<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 September 30, 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 November 9, 2001, there were 10,204,663 outstanding shares of the
Registrant's Common Stock.


                                       1

<PAGE>


                              NEOWARE SYSTEMS, INC.

                                      INDEX


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

            Consolidated Balance Sheets:
            September 30, 2001 and June 30, 2000                             3

            Consolidated Statements of Operations:
            Three Months Ended September 30, 2001 and 2000                   4

            Consolidated Statements of Cash Flows:
            Three Months Ended September 30, 2001 and 2000                   5

            Notes to Consolidated Financial Statements                       6

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

PART II.

Item 1. Legal Proceedings                                                   16

Item 6. Exhibits and Reports on Form 8-K                                    16

Signatures                                                                  17


                                       2
<PAGE>


                              NEOWARE SYSTEMS, INC
                           CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)
<TABLE>
<CAPTION>

ASSETS
                                                             September 30, 2001        June 30, 2001
                                                            -------------------        -------------
<S>                                                                    <C>                   <C>
CURRENT ASSETS:
Cash and cash equivalents                                          $12,165,500          $11,712,535
Marketable securities                                                  343,333              366,667
Accounts receivable, net                                             3,335,059            3,502,013
Inventories                                                            415,146              458,736
Prepaid expenses and other                                             257,582              369,529
Notes receivable                                                        26,072               26,072
                                                                  ------------         ------------
Total current assets                                                16,542,692           16,435,552

Property and equipment, net                                            202,280              199,397
Notes receivable                                                        21,549               52,193
Capitalized and purchased software, net                                 69,880               77,247
Intangible assets, net                                               2,021,874            2,024,453
                                                                  ------------         ------------
                                                                   $18,858,275          $18,788,842
                                                                  ============         ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable                                                    $1,104,530             $935,943
Accrued expenses                                                     1,124,963            1,473,718
Deferred revenue                                                       293,972              289,278
                                                                  ------------         ------------
Total current liabilities                                            2,523,465            2,698,939
                                                                  ------------         ------------

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock                                                              -                    -
Common stock                                                            10,286               10,280
Additional paid-in capital                                          24,530,673           24,524,567
Treasury stock                                                        (100,000)            (100,000)
Accumulated other comprehensive income                                  45,790               66,667
Accumulated deficit                                                 (8,151,939)          (8,411,611)
                                                                 -------------         ------------
Total stockholders' equity                                          16,334,810           16,089,903
                                                                                       ------------
                                                                 -------------
                                                                   $18,858,275          $18,788,842
                                                                 =============         ============
</TABLE>

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

                                       3

<PAGE>

                              NEOWARE SYSTEMS, INC
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                         Three Months Ended             Three Months Ended
                                                           September 30,                   September 30,
                                                                2001                           2000
                                                         ------------------             -------------------

      <S>                                                         <C>                            <C>
   Net revenues                                               $ 5,264,729                    $ 4,033,337
   Cost of revenues                                             3,060,589                      2,861,755
                                                              -----------                    -----------
   Gross profit                                                 2,204,140                      1,171,582
                                                              -----------                    -----------

   Sales and marketing                                          1,210,108                        714,276
   Research and development                                       330,866                        164,827
   General and administrative                                     515,447                        519,711
   Acquisition costs                                                    -                        161,038
                                                              -----------                    -----------
   Operating expenses                                           2,056,421                      1,559,852
                                                              -----------                    -----------

   Operating income (loss)                                        147,719                       (388,270)

   Interest income, net                                           111,953                        200,726
                                                              -----------                    -----------

   Net income (loss)                                          $   259,672                    $  (187,544)
                                                              ===========                    ===========

   Basic income (loss) per share                              $      0.03                    $     (0.02)
                                                              ===========                    ===========

   Diluted income (loss) per share                            $      0.02                    $     (0.02)
                                                              ===========                    ===========

   Weighted average number of
      shares used in basic
      earnings per share computation                           10,179,851                     10,275,163
                                                              ===========                    ===========

   Weighted average number of
      shares used in diluted
      earnings per share computation                           10,596,720                     10,275,163
                                                              ===========                    ===========


</TABLE>

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

                                       4
<PAGE>

                              NEOWARE SYSTEMS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                            Three Months Ended         Three Months Ended
                                                                               September 30,             September 30,
                                                                                   2001                       2000
                                                                            ------------------         -------------------

<S>                                                                                 <C>                        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                                 $259,672                $  (187,544)
Adjustments to reconcile net income (loss) to
      net cash provided by (used in) operating activities-
            Depreciation and amortization                                           50,821                     95,190
Changes in operating assets and liabilities-
      (Increase) decrease in:
            Accounts receivable                                                    166,954                   (577,463)
            Inventories                                                             43,590                    187,682
            Prepaid expenses and other                                             114,403                     31,076
      Increase (decrease) in:
            Accounts payable                                                       168,587                    (64,624)
            Accrued expenses                                                      (348,755)                   202,830
            Deferred revenue                                                         4,694                    (34,208)
                                                                               -----------                -----------
Net cash provided by (used in) operating activities                                459,966                   (347,061)
                                                                               -----------                -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
      Purchases of property and equipment                                          (31,336)                   (49,107)
      Increase in intangible assets                                                (12,421)                         -
      Capitalized software                                                               -                    (23,362)
                                                                               -----------                -----------
Net cash used in investing activities                                              (43,757)                   (72,469)
                                                                               -----------                -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
      Decrease in notes receivable                                                  30,644                          -
      Exercise of stock options                                                      6,112                          -
                                                                               -----------                -----------
Net cash provided by financing activities                                           36,756                          -
                                                                               -----------                -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                   452,965                   (419,530)
                                                                               -----------                -----------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                  11,712,535                 13,831,792
                                                                               -----------                -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                       $12,165,500                $13,412,262
                                                                               ===========                ===========
SUPPLEMENTAL DISCLOSURES:
      Cash paid for interest                                                   $     3,526                $     2,349
                                                                               ===========                ===========
</TABLE>


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


                                       5
<PAGE>


                              NEOWARE SYSTEMS, INC.

              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION
   ---------------------

The accompanying unaudited consolidated financial statements of Neoware Systems,
Inc. and Subsidiaries (the "Company") have been prepared in conformity with
generally accepted accounting principles. The interim financial information,
while unaudited, reflects all normal recurring adjustments which are, in the
opinion of management, necessary to present a fair statement of financial
position and operating results for the interim periods presented. The results of
operations for the three month period ended September 30, 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.
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. MARKETABLE SECURITIES
   ---------------------

The Company's marketable equity securities have been classified as
"available-for-sale" under the provisions of Statement of Financial Accounting
Standards No. ("SFAS") 115, "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 $45,790 at September 30, 2001 and
$66,667 at June 30, 2001. The Company owned 300,000 shares of Boundless
Corporation common stock at September 30, 2001 which has been classified as
current, available-for-sale securities.

                                       6
<PAGE>
4. 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 should be 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
during the three months ended September 30, 2001 and 2000 were $16,920 and
$67,797, respectively. Accounts receivable relating to "bill and hold"
transactions were $16,920 and $67,797 at September 30, 2001 and 2000,
respectively.

Net revenues from one customer were 16% of total net revenues for the three
months ended September 30, 2001 and net revenues from a different customer were
21% of total net revenues for the three months ended September 30, 2000.

5. 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:

                                                September 30,         June 30,
                                                    2001                2001
                                                -------------         --------

Purchased components and subassemblies            $129,409           $167,730
Finished goods                                     285,737            291,006
                                                  --------           --------
                                                  $415,146           $458,736
                                                  ========           ========

6. 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% (6.5% at September 30, 2001). At September 30, 2001 and June 30, 2001,
there was $2,000,000 available for borrowing under the line. During the three
months ended September 30, 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.

                                       7
<PAGE>

7. EARNINGS PER SHARE
   ------------------

The Company applies SFAS No. 128, "Earnings per Share." ("SFAS") No. 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:

<TABLE>
<CAPTION>

                                                               For the Three Months Ended
                                                                     September 30,

                                                              2001                 2000
                                                              ----                 ----
<S>                                                          <C>                  <C>
  Net income (loss)                                          $259,672              $(187,544)
                                                           ==========             ==========

  Weighted average shares outstanding:
     Basic                                                 10,179,851             10,275,163
     Employee stock options                                   416,869                      -
                                                           ----------             ----------
  Diluted                                                  10,596,720             10,275,163
                                                           ==========             ==========
  Net income (loss) per common share:
     Basic                                                      $0.03                 $(0.02)
                                                                =====                 ======
     Diluted                                                    $0.02                 $(0.02)
                                                                =====                 ======
</TABLE>


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

Introduction

The Company provides software 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 computer 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.



                                       8
<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.

                                                For the Three Months Ended
                                                      September 30,
                                                --------------------------
                                                    2001         2000
                                                    ----         ----
           Gross profit                             41.9%        29.0%

           Operating expenses
                Sales and marketing                 23.0         17.6
                Research and development             6.3          4.1
                General and administrative           9.8         12.9
                Acquisition costs                      -          4.0
                                                   -----        -----
           Operating  income (loss)                  2.8         (9.6)

           Interest income, net                      2.1          5.0
                                                   -----        -----
           Net income (loss)                         4.9%        (4.6)%
                                                   =====        =====

Net revenues for the three months ended September 30, 2001 increased by
$1,231,392 or 31% to $5,264,729 from $4,033,337 for the comparable period in the
prior fiscal year. The increase in net revenues was primarily attributable to
the shipment of a higher number of units of the Company's Eon computing
appliance products and from the introduction of the Capio product line acquired
in June 2001.

The Company's gross profit as a percentage of net revenues increased to 42% for
the three months ended September 30, 2001 from 29% for the comparable period of
the prior fiscal year. The increase was primarily attributable to reductions in
the purchase costs of certain components and third party license fees and a more
favorable mix of products sold. In addition, fixed overhead costs represented a
lower percentage of revenue during the three month period ended September 30,
2001 than in the prior year.

Operating expenses for the three month period ended September 30, 2001 were
$2,056,421, an increase of $496,569 or 32% from operating expenses of $1,559,852
in the comparable period of the prior fiscal year as a result of the following:

         Sales and marketing expenses for the three month period ended September
30, 2001 were $1,210,108, an increase of $495,832 or 69% from sales and
marketing expenses of $714,276 for the comparable period in the prior fiscal
year. This increase reflects 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 acquisition of the Capio
product line, along with higher professional costs, all in conjunction with the
Company's growth strategy.

         Research and development expenses for the three month period ended
September 30, 2001 were $330,866, an increase of $166,039 or 101% from research
and development expenses of $164,827 in the comparable period in the prior year
primarily as a result of an increase in personnel dedicated to software
development activities.

         General and administrative expenses for the three month period ended
September 30, 2001 were $515,447, a decrease of $4,264 or 1% from $519,711 in
the comparable period in the prior year as a result of the Company's focus on
cost containment.

                                       9
<PAGE>
         Acquisition costs of $161,038 were incurred during the three month
period ended September 30, 2000, which related primarily to professional
services fees incurred in connection with a proposed acquisition that was not
consummated.

Net interest income for the three month period ended September 30, 2001 was
$111,953, a decrease of $88,773 or 44% from $200,726 for the comparable period
in the prior fiscal year. The decrease was due to lower interest rates and a
reduction in the amount invested.

No income tax expense was recognized in the three month period ended September
30, 2001 due to the availability of net operating loss carryforwards. No income
tax benefit was recognized in the three month period ended September 30. 2000 as
there was no assurance that the benefit of the net operating loss carryforwards
would be realized.

For the three months ended September 30, 2001, the Company had net income of
$259,672 as compared to a net loss of $187,544 for the comparable period 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 September 30, 2001, the Company had net working capital of $14,019,227
composed primarily of cash and cash equivalents, marketable securities, accounts
receivable and inventory. The Company's principal sources of liquidity include
$12,508,833 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 September 30, 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 three months ended September 30, 2001.

Cash and cash equivalents increased by $452,965 during the three months ended
September 30, 2001, primarily as a result of net income and reductions in
accounts receivable, inventory and prepaid expenses, offset by a net decrease in
accrued expenses.

The Company generated cash from operations of $459,966 for the three months
ended September 30, 2001 versus using cash from operations of $347,061 for the
three months ended September 30, 2000. The increase is primarily attributable to
higher revenues and improved gross margins, offset by increased operating
expenses. Cash flow from operations can vary significantly from quarter to
quarter depending on the timing of payments from, and shipments to, large
customers.

The Company used $43,757 and $72,469 of cash from investing activities for the
three months ended September 30, 2001 and 2000, respectively. The decrease of
$28,712 was the result of lower spending on property plant and equipment and
capitalized software, offset by an increase in intangible assets.

The Company generated cash of $36,756 from financing activities during the three
months ended September 30, 2001 as a result of repayments of notes receivable
and cash received from the exercise of employee stock options.

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 must maintain sustained profitability in order to provide
adequate funding for the long term.


                                       10
<PAGE>
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 three
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
three quarters, we have incurred net losses in the past, including a net loss of
$500,000 in the year ended June 30, 2001. In addition, we had an accumulated
deficit of $8.2 million as of September 30, 2001. We expect to continue to incur
significant product development, sales and marketing and administrative
expenses. Our operating expenses increased during the three months ended
September 30, 2001 reflecting the hiring of additional key personnel as we
implement our growth plan. As a result, we will need to generate significant
revenues to maintain profitability. We cannot be certain that we will be able to
sustain profitability in the future. 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 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, we cannot forecast operating
expenses based on historical results, and 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. We do not know whether our business
will grow rapidly enough to absorb the costs of these employees and facilities.
As a result, our quarterly operating results could fluctuate.

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.


                                       11
<PAGE>

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.
We believe that our expectations for the growth of the computing appliance
market may not be fulfilled if customers continue to use general-purpose
personal computers. In addition, 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, its operations may suffer.

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. Linux 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 or if Mr.
Torvalds or other prominent Linux developers were to no longer work on 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.

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<PAGE>
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 do not have a large consulting staff, and our revenues may suffer if
customers demand extensive consulting or other support services.

         Many of our competitors offer extensive consulting services in addition
to products. If we introduced a product that required extensive consulting
services for installation and use or if our customers wanted to purchase from a
single vendor a menu of items that included extensive consulting services, we
would be required to change our business model. We would be required to hire and
train consultants, outsource the consulting services or enter into a joint
venture with another company that could provide those services. If these events
were to occur, our future profits would likely suffer because customers would
choose another vendor or we would incur the added expense of hiring and
retaining consulting personnel.

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.

                                       13
<PAGE>
         Our future competitive performance depends on a number of factors,
including our ability to:

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

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


                                       14
<PAGE>
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.

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
orother 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.

                                       15
<PAGE>
PART II. OTHER INFORMATION

Item 1. Legal Proceedings

         None

Item 6. Exhibits and Reports on Form 8-K

         None

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<PAGE>


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.


                                 NEOWARE SYSTEMS, INC.



Date:  November 14, 2001         By: /S/ MICHAEL G. KANTROWITZ
                                 -----------------------------
                                         Michael G. Kantrowitz
                                         President and Chief Executive Officer



Date:  November 14, 2001         By: /S/ VINCENT T. DOLAN
                                 ------------------------
                                         Vincent T. Dolan
                                         Vice President-Finance/Administration
                                         (Principal Accounting Officer and
                                          Principal Financial Officer)

                                       17