<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, 1999

-----    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 13, 1999, there were outstanding 6,285,782 shares of the Registrant's
Common Stock.

                                                              Page 1 of 16 pages

                                                     Exhibit Index is on page 15


<PAGE>


                              NEOWARE SYSTEMS, INC.


                                      INDEX

                                                                            Page
                                                                          Number
                                                                          ------
PART I.  FINANCIAL INFORMATION

Item 1.  Unaudited Consolidated Financial Statements:

                  Consolidated Balance Sheets:
                  March 31, 1999 and June 30, 1998                             3
                                                                           
                  Consolidated Statements of Operations:                   
                  Three and Nine Months Ended March 31, 1999 and 1998          4
                                                                           
                  Consolidated Statements of Cash Flows:                   
                  Nine Months Ended March 31, 1999 and 1998                    5
                                                                           
                  Notes to Consolidated Financial Statements                   6
                                                                           
Item 2.  Management's Discussion and Analysis of Financial                 
           Condition and Results of Operations                                 9
                                                                           
PART II. OTHER INFORMATION                                                 
                                                                           
Item 1.  Legal Proceedings                                                    14
                                                                           
                                                                           
                                                                           
Item 6.  Exhibits and Reports on Form 8-K                                     15
                                                                           
                  Signatures                                                  16
                                                                         


                                     Page 2

<PAGE>


                              NEOWARE SYSTEMS, INC.

                           CONSOLIDATED BALANCE SHEETS

                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                             March 31,                June 30,
                                ASSETS                                         1999                     1998
                                ------                                   ---------------          ---------------
<S>                                                                      <C>                      <C>            
CURRENT ASSETS:
   Cash and cash equivalents .......................................     $     1,962,492          $     1,302,984
   Accounts receivable, net of allowance for doubtful accounts of       
     $232,440 and $168,710 .........................................           1,197,120                4,777,957
   Inventories .....................................................           1,523,948                3,119,043
   Recoverable income taxes ........................................                  --                1,121,554
   Prepaid expenses and other ......................................             251,192                  123,575
   Deferred income taxes ...........................................             416,530                  416,530
                                                                         ---------------          ---------------
                Total current assets ...............................           5,351,282               10,861,643

PROPERTY AND EQUIPMENT, net ........................................             460,584                  636,414

NOTE RECEIVABLE ....................................................             700,000                  700,000

CAPITALIZED AND PURCHASED SOFTWARE, net ............................             607,965                  809,470

DEFERRED INCOME TAXES ..............................................              13,866                   13,866
                                                                         ---------------          ---------------
                                                                         $     7,133,697          $    13,021,393
                                                                         ===============          ===============
                 LIABILITIES AND STOCKHOLDERS' EQUITY
                 ------------------------------------

CURRENT LIABILITIES:

   Line of credit ..................................................     $       173,000         $      3,074,000
   Accounts payable ................................................             787,124                1,834,400
   Accrued expenses ................................................           1,101,358                1,106,607
   Deferred revenue ................................................             247,455                  165,312
                                                                         ---------------          ---------------
                Total current liabilities ..........................           2,308,937                6,180,319
                                                                         ---------------          ---------------


COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
   Preferred  stock, $.001 par value, 1,000,000 shares authorized,
     none issued and outstanding ...................................                  --                       -- 
   Common stock, $.001 par value, 50,000,000 shares authorized,
     6,285,782 and 6,264,158 shares issued and outstanding .........               6,285                    6,264
   Additional paid-in capital ......................................          10,178,358               10,154,052
   Accumulated deficit .............................................          (5,359,883)              (3,301,874)
   Deferred compensation ...........................................                  --                  (17,368)
                                                                         ---------------          ---------------
                Total stockholders' equity .........................           4,824,760                6,841,074
                                                                         ---------------          ---------------
                                                                         $     7,133,697          $    13,021,393
                                                                         ===============          ===============
</TABLE>

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


                                     Page 3

<PAGE>


                              NEOWARE SYSTEMS, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                   (Unaudited)


<TABLE>
<CAPTION>
                                                          Three Months Ended                      Nine Months Ended
                                                               March 31,                              March 31,
                                                  ----------------------------------    ----------------------------------
                                                        1999               1998               1999               1998     
                                                  ---------------    ---------------    ---------------    ---------------
<S>                                               <C>                <C>                <C>                <C>            
NET REVENUES .................................    $     2,437,877    $     3,700,832    $     7,844,285    $    16,312,324

COST OF REVENUES .............................          1,888,222          2,886,364          6,955,669         12,102,132
                                                  ---------------    ---------------    ---------------    ---------------
            Gross profit .....................            549,655            814,468            888,616          4,210,192
                                                  ---------------    ---------------    ---------------    ---------------
                                                                                 
OPERATING EXPENSES:
   Sales and marketing .......................            313,819          1,325,783          1,244,345          3,838,795
   Research and development ..................            161,001            384,995            571,301          1,268,857
   General and administrative ................            458,028            796,588          1,551,519          1,686,348
   Bridging Data Technology venture ..........                 --            159,231                 --            159,231
                                                  ---------------    ---------------    ---------------    ---------------
            Total operating expenses .........            932,848          2,666,597          3,367,165          6,953,231
                                                  ---------------    ---------------    ---------------    ---------------
            Operating loss ...................           (383,193)        (1,852,129)        (2,478,549)        (2,743,039)
                                                                                           
GAIN ON SALE OF EQUITY INVESTMENT ............                 --                 --           (406,930)                --

INTEREST (INCOME) EXPENSE, NET ...............            (18,507)           127,955            (13,610)           303,215
                                                  ---------------    ---------------    ---------------    ---------------
            Loss before income taxes .........           (364,686)        (1,980,084)        (2,058,009)        (3,046,254)
                                                  

INCOME TAX BENEFIT ...........................                 --           (626,666)                --           (959,570)
                                                  ---------------    ---------------    ---------------    ---------------
NET LOSS .....................................    $      (364,686)   $    (1,353,418)   $    (2,058,009)   $    (2,086,684)
                                                  ===============    ===============    ===============    ===============
BASIC AND DILUTED LOSS PER SHARE .............    $         (0.06)   $          (.23)   $         (0.33)   $          (.36)
                                                  ===============    ===============    ===============    ===============
WEIGHTED AVERAGE NUMBER OF SHARES                                                       
  OUTSTANDING IN BASIC AND DILUTED LOSS
  PER SHARE COMPUTATION ......................          6,285,772          5,767,932          6,281,543          5,763,191
                                                  ===============    ===============    ===============    ===============
</TABLE>


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

                                     Page 4
<PAGE>

                              NEOWARE SYSTEMS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                                          
                                                                                                 Nine Months Ended         
                                                                                                      March 31,            
                                                                                          -------------------------------- 
                                                                                              1999                1998
                                                                                          ------------        ------------    
<S>                                                                                       <C>                 <C>          
CASH FLOWS FROM OPERATING ACTIVITIES:                                                     
   Net loss ..........................................................................    $(2,058,009)        $(2,086,684) 
   Adjustments to reconcile net loss to net cash provided by                                                               
     operating activities-                                                                                                 
       Depreciation and amortization .................................................        561,744             636,536  
       Amortization of deferred compensation .........................................         17,368              39,077  
       Gain on sale of equity investment .............................................       (406,930)                 --  
       Provision for inventory obsolescence ..........................................        800,000                  --  
       Tax benefit from carry back of net operating loss .............................             --            (959,570) 
       Write-off of investment in subsidiary .........................................             --             159,231  
    
   Changes in operating assets and liabilities-                                                                            
     (Increase) decrease in:                                                                                               
       Accounts receivable ...........................................................      3,580,837           3,487,367  
       Inventories ...................................................................        795,095            (186,006) 
       Recoverable income taxes ......................................................      1,121,554                  --  
       Prepaid expenses and other ....................................................       (127,617)            615,452  
     Increase (decrease) in:                                                                                               
       Accounts payable ..............................................................     (1,047,276)           (864,183) 
       Accrued expenses ..............................................................         (5,249)            (46,746) 
       Deferred revenue                                                                        82,143              (1,787) 
                                                                                         ------------        ------------  
           Net cash provided by operating activities .................................      3,313,660             792,687  
                                                                                         ------------        ------------  
                                                                                                                           
CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                      
   Proceeds from sale of equity investment ...........................................        406,930                  --
   Purchases of property and equipment ...............................................        (21,500)           (192,643) 
   Capitalized software ..............................................................       (162,909)           (444,766) 
                                                                                         ------------        ------------  
           Net cash provided by (used in) investing activities .......................        222,521            (637,409) 
                                                                                         ------------        ------------  
                                                                                                                           
CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                      
   Net repayments under line of credit ...............................................     (2,901,000)           (801,000) 
   Sale of common stock ..............................................................         24,327                  --  
   Increase in note receivable .......................................................             --            (700,000) 
   Exercise of stock options .........................................................             --              12,500  
                                                                                         ------------        ------------  
           Net cash used in financing activities .....................................     (2,876,673)         (1,488,500) 
                                                                                         ------------        ------------  

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .....................................        659,508          (1,333,222) 
                                                                                                                           
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .......................................      1,302,984           1,452,409
                                                                                         ------------        ------------  
CASH AND CASH EQUIVALENTS, END OF PERIOD .............................................   $  1,962,492        $    119,187  
                                                                                         ============        ============  
                                                                                                                           
SUPPLEMENTAL DISCLOSURES:                                                                                                  
       Cash paid for interest ........................................................   $     59,028        $    261,270  
       Cash paid for income taxes ....................................................             --              50,719  
</TABLE>

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

                                     Page 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 three and nine month periods ended March 31, 1999 are not
necessarily indicative of results expected for the full year. These financial
statements should be read in conjunction with the audited 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
lack of storage space at customers' facilities 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, 1999 and 1998 were approximately
$403,000 and $2,093,000, respectively. There were no accounts receivable
relating to " bill and hold" transactions at March 31,1999. Accounts receivable
relating to "bill and hold" transactions were $3,582,000 at March 31, 1998.
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 accounted for 12% of total net revenues for the
three month period ended March 31, 1999 and no customer accounted for 10% or
more of total net revenues for the nine month period ended March 31, 1999. Net
revenues from one customer represented 19% of total net revenues for the three
month period ended March 31, 1998 and two customers represented 17% each of
total net revenues for the nine month period ended March 31, 1998.

                                     Page 6

<PAGE>


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,
                                                      1999             1998
                                                   ----------       ----------
Purchased components and subassemblies ........    $  841,324       $1,599,136
Work-in-process ...............................       176,607          283,587
Finished goods ................................       506,017        1,236,320
                                                   ----------       ----------
                                                   $1,523,948       $3,119,043
                                                   ==========       ==========

The Company entered into an agreement with SCI Technology, Inc. (SCI), a leading
contract manufacturer, under which SCI will begin to provide a significant
portion of the Company's manufacturing and fulfillment services. Primarily as a
result of this decision, the Company recorded a charge of $800,000 to cost of
revenues for the write down of certain inventory components during the nine
months ended March 31, 1999. Other factors contributing to this write down were
the decline in market prices for certain inventory components and the Company's
emphasis on marketing its newer NeoStation product line at the expense of its
@Work Station family of products.

4.   NOTE RECEIVABLE: 

In October 1997, the Company merged Information Technology Consulting, Inc., a
wholly-owned subsidiary, into Broadreach Consulting, Inc. ("Broadreach")
(formerly The Reohr Group, Inc.) in exchange for a 2% stock interest in
Broadreach and the reimbursement of $1 million 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 is due on
the earlier of three years or upon the completion of an initial public offering
of Broadreach. The note bears interest at 8%. Of the total reimbursement,
$292,000 was offset against general and administrative expenses during the nine
months ended March 31, 1998 for costs previously incurred and charged to
expense.

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

5.   LINE OF CREDIT:

During the three month period ended March 31, 1999, the Company entered into a
revolving line of credit agreement with a bank which provides for borrowings up
to $2,000,000 with interest at the bank's prime rate plus 2%. The agreement,
which will expire on December 31, 1999, also provides that the Company grant
security interests in substantially all of its assets and that borrowings will
be based on the amount of eligible accounts receivable, as defined. Under the
line, the Company is required to maintain specified ratios of working capital
and net worth, as defined.

6.   EARNINGS PER SHARE

The Company applies SFAS No. 128, "Earnings per Share," which supersedes APB
Opinion No. 15, "Earnings per Share." SFAS 128 requires dual presentation of
basic and diluted earnings per share (EPS)


                                     Page 7

<PAGE>


for complex capital structures on the face of the income statement. 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, 1999 and 1998,
there were no dilutive effects of stock options or warrants as the Company
incurred a net loss during those periods. Options and warrants to purchase
7,456,246 shares of Common stock at prices ranging from $1.06 to $8.75 per share
were outstanding at March 31, 1999. 


                                     Page 8

<PAGE>

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

Introduction

Neoware Systems, Inc. (the "Company") designs, manufactures and markets a family
of Windows-based terminals and thin client computers that are designed to allow
users to access Windows-based applications from a multi-user Windows(R) NT
server, plus connect to mainframes, minicomputers and the Internet. The
Company's NeoStationTM family of Windows-based terminals and related software
allows users to utilize all of their existing computer systems and applications
running on Windows platforms, UNIX, mainframes and minicomputers, and access
them across a network. Unlike Java network computers, an alternative type of
thin client, Neoware's products do not require customers to rewrite their
applications in the Java language or to use Java emulators to access their
existing systems. Unlike personal computers, the Company's products are designed
primarily to run applications on a server, not on the desktop. This offers a
number of significant advantages compared to an architecture based upon personal
computers. Windows-based terminals and thin clients such as the Company's
NeoStation line of products are designed to be easier to install, maintain and
administer than traditional personal computers. Such lower administration costs
are intended to lower the total cost of ownership of systems utilizing the
Company's products when compared to personal computers.

The Company's current strategy is to become a leader in the Windows-based
terminal and thin client computers market by focusing on expanding its software
products and its thin client computer hardware. The Company also plans to
continue to develop strategic partnerships on the basis of technology and/or
expanding its sales and distribution channels. In this regard, the Company has
engaged The Platinum Group of New York to assist in these areas as well as to
identify potential equity investors and other business combinations. The Company
sells its products in North America directly to end users, resellers, system
integrators and OEMs while international sales are generally made through
distributors.

In October 1997, the Company merged Information Technology Consulting, Inc.
("ITC"), a wholly owned subsidiary, with Broadreach Consulting, Inc.
("Broadreach") and Global Consulting Group ("Global"). Under the merger, ITC and
Global merged into Broadreach, and Neoware received stock that represented a 2%
ownership of Broadreach. The Company was also reimbursed for the expenses
incurred by the Company and ITC in connection with ITC's efforts to make these
acquisitions, $300,000 of which was paid in cash. The remainder of the expenses
in the amount of $700,000 is repayable by Broadreach on the earlier of three
years or the consummation of an initial public offering of Broadreach. The note
bears interest at 8% per year. During the nine months ended March 31, 1999, the
Company sold its 2% stock interest in Broadreach for $406,930 which is included
as a gain on sale of equity investment in the accompanying consolidated
statement of operations.

In February 1997, the Company formed a new subsidiary, Bridging Data Technology,
Inc. ("BDT"). BDT acquired and further developed a software product,
SmartBridge(TM), which utilizes the "intelligent bridging" approach to upgrading
programs and data for Year 2000 compliance. The Company entered into an
agreement effective January 1, 1998 which reduced the Company's ownership
position in Bridging Data Technology, Inc. and eliminated the Company's
requirement to fund future operations. In addition, effective March 31, 1998,
the Company wrote off the full amount of its investment in BDT. The write-off
reflects the Company's evaluation that recovery, if any, of its investment in
BDT will not occur in the near future. Future cash distributions, if any, from
BDT will be recorded as income in the period during which the transaction
occurs.

In June 1998, the Company entered into a joint marketing and development
agreement and an equity purchase agreement with Motorola, Inc., under which
Motorola purchased approximately 6% of the 


                                     Page 9


<PAGE>

Company's outstanding Common stock. Under the joint marketing and development
agreement, the two companies agreed to collaborate on technology for the
Windows-based terminal market, and to jointly promote this technology to OEM
customers. Although the Company believes that its agreement with Motorola will
allow it to compete more effectively in the market for customers who wish to
create Windows-based terminals under their own brand names, there can be no
assurance that the Company will generate significant revenue from this
agreement.


Results of Operations

The following table sets forth, for the periods indicated, certain items from
the Company's consolidated statements of operations as a percentage of net
revenues.



<TABLE>
<CAPTION>

                                                         Three Months Ended                 Nine Months Ended
                                                                March 31,                      December 31,
                                                        ----------------------            ---------------------
                                                         1999            1998              1999           1998
                                                        ------          ------            ------         ------

<S>                                                       <C>             <C>               <C>            <C>  
Gross Profit ........................................     22.6%           22.0%             11.3%          25.8%
Operating Expenses:
    Sales and marketing .............................     12.9            35.8              15.9           23.5
    Research and development ........................      6.6            10.4               7.3            7.8
    General and administrative ......................     18.8            21.5              19.7           10.3
    Bridging Data Technology venture ................        -             4.3                 -            1.0
                                                        ------          ------            ------         ------
Operating loss ......................................    (15.7)          (50.0)            (31.6)         (16.8)
Gain on sale of equity investment ...................        -               -               5.2              -
Interest income (expense), net ......................       .7            (3.5)               .2           (1.9) 
                                                        ------          ------            ------         ------
Loss before taxes ...................................    (15.0)          (53.5)            (26.2)         (18.7)
Income tax benefit ..................................        -           (16.9)                -           (5.9)
                                                        ------          ------            ------         ------
Net loss ............................................    (15.0)%         (36.6)%           (26.2)%        (12.8)%
                                                        ------          ------            ------         ------
</TABLE>

Net revenues for the three months ended March 31, 1999 decreased to $2,437,877
from $3,700,832 for the comparable period in the prior fiscal year. Net revenues
for the nine months ended March 31, 1999 decreased to $7,844,285 from
$16,312,324 for the comparable period in the prior fiscal year. The decrease in
net revenues was attributable to the continued transition to the NeoStation
family of products which have lower average selling prices ("ASPs") than older
products, and the gradual process associated with the full scale implementation
of thin client computers by corporate customers subsequent to the deployment of
Windows NT 4.0 Terminal Server Edition by Microsoft in August 1998. In addition,
revenues from sales to two of the Company's major customers declined
significantly in the three and nine months ended March 31,1999 as compared to
the comparable periods in the prior year as a result of completing delivery
under existing purchase orders during the nine months ended March 31, 1998. The
Company is subject to significant variances in its quarterly operating results
because of the fluctuations in the timing of the receipt of large orders.


                                    Page 10
<PAGE>

For the three months ended March 31, 1999, the Company's gross profit percentage
amounted to 22.6% versus 22.0% for the comparable period of the prior fiscal
year. The Company's gross profit percentage for the nine month period ended
March 31, 1999 was 11.3% after the provision for inventory obsolescence of
$800,000 and 21.5% before such provision versus 25.8% for the comparable period
of the prior fiscal year. The reduction in gross profit percentage in relation
to the nine month period ended March 31,1998 was a result of fixed overhead
costs representing a higher percentage of revenue and, to a lesser extent, the
impact of reduced ASPs which were not offset by lower manufacturing costs. The
Company anticipates that its gross margin percentage will vary from quarter to
quarter depending on ASP's, fixed costs in relation to revenue levels and the
mix of business, including the mix of hardware and software revenues. The gross
profit percentage 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.

Operating expenses for the three and nine month periods ended March 31, 1999
were $932,848 and $3,367,165, respectively, compared to $2,666,597 and
$6,953,231 in the comparable periods of the prior fiscal year. Sales and
marketing expenses decreased to $313,819 and $1,244,345 for the three and nine
months ended March 31, 1999 as compared to $1,325,783 and $3,838,795 for the
comparable periods of the prior year as a result of the continued restructuring
of the U.S. and international sales force and reduced commissions attributable
to lower revenues. During the nine months ended March 31, 1999, the Company
terminated its relationship with its U.S. distributor. The Company believes that
the elimination of a level of distribution will allow it to price its products
more competitively without a negative impact on gross profit. The Company is
utilizing a low cost telesales channel to complement its current sales efforts
and is selling to Value Added Resellers ("VAR's"). Research and development
expenses for the three and nine months ended March 31, 1999 decreased to
$161,001 and $571,301, respectively, as compared to $384,995 and $1,268,857 for
the comparable periods in the prior year primarily as a result of the Company's
completion of the introduction of the NeoStation family of products in fiscal
1998.The decreases in research and development expenses were accomplished
primarily through staffing changes and a substantial reduction in the use of
outside consultants and services. General and administrative expenses for the
three and nine months ended March 31, 1999 decreased to $458,028 and $1,551,519,
respectively, as compared to $796,588 and $1,686,348 for the comparable periods
in the prior year due primarily to the Company's cost reduction efforts. General
and administrative expenses for the nine months ended March 31, 1998 include the
impact of the reimbursement of expenses related to ITC totaling $292,000. The
reduction of BDT expenses for the three and nine month periods ended March 31,
1999 as compared to the comparable periods in the prior year reflects the impact
of an agreement which reduced the Company's ownership position and eliminated
the Company's requirement to fund future operations of BDT effective January 1,
1998.

The Company realized net interest income of $18,507 and $13,610 for the three
and nine months ended March 31, 1999 as compared to net interest expense of
$127,955 and $303,215 for the comparable periods in the prior year. The decline
in interest expense was primarily due to decreased borrowings under the
Company's line of credit combined with the collection of recoverable income
taxes of $1,121,554 and the proceeds of $406,930 from the sale of its equity
investment in Broadreach and the investment of such funds in interest bearing
accounts.

The effective income tax rate was approximately 31.6% and 31.5% for the three
and nine month periods ended March 31, 1998, respectively. No income tax benefit
was recognized as a result of the net operating losses incurred during the three
and nine month periods ended March 31, 1999. The tax benefits for the three and
nine month periods ended March 31, 1998 reflect recovery of taxes paid in prior
years.


                                    Page 11
<PAGE>


For the three and nine month periods ended March 31, 1999, the Company's net
loss was $364,686 and $2,058,009, respectively, as compared to a net loss of
$1,353,418 and $2,086,684 for the comparable periods of the prior year. The
decrease in net loss for the three month period ended March 31, 1999 compared to
the comparable period in the prior year was primarily attributable to the
Company's cost reduction and restructuring actions. The Company's net loss for
the nine months ended March 31, 1999 includes a provision for inventory
obsolescence of $800,000 and no income tax benefit from the net operating loss,
offset in part by reduced operating and interest expenses and the gain of
$406,930 on the sale of the Company's equity investment in Broadreach. The
Company's net loss for the nine months ended March 31, 1998 includes a reduction
in general and administrative expenses of $292,000 related to ITC and an income
tax benefit of $959,570.

Liquidity and Capital Resources

At March 31, 1999, the Company had net working capital of approximately
$3,042,000 composed primarily of cash and cash equivalents and accounts
receivable. The Company's principal sources of liquidity included approximately
$1,962,000 of cash and cash equivalents and a $2,000,000 revolving bank line of
credit facility which was entered into during the three month period ended March
31, 1999. The line of credit agreement expires on December 31, 1999 and provides
for interest at the bank's prime rate plus 2%. The agreement also provides that
the Company grant security interests in substantially all of its assets, that
borrowings under the line will be based on the amount of eligible accounts
receivable, as defined, and that the Company maintain specified ratios of
working capital and net worth, as defined. Management of the Company believes
that the new line, in conjunction with its existing cash reserves and the
recently completed restructuring of its operations, will provide adequate
funding for its operating requirements for the calendar year 1999.

Cash and cash equivalents increased by approximately $660,000 during the nine
month period ended March 31, 1999, primarily due to the collection of
recoverable income taxes, the proceeds from the sale of its equity investment in
Broadreach and a decrease in accounts receivable offset by the loss from
operations, repayments under the line of credit and a decrease in accounts
payable and accrued expenses.

The Company generated cash from operations of approximately $3,314,000 and
$793,000 during the nine months ended March 31, 1999 and 1998, respectively.

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. However, the
Company must achieve profitable operations in order to provide adequate funding
for the long term.


Year 2000 Compliance

The Company continues to evaluate its Year 2000 exposures. The following areas
were evaluated: internal management information and embedded systems, products,
vendors and customers.

   
The Company utilizes various computer software programs and systems as part of
its internal management information systems which are primarily off-the-shelf
products purchased from commercial sources with minor customization. Updates to
these products are routinely installed by the Company to upgrade the systems and
correct known defects in the software. All major systems have been reviewed 

       
                                     Page 12

<PAGE>

for Year 2000 issues. The Company's financial accounting software is not Year
2000 compliant. The Company is testing an upgrade to the current software, which
is Year 2000 compliant, and will cost approximately $25,000 for the software and
training. Conversion to the updated software is scheduled for the second quarter
of calendar year 1999. The Company's engineering department utilizes UNIX based
systems, which are not Year 2000 compliant; however, the nature of the
utilization is not date sensitive. The operating systems can be upgraded for
less than $5,000. The Company is in the process of implementing a sales contact
management and service data base software application which is Year 2000
compliant. The total cost of such software is expected to be less than $15,000.
All other significant internal systems are either compliant or not critical to
ongoing operations. The Company does not utilize any significant systems with
embedded technology.
    

All of the Company's products sold after March 1997 were tested and found to be
Year 2000 compliant.

None of the Company's vendors provides more than 20% of the Company's annual raw
material requirements and alternative sources are generally available. The
Company is scheduled to complete the evaluation of the Year 2000 readiness of
its sole source vendors by June 30, 1999. Contingency plans will be developed to
ensure continued supply in the event a vendor expects to incur difficulties
achieving Year 2000 compliance. In addition, any customers which represent more
than 10% of the Company's annual revenues will be surveyed for compliance with
Year 2000 by June 30, 1999 in an effort to identify possible interruptions to
the Company's revenue streams. The Company intends to complete this analysis and
contingency planning by September 30, 1999. There can be no assurance that the
Company will not be adversely affected by the failure of distributors,
suppliers, customers and vendors with which it interacts to become Year 2000
compliant. The Company has not determined the extent to which its business and
customers might be affected in that event.

The Company estimates that the total cost to complete its Year 2000 evaluation
and remediation, including normal planned system upgrades, of all internal
systems will be less than $50,000, of which approximately $35,000 has been
incurred to date. Funding for these costs is expected to be provided by cash
flows from operations. The Company has not deferred any significant system
projects due to its Year 2000 efforts.

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 anticipated purchases by customers, future margins and margin
trends, future revenues and operating losses, the Company's competitive
position, lower cost of ownership of the Company's systems, expansion of
software products and thin client computer hardware products, statements
regarding Year 2000 compliance and statements regarding the pending litigation.
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 lower its
costs, the ability of the Company to market its products with Motorola to OEM
customers, reliance on Microsoft's actions relating to Windows NT, customers'
acceptance of Neoware's line of thin clients and newly introduced options,
pricing pressures, rapid technological changes in the industry, growth of the
thin client computer market, increased competition and the ability of the
Company, its distributors, vendors, suppliers and customers to effectively


                                    Page 13
<PAGE>

address Year 2000 compliance issues. 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 entitled Cerrato, Inc. v. Neoware Systems, Inc.,
98 Civ. 1748 (JSM), was filed in the United States District Court for the
Southern District of New York, naming as defendants the Company, its Chairman,
and its former CFO (the New York action). The Complaint asserts claims under ss.
10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act"), Rule
10b-5 promulgated thereunder, and common law. The complaint, which 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, alleges, 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. A
First Amended Complaint ("FAC") was filed on or about May 1, 1998. The FAC adds
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: Galitzer v.
Neoware Systems, Inc., 98CV2582 (BWK), Pollison v. Neoware Systems, Inc.,
98CV2879 (BWK), Tuchman v. Neoware Systems, Inc., 98CV2868 (BWK), and Grubin v.
Neoware Systems, Inc., 98CV3651 (BWK), were filed in the United States District
Court for the Eastern District of Pennsylvania (the "Pennsylvania actions"). The
Pennsylvania actions name some of the same individual defendants as the FAC, as
well as certain additional directors and officers, and alleges violations of
ss.ss. 10(b) and 20(a) of the Exchange Act and Rule 10b-5 based on factual
allegations similar to those added to the New York action in the FAC on behalf
of a purported class of purchasers of the Company's securities between October
30, 1997 and April 30, 1998. In December 1998, the New York action was
transferred to the Eastern District of Pennsylvania and now all actions have
been consolidated under the heading In re Neoware Systems, Inc. Securities
Litigations, Master File No. 98-CV-2582. Lead co-plaintiffs and counsel have
been appointed, and a consolidated and amended complaint and an amended motion
for class certification have been filed.

Defendants' time to respond to the amended consolidated complaint and the
amended class certification motion has not yet expired. The Company disputes the
validity of these claims and intends to defend the cases vigorously.

On May 5, 1998, a complaint was filed in the Court of Common Pleas of Montgomery
County against the Company by Development Concepts, Inc. The complaint asserts
claims for common law breach of contract, fraud, misrepresentation, breach of
warranty and violations of the federal Lanham Act arising primarily from the
parties' contractual relationships. The complaint seeks an indeterminate amount
of monetary damages in excess of $1,500,000. On October 29, 1998, the Company
filed its Answer and Counterclaim to the Complaint asserting claims for breach
of contract, unjust enrichment, unfair competition and misappropriation of trade
secrets. The Counterclaim demands injunctive and monetary relief in excess of
$180,000. The Company disputes the validity of Development Concepts, Inc.'s
claims and intends to both defend these claims and pursue its own counterclaims
vigorously.


                                    Page 14
<PAGE>

Management does not anticipate that resolution of the pending litigation, either
separately or in the aggregate, will have a material effect on the Company's
financial position or results of operations. This is a forward-looking
assessment, which may change as the cases develop. While management may reassess
this from time to time, it does not undertake to do so on any regular basis.


Item 6.  Exhibits and Reports on Form 8-K

                  (a)      Exhibits:

                           None
                  (b)      Reports on Form 8-K:

                           None



                                     Page 15
<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 14, 1999             By: /S/ EDWARD C. CALLAHAN, JR.  
                                    -----------------------------
                                        Edward C. Callahan, Jr., President
                                        and Chief Executive Officer




Date: May 14, 1999              By: /S/ VINCENT T. DOLAN             
                                    ---------------------------------
                                        Vincent T. Dolan, Chief Financial 
                                        Officer (Principal Accounting
                                        Officer and Principal Financial Officer)

                                     Page 16