**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549____________________**

**FORM 10-Q____________________**

|  (Mark One)                                          |
|-----------------------------------------------------------|
|                                                      |   |
|                                                           | QUARTERLY    REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934 |
|                                                      |
|                                                      |   |
|  For the Quarter ended December 31, 2003             |
|                                                      |   |
|                                                           | 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****incorporation or organization)** |   |   | **     (IRS Employer Identification No.)**  |   |
|                                                                  |   |   |

| 400 Feheley DriveKing 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 |  | No |  |
|-----|--|----|--|

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

| Yes |  | No |  |
|-----|--|----|--|

As of February 10, 2004, there were 15,769,139 outstanding shares of the Registrant's Common Stock.

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NEOWARE SYSTEMS, INC.

INDEX

    

| **PART I.     FINANCIAL    INFORMATION  ** |   |   |                                                       |   |
|--------------------------------------------------------------------------|--------|--------|------------------------------------------------------------|--------|
|                                                                     |   |   |                                                       |   |   | **PageNumber** |   |
|                                                                     |   |   |                                                       |   |  |  |   |
|                                                                     |   |   |                                                       |   |   |   |   |
| Item 1.                                                                  |   |   | Consolidated Financial Statements:                         |   |   |   |   |
|                                                                     |   |   |                                                       |   |   |   |   |
|                                                                     |   |   | Consolidated Balance Sheets:                               |   |  |   |   |
|                                                                     |   |   | December 31, 2003 and June 30, 2003                        |   |  | 3 |   |
|                                                                     |   |   |                                                       |   |   |   |   |
|                                                                     |   |   | Consolidated Statements of Operations:                     |   |  |   |   |
|                                                                     |   |   | Six and Three Months Ended December 31, 2003 and 2002      |   |  | 4 |   |
|                                                                     |   |   |                                                       |   |   |   |   |
|                                                                     |   |   | Consolidated Statements of Cash Flows:                     |   |   |  |   |
|                                                                     |   |   | Six Months Ended December 31, 2003 and 2002                |        |  | 5 |   |
|                                                                     |   |   |                                                       |   |   |   |   |
|                                                                     |   |   | Notes to Consolidated Financial Statements                 |   |  | 6 |   |
|                                                                     |   |   |                                                       |   |   |   |   |
| Item 2.                                                                  |   |   | Management's Discussion and Analysis of Financial          |   |  |  |   |
|                                                                     |   |   | Condition and Results of Operations                        |   |  | 10 |   |
|                                                                     |   |   |                                                       |   |   |   |   |
| Item 3.                                                                  |   |        | Quantitative and Qualitative Disclosures About Market Risk |   |  | 19 |   |
|                                                                     |   |   |                                                       |   |   |   |   |
| Item 4.                                                                  |   |        | Controls and Procedures                                    |   |  | 19 |   |
|                                                                     |   |   |                                                       |   |   |   |   |
| **PART II.     OTHER INFORMATION**              |   |   |                                                       |   |
|                                                                     |   |   |                                                       |   |   |   |   |
| Item 1.                                                                  |   |        | Legal Proceedings                                          |   |  | 20 |   |
|                                                                     |   |   |                                                       |   |   |   |   |
| Item 2.                                                                  |        |        | Changes in Securities and Use of Proceeds                  |        |  | 20 |   |
|                                                                     |   |   |                                                       |   |   |   |   |
| Item 4.                                                                  |        |        | Submission of Matters to a Vote of Security Holders        |        |  | 20 |   |
|                                                                     |   |   |                                                       |   |   |   |   |
| Item 6.                                                                  |        |        | Exhibits and Reports on Form 8-K                           |        |  | 20 |   |
|                                                                     |   |   |                                                       |   |   |   |   |
| Signatures                                                               |        |        |                                                       |        |  | 21 |   |

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**NEOWARE SYSTEMS, INC.  CONSOLIDATED BALANCE SHEETS**

|                                                                                                                                                                                                                          |   |   | **(Unaudited)**      |   |   |             |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------------------|--------|--------|------------------|--------|
|                                                                                                                                                                                                                          |   |   | **December 31,2003** |   |   | **June 30,2003** |   |
|                                                                                                                                                                                                                               |        |        |                      |        |        |                  |        |
|                                                                                                                                                                                                                          |   |   |                      |   |   |                  |   |
| **ASSETS**                                                                                                                                                                                                                    |   |   |                 |   |   |             |   |
| CURRENT ASSETS:                                                                                                                                                                                                               |   |   |                 |   |   |             |   |
|  Cash    and cash equivalents                                                                                                                                                                                            |   | $      | 40,004,486           |   | $      | 26,013,555       |   |
|  Short-term    investments                                                                                                                                                                                               |   |   | 10,793,619           |   |   | 3,151,320        |   |
|  Accounts    receivable, net                                                                                                                                                                                             |   |   | 9,270,309            |   |   | 11,088,994       |   |
|  Inventories                                                                                                                                                                                                             |   |   | 739,798              |   |   | 772,494          |   |
|  Prepaid    expenses and other                                                                                                                                                                                           |   |   | 847,785              |   |   | 798,383          |   |
|  Deferred    income taxes                                                                                                                                                                                                |   |   | 945,585              |   |   | 945,585          |   |
|                                                                                                                                                                                                                               |        |        |                      |        |        |                  |        |  |  |  |
|   Total    current assets                                                                                                                                                                                           |   |   | 62,601,582           |   |   | 42,770,331       |   |
|                                                                                                                                                                                                                               |        |        |                      |        |        |                  |        |  |  |  |  |  |  |
|                                                                                                                                                                                                                          |   |   |                 |   |   |             |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                          |   |   |                 |   |   |             |   |
| Property and equipment, net                                                                                                                                                                                                   |   |   | 541,728              |   |   | 572,048          |   |
| Goodwill                                                                                                                                                                                                                      |   |   | 17,304,671           |   |   | 8,943,175        |   |
| Intangibles, net                                                                                                                                                                                                              |   |   | 4,050,295            |   |   | 2,090,617        |   |
| Other                                                                                                                                                                                                                         |   |   | 56,677               |   |   | —           |   |
|                                                                                                                                                                                                                               |        |        |                      |        |        |                  |        |
|                                                                                                                                                                                                                          |   |   |                 |   |   |             |   | $ | 84,554,953 |   | $ | 54,376,171 |   |
|                                                                                                                                                                                                                               |        |        |                      |        |        |                  |        |  |  |  |  |  |  |
|                                                                                                                                                                                                                          |   |   |                 |   |   |             |   |   |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                |   |   |                 |   |   |             |   |
| CURRENT LIABILITIES:                                                                                                                                                                                                          |   |   |                 |   |   |             |   |
|  Accounts    payable                                                                                                                                                                                                     |   | $      | 3,633,082            |   | $      | 4,206,346        |   |
|  Accrued    expenses                                                                                                                                                                                                     |   |   | 2,396,701            |   |   | 2,817,791        |   |
|  Capital    lease obligations                                                                                                                                                                                            |   |   | 6,926                |   |   | 6,557            |   |
|  Deferred    revenue                                                                                                                                                                                                     |   |   | 878,146              |   |   | 691,614          |   |
|                                                                                                                                                                                                                               |        |        |                      |        |        |                  |        |  |  |  |
|   Total    current liabilities                                                                                                                                                                                      |   |   | 6,914,854            |   |   | 7,722,308        |   |
|                                                                                                                                                                                                                               |        |        |                      |        |        |                  |        |  |  |  |  |  |  |
|                                                                                                                                                                                                                          |   |   |                 |   |   |             |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                          |   |   |                 |   |   |             |   |
| Capital lease obligations                                                                                                                                                                                                     |   |   | 7,166                |   |   | 10,252           |   |
|                                                                                                                                                                                                                               |        |        |                      |        |        |                  |        |
| Deferred income taxes                                                                                                                                                                                                         |   |   | 16,788               |   |   | 16,788           |   |
|                                                                                                                                                                                                                               |        |        |                      |        |        |                  |        |
|                                                                                                                                                                                                                          |   |   |                 |   |   |             |   |   |   |   |   |   |   |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                                                                                                |   |   |                 |   |   |             |   |
|                                                                                                                                                                                                                          |   |   |                 |   |   |             |   |   |   |   |   |   |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                                                   |   |   |                 |   |   |             |   |
|  Preferred      stock, $.001 par value, 1,000,000 shares authorized     and none issued and outstanding                                                                                         |   |   | —               |   |   | —           |   |
|  Common      stock, $.001 par value, 50,000,000 shares authorized,     15,865,764 and 14,054,800    shares issued and 15,765,764 and     13,954,800 shares outstanding |   |   | 15,767               |   |   | 14,056           |   |
|  Additional    paid-in capital                                                                                                                                                                                           |   |   | 71,266,921           |   |   | 44,214,516       |   |
|  Treasury    stock, 100,000 shares at cost                                                                                                                                                                               |   |   | (100,000             | )      |   | (100,000         | )      |
|  Other    comprehensive income (loss)                                                                                                                                                                                    |   |   | 649,674              |   |   | (26,943          | )      |
|  Retained    earnings                                                                                                                                                                                                    |   |   | 5,783,782            |   |   | 2,525,194        |   |
|                                                                                                                                                                                                                               |        |        |                      |        |        |                  |        |  |  |  |
|   Total    stockholders’ equity                                                                                                                                                                               |   |   | 77,616,144           |   |   | 46,626,823       |   |
|                                                                                                                                                                                                                               |        |        |                      |        |        |                  |        |
|                                                                                                                                                                                                                |   | $      | 84,554,953           |   | $      | 54,376,171       |   |
|                                                                                                                                                                                                                               |        |        |                      |        |        |                  |        |

See accompanying notes to consolidated financial statements.

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

|                                                                                                                         |   |   | **Three Months EndedDecember 31,** |   |   | **Six Months EndedDecember 31,** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|--------|------------------------------------|--------|--------|----------------------------------|--------|
|                                                                                                                         |   |        |                                    |   |        |                                  |   |
|                                                                                                                         |   |   | **2003**                           |   |   | **2002**                         |   |   | **2003** |   |   | **2002** |   |
|                                                                                                                         |   |        |                                    |   |        |                                  |   |  |  |   |  |  |   |
|                                                                                                                         |   |   |                               |   |   |                             |   |   |   |   |   |   |   |
|                                                                                                                         |   |   |                               |   |   |                             |   |   |   |   |   |   |   |
| Net revenues                                                                                                                 |   | $      | 15,322,269                         |   | $      | 14,713,778                       |   | $ | 30,335,656 |   | $ | 28,230,456 |   |
| Cost of revenues                                                                                                             |   |   | 7,683,826                          |   |   | 8,167,076                        |   |   | 14,733,057 |   |   | 15,989,578 |   |
|                                                                                                                         |   |        |                                    |   |        |                                  |   |  |  |   |  |  |   |
| Gross    profit                                                                                                              |   |   | 7,638,443                          |   |   | 6,546,702                        |   |   | 15,602,599 |   |   | 12,240,878 |   |
|                                                                                                                         |   |        |                                    |   |        |                                  |   |  |  |   |  |  |   |
|                                                                                                                         |   |   |                               |   |   |                             |   |   |   |   |   |   |   |
| Sales and marketing                                                                                                          |   |   | 3,376,645                          |   |   | 2,299,087                        |   |   | 6,341,950 |   |   | 4,526,420 |   |
| Research and development                                                                                                     |   |   | 686,831                            |   |   | 420,686                          |   |   | 1,407,911 |   |   | 808,449 |   |
| General and administrative                                                                                                   |   |   | 1,478,102                          |   |   | 974,583                          |   |   | 2,935,179 |   |   | 1,882,700 |   |
|                                                                                                                         |   |        |                                    |   |        |                                  |   |  |  |   |  |  |   |
| Operating    expenses                                                                                                        |   |   | 5,541,578                          |   |   | 3,694,356                        |   |   | 10,685,040 |   |   | 7,217,569 |   |
|                                                                                                                         |   |        |                                    |   |        |                                  |   |  |  |   |  |  |   |
|                                                                                                                         |   |   |                               |   |   |                             |   |   |   |   |   |   |   |
| Operating    income                                                                                                          |   |   | 2,096,865                          |   |   | 2,852,346                        |   |   | 4,917,559 |   |   | 5,023,309 |   |
|                                                                                                                         |   |   |                               |   |   |                             |   |   |   |   |   |   |   |
| Interest income, net                                                                                                         |   |   | 94,005                             |   |   | 90,912                           |   |   | 177,323 |   |   | 180,935 |   |
|                                                                                                                         |   |        |                                    |   |        |                                  |   |  |  |   |  |  |   |
|                                                                                                                         |   |   |                               |   |   |                             |   |   |   |   |   |   |   |
| Income    before income taxes                                                                                                |   |   | 2,190,870                          |   |   | 2,943,258                        |   |   | 5,094,882 |   |   | 5,204,244 |   |
| Income taxes                                                                                                                 |   |   | 795,635                            |   |   | 1,059,573                        |   |   | 1,836,294 |   |   | 1,873,528 |   |
|                                                                                                                         |   |        |                                    |   |        |                                  |   |  |  |   |  |  |   |
|                                                                                                                         |   |   |                               |   |   |                             |   |   |   |   |   |   |   |
| Net income                                                                                                                   |   | $      | 1,395,235                          |   | $      | 1,883,685                        |   | $ | 3,258,588 |   | $ | 3,330,716 |   |
|                                                                                                                         |   |        |                                    |   |        |                                  |   |  |  |   |  |  |   |
|                                                                                                                         |   |   |                               |   |   |                             |   |   |   |   |   |   |   |
| Basic earnings per share                                                                                                     |   | $      | 0.09                               |   | $      | 0.14                             |   | $ | 0.21 |   | $ | 0.25 |   |
|                                                                                                                         |   |        |                                    |   |        |                                  |   |  |  |   |  |  |   |
|                                                                                                                         |   |   |                               |   |   |                             |   |   |   |   |   |   |   |
| Diluted earnings per share                                                                                                   |   | $      | 0.09                               |   | $      | 0.13                             |   | $ | 0.20 |   | $ | 0.23 |   |
|                                                                                                                         |   |        |                                    |   |        |                                  |   |  |  |   |  |  |   |
|                                                                                                                         |   |   |                               |   |   |                             |   |   |   |   |   |   |   |
|                                                                                                                         |   |   |                               |   |   |                             |   |   |   |   |   |   |   |
|                                                                                                                         |   |   |                               |   |   |                             |   |   |   |   |   |   |   |
| Weighted average number of common    shares outstanding     in basic earnings per share computation |   |   | 15,742,689                         |   |   | 13,573,656                       |   |   | 15,594,091 |   |   | 13,368,120 |   |
|                                                                                                                         |   |        |                                    |   |        |                                  |   |  |  |   |  |  |   |
|                                                                                                                         |   |   |                               |   |   |                             |   |   |   |   |   |   |   |
| Weighted average number of common shares outstanding     in diluted earnings per share computation  |   |   | 16,285,146                         |   |   | 14,785,902                       |   |   | 16,282,267 |   |   | 14,719,001 |   |
|                                                                                                                         |   |        |                                    |   |        |                                  |   |  |  |   |  |  |   |

See accompanying notes to consolidated financial statements.

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**NEOWARE SYSTEMS, INCCONSOLIDATED STATEMENTS OF CASH FLOWS**(Unaudited)

|                                                                                 |   |   | **Six Months          Ended      December 31,** |   |
|--------------------------------------------------------------------------------------|--------|--------|-------------------------------------------------|--------|
|                                                                                 |   |        |                                                 |   |
|                                                                                 |   |   | **2003**                                        |   |   | **2002** |   |
|                                                                                 |   |        |                                                 |   |  |  |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                |   |   |                                            |   |   |   |   |
| Net    income                                                                        |   | $      | 3,258,588                                       |   | $ | 3,330,716 |   |
| Adjustments    to reconcile net income to net cash provided by operating activities- |   |   |                                            |   |   |   |   |
| Income    tax benefit, primarily from stock option exercises                         |   |   | 1,618,183                                       |   |   | 1,858,489 |   |
| Depreciation                                                                         |   |   | 136,412                                         |   |   | 115,775 |   |
| Amortization    of intangibles                                                       |   |   | 503,333                                         |   |   | 259,732 |   |
| Changes    in operating assets and liabilities, net of effect from acquisition-      |   |   |                                            |   |   |   |   |
| (Increase)    decrease in:                                                           |   |   |                                            |   |   |   |   |
| Accounts    receivable                                                               |   |   | 1,818,685                                       |   |   | (1,173,251 | ) |
| Inventories                                                                          |   |   | 32,696                                          |   |   | 247,430 |   |
| Prepaid    expenses and other                                                        |   |   | (106,078                                        | )      |   | 2,537 |   |
| Increase    (decrease) in:                                                           |   |   |                                            |   |   |   |   |
| Accounts    payable                                                                  |   |   | (573,264                                        | )      |   | 1,162,233 |   |
| Accrued    expenses                                                                  |   |   | (421,091                                        | )      |   | (311,187 | ) |
| Deferred    revenue                                                                  |   |   | 186,532                                         |   |   | 103,787 |   |
|                                                                                 |   |        |                                                 |   |  |  |   |
| Net    cash provided by operating activities                                         |   |   | 6,453,996                                       |   |   | 5,596,261 |   |
|                                                                                 |   |        |                                                 |   |  |  |   |
|                                                                                 |   |   |                                            |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                |   |   |                                            |   |   |   |   |
| Purchase    of the TeemTalk software business                                        |   |   | (9,994,759                                      | )      |   | — |   |
| Purchases    of short-term investments                                               |   |   | (22,055,911                                     | )      |   | — |   |
| Sales    of short-term investments                                                   |   |   | 14,413,613                                      |   |   | — |   |
| Purchase    of intangible assets                                                     |   |   | (125,000                                        | )      |   | (44,424 | ) |
| Purchases    of property and equipment                                               |   |   | (106,089                                        | )      |   | (78,650 | ) |
|                                                                                 |   |        |                                                 |   |  |  |   |
| Net    cash used in investing activities                                             |   |   | (17,868,146                                     | )      |   | (123,074 | ) |
|                                                                                 |   |        |                                                 |   |  |  |   |
|                                                                                 |   |   |                                            |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                |   |   |                                            |   |   |   |   |
| Repayments    of capital leases                                                      |   |   | (2,717                                          | )      |   | (30,722 | ) |
| Sale    of common stock, net of expenses                                             |   |   | 24,609,302                                      |   |   | — |   |
| Expenses    for prior issuance of common stock                                       |   |   | (3,302                                          | )      |   | (122,409 | ) |
| Exercise    of stock options and warrants                                            |   |   | 829,933                                         |   |   | 1,634,512 |   |
| Repayments    of officer loans                                                       |   |   | —                                          |   |   | 9,463 |   |
|                                                                                 |   |        |                                                 |   |  |  |   |
| Net    cash provided by financing activities                                         |   |   | 25,433,216                                      |   |   | 1,490,844 |   |
|                                                                                 |   |        |                                                 |   |  |  |   |
|                                                                                 |   |   |                                            |   |   |   |   |
| EFFECT OF FOREIGN EXCHANGE RATE        CHANGES ON CASH                               |   |   | (28,135                                         | )      |   | — |   |
|                                                                                 |   |        |                                                 |   |  |  |   |
|                                                                                 |   |   |                                            |   |   |   |   |
| INCREASE    IN CASH AND CASH EQUIVALENTS                                             |   |   | 13,990,931                                      |   |   | 6,964,031 |   |
| CASH AND CASH EQUIVALENTS, BEGINNING        OF PERIOD                                |   |   | 26,013,555                                      |   |   | 17,031,422 |   |
|                                                                                 |   |        |                                                 |   |  |  |   |
| CASH    AND CASH EQUIVALENTS, END OF PERIOD                                          |   | $      | 40,004,486                                      |   | $ | 23,995,453 |   |
|                                                                                 |   |        |                                                 |   |  |  |   |
|                                                                                 |   |   |                                            |   |   |   |   |
| SUPPLEMENTAL DISCLOSURES:                                                            |   |   |                                            |   |   |   |   |
| Cash    paid for income taxes                                                        |   | $      | 264,400                                         |   | $ | 79,947 |   |
| Cash    paid for interest                                                            |   |   | 5,956                                           |   |   | 17,189 |   |

     See accompanying notes to consolidated financial statements.

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**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 accordance with accounting principles generally accepted in the United States of America. These statements, while unaudited, reflect all normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial statements. The results for the interim periods presented are not necessarily indicative of the results that may be expected for any future period.  Certain information and footnote disclosures included in financial statements prepared in accordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements. The consolidated financial statements included in this Form 10-Q 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 for the year ended June 30, 2003, filed with the Securities and Exchange Commission.

**2.      RECENT ACCOUNTING PRONOUNCEMENTS**

           In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.”  This Issue addresses the appropriate accounting for arrangements that will result in the delivery of multiple products, services and/or rights to assets that may occur over a period of time. The Issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No. 00-21 did not have any impact on the Company’s financial statements. 

          In December 2003, the FASB issued Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, which was issued in January 2003. The Company will be required to apply FIN 46R to variable interests in VIE’s created after December 31, 2003. For variable interests in VIE’s created before January 1, 2004, the Interpretation will be applied beginning on January 1, 2005. For any VIE’s that must be consolidated under FIN46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amount is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liability and noncontrolling interest of the VIE. The adoption of this Interpretation is not expected to have any impact on the Company’s financial statements.

          In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity."  SFAS No. 150 establishes standards for how an issuer of financial statements classifies and measures certain financial instruments that have characteristics of both liabilities and equity.  This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.  The adoption of this statement did not have an impact on the Company's financial statements.

**3.      STOCK-BASED COMPENSATION**

          The Company applies Accounting Principles Board Opinion, “Accounting for Stock Issued to Employees” (APB 25), and related interpretations for stock options and other stock-based awards while disclosing pro forma net income and earnings per share as if the fair value method had been applied in accordance with SFAS No. 123, “Accounting for Stock-based Compensation.”

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          In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition and disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The Company hasdetermined that it will not make the voluntary change to the fair value based method of accounting at this time. Had compensation cost been recognized consistent with SFAS No. 123, the Company’s consolidated net income and earnings per share would have been as follows:

|                             |             |                                                                                                                         |   |      | **Three Months EndedDecember 31,** |   |            | **Six Months EndedDecember 31,** |    |
|-----------------------------|-------------|-------------------------------------------------------------------------------------------------------------------------|--------|-----------|-----------------------------------------|--------|-----------------|---------------------------------------|---------|
|                             |             |                                                                                                                         |        |           |                                         |        |                 |                                       |         |
|                             |             |                                                                                                                         |   |      | **2003**                                |   |            | **2002**                              |    |   | **2003** |   |   | **2002** |   |
|                             |             |                                                                                                                         |        |           |                                         |        |                 |                                       |         |  |  |  |  |  |  |
|                             |             |                                                                                                                         |   |      |                                         |   |            |                                  |    |   |   |   |   |  |   |
| Net income                  |        |                                                                                                                    |   |      |                                    |   |            |                                  |    |   |   |   |   |
|                        | As reported |                                                                                                                    | $      | 1,395,235 |                                    | $      |  1,883,685 |                                  | $       |  3,258,588 |   | $ |  3,330,716 |   |
|                        | Less:       |                                                                                                                    |   |      |                                    |   |            |                                  |    |   |   |   |   |   |
|                        |        | Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax |   |      | (773,752                                | )      |            | (342,082                              | )  |   | (1,434,563 | ) |   | (534,315 | )  |
|                        |        |                                                                                                                    |   |           |                                         |   |                 |                                       |    |  |  |   |  |  |   |
|                        | Pro forma   |                                                                                                                    | $      | 621,483   |                                    | $      | 1,541,603       |                                  | $       | 1,824,025 |   | $ | 2,796,401 |   |
|                        |        |                                                                                                                    |   |           |                                         |   |                 |                                       |    |  |  |   |  |  |   |
|                        |        |                                                                                                                    |   |      |                                    |   |            |                                  |    |   |   |   |   |   |   |
| Basic earnings per share:   |        |                                                                                                                    |   |      |                                    |   |            |                                  |    |   |   |   |   |
|                        | As reported |                                                                                                                    | $      | 0.09      |                                    | $      | 0.14            |                                  | $       | 0.21 |   | $ | 0.25 |   |
|                        |        |                                                                                                                    |   |           |                                         |   |                 |                                       |    |  |  |   |  |  |   |
|                        | Pro forma   |                                                                                                                    | $      | 0.04      |                                    | $      | 0.11            |                                  | $       | 0.12 |   | $ | 0.21 |   |
|                        |        |                                                                                                                    |   |           |                                         |   |                 |                                       |    |  |  |   |  |  |   |
|                        |        |                                                                                                                    |   |      |                                    |   |            |                                  |    |   |   |   |   |   |   |
| Diluted earnings per share: |        |                                                                                                                    |   |      |                                    |   |            |                                  |    |   |   |   |   |
|                        | As reported |                                                                                                                    | $      | 0.09      |                                    | $      | 0.13            |                                  | $       | 0.20 |   | $ | 0.23 |   |
|                        |        |                                                                                                                    |   |           |                                         |   |                 |                                       |    |  |  |   |  |  |   |
|                        | Pro forma   |                                                                                                                    | $      | 0.04      |                                    | $      | 0.10            |                                  | $       | 0.11 |   | $ | 0.19 |   |
|                        |        |                                                                                                                    |   |           |                                         |   |                 |                                       |    |  |  |   |  |  |   |

          The fair value of the Company’s stock-based awards to employees was estimated at the date of grant using the Black-Scholes option pricing model, assuming an estimated life of five to ten years, no dividends, volatility of 70% – 126%, and risk-free interest rates of 2.1% – 6.8%.

**4.      ACQUISITION**

          On July 1, 2003, the Company acquired the host access software business from Pericom Holdings PLC (referred to as “TeemTalk software business”), for approximately $9.8 million in cash, excluding transaction costs. The Company acquired all of the assets of the software business, including the TeemTalk host access software, intellectual property and technology, customer lists, customer contracts and distribution channels and also entered into a non-competition agreement. The acquisition was accounted for using the purchase method of accounting and the purchase price has been allocated to the assets acquired, including goodwill and intangible assets. The Company has substantially completed the allocation of the purchaseprice for this acquisition and does not expect future adjustments to the purchase price allocation to be material. The results of operations of the TeemTalk software business have been included in the Company’s statements of operations from the date of the acquisition.

          The purchase price was allocated, based on an independent valuation, as follows: $7,794,759 to goodwill, $1,600,000 to acquired technology, $500,000 to customer relationships and $100,000 to tradenames.

          The following unaudited pro forma information presents the results of the Company’s operations as though the acquisition had been completed as of July 1, 2002.  The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisition been completed as of July 1, 2002 or the results that may occur in the future:

|                       |   |   | **Three Months EndedDecember 31,**             |   |   | **Six Months EndedDecember 31,**               |   |
|----------------------------|--------|--------|-----------------------------------------------------|--------|--------|-----------------------------------------------------|--------|
|                            |        |        |                                                     |        |        |                                                     |        |
|                       |   |   | **2003**                                            |   |   | **2002**                                            |   |   | **2003** |   |   | **2002** |   |
|                            |        |        |                                                     |        |        |                                                     |        |  |  |  |  |  |  |
| Total net revenue          |   | $      | 15,322,269                                     |   | $      | 15,707,148                                     |   | $ | 30,335,656  |   | $ | 29,772,729  |   |
| Net income                 |   |   |       1,395,235  |   |   |       2,165,910  |   |   |       3,258,588  |   |   |       3,729,712  |   |
| Basic earnings per share   |   |   |      0.09             |   |   |      0.16             |   |   |      0.21  |   |   |       0.28  |   |
| Diluted earnings per share |   |   |       0.09       |   |   |       0.15       |   |   |       0.20  |   |   |       0.25  |   |

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**5.      GOODWILL ANDINTANGIBLE ASSETS**

          The following tablesets forth the carrying amount of goodwill:

|     |   |   | **December 31,2003** |   |   | **June 30,2003** |   |
|----------|--------|--------|----------------------|--------|--------|------------------|--------|
|          |        |        |                      |        |        |                  |        |
| Goodwill |   | $      | 17,304,671           |   | $      | 8,943,175        |   |

          The increase in goodwill is due to the acquisition of the TeemTalk software business (See Note 4) ($7,794,756) and the impact of foreign exchange differences.

          Intangible assets with finite useful lives are amortized over their respective estimated useful lives.  The following table provides a summary of the Company’s intangible assets:

|                      |   |   |                                          |   |    | **December 31, 2003**                   |   |
|---------------------------|--------|--------|------------------------------------------|--------|---------|-----------------------------------------|--------|
|                           |        |        |                                          |        |         |                                         |        |
|                      |   |   | **Estimated  useful life**               |   |    | **Gross  carrying  value**              |   |   | **Accumulated  amortization** |   |   | **Net** |   |
|                           |        |        |                                          |        |         |                                         |        |  |  |  |  |  |  |
| Tradenames                |   |   | Indefinite                               |   | $  | 257,430                                 |   | $  | – |   | $  | 257,430 |   |
| Customer relationships    |   |   | 2 years                                  |   |    | 537,149                                 |   |   | 134,287 |   |   | 402,862 |   |
| Distributor relationships |   |   | 5 years                                  |   |    | 2,325,000                               |   |   | 916,248 |   |   | 1,408,752 |   |
| Acquired technology       |   |   | 5-10 years                               |   |    | 2,224,491                               |   |   | 243,240 |   |   | 1,981,251 |   |
|                      |   |   |                                     |   |         |                                         |   |  |  |   |  |  |   |
|                      |   |   |                                     |   | $  | 5,344,070                               |   | $  | 1,293,775 |   | $  | 4,050,295 |   |
|                      |   |   |                                     |   |         |                                         |   |  |  |   |  |  |  |
|                      |   |   |                                     |   |    |                                    |   |   |   |   |   |   |   |
|                      |   |   |                                     |   |    | **June 30, 2003**                       |   |
|                           |        |        |                                          |        |         |                                         |        |
|                      |   |   | **Estimated  useful  life**              |   |    | **Gross  carrying  value**              |   |   | **Accumulated  amortization** |   |   | **Net** |   |
|                           |        |        |                                          |        |         |                                         |        |  |  |  |  |  |  |
| Tradenames                |   |   |      Indefinite |   | $       | 150,000                                 |   | $ | — |   | $ | 150,000 |   |
| Customer relationships    |   |   |      2 years    |   |    |      —    |   |   |      — |   |   |      — |   |
| Distributor relationships |   |   |      5 years    |   |    |      2,200,000 |   |   |      690,000 |   |   |      1,510,000 |   |
| Acquired technologies     |   |   |      10 years   |   |    | 505,615                                 |   |   | 74,998 |   |   | 430,617 |   |
|                      |   |   |                                     |   |         |                                         |   |  |  |   |  |  |  |
|                      |   |   |                                     |   | $       | 2,855,615                               |   | $ | 764,998 |   | $ | 2,090,617 |   |
|                      |   |   |                                     |   |         |                                         |   |  |  |   |  |  |  |

          In      September 2003, the Company acquired certain distribution rights in Europe      for $125,000, which was recorded as a distributor relationship. Intangible      assets related to the TeemTalk software business fluctuate based on foreignexchange differences.

          The amortizationexpense of intangible assets is set forth below:

|                      |   |   | **Three Months EndedDecember 31,** |   |   | **Six Months EndedDecember 31,**       |   |
|---------------------------|--------|--------|-----------------------------------------|--------|--------|---------------------------------------------|--------|
|                           |        |        |                                         |        |        |                                             |        |
|                      |   |   | **2003**                                |   |   | **2002**                                    |   |   | **2003** |   |   | **2002** |   |
|                           |        |        |                                         |        |        |                                             |        |  |  |  |  |  |  |
|                      |   |   |                                    |   |   |                                        |   |   |   |   |   |   |   |
| Customer relationships    |   | $      | 125,000                                 |   | $      | —                                      |   | $ | 125,000 |   | $ | — |   |
| Distributor relationships |   |   |      110,000   |   |   |       110,000 |   |   |       220,000 |   |   |      220,000 |   |
| Acquired technologies     |   |   |      81,552    |   |   |      12,500        |   |   |      158,333 |   |   |      25,000 |   |
| Capitalized software      |   |   |  —                            |   |   |  7,367                                 |   |   |  — |   |   | 14,734 |   |
|                      |   |        |                                         |   |        |                                             |   |  |  |   |  |  |   |
|                      |   | $      | 316,552                                 |   | $      | 129,867                                     |   | $ | 503,333 |   | $ | 259,734 |   |
|                      |   |        |                                         |   |        |                                             |   |  |  |   |  |  |   |

          Amortization expense for customer relationships and distributor relationships is included in sales and marketing expenses and amortization expense for acquired technologies is included in cost of revenues.

          The following table provides estimated future amortization expense related to intangible assets (assuming there is no write down associated with these intangible assets causing an acceleration of expense):

| **Year Ending June 30,** |   |   | **Future Amortization**                 |   |
|--------------------------|--------|--------|-----------------------------------------|--------|
|                          |        |        |                                         |        |
|                     |   |   |                                    |   |
| Remainder of fiscal 2004 |   | $      | 540,642                                 |   |
| 2005                     |   |   |      1,070,054 |   |
| 2006                     |   |   |      801,479   |   |
| 2007                     |   |   |      551,481   |   |
| 2008                     |   |   |      361,479   |   |
| 2009 through 2013        |   |   | 467,730                                 |   |
|                     |   |        |                                         |   |
|                     |   | $      | 3,792,865                               |   |
|                     |   |        |                                         |   |

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**6.      COMPREHENSIVEINCOME**

          Excluding net income, the Company’s    sources of other comprehensive income (loss) are unrealized appreciation    (depreciation) on its holdings of short-term investments classified as available-for-sale    and unrealized income (loss) relating to foreign exchange rate fluctuations.The following summarizes the components of comprehensive income:

|                                                                                           |   | **Three Months        Ended    December 31,** |   |   | **Six Months Ended    December 31,** |   |
|------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|--------|--------|-------------------------------------------|--------|
|                                                                                           |        |                                               |        |   |
|                                                                                           |   | **2003**                                           |   |   | **2002**                                  |   |   | **2003** |   |   | **2002** |   |
|                                                                                                |        |                                                    |        |        |                                           |        |  |  |  |  |  |  |
| Net income                                                                                     | $      | 1,395,235                                          |   | $      | 1,883,685                                 |   | $ | 3,258,588 |   | $ | 3,330,716 |   |
|       Foreign currency translation adjustment                    |   |      663,466              |   |   |      232         |   |   |      676,617 |   |   |      3,737 |   |
|       Unrealized holding losses in available-for-sale securities |   | —                                             |   |   | (50,000                                   | )      |   | — |   |   | (86,667 | ) |
|                                                                                           |        |                                                    |   |        |                                           |   |  |  |   |  |  |   |
| Comprehensive income                                                                           | $      | 2,058,701                                          |   | $      | 1,833,917                                 |   | $ | 3,935,205 |   | $ | 3,247,786 |   |
|                                                                                           |        |                                                    |   |        |                                           |   |  |  |   |  |  |   |
|                                                                                           |   |                                               |   |   |                                      |   |   |   |   |   |   |   |

**7.      REVENUE RECOGNITION**

          The Company’s products include both a hardware and software component.  Software has been deemed to be essential to the functionality of the hardware and, therefore, the Company follows AICPA Statement of Position No. 97-2, “Software Revenue Recognition” (“SOP 97-2”)    for revenue recognition. Revenue is recognized on product sales when persuasive    evidence of an arrangement exists, delivery of the product has occurred,    the fee is fixed or determinable and collectibility is probable. Revenue    related to post-contract services is generally recognized with the initial    product sale when the fee is included with the initial product fee, post-contract    services are typically for one year or less, the estimated cost of providing    such services during the arrangement is insignificant, and unspecified upgrades    and enhancements offered during the period historically have been and are    expected to continue to be minimal and infrequent. Revenue from consulting    services is recognized as services are performed. In limited circumstances,    the Company provides certain distributors with stock rotation rights, which    are contractually limited to a maximum amount per quarter and require a corresponding    order of equal or greater value at the time of the stock rotation. The Company    reserves for these arrangements based on historical experience and the level    of inventories in the distribution channel. Product warranty costs are accruedat the time the related 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 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; the billing and credit terms for the customer have not been modified from the Company’s normal policies;and the risks of ownership have passed to the customer. There were no “bill and hold” transactionsfor the three months ended December 31, 2003 and 2002.

**8.      MAJOR CUSTOMERS**

          For the three months ended December 31, 2003, sales to IBM accounted for 12% of total revenues and sales to one European distributor constituted 10% of total revenues, and accounts receivable from IBM and the European distributor  as of December 31, 2003 amounted to $1,105,723 and $903,713, respectively.  For the six months ended December 31, 2003, sales to IBM accounted for 13% of total revenues. For the three months ended December 31, 2002, sales to IBM accounted for 13% of total revenues and sales to one European distributor constituted 16% of total revenues.  Each of these customers resells the Company’s products to individual resellers and/or end-users, none of which contributed sales of more than 10% of theCompany’s net revenues for the three and six months ended December 31,2003 or 2002. The percentage of revenue derived from individual distributors,resellers or end-users can vary significantly from quarter to quarter. 

**9.      INVENTORIES**

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

|                                        |   |   | **December 31,2003** |   |   | **June 30,2003** |   |
|----------------------------------------|--------|--------|----------------------|--------|--------|------------------|--------|
|                                        |        |        |                      |        |        |                  |        |
| Purchased components and subassemblies |   | $      | 190,903              |   | $      | 172,160          |   |
| Finished goods                         |   |   | 548,895              |   |   | 600,334          |   |
|                                   |   |        |                      |   |        |                  |   |
|                                   |   | $      | 739,798              |   | $      | 772,494          |   |
|                                   |   |        |                      |   |        |                  |   |

**10.      INCOME TAXES**

          The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Under    the asset-and-liability method of SFAS No. 109, deferred tax assets and liabilities    are recognized for the future tax consequences attributable to differences    between the financial statement carrying amounts of existing assets and liabilities    and the respective tax bases. Deferred tax assets and liabilities are measured    using enacted tax rates expected to apply to taxable income in the years    in which those temporary differences are expected to be recovered or settled.    Under SFAS No. 109, the effect on deferred tax assets and liabilities of    a change in tax rates is recognized in income in the period that includesthe enactment date.

          During the six months    ended December 31, 2003 and 2002, the income tax benefit from the exercise    of employee and director stock options was $1,618,183 and $1,754,541, respectively.This benefit was recorded as an increase in additional paid-in capital.

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**11.      SALE OF COMMONSTOCK**

          On July 10, 2003,    the Company sold 1,500,000 shares of common stock at $17.50 per share, which    represented a premium of 10% on the average closing price for the 15-day    period immediately preceding the sale. Net proceeds to the Company were $24,609,302    after transaction costs. The Company used a portion of the net proceeds to    replenish the cash used to acquire the TeemTalk software business (See Note    4). The Company intends to use the remaining net proceeds of the financingfor general corporate purposes and to fund potential future acquisitions. 

**12.      LINE OF CREDIT**

          The Company has    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, 2004. Borrowings under the credit agreement bear    interest at the Libor Market Index rate plus 2.5% (3.59% at December 31,    2003). At December 31, 2003 and 2002, $2,000,000 was available for borrowing    under the line. During the three months ended December 31, 2003 and 2002,there were no borrowings under the line.

           The line of credit    is unsecured and requires the Company to maintain a minimum balance of $3,000,000    in cash and cash equivalents with the bank. The Company is in compliancewith this condition at December 31, 2003.

**13.      EARNINGSPER SHARE**

          The Company applies SFAS No. 128, “Earnings per Share,” which requires dual presentation of basic and diluted earnings per share (“EPS”)    for complex capital structures on the face of the statement of operations.    Basic EPS is computed by dividing income 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 and warrants. The following table sets forth the computationof basic and diluted earnings per share: 

|                                                                    |   |   | **Three Months EndedDecember 31,**  |   |   | **Six Months EndedDecember 31,**    |   |
|-------------------------------------------------------------------------|--------|--------|------------------------------------------|--------|--------|------------------------------------------|--------|
|                                                                         |        |        |                                          |        |        |                                          |        |
|                                                                    |   |   | **2003**                                 |   |   | **2002**                                 |   |   | **2003** |   |   | **2002** |   |
|                                                                         |        |        |                                          |        |        |                                          |        |  |  |  |  |  |  |
|                                                                    |   |   |                                     |   |   |                                     |   |   |   |   |   |   |   |
| Net income                                                              |   | $      | 1,395,235                                |   | $      | 1,883,685                                |   | $ | 3,258,588 |   | $ | 3,330,716 |   |
|                                                                    |   |        |                                          |   |        |                                          |   |  |  |   |  |  |   |
|                                                                    |   |   |                                     |   |   |                                     |   |   |   |   |   |   |   |
| Weighted average shares outstanding:                                    |   |   |                                     |   |   |                                     |   |   |   |   |   |   |   |
|      Basic                                     |   |   |      15,742,689 |   |   |      13,573,656 |   |   |      15,594,091 |   |   |      13,368,120 |   |
|      Effect of dilutive employee stock options |   |   |      529,457    |   |   |      1,196,836  |   |   |      673,024 |   |   |      1,335,471 |   |
|      Effect of dilutive warrants               |   |   | 13,000                                   |   |   | 15,410                                   |   |   | 15,152 |   |   | 15,410 |   |
|                                                                    |   |        |                                          |   |        |                                          |   |  |  |   |  |  |   |
|      Diluted                                   |   |   | 16,285,146                               |   |   | 14,785,902                               |   |   | 16,282,267 |   |   | 14,719,001 |   |
|                                                                    |   |        |                                          |   |        |                                          |   |  |  |   |  |  |   |
|                                                                    |   |   |                                     |   |   |                                     |   |   |   |   |   |   |   |
| Earnings per common share:                                              |   |   |                                     |   |   |                                     |   |   |   |   |   |   |   |
|      Basic                                     |   | $      | 0.09                                     |   | $      | 0.14                                     |   | $ | 0.21 |   | $ | 0.25 |   |
|                                                                    |   |        |                                          |   |        |                                          |   |  |  |   |  |  |   |
|      Diluted                                   |   | $      | 0.09                                     |   | $      | 0.13                                     |   | $ | 0.20 |   | $ | 0.23 |   |
|                                                                    |   |        |                                          |   |        |                                          |   |  |  |   |  |  |   |

          For the three and six months ended December 31, 2003 and 2002, an aggregate of 224,500 and 129,250, respectively, compared to 165,500 and 83,500, respectively, of stock options and warrants were excluded from the calculation of dilutive earnings per share because their inclusion would have been anti-dilutive.

**Item 2.**     **Management'sDiscussion and Analysis of Financial Condition and Results of Operations.**

**Overview**

Neoware provides software, services and solutions to enable thin client appliance computing, which is a computing architecture targeted at business customers as an easier to manage, more secure, more reliable, and more cost-effective solution than traditional PC-based, client server computing. Our software and management tools secure, power and manage a new generation of smart thin client appliances that utilize the benefits of open, industry-standard technologies used in the PC industry to create new alternatives to full-function personal computers used in business, as well as green-screen terminals. 

Our software runs on thin client appliances and personal computers, and enables these devices to be secured and centrally managed, as well as to connect to mainframes, midrange, UNIX, Linux and legacy systems. We generate revenues primarily from sales of thin client appliance systems, which include the appliance device and related software marketed under the brand names Eon, Capio, ThinSTAR and Voyager, and to a lesser extent from ThinPC thin client software for PCs, TeemTalk host access software for servers, PCs and UNIX workstations, ezRemote Manager central management software, and services such as training and integration.

The market for thin client appliances is a subset of the enterprise PC market. We have achieved revenue growth in the first nine months of calendar 2003 even though industry-wide thin client appliance revenues were essentially flat for the comparable period, as reported by industry research group International Data Corporation (IDC). IDC and other research groups project growth in the thin client market in coming years due to the cost, security, management and reliability benefits of thin clients compared to traditional personal computers.  We intend to actively seek to stimulate demand for thin client appliances in our target markets by realigning certain of our sales and marketing resources to penetrate target accounts and byintroducing new products that will more effectively compete with PC based solutions and other thin client competitors.

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*International Sales*

We sell our products and services worldwide through our direct sales force, distributors, our alliance with IBM and other indirect channels, such as, VARs, and systems integrators.  International sales are primarily made through distributors and resellers and are collectable primarily in US dollars, while the associated operating expenses are payable in foreign currencies.   In addition to our headquarters in the United States, we maintain offices and/or staff in the UK, Germany, France, Austria, Sweden, Australia, and the Netherlands.  International revenues have increased as we have invested in additional sales and marketing staff and targeted marketing programs in these markets.  

International revenues, primarily from Europe were as follows:

|                       |   |   | **Three Months Ended  December 31,** |   |   |                             |   |   | **Six Months Ended  December 31,** |   |   |                             |   |
|----------------------------|--------|--------|-------------------------------------------|--------|--------|----------------------------------|--------|--------|-----------------------------------------|--------|--------|----------------------------------|--------|
|                            |        |        |                                           |        |        |                                  |        |        |                                         |        |        |                                  |        |
|                       |   |   | **2003**                                  |   |   | **2002**                         |   |   | **% Change**                            |   |   | **2003**                         |   |   | **2002** |   |   | **% Change** |   |
|                            |        |        |                                           |        |        |                                  |        |        |                                         |        |        |                                  |        |  |  |  |  |  |  |
| International revenues     |   | $      | 6,021,247                                 |   | $      | 5,665,791                        |   |   |      6         | %      | $      | 11,446,362                       |   | $ | 10,662,207 |   |   |      7 | % |
| Percentage of net revenues |   |   |      39          | %      |   |      38 | %      |   |                                    |   |   |      38 | %      |   |      38 | % |   |   |   |

**Critical Accounting Estimates**

Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The Notes to the Consolidated Financial Statements contained in our most recent annual report on Form 10-K describes our significant accounting policies used in the preparation of the consolidated financial statements. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting period, and relateddisclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to bad debts, sales returns and allowances, intangible assets and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions.

We believe we make significant judgments and estimates related to the following in the preparation of our consolidated financial statements.

*Valuation of Long-Lived and Intangible Assets and Goodwill*.     In connection with acquisitions, we determine the estimated useful lives of intangible assets and allocated portions of the purchase price to intangible assets, consisting of acquired technology, distributor and customer relationships and trade names, with the remainder to goodwill based on independent appraisals received after each acquisition. We review identifiable intangible and other long-lived assets for impairment annually or sooner if events or changes in circumstances indicate that the carrying amount may not be recoverable   

We are required to test our goodwill for impairment at the reporting unit level, which we have determined is our sole operating segment. The test for goodwill is a two-step process:

     First,  we compare the carrying amount of our reporting unit, which is the book value of our entire company, to the fair value of our reporting unit, which corresponds to our market capitalization. If the carrying amount of our reporting unit exceeds its fair value, we have to perform the second step of the process. If not, no further testing is needed.

     For the second prong of the analysis, we allocate the fair value of our reporting unit to all assets and liabilities of our reporting units as if the reporting unit had been acquired in a business combination at the date of the impairment test. We then compare the implied fair value of our reporting unit’s goodwill to its carrying amount. If the carrying amount of our reporting unit’s goodwill exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess.

We review our long-lived assets including intangibles, for impairment when events indicate that their carrying amount may not be recoverable. When we determine that one or more impairment indicators are present for an asset, we compare the carrying amount of the asset to net future undiscounted cash flows that the asset is expected to generate. If the carrying amount of the asset is greater than the net future undiscounted cash flows that the asset is expected to generate, we compare the fair value to the book value of the asset.  If the fair value is less than the book value, we recognize an impairment loss. The impairment loss is the excess of the carrying amount of the asset over its fair value.

Some of the events that we consider as impairment indicators for our long-lived assets, including goodwill, are:

|   | • | Significant underperformance of the company relative to expected operating results; |
|--------|--------|-------------------------------------------------------------------------------------|

|   | • | Our net book value compared to our market capitalization; |
|--------|--------|-----------------------------------------------------------|

|   | • | Significant adverse economic and industry trends; |
|--------|--------|---------------------------------------------------|

|   | • | Significant decrease in the market value of the asset; |
|--------|--------|--------------------------------------------------------|

|   | • | The extent that we use an asset or changes in the manner that we use it; and |
|--------|--------|------------------------------------------------------------------------------|

|   | • | Significant changes to the asset since we acquired it. |
|--------|--------|--------------------------------------------------------|

     We have not recorded an impairment loss on goodwill or other long-lived assets.

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**Results of Operations**

***Net Revenues***

|        |   |   | **Three Months Ended  December 31,** |   |   |       |   |   | **Six Months Ended  December 31,** |   |   |       |   |
|-------------|--------|--------|-------------------------------------------|--------|--------|------------|--------|--------|-----------------------------------------|--------|--------|------------|--------|
|             |        |        |                                           |        |        |            |        |        |                                         |        |        |            |        |
|             |   |   | **2003**                                  |   |   | **2002**   |   |   | **% Change**                            |   |   | **2003**   |   |   | **2002** |   |   | **% Change** |   |
|             |        |        |                                           |        |        |            |        |        |                                         |        |        |            |        |  |  |  |  |  |  |
| Net Revenue |   | $      | 15,322,269                                |   | $      | 14,713,778 |   |   |      4         | %      | $      | 30,335,656 |   | $ | 28,230,456 |   |   |      7 | % |

We derive revenues primarily from the sale of thin client appliances, which include an appliance device and related software. The increase in net revenues in the second quarter of fiscal 2004 over the same period in fiscal 2003 reflects increases in revenue from the Company’s thin client appliance products (4%) and software (6%), partially offset by a reduction in revenues from services and third party products (6%).  The increase in net revenues in the first half of 2003 over the same period in 2002 reflects increases in revenue from our thin client appliance products (5%) and software (5%), partially offset by a reduction in revenues from services and third party products (3%).  The increases resulted from our acquisition of the TeemTalksoftware business and increasing sales of other software products, increasing market acceptance of thin client products, and the Company’s alliance with IBM.  Decreases in sales from services and third party products were due to fluctuations in the timing and receipt of orders for such services and third party products.

We anticipate that growth of the thin client market for the balance of fiscal 2004 will be consistent with the limited growth experienced during calendar 2003, resulting in revenues in absolute dollars for the second half of fiscal 2004 being consistent with that of the first half of fiscal 2004.

***Cost of Revenues and Gross Profit Margin***

|                |   |   | **Three Months Ended  December 31,** |   |   |                             |   |   |                              | **Six Months Ended  December 31,** |   |   |                             |   |
|---------------------|--------|--------|-------------------------------------------|--------|--------|----------------------------------|--------|--------|-----------------------------------|-----------------------------------------|--------|--------|----------------------------------|--------|
|                     |        |        |                                           |        |        |                                  |        |   |                                   |                                         |        |        |                                  |        |
|                     |   |   | **2003**                                  |   |   | **2002**                         |   |   | **% Change**                      |                                    |   |   | **2003**                         |   |   | **2002** |   |   | **% Change** |   |
|                     |        |        |                                           |        |        |                                  |        |        |                                   |                                         |   |        |                                  |        |  |  |  |  |  |  |
| Cost of Revenues    |   | $      | 7,683,826                                 |   | $      | 8,167,076                        |   |   |      (6) | %                                       |   | $      | 14,733,057                       |   | $ | 15,989,578 |   |   |      (8 | )% |
| Gross Profit Margin |   |   |      50          | %      |   |      44 | %      |   |                              |                                    |   |   |      51 | %      |   |      43 | % |   |   |   |

Cost of revenues consist primarily of the cost of thin client appliances, which include an appliance device and related software, and, to a lesser extent salaries and related benefits for personnel who fulfill product orders and deliver services and distribution costs.

The decrease in cost of revenues in the second quarter of fiscal 2004 over the same period in 2003 is primarily the result of lower component costs (6%) and lower third-party license costs (2%), partially offset by higher transportation costs (1%) and amortization of intangibles related to technologies acquired in our acquisition of the TeemTalk software business (1%).

The decrease in cost of revenues in the first half of fiscal 2004 over the same period in 2003 is primarily the result of lower component costs (8%) and lower third-party license costs (3%), partially offset by higher transportation costs due to greater volume of units sold (2%) and amortization of intangibles related to acquired technologies related to the acquisition of the TeemTalk software business (1%). We have benefited from manufacturing efficiencies and component cost reductions achieved through our outsourced manufacturing model, which depends on high volume, offshore sources to produce our thin client products. We have also benefited from licensee fee expense reductions due to the acquisition of the TeemTalk software, which wepreviously licensed under a royalty fee agreement, and reductions in other software license fees.

The increase in gross profit is attributable primarily to lower component and license costs and increased sales of high margin software.  We expect gross margins to fluctuate in the future, reflecting changes in product mix, the mix of revenues from thin client appliance systems and software, fluctuations in sales prices due to competition and changes in the cost of thin client appliances, memory and other components. Accordingly, for the balance of fiscal 2004, we expect gross margin to be in the range of 45% to 48%.

***Selling and Marketing***

|                            |   |   | **Three Months Ended  December 31,** |   |   |                             |   |   | **Six Months Ended  December 31,** |   |   |                             |   |
|---------------------------------|--------|--------|-------------------------------------------|--------|--------|----------------------------------|--------|--------|-----------------------------------------|--------|--------|----------------------------------|--------|
|                                 |        |        |                                           |        |        |                                  |        |        |                                         |        |        |                                  |        |
|                                 |   |   | **2003**                                  |   |   | **2002**                         |   |   | **% Change**                            |   |   | **2003**                         |   |   | **2002** |   |   | **% Change** |   |
|                                 |        |        |                                           |        |        |                                  |        |        |                                         |        |        |                                  |        |  |  |  |  |  |  |
| Selling and marketing           |   | $      | 3,376,645                                 |   | $      | 2,299,087                        |   |   |      47        | %      | $      | 6,341,950                   |   | $ | 4,526,420 |   |   |      40 | % |
| As a percentage of net revenues |   |   |      22          | %      |   |      16 | %      |   |                                    |   |   |      21 | %      |   |      16 | % |   |   |   |

Selling and marketing expenses consist primarily of salaries, related benefits, commissions, amortization of intangibles related to customer and distribution relationships and other costs associated with our sales and marketing efforts. The increase in selling and marketing expense in the second quarter and first half of fiscal 2004 over the same periods in 2003 is primarily the result of increasing our organizational investments in Europe and the United States. The increase in the second quarter of fiscal 2004 also reflects amortization of intangibles related to customer relationships related to the acquisition of the TeemTalk software business.

We expect selling and marketing expenses to increase moderately in absolute dollars in the second half of fiscal 2004 as a result of marketing efforts to simulate demand for thin client appliances, amortization of intangibles related to customer relationships and spending in international sales and marketing. 

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***Research and Development***

|                            |   |   | **Three Months          Ended      December 31,** |   |   |                            |   |   | **Six Months          Ended      December 31,** |   |   |                            |   |
|---------------------------------|--------|--------|--------------------------------------------------------|--------|--------|---------------------------------|--------|--------|------------------------------------------------------|--------|--------|---------------------------------|--------|
|                                 |        |        |                                                        |        |        |                                 |        |        |                                                      |        |        |                                 |        |
|                                 |   |   | **2003**                                               |   |   | **2002**                        |   |   | **% Change**                                         |   |   | **2003**                        |   |   | **2002** |   |   | **% Change** |   |
|                                 |        |        |                                                        |        |        |                                 |        |        |                                                      |        |        |                                 |        |  |  |  |  |  |  |
| Research and development        |   | $      | 686,831                                                |   | $      | 420,686                         |   |   |      63                     | %      | $      | 1,407,911                       |   | $ | 808,449 |   |   |      74 | % |
| As a percentage of net revenues |   |   |      4                        | %      |   |      3 | %      |   |                                                 |   |   |      5 | %      |   |      3 | % |   |   |   |

Research and development expenses consist primarily of salaries, related benefits, and other engineering related costs. The increase in research and development expense in the second quarter and first half of fiscal 2004 over the same periods in 2003 is primarily the result of an increase in staff levels, including additional headcount from the acquisition of the TeemTalk software business. 

We believe that a significant level of research and development investment is required to remain competitive and expect research and development expenses in absolute dollars for the second half of fiscal 2004 will be consistent with the first half of fiscal 2004.

***General and Administrative***

|                            |   |   | **Three Months Ended  December 31,** |   |   |                            |   |   | **Six Months Ended  December 31,** |   |   |                             |   |
|---------------------------------|--------|--------|-------------------------------------------|--------|--------|---------------------------------|--------|--------|-----------------------------------------|--------|--------|----------------------------------|--------|
|                                 |        |        |                                           |        |        |                                 |        |        |                                         |        |        |                                  |        |
|                                 |   |   | **2003**                                  |   |   | **2002**                        |   |   | **% Change**                            |   |   | **2003**                         |   |   | **2002** |   |   | **% Change** |   |
|                                 |        |        |                                           |        |        |                                 |        |        |                                         |        |        |                                  |        |  |  |  |  |  |  |
| General and administrative      |   | $      | 1,478,102                                 |   | $      | 974,583                         |   |   |      52        | %      | $      | 2,935,179                        |   | $ | 1,882,700 |   |   |      56 | % |
| As a percentage of net revenues |   |   |      10          | %      |   |      7 | %      |   |                                    |   |   |      10 | %      |   |      7 | % |   |   |   |

General and administrative expenses consist primarily of salaries, related benefits, corporate insurance, such as director and officer liability insurance, fess related to the obligations of a public company and fees for legal, audit and tax services. The increase in general and administrative expenses in the second quarter and first half of fiscal 2004 over the same periods in 2003 is primarily the result of an increase in staffing levels, and, to a lesser extent, increases in compensation levels and in director and officer liability insurance.  The increase in staffing levels reflects additional personnel related to our organizational investments in executive management and other positions.

We expect general and administrative expenses in absolute dollars for the remainder of fiscal 2004 to remain at comparable levels with the first half of fiscal 2004.

***Income Taxes***

|                            |   |   | **Three Months Ended  December 31,** |   |   |                             |   |   |                               | **Six Months Ended  December 31,** |   |   |                             |   |
|---------------------------------|--------|--------|-------------------------------------------|--------|--------|----------------------------------|--------|--------|------------------------------------|-----------------------------------------|--------|--------|----------------------------------|--------|
|                                 |        |        |                                           |        |        |                                  |        |   |                                    |                                         |        |        |                                  |        |
|                                 |   |   | **2003**                                  |   |   | **2002**                         |   |   | **% Change**                       |                                    |   |   | **2003**                         |   |   | **2002** |   |   | **% Change** |   |
|                                 |        |        |                                           |        |        |                                  |        |        |                                    |                                         |   |        |                                  |        |  |  |  |  |  |  |
| Income taxes                    |   | $      | 795,635                                   |   | $      | 1,059,573                        |   |   |      (25) | %                                       |   | $      | 1,836,294                        |   | $ | 1,873,528 |   |   |      (2 | )% |
| As a percentage of net revenues |   |   |      5           | %      |   |      7  | %      |   |                               |                                    |   |   |      6  | %      |   |      7 | % |   |   |   |
| Effective tax rate              |   |   |      36          | %      |   |      36 | %      |   |                               |                                    |   |   |      36 | %      |   |      36 | % |   |   |   |

The Company income tax provision is comprised primarily of federal and state taxes.

**Liquidity and Capital Resources**

As of December 31, 2003, we had net working capital of $55,669,940 consisting primarily of cash and cash equivalents, short-term investments and accounts receivable. Our principal sources of liquidity include $50,798,106 of cash and cash equivalents and short-term investments and a $2,000,000 line of credit facility with Wachovia Bank, all of which was available as of December 31, 2003. The credit facility requires us to maintain a minimum cash balance of $3,000,000 with the bank.  Interest on the line of credit facility accrues at the Libor Market Index rate plus 2.5% and the facility matures on December 31, 2004. We had no borrowings under the line of credit during the three months ended December 31, 2003 and 2002.

Cash and cash equivalents and short-term investments increased by $21,633,230 during the six months ended December 31, 2003, primarily as a result of the net proceeds of $24,609,302 from the sale of common stock in a private placement transaction and $6,453,996 in cash from operating activities offset partially by cash of $9,994,759 used to acquire the TeemTalk software business.   

Cash flows from operating activities increased in the first half of fiscal 2004 compared to the same period in 2003 primarily due to the improved timeliness in the collection of accounts receivable. Days sales outstanding, which is calculated by dividing period end accounts receivable by average daily sales for the quarter, was 54 and 61 for the quarters ended December 31, 2003 and June 30, 2003, respectively.

We expect to fund current operations and other cash expenditures through the use of available cash, cash from operations, funds available under our credit facility and, potentially, new debt or equity financings. Management believes that we will have sufficient funds from current cash, operations and available financing to fund operations and cash expenditures for the foreseeable future; however, we may seek additional sources of funding, including equity and/or debt financing, in order to fund potential acquisitions, including our ability to issue debt and equity securities under our $100 million shelf registration, which was declared effective by the SEC on September 29, 2003.

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**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.*

     During the past year, we have increased operating expenses significantly as a foundation for us to stimulate growth in our market, and we expect to continue incurring these expenses. If we do not increase revenues or appropriately manage further increases in operating expenses, including expenses associated with the integration of recently hired employees and executive officers, our profitability will suffer.  

     Our business has grown during the past three years through both internal expansion and business acquisitions, and has put pressure on our infrastructure, internal systems and managerial resources. The number of our employees increased from 50 employees in September 2000 to 126 employees at January 31, 2004. Our new employees include a number of senior executive officers and other key managerial, technical, sales and marketing personnel. To manage our growth effectively, we must continue to improve and expand our infrastructure, including operating and administrative systems and controls, and continue managing and integrating our personnel in an efficient manner. Our business may be adversely affected if we do not integrateand train our new employees quickly and effectively and coordinate among our executive, engineering, finance, marketing, sales, operations and customer support organizations, all of which add to the complexity of our organization and increase our operating expenses, which may grow at a faster rate than our sales. In addition, because of the growth of our foreign operations, we now have facilities located in multiple locations, and we have limited experience coordinating a geographically separated organization. 

*Although we have generated operating profits for the past two fiscal years, we have a prior history of losses and may experience losses in the future, which could result in the market price of our common stock declining.*

     Although we have generated operating profits in the past two fiscal years, we have incurred net losses in prior periods. We expect to continue to incur significant operating expenses. Our operating expenses increased during the three months ended **December 31,** 2003 reflecting the hiring of additional key personnel as we continue to implement our growth strategy, including our plan to introduce new products to compete with PC-based solutions and other thin client competitors. As a result, we will need to generate significant revenues to maintain profitability. If we do not maintain profitability, the market price for our common stock may decline. 

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

*We may not be able to successfully integrate  future acquisitions we may complete, which may materially adversely affect our growth and our operating results.*

     Since June 2001, we have made four acquisitions and entered into an alliance with IBM, and we may make additional acquisitions as part of our growth strategy. There is no assurance that we will successfully integrate future acquisitions into our business. We may be unable to retain key employees or key business relationships of the acquired businesses, consolidate the corporate IT infrastructure, combine administrative, research and development and other operations and combine product offerings, and integration of the businesses may divert the attention and resources of our management. Our failure to successfully integrate acquired businesses into our operations could have a material adverse effect on our business, operatingresults and financial condition. Even if future acquisitions are successfully integrated, we may not receive the expected benefits of the transactions if we find that the business does not further our business strategy or that we paid more than what the assets were worth. Managing acquisitions and alliances requires management resources, which may divert our attention from other business operations. As a result, the effects of any completed or future transactions on financial results may differ from our expectations. 

*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.*

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

     Future operating results will continue to be subject to quarterly fluctuations based on a wide variety of factors, including:

|   |   | • | Linearity – Our quarterly sales have historically reflected a pattern in which a disproportionate percentage of sales occur in the last month of the quarter. This pattern makes prediction of revenues and earnings for each financial period especially difficult and uncertain and increases the risk of unanticipated variations in quarterly results and financial condition; and |
|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | • | Significant Orders –  We are subject to variances in our quarterly operating results because of the fluctuations in the timing of our receipt of large orders. If even a small number of large orders are delayed until after a quarter ends, our operating results could vary substantially from quarter to quarter and net income could be substantially less than expected. Conversely, if even a small number of large orders are pulled into a quarter from a future quarter, our revenues and net income could be substantially higher than expected, making it possible that sales and net income in future periods may decline sequentially. |
|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   |   | • | the growth and changing requirements of the thin client segment of the PC market; |
|--------|--------|--------|-----------------------------------------------------------------------------------|

|   |   | • | the quality, price, performance and total cost of ownership of our products compared to personal computers; |
|--------|--------|--------|-------------------------------------------------------------------------------------------------------------|

|   |   | • | the availability, price, quality and performance of competing products and technologies; and |
|--------|--------|--------|----------------------------------------------------------------------------------------------|

|   |   | • | 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 software and thin client appliance products and our operating results may decline as a result. 

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

     Our 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 our business, including the percentage of revenues derived from thin client appliances, software, third party products and consulting services. Our 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 PC market in which we compete remains very competitive, and although we intend to continue our efforts to reduce the cost of our products, there can be no certainty that we will not be required to reduce prices of our products without compensating reductions inthe cost to produce our products in order to increase our market share or to meet competitors' price reductions. 

*Our business is dependent on customer adoption of thin client appliances as an alternative to personal computers, 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 thin client appliances to perform discrete tasks for corporate and Internet-based networks to increase our revenues. If thin client appliances are not accepted by corporations as an alternative to personal computers, the result would be slower than anticipated revenue growth or even a decline in our revenues. 

     Thin client appliances have historically represented a very small percentage of the overall PC market, and if sales do not grow as a percentage of the PC market, or if the overall PC market were to decline, our revenues may not grow or may decline. 

*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. Microsoft Corporation provides Windows to us, and we do not have access to the source code for certain versions of the Windows operating system. If Microsoft fails to continue to enhance and develop its embedded operating systems, or if we are unable to license these operating systems on favorable terms, our 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. Linus Torvalds, the original developer of the Linux kernel, and a small group of independent engineers are primarily responsible for the development and evolution of the Linux kernel. If this group of developers fails to further develop the Linux kernel, we would have to either rely on another party to further develop the kernel or develop it ourselves. To date, we have optimized our Linux-based operating system based on a version of Red Hat Linux. If we were unable to access Red Hat Linux, we would be required to spend additional timeto obtain a tested, recognized version of the Linux kernel from another source or develop our own operating system internally, which could significantly increase our costs. 

*Actions taken by the SCO Group (SCO) could impact the sale of Linux as an operating system, negatively affecting sales of some of our products.*

     SCO has taken legal action against IBM and sent a letter to 1,500 Linux customers alleging that certain Linux kernels infringe on SCO's Unix intellectual property and other rights, and that SCO intends to aggressively protect those rights. While we are not a party to any legal proceeding with SCO, since some of our products use Linux as their operating system, SCO's allegations, regardless of merit, could adversely affect sales of such products.

*Because we depend on sole source, limited source and foreign source suppliers for key components in our thin client appliance products, 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 thin client 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, political instability and currency fluctuations. A weakening dollar could result in greater costs to us for our components. Severe Acute Respiratory Syndrome and similar medical crises could also disrupt manufacturing processes and result in quarantines being imposed in the future**.**

     We have in the past experienced and may in the future experience shortages of, or difficulties in acquiring, these components. A significant portion of our revenues is derived from the sale of thin client appliances that are bundled with our software. Third parties produce these thin client appliances for us, and we typically do not have long-term supply contracts with them obligating them to continue producing products for us. If we experience shortages of these products, or of their components, we may not be able to deliver our products to our customers, and our revenues would decline. 

*If we are unable to continue generating substantial revenues from international sales our business could be adversely affected.*

     Approximately 39% of our revenues were derived from international sales during the three months ended December 31, 2003. Our ability to sell our products internationally is subject to a number of risks. General economic and political conditions in each country could adversely affect demand for our products and services in these markets. Although most of our international sales are denominated in US Dollars, currency exchange rate fluctuations could result in lower demand for our products or lower pricing resulting in reduced revenue and margins, as well as currency translation losses. In addition, a weakening dollar has resulted in increased costs for our international operations, and could result in greater costs for ourinternational operations in the future.  Changes to and compliance with a variety of foreign laws and regulations may increase our cost of doing business in these jurisdictions. Trade protection measures and import and export licensing requirements subject us to additional regulation and may prevent us from shipping products to a particular market, and increase our operating costs. 

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*Because we rely on channel partners, including IBM, to sell our products, our revenues could be negatively impacted if our existing channel partners, including IBM, 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, including IBM, is obligated to continue    selling our products or 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 indirectsales channels, and if we fail to do so, our growth could be limited.

     If our channel partners    were to discontinue sales of our products or reduce their sales efforts,    it could adversely affect our operating results. In addition, there can be    no assurance as to the continued viability and financial condition of our    channel partners, one of which has accounted for 10% of our net sales duringthe three months ended December 31, 2003. 

     As a result of our    alliance with IBM, we rely on IBM for distribution of our products to IBM's    customers. Sales to IBM accounted for 12% of our net sales during the three    months ended December 31, 2003. IBM is under no obligation to continue to    actively market our products. If IBM were to discontinue sales of our productsor reduce its sales efforts, our operating results would be adversely affected. 

*Our business may suffer if it is alleged or found that we have infringed the intellectual property rights of others.*

     Although we have    not received any claims that our products infringe on the proprietary rights    of third parties, if we were to receive such claims in the future, responding    to such claims, regardless of their merit, could be time consuming, result    in costly litigation, divert management's attention and resources and cause    us to incur significant expenses. There is no assurance, in the event of    such claims, that we would be able to enter into a licensing arrangement    on acceptable terms or that litigation would not occur. In the event that    there were a temporary or permanent injunction entered prohibiting us from    marketing or selling certain of our products, or a successful claim of infringement    against us requiring us to pay royalties to a third party, and we failed    to develop or license a substitute technology, our business, results of operationsor financial condition could be materially adversely affected. 

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

     In the desktop PC    market, we face significant competition from makers of traditional personal    computers, many of which are larger companies that have greater name recognition    than we have. In addition, we face significant competition from thin client    providers, including Hewlett Packard, Wyse Technology and other smaller companies.    Increased competition may negatively affect our business and future operating    results by leading to price reductions, higher selling expenses or a reduction    in our market share. Our strategy to seek to increase our share of the overall    PC market by targeting our core markets may create increased pressure, includingpricing pressure, on certain of our thin client appliance products.

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

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

|   |   | • | offer a wide range of products; and |
|--------|--------|--------|-------------------------------------|

|   |   | • | 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, including PC manufacturers, 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. 

*Thin client appliance products, like personal computers, 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 PC 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 are differentiated from those of our competitors by our internally developed technology that is incorporated into our products. If we are unable 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 thin client appliances.*

     Our thin client appliances include our own software, plus software from other companies for specific 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 thin client 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.*

     In order to continue to develop and market our line of thin client appliances, we may need to hire additional personnel. Competition for employees is significant and we may experience difficulty in attracting qualified people. 

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     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:

|   |   | • | improve existing and implement new operational, financial and management information controls, reporting systems and procedures; |
|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------|

|   |   | • | hire, train and manage additional qualified personnel; and |
|--------|--------|--------|------------------------------------------------------------|

|   |   | • | establish relationships with additional suppliers and partners while maintaining our existing relationships. |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------|

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

     Our products, technologies and operations 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 profits and slow our product development processes. We generally do not have employment agreements with our key employees. Further, we do not maintain key person life insurance on any of our employees.

*Recent and proposed regulations related to equity compensation could adversely affect our ability to attract and retain key personnel.*

     We have historically used stock options as a key component of our employee compensation program. We believe that stock options and other long-term equity incentives directly motivate our employees to maximize long-term stockholder value, through the use of vesting, encourage employee retention and allow us to provide competitive compensation packages. Financial Accounting Standards Board has announced that it will propose, changes to US GAAP that, if implemented, would require us and other companies to record a charge to earnings for employee stock option grants. This pending regulation would negatively impact our earnings. In addition, new regulations implemented by The Nasdaq National Market requiring stockholder approval forall stock option plans, as well as new regulations implemented by the New York Stock Exchange prohibiting NYSE member organizations from voting on equity-compensation plans unless the beneficial owner of the shares has given voting instructions, could make it more difficult for us to grant options to employees in the future. To the extent that new regulations make it more difficult or expensive to grant options to employees, we may incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could materially and adversely affect our business. 

*We license our TeemTalk software to other thin client providers who may choose to license alternative products from other suppliers who are not their competitors.*

     We license our TeemTalk software, which enables thin clients to connect to legacy systems, to certain of our competitors, including Wyse Technology and Hewlett Packard. Although it is our strategy to continue to generate sales of this software by licensing it to other thin client vendors, these vendors may seek alternative products from suppliers who are not their direct competitors. If we were to lose one or more of these customers, our revenue and profits would decline. 

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

     Because our software and thin client 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: 

|   |   | • | the loss of or delay in market acceptance and sales of our products; |
|--------|--------|--------|----------------------------------------------------------------------|

|   |   | • | diversion of development resources; |
|--------|--------|--------|-------------------------------------|

|   |   | • | injury to our reputation; or |
|--------|--------|--------|------------------------------|

|   |   | • | increased maintenance and warranty costs. |
|--------|--------|--------|-------------------------------------------|

     These problems could harm our business and future operating results. 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. 

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

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

*Our prior use of Arthur Andersen LLP as our independent auditor may pose risks to us and limit our ability to seek potential recoveries from them related to their work.*

     Our consolidated financial statements as of and for each of the three years in the period ended June 30, 2001 were audited by Arthur Andersen LLP (Andersen). On March 14, 2002, Andersen was indicted on federal obstruction of justice charges arising from the government's investigation of Enron Corporation. On June 15, 2002, a jury convicted Andersen of these charges. On July 23, 2002, we dismissed Andersen and retained KPMG LLP as our independent auditors for our fiscal year ended June 30, 2002. SEC rules require us to present historical audited financial statements in various SEC filings, such as registration statements, along with Andersen's consent to our inclusion of its audit report in those filings. Since our formerengagement partner and audit manager left Andersen and in light of the cessation of Andersen's SEC practice, we will not be able to obtain the consent of Andersen to the inclusion of its audit report in our relevant current and future filings. The SEC has provided regulatory relief designed to allow companies that file reports with the SEC to dispense with the requirement to file a consent of Andersen in certain circumstances, but purchasers of securities sold under our registration statements, which were not filed with the consent of Andersen to the inclusion of its audit report, will not be able to sue Andersen pursuant to Section 11(a)(4) of the Securities Act and, therefore, their right of recovery under that section may be limited as a result of the lack of our ability to obtainAndersen's consent. 

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*Our stock price can be volatile.*

     Our stock price,    like that of other technology companies, can be volatile. For example, our    stock price can be affected by many factors such as quarterly increases or    decreases in our revenues or earnings, changes in revenues or earnings estimates    or publication of research reports by analysts; speculation in the investment    community about our financial condition or results of operations and changes    in revenue or earnings estimates, announcement of new products, technological    developments, alliances, acquisitions or divestitures by us or one of our    competitors or the loss of key management personnel. In addition, general    macroeconomic and market conditions unrelated to our financial performancemay also affect our stock price. 

*Provisions in our charter documents and Delaware law may delay or prevent acquisition of us, which could decrease the value of your shares.*

     Our certificate    of incorporation and bylaws and Delaware law contain provisions that could    make it harder for a third party to acquire us without the consent of our    board of directors. These provisions include advance notice procedures with    respect to stockholder proposals and the nomination of candidates for election    as directors. Delaware law also imposes some restrictions on mergers and    other business combinations between us and any holder of 15% or more of ouroutstanding common stock. 

*The issuance of additional equity securities may have a dilutive effect on our existing stockholders and could lead to a decline in the price of our common stock.*

     Any additional issuance    of equity securities, including for acquisitions, may have a dilutive effect    on our existing stockholders. In addition, the perceived risk associated    with the possible sale of a large number of shares could cause some of our    stockholders to sell their stock, thus causing the price of our stock to    decline. Subsequent sales of our common stock in the open market or the private    placement of our common stock or securities convertible into common stock    could also have an adverse effect on the market price of the shares. If our    stock price declines, it may be more difficult or we may be unable to raiseadditional capital. 

**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: our expectations regarding revenues, the growth of the thin client    market, gross margins and fluctuations in gross margins, selling and marketing    expenses, and general and administrative expenses for the balance of fiscal    2004; the introduction of new products; cost benefits and other advantages    of our products; our acquisition of businesses and technologies; the availability    of cash or other financing sources to fund future operations, cash expenditures    and acquisitions, our potential issuance of issuance of debt and equity securities    under our $100 million shelf registration and the development of new products.    These forward-looking statements involve risks and uncertainties. The factors    set forth below, and those 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 our actual results include the final results of our results    for our 2004 fiscal year , the timing and receipt of future orders, our timely    development and customers' acceptance of our products, pricing pressures,    rapid technological changes in the industry, growth of overall thin client    sales through the capture of a greater portion of the PC market, increasedcompetition, our ability to attract and retain qualified personnel, the economic    viability of our channel partners, adverse changes in customer order patterns,    our ability to identify and successfully consummate and integrate future    acquisitions, adverse changes in general economic conditions in the U. S.    and internationally, risks associated with foreign operations and politicaland economic uncertainties associated with current world events. 

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**Item 3.     Quantitative and Qualitative Disclosures About Market Risk**

The Company earns interest income from its balances of cash and cash equivalents and short-term investments.  This interest income is subject to market risk related to changes in interest rates which primarily affects the investment portfolio.  The Company invests in instruments that meet high credit quality standards, as specified in its investment policy.

As of December 31, 2003 and June 30, 2003, cash equivalents and short-term investments consisted primarily of certificates of deposit, commercial paper and money market funds maturing over the following three months.  Due to the average maturity and conservative nature of the Company’s investment portfolio, a sudden change in interest rates would not have a material effect on the value of the portfolio.

Management estimates that if the average yield of the Company’s investments decreased by 100 basis points, interest income for the three months ended December 31, 2003 would have decreased by less that $215,000.  This estimate assumes that the decrease occurred on October 1, 2003 and reduced the yield of each investment instrument by 100 basis points.

******Item 4.     Controls and Procedures**

|   | (a) | Disclosure Controls and Procedures. |
|--------|-----|-------------------------------------|

The Company, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of its disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of December 31, 2003 (the “Evaluation Date”). Based on the evaluation performed, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting in the periods specified in the SEC’s rules and forms the information required to bedisclosed by the Company in its reports filed or furnished under the Exchange Act.

|   | (b) | Changes in Internal Control Over Financial Reporting |
|--------|-----|------------------------------------------------------|

There have not been any changes in the Company’s internal control over financial reporting during the fiscal quarter ended December 31, 2003 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

**Item 1.     Legal Proceedings**

None.

******Item 2.     Changes in Securities and Use of Proceeds**

In July 2003, the Company sold 1.5 million shares of common stock in a private placement at a price of $17.50 per share.  Net proceeds to the Company were approximately $24.5 million after transaction costs.  The shares were issued in reliance upon the exemption from the registration requirements of the Securities Act under Section 4(2) and Rule 506 thereof as a transaction not involving a public offering. The shares were acquired for investment and not with a view to the distribution thereof by accredited investors who had access to information regarding the Company and its business.

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

On December 3, 2003,, the Company held its Annual Meeting of Stockholders.  The Stockholders voted to elect five members to the Board of Directors and on proposals to amend the Company’s 1995 Stock Option Plan to increase the number of shares issuable thereunder and to ratify the selection of KPMG LLP as the Company's independent accountants for the fiscal year ending June 30, 2004.

Elected to the Board of Directors were Michael G. Kantrowitz (10,671,367 shares voted for election and 3,716,651 shares were withheld), John M. Ryan (14,003,035 shares voted for election and 384,983 shares were withheld), Christopher G. McCann (13,969,825 shares voted for election and 418,193 shares were withheld), John P. Kirwin, III (14,003,335 shares voted for election and 384,683 shares were withheld) and David D. Gathman (14,115,142 shares voted for election and 272,876 shares were withheld).

The proposal to amend the 1995 Stock option Plan was not approved, with 5,507,380 shares voting against, 2,812,217 shares voting in favor, and 15,597 shares abstaining.

The proposal to select of KPMG LLP as the Company's independent accountants was ratified, with 14,021,650 shares voting in favor of ratification, 353,521 shares voting against ratification and 12,847 shares abstaining.

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

|   | a. | Exhibits |
|--------|----|----------|

|   |   |   |
|--------|--------|--------|

|   |   | The following exhibits are being filed as part of this quarterly report on Form 10-Q: |
|--------|--------|---------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|

| ExhibitNumbers |   |   | Description                                                                                                                                                                  |   |
|----------------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|           |   |   |                                                                                                                                                                         |   |
| 31.1           |   |   | Certification of Michael Kantrowitz as Chairman, President and Chief Executive Officer of Neoware Systems, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002    |   |
|           |   |   |                                                                                                                                                                         |   |
| 31.2           |   |   | Certification of Keith D. Schneck as Executive Vice President and Chief Financial Officer of Neoware Systems, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |   |
|           |   |   |                                                                                                                                                                         |   |
| 32.1           |   |   | Certification of Michael Kantrowitz as Chairman, President and Chief Executive Officer of Neoware Systems, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    |   |
|           |   |   |                                                                                                                                                                         |   |
| 32.2           |   |   | Certification Keith D. Schneck as Executive Vice President and Chief Financial Officer of Neoware Systems, Inc pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     |   |

|   | b. | Reports on Form 8-K |
|--------|----|---------------------|

|   |   |   |
|--------|--------|--------|

|   |   | On October 27, 2003,    the Company filed (excluding the portion furnished pursuant to Item 12) a    Form 8-K relating to a press release announcing earnings for the three monthsended September 30, 2003. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**SIGNATURES**

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

| NEOWARE SYSTEMS, INC.    |
|--------------------------|
|                     |   |
|                     |   |
|                     |   |
| Date:  February 13, 2004 | By: /s/ MICHAEL KANTROWITZ |
|                     |  |
|                     | Michael Kantrowitz |
|                     | Chairman, President and Chief  Executive Officer |
|                     |   |
|                     |   |
|                     |   |
| Date:  February 13, 2004 | By: /s/ KEITH D. SCHNECK |
|                     |  |
|                     | Keith D. Schneck |
|                     | Executive Vice President and Chief Financial Officer |

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