<PAGE>

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

                                    FORM 10-Q
                              ____________________

(Mark One)

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

For the Quarter ended September 30, 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                (IRS Employer Identification No.)
  incorporation or organization)

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

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


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

                                   Yes___ No X
                                            ---

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

                                   Yes X  No
                                      ---   ---

As of November 12, 2003, there were 15,748,243 outstanding shares of the
Registrant's Common Stock.



                                       1
<PAGE>



                              NEOWARE SYSTEMS, INC.

                                      INDEX


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

          Consolidated Balance Sheets:
          September 30, 2003 (unaudited) and June 30, 2003                   3

          Consolidated Statements of Operations:
          Three Months Ended September 30, 2003 and 2002 (unaudited)         4

          Consolidated Statements of Cash Flows:
          Three Months Ended September 30, 2003 and 2002 (unaudited)         5

          Notes to Consolidated Financial Statements                         6

Item 2.   Management's Discussion and Analysis of Financial
          Condition and Results of Operations                               11

Item 3.   Quantitative and Qualitative Disclosures About Market Risk        22

Item 4.   Controls and Procedures                                           22

PART II.    OTHER INFORMATION

Item 1.   Legal Proceedings                                                 23

Item 2.   Changes in Securities and Use of Proceeds                         23

Item 6.   Exhibits and Reports on Form 8-K                                  23

Signatures                                                                  24







                                       2
<PAGE>



                                            NEOWARE SYSTEMS, INC.
                                         CONSOLIDATED BALANCE SHEETS



<TABLE>
<CAPTION>

                                                       (Unaudited)
                          ASSETS                   September 30, 2003     June 30, 2003
                                                   --------------------  -----------------
<S>                                              <C>                   <C>
CURRENT ASSETS:
 Cash and cash equivalents                             $27,285,394          $26,013,555
 Short-term investments                                 18,378,475            3,151,320
 Accounts receivable, net                                9,692,651           11,088,994
 Inventories                                             1,562,912              772,494
 Prepaid expenses and other                                680,953              798,383
 Deferred income taxes                                     945,585              945,585
                                                       -----------          -----------
              Total current assets                      58,545,970           42,770,331

Property and equipment, net                                629,310              572,048
Goodwill                                                16,955,950            8,943,175
Intangibles, net                                         3,928,837            2,090,617
Other                                                       71,535                    -
                                                       -----------          -----------
                                                       $80,131,603          $54,376,171
                                                       ===========          ===========

           LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
 Accounts payable                                       $1,943,099           $4,206,346
 Accrued expenses                                        3,476,359            2,817,791
 Capital lease obligations                                   6,738                6,557
 Deferred revenue                                          830,430              691,614
                                                       -----------          -----------
              Total current liabilities                  6,256,626            7,722,308
                                                       -----------          -----------

Capital lease obligations                                    8,497               10,252
Deferred income taxes                                       16,788               16,788


COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
 Common stock, $.001 par value, 50,000,000 shares
   authorized, 15,727,810 and 14,054,800 shares
   issued and 15,627,810 and 13,954,800 shares
   outstanding                                              15,729               14,056
 Additional paid-in capital                             69,559,207           44,214,516
 Treasury stock, 100,000 shares at cost                   (100,000)            (100,000)
 Accumulated other comprehensive loss                      (13,792)             (26,943)
 Retained earnings                                       4,388,547            2,525,194
                                                       -----------          -----------
              Total stockholders' equity                73,849,692           46,626,823
                                                       -----------          -----------
                                                       $80,131,603          $54,376,171
                                                       ===========          ===========
</TABLE>



          See accompanying notes to consolidated financial statements.


                                       3
<PAGE>




                              NEOWARE SYSTEMS, INC
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)




                                                          Three Months Ended
                                                             September 30,
                                                    ---------------------------
                                                        2003            2002
                                                    -----------     -----------
Net revenues                                        $15,013,387     $13,516,678
Cost of revenues                                      7,049,231       7,822,502
                                                    -----------     -----------
         Gross profit                                 7,964,156       5,694,176
                                                    -----------     -----------

Sales and marketing                                   2,965,305       2,227,333
Research and development                                721,080         387,763
General and administrative                            1,457,077         908,117
                                                    -----------     -----------
         Operating expenses                           5,143,462       3,523,213
                                                    -----------     -----------

         Operating income                             2,820,694       2,170,963

Interest income, net                                     83,318          90,023
                                                    -----------     -----------

         Income before income taxes                   2,904,012       2,260,986
Income taxes                                          1,040,659         813,955
                                                    -----------     -----------

Net income                                          $ 1,863,353      $1,447,031
                                                    ===========     ===========

Basic earnings per share                                $  0.12         $  0.11
                                                    ===========     ===========

Diluted earnings per share                              $  0.12         $  0.10
                                                    ============    ===========


Weighted average number of common shares
  outstanding used in basic earnings per share
  computation                                        15,445,492      13,162,589
                                                    ============    ===========

Weighted average number of common shares
  outstanding used in diluted earnings per share
  computation                                        16,200,219      14,652,096
                                                    ============    ===========


          See accompanying notes to consolidated financial statements.


                                       4
<PAGE>




                              NEOWARE SYSTEMS, INC
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                              Three Months Ended
                                                                 September 30,
                                                        ---------------------------
                                                           2003             2002
                                                        -----------     -----------
<S>                                                     <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                               $1,863,353      $1,447,031
Adjustments to reconcile net income to net cash
  provided by operating activities-
      Deferred income taxes                                       -         799,136
      Depreciation and amortization                         259,100         187,509
Changes in operating assets and liabilities,
  net of effects from acquisition
  (Increase) decrease in:
      Accounts receivable                                 1,396,343        (667,572)
      Inventories                                          (790,418)        319,420
      Prepaid expenses and other                             45,895        (120,114)
  Increase (decrease) in:
      Accounts payable                                   (2,263,247)       (177,103)
      Accrued expenses                                      658,568        (116,834)
      Deferred revenue                                      138,816         131,861
                                                        -----------     -----------

            Net cash provided by operating activities     1,308,410       1,803,334
                                                        -----------     -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of the host access software business from
      Pericom Holdings Plc                               (9,962,776)              -
Purchases of short-term investments                     (16,209,307)              -
Sales of short-term investments                             982,152               -
Purchase of intangible assets                              (125,000)        (29,652)
Purchases of property and equipment                         (79,581)        (62,378)
                                                        -----------     -----------

            Net cash used in investing activities       (25,394,512)        (92,030)
                                                        -----------     -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital leases                                 (1,574)        (15,183)
Exercise of stock options and warrants                      737,062       1,444,273
Sale of common stock, net of expenses                    24,609,302               -
Expenses for prior issuance of common stock                       -       (118,940)
Repayments of officer loans                                       -           9,463
                                                        -----------     -----------

            Net cash provided by financing activities    25,344,790       1,319,613
                                                        -----------     -----------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                      13,151               -
                                                        -----------     -----------

INCREASE IN CASH AND CASH EQUIVALENTS                     1,271,839       3,030,917
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD           26,013,555      17,031,422
                                                        -----------     -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD                $27,285,394     $20,062,339
                                                        ===========     ===========

SUPPLEMENTAL DISCLOSURES:
     Cash paid for income taxes                            $264,400         $54,180
     Cash paid for interest                                   3,570           8,918
</TABLE>

          See accompanying notes to consolidated financial statements.



                                       5
<PAGE>




                              NEOWARE SYSTEMS, INC.

              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Neoware Systems,
Inc. and Subsidiaries (the "Company") have been prepared in 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 interim results of operations for the
three month period ended September 30, 2003 are not necessarily indicative of
results to be expected for the full year or for any other interim period.
Certain information and footnote disclosures included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of 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 a material impact on the Company's
financial statements.

In January 2003, the FASB issued Interpretation No. 46, which addresses the
consolidation by business enterprises of variable interest entities as defined
in the Interpretation. The Interpretation applies immediately to variable
interests in variable interest entities created or obtained after January 31,
2003. The Interpretation becomes effective for entities created before February
1, 2003 as of the beginning of the first fiscal period ending after December 15,
2003. 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."

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 has determined 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:

                                       6
<PAGE>
<TABLE>
<CAPTION>
                                                                        Three Months Ended
                                                                           September 30,
                                                                    ----------------------------
                                                                        2003             2002
                                                                    ------------     -----------
<S>                                               <C>               <C>              <C>
Net income                                          As reported     $ 1,863,353      $ 1,447,031
  Less total stock-based compensation
      determined under fair value method
      for all awards, net of tax                                       (660,811)        (192,233)
                                                                    -----------      -----------
Net income                                          Pro forma       $ 1,202,542      $ 1,254,798
                                                                    ===========      ===========

Basic and diluted earnings per share:

  Basic EPS                                         As reported     $      0.12      $      0.11
                                                    Pro forma       $      0.08      $      0.10
  Diluted EPS                                       As reported     $      0.12      $      0.10
                                                    Pro forma       $      0.07      $      0.09
</TABLE>

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 from Pericom Holdings PLC the host access
software business formerly operated under the Pericom Software name for
approximately $9.8 million in cash, excluding transaction costs. The Company
acquired all of the assets of the software business, including 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 intangible assets. The Company has not completed the
allocation of the purchase price for this acquisition. Therefore, the allocation
of the purchase price could be adjusted once the final valuation of assets
acquired is completed. The results of operations of the host access software
business have been included in the Company's statements of operations from the
date of the acquisition.

The following unaudited pro forma information presents the results of the
Company's operations for the three months ended September 30, 2003 and 2002 as
though the acquisition had been completed as of July 1, 2002:

                                        Three Month Ended
                                          September 30,
                                ------------------------------
                                     2003              2002
                                ------------     -------------
Total revenue                   $ 15,013,387     $ 14,125,790
                                ============     =============
Net income                      $  1,863,353     $  1,608,096
                                ============     =============
Basic earnings per share        $       0.12     $       0.12
                                ============     =============
Diluted earnings per share      $       0.12     $       0.11
                                ============     =============

                                       7
<PAGE>

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.

5. GOODWILL AND INTANGIBLE ASSETS

The following is a summary of changes in the carrying amount of goodwill:

Balance, June 30, 2003                                           $  8,943,175
Acquisition of the host access
  software business of Pericom Holdings Plc (See Note 4)            8,012,775
                                                                 ------------
Balance, September 30, 2003                                      $ 16,955,950
                                                                 ============

Intangible assets with finite useful lives are amortized over their respective
estimated useful lives to their residual values. The following table provides a
summary of the Company's intangible assets:
<TABLE>
<CAPTION>
                                                               September 30, 2003
                                            --------------------------------------------------------
                             Estimated      Gross carrying        Accumulated
                            useful life         value             amortization              Net
                           --------------   ------------          ------------         -----------
<S>                       <C>               <C>                    <C>                  <C>
Tradenames                  Indefinite       $   250,000           $      ---           $  250,000
Distributor relationships     5 years          2,325,000             (717,500)           1,607,500
Acquired technology          5-10 years        2,305,615             (234,278)           2,071,337
                                             -----------           -----------          ----------
                                             $ 4,880,615           $ (951,778)          $3,928,837
                                             ===========           ==========           ==========

                                                                 June 30, 2003
                                             -----------------------------------------------------
                             Estimated       Gross carrying        Accumulated
                            useful life          value             amortization            Net
                           --------------    -----------          --------------       -----------
Tradenames                  Indefinite       $   150,000           $      ---           $  150,000
Distributor relationships     5 years          2,200,000             (690,000)           1,510,000
Acquired technology          10 years            505,615              (74,998)             430,617
                                             -----------           ----------           ----------
                                             $ 2,855,615           $ (764,998)          $2,090,617
                                             ===========           ==========           ==========
</TABLE>
The increase in intangible assets during the three months ended September 30,
2003 was due to the acquisition of the host access software business from
Pericom Holdings PLC (Note 4), which resulted in additional acquired technology
($1.8 million) and tradenames ($100,000), and the acquisition of certain
distribution rights in Europe ($125,000).

Amortization of intangibles was $186,780 and $122,500 for the three months ended
September 30, 2003 and 2002, respectively.

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,         Total
------------------------------     -----------
Remainder of fiscal 2004           $   584,722
2005                                   772,143
2006                                   772,143
2007                                   522,145
2008                                   332,143
2009 through 2013                      695,541
                                   -----------
                                   $ 3,678,837
                                   ===========




                                       8
<PAGE>

6. COMPREHENSIVE INCOME

Excluding net income, the Company's source of other comprehensive income 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 Month Ended
                                                    September 30,
                                            -----------------------------
                                                2003              2002
                                            -----------       -----------
Net income                                  $ 1,863,353       $ 1,447,031
   Foreign currency translation adjustment      (13,151)          (13,570)
   Unrealized holding losses in
     available-for-sale securities                  ---          (169,769)
                                            -----------       -----------
Comprehensive income                        $ 1,850,202       $ 1,263,692
                                            ===========       ===========

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
accrued at 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. Revenues recognized from "bill and hold" transactions for products
which had not shipped by September 30, 2003 and 2002 were $-0- and $312,438,
respectively. Accounts receivable relating to "bill and hold" transactions were
-0- and $257,333 at September 30, 2003 and 2002, respectively.

8. MAJOR CUSTOMERS

For the three months ended September 30, 2003, sales to one customer constituted
16% of net revenues, and accounts receivable from this customer as of September
30, 2003 amounted to $938,133. For the three months ended September 30, 2002,
sales to two customers constituted 18% and 16% of net revenues, respectively,
and accounts receivable from these customers as of September 30, 2002 amounted
to $4,549,956.

                                       9
<PAGE>

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:

                                         September 30,        June 30,
                                             2003               2003
                                          -----------        ---------
Purchased components and subassemblies    $  237,012         $ 172,160
Finished goods                             1,325,900           600,334
                                          ----------         ---------
                                          $1,562,912         $ 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 includes the enactment date.

11. SALE OF COMMON STOCK

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 host access software business
from Pericom Holdings Plc (See Note 4). The Company intends to use the remaining
net proceeds of the financing for 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% (3.62% at September 30,
2003). At September 30, 2003 and 2002, $2,000,000 was available for borrowing
under the line. During the three months ended September 30, 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 compliance with this condition at September 30, 2003.




                                       10
<PAGE>


13. EARNINGS PER SHARE

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

                                                  Three months ended
                                                     September 30,
                                           --------------------------------
                                                 2003            2002
                                             -----------      ----------

Net income                                   $ 1,863,353      $1,447,031
                                             ===========      ==========

Weighted average shares outstanding:
   Basic                                      15,445,492      13,162,589
   Effect of dilutive employee stock options     748,506       1,474,097
   Effect of dilutive warrants                     6,221          15,410
                                             -----------      ----------
   Diluted                                    16,200,219      14,652,096
                                             ===========      ==========

Earnings per common share:
   Basic                                     $      0.12      $     0.11
                                             ===========      ==========
   Diluted                                   $      0.12      $     0.10
                                             ===========      ==========

For the three month periods ended September 30, 2003 and 2002, an aggregate of
34,000 and 5,550 stock options and warrants were excluded from the calculation
of dilutive earnings per share because their inclusion would have been
anti-dilutive.

14. RELATED PARTY

For the three months ended September 30, 2003 and 2002, the Company had sales of
$113,115 and $-0- to a customer of which one of the Company's directors is an
executive officer and director.

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

Introduction

The Company provides software, services and solutions to enable Appliance
Computing, a proven Internet-based computing architecture targeted at business
customers that is designed to be easier to manage and more cost-effective than
traditional PC-based computing. The Company's 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 and proprietary business devices including green-screen terminals.

The Company's 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. The Company
generates revenues from sales of its Eon, Capio, ThinSTAR and Voyager thin
client appliances, as well as its ThinPC thin client software for PCs, TeemTalk
host access software for PCs and UNIX workstations, ezRemote Manager central
management software, and services such as training and integration.


                                       11
<PAGE>



Results of Operations

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

                                        Three Months Ended
                                             September 30,
                                    --------------------------
                                     2003            2002
                                    ------         -------
Gross profit                         53.0%          42.1%

Operating expenses
    Sales and marketing              19.8           16.5
    Research and development          4.8            2.8
    General and administrative        9.7            6.7
                                    -----           ----
Operating income                     18.7           16.1

Interest income, net                  0.6            0.6
Income tax expense                   (6.9)          (6.0)
                                    -----           ----
Net income                           12.4%          10.7%
                                    =====          =====

Net revenues for the three month period ended September 30, 2003 increased by
$1,496,709 or 11% to $15,013,387 from $13,516,678 for the comparable period in
the prior fiscal year. The increase in net revenues was primarily attributable
to an increase in sales of the Company's thin client appliance products (7%) and
software (6%), offset by a reduction in the sales of third party products (2%).
The increases resulted from increasing acceptance in the marketplace of thin
client technology, the Company's increased access to customers as a result of
its greater market share, its alliance with IBM, its acquisition of the host
access software business from Pericom Holdings Plc, and its larger sales
organization.

The Company's gross profit as a percentage of net revenues for the three month
period ended September 30, 2003 increased to 53% compared to 42% for the
comparable prior period. The increase in gross profit is attributable primarily
to lower component and license costs (5%), increased software sales (4%) and the
spreading of fixed overhead costs over a larger revenue base (2%).

Operating expenses for the three month period ended September 30, 2003 were
$5,143,462, an increase of $1,620,249 or 46% from operating expenses of
$3,523,213 in the comparable period of the prior fiscal year. As a percentage of
revenue, operating expenses increased to 34% in the three month period ended
September 30, 2003, compared to 26% in the comparable period of the prior fiscal
year as the Company implemented its growth plans.

Sales and marketing expenses for the three month period ended September 30, 2003
were $2,965,305, an increase of $737,972, or 33% from sales and marketing
expenses of $2,227,333 for the comparable prior period. The increase is
primarily attributable to personnel additions to sales, marketing and business
development staffing, and it is anticipated that such costs will continue to
increase as the Company grows. As a percentage of revenue, sales and marketing
expenses increased to 20% in the three month period ended September 30, 2003,
compared to 17% in the comparable period of the prior fiscal year as the Company
implemented its growth plans.

Research and development expenses for the three month period ended September 30,
2003 were $721,080, an increase of $333,317, or 86% from research and
development expenses of $387,763 in the comparable period in the prior year
primarily due to increased staffing of professionals dedicated to research and
development activities. The Company is committed to investing in research and
development in order to continue to develop new products and enhance existing
products, and it is anticipated that such expenses will continue to increase as
the Company continues to grow. As a percentage of revenue, research and
development expenses increased to 5% in the three month period ended September
30, 2003, compared to 3% in the comparable period of the prior fiscal year as
the Company implemented its growth plans.

                                       12
<PAGE>

General and administrative expenses for the three month period ended September
30, 2003 were $1,457,077, an increase of $548,960, or 60% from $908,117 in the
comparable period in the prior fiscal year primarily due to increase in staffing
levels, and it is anticipated that such costs will continue to increase as the
Company grows. General and administrative expenses for the period ended
September 30, 2003 include the cost of the Company's Chief Operating Officer,
hired in December 2002, the Company's new Chief Financial Officer, hired in
April, 2003, and other management personnel added during fiscal 2003 to support
the Company's growth. As a percentage of revenue, general and administrative
expenses increased to 10% for the three month period ended September 30, 2003,
compared to 7% for the comparable period of the prior fiscal year as the Company
implemented its growth plans.

Net interest income for the three month period ended September 30, 2003 was
$83,318 compared to $90,023 in the comparable period in the prior fiscal year.
The decrease was due to the decline in interest rates offset partially by the
higher average levels of cash invested during the current year primarily as a
result of cash provided from operations and the private placement completed in
July 2003.

The effective tax rate for the three months ended September 30, 2003 and 2002
was approximately 36%.

Liquidity and Capital Resources

As of September 30, 2003, the Company had net working capital of $52,289,344
consisting primarily of cash and cash equivalents, short-term investments and
accounts receivable. The Company's principal sources of liquidity include
$45,663,869 of cash and cash equivalents and short-term investments and a
$2,000,000 line of credit facility with Wachovia Bank, formerly First Union
National Bank, all of which was available as of September 30, 2003. The facility
is unsecured and requires the Company 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.
The Company had no borrowings under the line of credit during the three month
periods ended September 30, 2003 and 2002.

Cash and cash equivalents and short-term investments increased by $16,498,994
during the three months ended September 30, 2003, primarily as a result of the
net proceeds of $24,609,302 from the sale of common stock in a private placement
transaction, offset partially by cash of $9,962,776 used to acquire the host
access software business of Pericom Holdings Plc.

The Company generated cash from operating activities of $1,308,410 for the three
months ended September 30, 2003 primarily due to net income of $1,863,353,
adjusted for depreciation and amortization of $259,100, a decrease in accounts
receivable of $1,396,343, and an increase in accrued expenses of $658,568 which
were partially offset by an increase in inventories of $790,418 and a decrease
in accounts payable of $2,263,247.

The Company used cash in investing activities of $10,167,357 for the three
months ended September 30, 2003 primarily as a result of the acquisition of the
host access software business (TeemTalk product line) from Pericom Holdings Plc.

                                       13
<PAGE>

The Company generated cash in financing activities of $25,344,790 during the
three months ended September 30, 2003, primarily as a result of the sale of
common stock in a private placement transaction and the exercise of stock
options.

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

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.

We experienced significant growth in our business in the past three years due to
internal expansion and business acquisitions, and if we do not appropriately
manage this growth and any future growth, including the integration of our newly
hired employees and executive officers, our business 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 125 employees at
October 31, 2003. 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 integrate and 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 September 30, 2003 reflecting the hiring of additional
key personnel as we continue to implement our growth strategy. As a result, we
will need to generate significant revenues to maintain profitability. If we do
not maintain profitability, the market price for our common stock may decline.

         Our financial resources may not be enough for our capital and corporate
development needs, and we may not be able to obtain additional financing. A
failure to 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 the acquisitions we have completed,
the alliance we have entered into or future acquisitions we may complete as part
of our growth strategy, which may materially adversely affect our growth and our
operating results.

         Within the last two and one-half years, we have made four acquisitions
and entered into an alliance with IBM, and we may make additional acquisitions
as part of our growth strategy. We have not yet fully integrated some of these
acquisitions or fully implemented the alliance. There is no assurance that we
will successfully integrate these acquisitions into our business or successfully
implement the alliance. In addition, we may be unable to retain key employees or
key business relationships of the acquired businesses and integration of the
businesses may divert the attention and resources of our management. We cannot
assure that we will achieve anticipated revenue and earnings growth as a result
of these transactions. Our failure to successfully integrate the acquired
businesses into our operations or successfully implement the alliance could have
a material adverse effect upon our business, operating results and financial
condition. Even if the acquisitions and alliance are successfully integrated, we
may not receive the expected benefits of the transactions if we find that the
business or alliance 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.

                                       14
<PAGE>

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

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

We expect our quarterly revenues and operating results to fluctuate for a number
of reasons.

         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, earnings and working capital
for each financial period especially difficult and uncertain and increases the
risk of unanticipated variations in quarterly results and financial condition.

         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:

  o  the growth and changing requirements of the thin client appliance and host
     access markets;

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

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

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

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

                                       15
<PAGE>

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
hardware, software and consulting services. The gross profit margin also varies
in response to competitive market conditions as well as periodic fluctuations in
the cost of memory and other significant components. The market in which 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 in
the 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 Windows and Linux-based thin
client appliances to perform discrete tasks for corporate and Internet-based
computer networks and a decrease in their rates of adoption could adversely
affect our ability to increase our revenues.

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

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

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

         We may not be able to introduce new products on a timely basis because
some of our products use embedded versions of Microsoft Windows as their
operating system. 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 time to 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.


                                       16
<PAGE>

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 recently 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.

         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. 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 36% of our revenues were derived from international sales
during the three months ended September 30, 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. 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. 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.

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

         We cannot be certain that we will be able to attract channel partners
that market our products effectively or provide timely and cost-effective
customer support and service. None of our current channel partners, 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 indirect sales 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 have accounted for more than 10%
of our net sales during the three months ended September 30, 2003.

                                       17
<PAGE>

         As a result of our alliance with IBM, we rely on IBM for distribution
of our products to IBM's customers. If IBM were to discontinue sales of our
products or reduce its sales efforts, it could adversely affect our operating
results.

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
operations or 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 market for thin client appliances, which is part of the overall
PC market, we face significant competition from makers of personal computers, as
well as larger companies that have greater name recognition than we have.
Increased competition may negatively affect our business and future operating
results by leading to price reductions, higher selling expenses or a reduction
in our market share.

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

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

      o  offer a wide range of products; and

      o  offer high-quality products and services.

         If we are unable to offer products and services that compete
successfully with the products and services offered by our competitors,
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 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 thin client appliance market segment of 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.


                                       18
<PAGE>

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

         Our products will be differentiated from those of our competitors by
our internally developed technology that is incorporated into our products. If
we 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 suitably qualified
people.

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

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

      o  hire, train and manage additional qualified personnel; and

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

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 license our TeemTalk software to competitors who may choose to license
competitive products from 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 competitors. If we
were to lose one or more of these customers, our revenue and profits would
decline.


                                       19
<PAGE>

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:

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

      o  diversion of development resources;

      o  injury to our reputation; or

      o  increased maintenance and warranty costs.

         These problems could harm our business and future operating results.
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 former engagement 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 obtain
Andersen's consent.

                                       20
<PAGE>

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
performance may 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 our outstanding 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 sale of equity securities 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 raise additional 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 the increase in sales, business and marketing
personnel and the anticipated costs to implement such increase, the Company's
commitment to invest in the development and enhancement of its technology, the
investment of significant resources in software development activities, the
anticipated increases in general and administrative expenses, cost benefits and
other advantages of the Company's products, the acquisition of businesses and
technologies, the availability of cash or other financing sources to fund future
operations, cash expenditures and acquisitions, the Company's potential issuance
of debt and equity securities under its $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 the
Company's actual results include the Company's ability to lower its costs,
customers' acceptance of Neoware's line of computing appliance products, pricing
pressures, rapid technological changes in the industry, growth of the computing
appliance market, increased competition, the Company's ability to attract and
retain qualified personnel, the ability to identify acquisition candidates and
to consummate and successfully integrate acquisitions, the ability to obtain
financing on favorable terms to finance future acquisitions, the economic
viability of the Company's channel partners, changes in general economic
conditions and risks associated with foreign operations and political and
economic uncertainties associated with current world events.


                                       21
<PAGE>

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 September 30, 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
September 30, 2003 would have decreased by less that $70,000. This estimate
assumes that the decrease occurred on July 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 September 30, 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 be disclosed 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 September 30, 2003 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.


                                       22
<PAGE>

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 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:

         Exhibit
         Numbers    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 August 21, 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 months and fiscal year
            ended June 30, 2000.

            On July 16, 2003, the Company filed a Form 8-K relating to the
            completion of a private placement of its Common Stock to a limited
            number of accredited investors.

            On July 16, 2003, the Company filed Form 8-K announcing the
            completion of its acquisition of the host access software product
            line from Pericom Holdings Plc.

            On July 10, 2003, the Company filed a Form 8-K relating to the
            execution of Securities Purchase Agreements with a limited number of
            institutional accredited investors in connection with a sale of its
            common stock in a private placement transaction.

            On July 9, 2003, the company filed (excluding the portion furnished
            pursuant to Item 12) a Form 8-K related to a press release
            announcing preliminary results for the fiscal quarter and year ended
            June 30, 2003.


                                       23
<PAGE>

                                   SIGNATURES

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


                              NEOWARE SYSTEMS, INC.



Date: November 14, 2003                 By: /s/ MICHAEL KANTROWITZ
                                        -----------------------------
                                                Michael Kantrowitz
                                                Chairman, President and Chief
                                                Executive Officer



Date: November 14, 2003                  By: /s/ KEITH D. SCHNECK
                                         ------------------------
                                                 Keith D. Schneck
                                                 Executive Vice President and
                                                 Chief Financial Officer

                                       24