all principal and interest due and payable on
December 31, 2002. The Company had no borrowings under the line of credit during
the six months ended December 31, 2001.

Cash and cash equivalents decreased by $592,191 during the six months ended
December 31, 2001 primarily as a result of an increase in accounts receivable
and the cash paid for the acquisition of ACTIV-e Solutions offset by net income
for the period.

                                       11
<PAGE>

The Company used cash in operations of $44,870 and $600,103 for the six months
ended December 31, 2001 and 2000, respectively. The decrease is primarily
attributable to higher revenues and improved gross margins, offset by increases
in operating expenses and accounts receivable.

The Company used cash in investing activities of $209,790 and $177,501 for the
six months ended December 31, 2001 and 2000, respectively. The decrease was the
result of the total amount cash paid for the acquisition of Activ-e Solutions in
December 2001 offset by the purchase of treasury stock in December 2000 and a
reduction in capitalized software.

The Company used cash in financing activities of $337,531 and $99,455 during the
six months ended December 31, 2001 and 2000, respectively. The increase was
primarily attributable to repayments of debt assumed in connection with the
acquisition of ACTIV-e Solutions in December 2001.

The Company expects to fund current operations and other cash expenditures
through the use of available cash, cash from operations, funds available under
its credit facility and possible new debt or equity sources. Management believes
that there will be sufficient funds from current cash, operations and available
financing to fund operations and cash expenditures for the foreseeable future,
however, the Company may seek additional sources of funding, including equity
and/or debt financing, in order to fund potential acquisitions. Additionally,
the Company must continue to maintain sustained profitability in order to
provide adequate funding for the long term.

Factors Affecting the Company and Future Operating Results

Our future results may be affected by industry trends and specific risks in our
business. Some of the factors that could materially affect our future results
include those described below.

Although the Company has generated an operating profit in the past four
quarters, we have a history of losses and may experience losses in the future,
which could result in the market price of our common stock declining.

         Although the Company has generated an operating profit in the last four
quarters, we have incurred net losses in the past and have an accumulated
deficit of $7.5 million as of December 31, 2001. We expect to continue to incur
significant operating expenses. Our operating expenses increased during the
three and six months ended December 31, 2001 reflecting the hiring of additional
key personnel as we continue to implement our growth strategy. As a result, we
will need to generate significant revenues to maintain profitability. If we do
not maintain profitability, the market price for our common stock may decline.

         Our financial resources may not be enough for our capital and corporate
development needs, and we may not be able to obtain additional financing. A
failure to derive significant revenues would likely cause us to incur losses and
negatively impact the price of our common stock.

Our ability to accurately forecast our quarterly sales is limited, although our
costs are relatively fixed in the short term and we expect our business to be
affected by rapid technological change, which may adversely affect our quarterly
operating results.

         Because of the new and rapidly evolving market for our embedded Windows
and Linux-based computing appliances, our ability to accurately forecast our
quarterly sales is limited, which makes it difficult to predict the quarterly
revenues that we will recognize. In addition, most of our costs are for
personnel and facilities, which are relatively fixed in the short term. If we
have a shortfall in revenues in relation to our expenses, we may be unable to
reduce our expenses quickly enough to avoid losses. As a result, our quarterly
operating results could fluctuate.

                                       12
<PAGE>

There are factors that may affect the market acceptance of our products, some of
which are beyond our control, including the following:

o    the growth and changing requirements of the computing appliance market;

o    the quality, price, performance and total cost of ownership of our
     products;

o    the availability, price, quality and performance of competing products and
     technologies; and

o    the successful development of our relationships with software providers,
     original equipment manufacturers and existing and potential channel
     partners.

     We may not succeed in developing and marketing our computing appliance
products and our operating results may decline as a result.

Our gross margins can vary significantly, based upon a variety of factors. If
the Company is unable to sustain adequate gross margins it may be unable to
reduce operating expenses in the short term, resulting in losses.

         The Company's gross margins can vary significantly from quarter to
quarter depending on average selling prices, fixed costs in relation to revenue
levels and the mix of the Company's business, including the percentage of
revenues derived from hardware, software and consulting services. The gross
profit margin also varies 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.

Our business is dependent on customer adoption of Windows and Linux-based
computing appliances to perform discrete tasks for corporate and Internet-based
computer networks and a decrease in their rates of adoption could adversely
affect our ability to increase our revenues.

         We are dependent on the growing use of computing appliances to perform
discrete tasks for corporate and Internet-based networks to increase our
revenues. If the role of computing appliances does not increase as we
anticipate, or if it in any way decreases, our revenues would not materialize.
If corporate information technology organizations do not accept Windows or
Linux-based embedded operating systems, or if there is a wide acceptance of
alternative operating systems that provide enhanced capabilities, our operating
results could be harmed.

         The computing appliance market in which we compete is new and
unpredictable, and if this market does not develop and expand as we anticipate,
our revenues may not grow.

Because some of our products use embedded versions of Microsoft Windows as their
operating system, an inability to license these operating systems on favorable
terms could impair our ability to introduce new products and maintain market
share.

         We may not be able to introduce new products on a timely basis because
some of our products use embedded versions of Microsoft Windows as their
operating system. Windows is provided to the Company by Microsoft Corporation,
and the Company does not have access to the source code for Windows. If
Microsoft fails to continue to enhance and develop its embedded operating
systems, or if the Company is unable to license these operating systems on
favorable terms, our operations may suffer.



                                       13
<PAGE>

Because some of our products use Linux as their operating system, the failure of
Linux developers to enhance and develop the Linux kernel could impair our
ability to release new products and maintain market share.

         We may not be able to release new products on a timely basis because
some of our products use Linux as their operating system. The heart of Linux,
the Linux kernel, is maintained by third parties. Linus Torvalds, the original
developer of the Linux kernel, and a small group of independent engineers are
primarily responsible for the development and evolution of the Linux kernel. If
this group of developers fails to further develop the Linux kernel, we would
have to either rely on another party to further develop the kernel or develop it
ourselves. To date, we have optimized our Linux-based operating system based on
a version of Red Hat Linux. If we were unable to access Red Hat Linux, we would
be required to spend additional time to obtain a tested, recognized version of
the Linux kernel from another source or develop our own operating system
internally. We cannot predict whether enhancements to the kernel would be
available from reliable alternative sources. We could be forced to rely to a
greater extent on our own development efforts, which would increase our
development expenses and might delay our product release schedules. In addition,
any failure on the part of the kernel developers to further develop and enhance
the kernel could stifle the development of additional Linux-based applications
for use with our products.

Because we depend on sole source, limited source and foreign source suppliers
for key components, we are susceptible to supply shortages that could prevent us
from shipping customer orders on time, if at all, and result in lost sales.

         We depend upon single source suppliers for our computing appliance
products and for several of the components in them. We also depend on limited
sources to supply several other industry standard components. We also rely on
foreign suppliers which subject us to risks associated with foreign operations
such as the imposition of unfavorable governmental controls or other trade
restrictions, changes in tariffs and political instability.

         We have in the past experienced and may in the future experience
shortages of, or difficulties in acquiring, these components. If we are unable
to buy these components, we will not be able to deliver our products to our
customers.

Because we rely on channel partners to sell our products, our revenues could be
negatively impacted if our existing channel partners do not continue to purchase
products from us.

         We cannot be certain that we will be able to attract channel partners
that market our products effectively or provide timely and cost-effective
customer support and service. None of our current channel partners is obligated
to continue selling our products nor to sell our new products. We cannot be
certain that any channel partner will continue to represent our products or that
our channel partners will devote a sufficient amount of effort and resources to
selling our products in their territories. We need to expand our direct and
indirect sales channels, and if we fail to do so, our growth could be limited.

We may not be able to effectively compete against other providers as a result of
their greater financial resources and brand awareness.

         In the market for computing appliances, we face significant competition
from larger companies which have greater financial resources and name
recognition than we do. Increased competition may negatively affect our business
and future operating results by leading to price reductions, higher selling
expenses or a reduction in our market share.

         Our future competitive performance depends on a number of factors,
including our ability to:

                                       14
<PAGE>

o    continually develop and introduce new products and services with better
     prices and performance than offered by our competitors;

o    offer a wide range of products; and

o    offer high-quality products and services.

         If we are unable to offer products and services that compete
successfully with the products and services offered by our competitors, our
business and our operating results would be harmed. In addition, if in
responding to competitive pressures, we are forced to lower the prices of our
products and services and we are unable to reduce our costs, our business and
operating results would be harmed.

Computing appliance products are subject to rapid technological change due to
changing operating system software and network hardware and software
configurations, and our products could be rendered obsolete by new technologies.

         The computing appliance market is characterized by rapid technological
change, frequent new product introductions, uncertain product life cycles,
changes in customer demands and evolving industry standards. Our products could
be rendered obsolete if products based on new technologies are introduced or new
industry standards emerge.

We may not be able to preserve the value of our products' intellectual property
because we do not have any patents and other vendors could challenge our other
intellectual property rights.

         Our products will be differentiated from those of our competitors by
our internally developed technology that is incorporated into our products. If
we fail to protect our intellectual property, other vendors could sell products
with features similar to ours, and this could reduce demand for our products,
which would harm our operating results.

We may not be able to attract software developers to bundle their products with
our computing appliances.

         Our computing appliances include our own software, plus software from
other companies for specific vertical markets. If we are unable to attract
software developers, and are unable to include their software in our products,
we may not be able to offer our computing appliances for certain important
target markets, and our financial results will suffer.

In order to continue to grow our revenues, we may need to hire additional
personnel, including software engineers.

         In order to continue to develop and market our line of computing
appliances, we may need to hire additional software engineers as well as
marketing and sales personnel. Competition for employees with these skills is
severe and we may experience difficulty in attracting suitably qualified people.

         Future growth that we may experience will place a significant strain on
our management, systems and resources. To manage the anticipated growth of our
operations, we may be required to:

o    improve existing and implement new operational, financial and management
     information controls, reporting systems and procedures;

o    hire, train and manage additional qualified personnel; and



                                       15
<PAGE>

o    establish relationships with additional suppliers and partners while
     maintaining our existing relationships.

We rely on the services of certain key personnel, and those persons' knowledge
of our business and technical expertise would be difficult to replace.

         Our products and technologies are complex and we are substantially
dependent upon the continued service of our existing personnel. The loss of any
of our key employees could adversely affect our business and slow our product
development processes.

Errors in our products could harm our business and our operating results.

         Because our computing appliance products are complex, they could
contain errors or bugs that can be detected at any point in a product's life
cycle. Although many of these errors may prove to be immaterial, any of these
errors could be significant. Detection of any significant errors may result in:

o    the loss of or delay in market acceptance and sales of our products;

o    diversion of development resources;

o    injury to our reputation; or

o    increased maintenance and warranty costs.

         These problems could harm our business and future operating results.
Product errors or delays could be material, including any product errors or
delays associated with the introduction of new products or the versions of our
products that support operating systems other than Linux. Occasionally, we have
warranted that our products will operate in accordance with specified customer
requirements. If our products fail to conform to these specifications, customers
could demand a refund for the purchase price or assert claims for damages.

         Moreover, because our products are used in connection with critical
distributed computing systems services, we may receive significant liability
claims if our products do not work properly. Our agreements with customers
typically contain provisions intended to limit our exposure to liability claims.
However, these limitations may not preclude all potential claims. Liability
claims could require us to spend significant time and money in litigation or to
pay significant damages. Any such claims, whether or not successful, could
seriously damage our reputation and our business.

Our IT consulting operations, which we acquired from Activ-e Solutions, would
suffer and we could lose our customers or fail to attract new customers if we
are unable to attract and retain qualified personnel.

         Our IT consulting business is labor-intensive, and our success depends
  in large part upon our ability to attract, develop, motivate and retain highly
  skilled personnel. Some of these individuals are in great demand and are
  likely to remain a limited resource for the foreseeable future. We may not be
  able to engage the services of such personnel or retain our current personnel.
  If we do not succeed in attracting new, qualified personnel or successfully
  retaining our current personnel, our IT consulting business will suffer.

If our contracts with Citrix and other vendors of hardware components and
software applications were terminated, our IT consulting business would be
materially adversely affected.



                                       16
<PAGE>

         We depend on third-party suppliers to provide us with key hardware
components and software applications in connection with our IT consulting
services business. If such contracts and relationships were terminated, our IT
revenues would be negatively affected.

We may not be able to successfully integrate the acquisitions we have completed
as part of our growth strategy, which may materially adversely affect our growth
and our operating results.

         We have made two acquisitions and entered into an alliance with IBM to
be the preferred provider of thin client appliance products to IBM and its
customers within the last eight months. We have not yet fully integrated these
businesses or fully implemented the alliance. There is no assurance that we will
successfully integrate these acquisitions into our business or successfully
implement the alliance. In addition, we cannot assure you that, we will achieve
anticipated revenue and earnings growth as a result of these transactions. Our
failure to successfully integrate the acquired businesses into our operations or
successfully implement the alliance could have a material adverse effect upon
our business, operating results and financial condition.

Forward-Looking Statements

This quarterly report on Form 10-Q contains statements that are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, such as statements regarding future margins and margin trends, future
revenues and profitability, increased sales and operating expenses, the
Company's competitive position, the reduction in the cost of producing the
Company's products, the cost benefits and other advantages of the Company's
products and the development of new products and the availability of cash or
other financing sources to fund future operations. These forward-looking
statements involve risks and uncertainties. The factors contained in "Factors
Affecting the Company and Future Operating Results" and set forth elsewhere in
this report, could cause actual results to differ materially from those
predicted in any such forward-looking statement. Factors that could affect the
Company's actual results include the Company's ability to lower its costs,
customers' acceptance of Neoware's line of computing appliance products, pricing
pressures, rapid technological changes in the industry, growth of the computing
appliance market, increased competition, the Company's ability to attract and
retain qualified personnel, changes in general economic conditions, risks
associated with foreign operations and political and economic uncertainties
associated with current world events.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 2.  Changes in Securities and Use of Proceeds

On December 4, 2001, in connection with the acquisition of substantially all of
the assets of Telcom Assistance Center Corporation d/b/a ACTIV-e Solutions, the
Company issued 619,101 shares of Neoware's common stock to ACTIV-e. Up to an
additional 100,000 shares were to be issued upon the satisfaction of certain
conditions. The shares were issued in reliance upon the exception from the
registration requirements of the Securities Act under Section 4(2) thereof as a
transaction not involving a public offering. The sale was made to a
knowledgeable and experienced investor which had access to information
respecting the Company and its business.


                                       17
<PAGE>





Item 4.   Submission of Matters to a Vote of Security Holders

On December 7, 2001, the Company held its Annual Meeting of Stockholders. The
Stockholders voted to elect five members to the Board of Directors and to ratify
the selection of Arthur Andersen LLP as the Company's independent accountant for
the fiscal year ending June 30, 2002.

Elected to the Board of Directors were Arthur R. Spector (9,188,891 shares voted
for election and 56,611 shares were withheld), Michael G. Kantrowitz (9,217,612
shares voted for election and 27,890 shares were withheld), Christopher G.
McCann (9,236,782 shares voted for election and 8,720 shares were withheld),
John M. Ryan (9,234,882 shares voted for election and 10,620 shares were
withheld), and Carl G. Sempier (9,236,682 shares voted for election and 8,820
shares were withheld).

The selection of Arthur Andersen LLP as the Company's independent public
accountants was ratified with 8,890,353 shares voting in favor of ratification,
29,315 shares voting against ratification and 325,834 shares abstaining.

Item 6. Exhibits and Reports on Form 8-K

     (a) Exhibits:
             10.1* Employment Agreement dated December 4, 2001 between the
                   Company and Anthony J. DePaul

             10.2* 2002 Non-Qualified Stock Option Plan

             *Management Contract

     (b) Report on Form 8-K:
         On January 29, 2002, the Company filed a Form 8-K reporting the
         acquisition of Substantially all of the assets of ACTIV-e Solutions.


                                       18
<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:  February 14, 2002                 By: /S/ MICHAEL G. KANTROWITZ
                                         -----------------------------
                                         Michael G. Kantrowitz
                                         President and
Chief Executive Officer



Date:  February 14, 2002                 By: /S/ VINCENT T. DOLAN
                                         ------------------------
                                         Vincent T. Dolan
                                         Vice President-Finance/Administration
                                         (Principal Accounting Officer and
                                         Principal Financial Officer)




                                       19