<PAGE>   1
                                                                    EXHIBIT 10.5


                    SEPARATION AGREEMENT AND GENERAL RELEASE

        THIS SEPARATION AGREEMENT AND GENERAL RELEASE (the "Agreement") is
entered into as of June 30, 1997, by James Simpson (hereinafter referred to as
"Simpson") and Wall Data Incorporated (hereinafter referred to as "Wall Data").

                                    RECITALS

        A. Simpson has served as Chairman of the Board ("Chairman") and Chief
Executive Officer ("CEO") of Wall Data. Effective July 31, 1997, Simpson will
resign as Chairman and CEO of Wall Data, and, effective October 31, 1997,
Simpson's employment relationship with Wall Data will terminate.

        B. Simpson and Wall Data wish to enter into an agreement to clarify and
resolve any disputes that may exist between them arising out of the board
relationship and employment relationship and their termination, and any
continuing obligations of the parties to one another following the end of these
relationships.

        C. Wall Data has advised Simpson of Simpson's right to consult an
attorney prior to signing this Agreement and has provided Simpson with up to 21
days to consider its severance offer and to seek legal assistance. Simpson has
consulted an attorney of Simpson's choice and understands that Simpson is
waiving all potential claims against Wall Data.

                                   AGREEMENTS

        NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises contained below, it is agreed as follows:



<PAGE>   2




1.      EMPLOYMENT: ENDING DATE AND RESPONSIBILITIES

        Simpson's service as Chairman and CEO of Wall Data will terminate
effective July 31, 1997. Simpson shall remain an employee of Wall Data until
October 31, 1997, at his current salary and benefits. Effective October 31,
1997, Simpson will have no further employment or board duties or
responsibilities to Wall Data, except as may be specifically set forth herein.

2.      CHARACTERIZATION OF TERMINATION

        Simpson and Wall Data agree that Simpson's termination of employment and
board service is a voluntary resignation and shall be characterized as such for
all future purposes.

3.      SEVERANCE AND BENEFITS

        On July 31, 1997, Wall Data will pay to Simpson a lump sum payment of
Five Hundred Twenty-Five Thousand Dollars ($525,000.00). Similarly, on July 31,
1997, Wall Data will also pay to Simpson an additional payment of Eighty-Seven
Thousand Five Hundred Dollars ($87,500.00) as the pro rata portion of Simpson's
cash bonus for calendar year 1997, based on the amount of time he was employed
as CEO during the year. Simpson will continue to receive his full salary,
payable on Wall Data's normal payroll schedule, through October 31, 1997. On
that date, Simpson will be paid his final paycheck, which will include any
accrued but unused vacation time. Wall Data will also pay on Simpson's behalf,
Simpson's COBRA payments for the period beginning November 1, 1997 until May 1,
1999, or until Simpson becomes eligible for coverage under another employer's
medical plan, whichever occurs first. All other benefits shall cease effective
the date that Simpson's employment terminates (October 31, 1997).

                                      -2-

<PAGE>   3


4.      STOCK OPTIONS

        a. Wall Data will recommend to the Compensation Committee that at its
next meeting the Committee consider accelerating the vesting of Simpson's
employee stock options listed on Exhibit A (the "Options"), which represent all
of Simpson's unvested options effective as of October 31, 1997, so that such
options are fully vested at the close of business on July 15, 1997. Wall Data
will also extend the post-termination exercise period for the Options, so that
the Options will remain exercisable until and including October 31, 1999, at
which time they will expire. Simpson understands that these modifications will
disqualify the options listed on Exhibit A as incentive stock options under the
Internal Revenue Code of 1986 (the "IRC"), as amended, and that such options
will become nonqualified stock options.

        b. Exhibit A also sets forth Simpson's employee stock options which,
absent the acceleration of vesting provided for in subparagraph (a) above, will
be vested as of October 31, 1997 (taking into account Simpson's continued
employment by Wall Data through that date). In accordance with the applicable
stock option plan, such options will continue to vest until October 31, 1997,
and will remain exercisable for ninety (90) days, at which time they will
expire. Such options are and will qualify as incentive stock options under the
IRC, absent any disqualifying event by Simpson.

        c. Wall Data agrees that the following shall apply with respect to any
and all shares of Wall Data issued upon exercise of any of the stock options
referenced in subparagraphs (a) and (b) above:

                i. The Company will use its best efforts to undertake all action
to maintain the effectiveness of the registration of such shares under the
Securities Act of 1933, as amended, pursuant to one or more Registration
Statements on Form S-9 (or any successor form).


                                      -3-
<PAGE>   4




               ii. Because the stock option plan(s) under which the foregoing
options were issued qualify under Securities and Exchange Commission ("SEC")
Rule 16b-3, and assuming that Simpson did not purchase any Wall Data shares
within the six-month period preceding July 31, 1997, any trading profits on
sales of any of the shares issued upon exercise of the foregoing options will
not be subject to the recapture provisions of Section 16(b) of the Securities
Exchange Act of 1934, as amended; and

              iii. To the best of the Company's knowledge, Simpson will not be
required to file Form 4's or Form 144's with the SEC in connection with his
sales of such shares.

5.      VALID CONSIDERATION

        Simpson and Wall Data agree that payments by Wall Data to Simpson
herein, as well as the acceleration of vesting and extension of post-termination
exercise periods offered in Paragraph No. 4 above, are not required by Wall Data
policies or procedures or by any contractual obligation of Wall Data, and are
offered by Wall Data solely as consideration for this Agreement.

6.      NONCOMPETITION

        Simpson agrees that for a period of one year from the date this
Agreement is executed, he will not be employed by, consult with or otherwise
perform services for any entity who directly competes with Wall Data, wherein
Simpson's employment, consultantship or the provision of his services would
involve or relate to terminal emulation technology, excluding any InterNet
solution to host-to-PC connectivity, other than any product that directly
competes with Arpeggio Live by providing: (a) legacy system connectivity, or (b)
the formatting of data from industry standard data bases. For its part, Wall
Data specifically acknowledges that this noncompetition provision would not bar
Simpson from accepting employment with, consulting for or otherwise

                                      -4-

<PAGE>   5




providing services to any entity so long as he does not engage in the
competitive activity described in this paragraph.

7.      NONSOLICITATION

        Simpson shall not, for a period of one (1) year from the date this
Agreement is executed, anywhere in the world, directly or indirectly solicit,
influence or entice, or attempt to solicit, influence or entice, any employee or
consultant of Wall Data to cease his or her relationship with Wall Data or
solicit, influence, entice or in any way divert any customer, distributor,
partner, joint venturer or supplier of Wall Data to do business or in any way
become associated with any Competitor.

8.      REAFFIRMATION OF CONFIDENTIALITY AGREEMENT AND INDEMNIFICATION AGREEMENT

        Simpson agrees to sign, and expressly reaffirms and incorporates herein
as part of this Agreement the Confidential Information and Inventions Agreement,
or other such agreement that Simpson signed as part of his employment with Wall
Data, copies of which are attached as Exhibit B and which shall remain in full
effect. Wall Data agrees that the Indemnification Agreement that Simpson signed
as part of his employment with Wall Data, a copy of which is attached as Exhibit
C, shall remain in full force and effect and shall cover all of Simpson's
activities as an officer, director and/or employee of Wall Data in accordance
with its terms.

9.      GENERAL RELEASE OF CLAIMS

        Simpson expressly waives any claims against Wall Data and releases Wall
Data (including its officers, directors, shareholders, managers, agents and
representatives) from any claims, known or unknown, that Simpson may have in any
way connected with Simpson's employment or board service with Wall Data and the
termination thereof. It is understood that


                                      -5-
<PAGE>   6




this release includes, but is not limited to, any claims for wages, bonuses,
employment benefits, stock options other than what is provided herein, or
damages of any kind whatsoever, arising out of any contracts, express or
implied, any covenant of good faith and fair dealing, express or implied, any
theory of wrongful discharge, any legal restriction on Wall Data's right to
terminate employees, or any federal, state or other governmental statute or
ordinance, including, without limitation, Title VII of the Civil Rights Act of
1964, the federal Age Discrimination in Employment Act, the Americans with
Disabilities Act, the Washington Law Against Discrimination, or any other legal
limitation on the employment relationship.

        It is the intention of the parties in executing this Agreement that this
release shall be effective as a bar to each and every claim, demand, or cause of
action released hereby. Simpson recognizes that he may have some claim, demand,
or cause of action against Wall Data of which he is totally unaware and
unsuspecting, which he is giving up by execution of this Agreement. Simpson's
intention in executing this instrument that it will deprive Simpson of each such
claim, demand or cause of action and prevent him from asserting same against
Wall Data. In furtherance of this intention, Simpson expressly waives any rights
or benefits conferred by the provisions of Section 1542 of the California Civil
Code or any similar statute of any other jurisdiction. California Civil Code
Section 1542, provides as follows:

               "A general release does not extend to claims which the creditor
               does not know or suspect to exist in his favor at the time of
               executing the release, which if known by him must have materially
               affected his settlement with the debtor."

                                      -6-

<PAGE>   7




        Simpson represents that Simpson has not filed any complaints, charges or
lawsuits against Wall Data with any governmental agency or any court, and agrees
that Simpson will not initiate, assist or encourage any such actions.

        This waiver and release shall not preclude Simpson from filing a lawsuit
for the exclusive purpose of enforcing Simpson's rights under this Agreement.

10.     REVIEW AND REVOCATION PERIOD; EFFECTIVE DATE

        Simpson and Wall Data agree that Simpson had up to 21 days to review
this Agreement and consult legal counsel, during which time the proposed terms
of this Agreement were not amended, modified, or revoked by Wall Data ("Review
Period"). Simpson may revoke this Agreement if Simpson so chooses by providing,
within seven days following the date Simpson signs this Agreement ("Revocation
Period"), written notice of Simpson's decision to revoke the Agreement to Wall
Data. This Agreement shall become effective and enforceable upon expiration of
the Revocation Period.

11.     SEVERABILITY

        The provisions of this Agreement are severable, and if any part of it is
found to be unlawful or unenforceable, the other provisions of this Agreement
shall remain fully valid and enforceable to the maximum extent consistent with
applicable law.

12.     GOVERNING LAW

        This Agreement will be governed by the laws of the state of Washington
without regard to its choice of law provisions.

13.     KNOWING AND VOLUNTARY AGREEMENT

        Simpson represents and agrees that Simpson has read this Agreement,
understands its terms and the fact that it releases any claim he might have
against Wall Data and its agents,

                                      -7-

<PAGE>   8




understands that he has the right to consult counsel of choice and has done so,
and enters into this Agreement without duress or coercion from any source.

14.     NONDISPARAGEMENT

        Both Wall Data and Simpson agree that Simpson and Wall Data will not
make or publish, either orally or in writing, any disparaging statements
regarding the other.

15.     ENTIRE AGREEMENT

        This Agreement sets forth the entire understanding between Simpson and
Wall Data and supersedes any prior agreements or understandings, express or
implied, pertaining to the terms of Simpson's employment or board service with
Wall Data and the termination of same, unless expressly reaffirmed and
incorporated herein by reference. Simpson acknowledges that in executing this
Agreement, Simpson does not rely upon any representation or statement by any
representative of Wall Data concerning the subject matter of this Agreement,
except as expressly set forth in the text of the Agreement.

        IN WITNESS WHEREOF, the parties have executed this Agreement as of the
dates indicated below.

WALL DATA INCORPORATED


By:                                               /s/   James Simpson
  --------------------------------          ------------------------------------
                                                        JAMES SIMPSON
Title:
     ----------------------------

Dated:                                            Dated: 8th July 1997
     ----------------------------                        -----------------------

                                      -8-




<PAGE>   9
                                                                       EXHIBIT A

                         STOCK OPTION PERSONNEL SUMMARY
                                 AS OF 10/31/97

<TABLE>
<CAPTION>

GRANT         GRANT     PLAN/
NUMBER        DATE      TYPE      GRANTED      PRICE    EXERCISED     VESTED    CANCELLED    UNVESTED   OUTSTANDING    EXERCISABLE
------        ----      ----      -------      -----    ---------     ------    ---------    --------   -----------    -----------
<S>         <C>        <C>        <C>         <C>        <C>         <C>         <C>          <C>        <C>            <C>    
000179      05/15/91   83/ISO     340,000     $ 0.200    150,100     340,000           0          0      189,900         189,900
000404      05/15/91   83/ISO      25,000     $ 0.400     25,000      25,000           0          0            0               0
000265      02/27/92   83/ISO      37,500     $ 0.200          0      37,500           0          0       37,500          37,500
000403      10/21/92   83/NQ       37,500     $ 0.200          0      37,500           0          0       37,500          37,500
002392      01/23/96   93/ISO      13,670     $18.750          0       6,835           0      6,835       13,670           6,835
002393      01/23/96   93/NQ       11,330     $18.750          0       3,165           0      8,165       11,330           3,165
002272      04/17/96   93/NQ       68,499     $15.380          0      37,500           0     30,999       68,499          37,500
002275      04/17/96   93/ISO       6,501     $15.380          0           0           0      6,501        6,501               0
002557      01/21/97   93/NQ       30,000     $15.500          0      14,999           0     15,001       30,000          14,999
                                   -------     -------    -------     ------       ------     ------      -------         -------
                        TOTALS     570,000    [$83.825]   175,100     502,499           0     67,501      394,900         327,399
</TABLE>



<PAGE>   10




                                                                       EXHIBIT B


                CONFIDENTIAL INFORMATION AND INVENTIONS AGREEMENT

        In consideration of my employment as an employee or independent
contractor with Wall Data Incorporated, a Washington corporation (the
"Company"), the opportunities for advancement that such employment provides me,
the compensation paid to me by the Company, the understandings set forth below,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, I agree as follows:

SECTION 1.     DEFINITIONS

        Whenever used in this Agreement, the following terms will have the
following specified meanings:

        1.1 "CONFIDENTIAL INFORMATION" means any information that (a) directly
relates to the business of the Company, (b) is not generally available to the
public, nor does not become generally available to the public (other than
information made available directly or indirectly through me) and (c) is
conceived, compiled, developed, discovered or received by, or made available to
me during the Term, whether solely or jointly with others, and whether or not
while engaged in performing work for the Company. Without limiting the
generality of the foregoing, Confidential Information includes information
relating to Inventions or the trade secrets, products, services, finances,
business plans, marketing plans, legal affairs, suppliers, clients, potential
clients, prospects, opportunities, contracts or assets of the Company.
Confidential Information also includes any information which has been made
available to the Company by another Person and which the Company is obligated to
keep confidential.

        1.2 "INVENTION" means any product, computer program, device, technique,
know-how, algorithm, method, process, procedure, improvement, discovery or
invention, whether or not patentable or copyrightable and whether or not reduced
to practice, that (a) is within the scope of the Company's business, research or
investigations or results from or is suggested by any work performed by me for
the Company and (b) is created, conceived, reduced to practice, developed,
discovered, invented or made by me during the Term, whether solely or jointly
with others, and whether or not while engaged in performing work for the
Company.

        1.3 "MATERIAL" means any product, prototype, model, document, diskette,
tape, picture, drawing, design, recording, paper, note, writing or other
tangible item which contains or manifests, whether in printed, handwritten,
coded, magnetic or other form, any Confidential Information or Invention.

        1.4 "PERSON" means any corporation, partnership, trust, association,
governmental authority, educational institution, individual or other entity.



<PAGE>   11




        1.5 "PROPRIETARY RIGHT" means any patent, copyright, mask work, trade
secret, trade mark, trade name, service mark or other protected intellectual
property right in any Confidential Information, Invention or Material.

        1.6 "TERM" means the term of my employment or engagement with the
Company, whether on a full-time, part-time or consulting basis.

SECTION 2.     CONFIDENTIAL INFORMATION, INVENTIONS AND MATERIALS

        2.1 The Company will be the exclusive owner of all Confidential
Information, Inventions, Materials and Proprietary Rights. To the extent
applicable, all Materials will constitute "works for hire" under applicable
copyright laws.

        2.2 I hereby assign and transfer, or will assign and transfer to the
Company all right, title and interest that I may now or hereafter have in the
Confidential Information, Inventions, Materials and Proprietary Rights, subject
to the limitations set forth in the notice below. I will take such action
(including, but not limited to, the execution, acknowledgment, delivery and
assistance in preparation of documents or the giving of testimony) as may be
requested by the Company to evidence, transfer, vest or confirm the Company's
right, title and interest in the Confidential Information, Inventions, Materials
and Proprietary Rights. I will not contest the validity of any Proprietary
Rights.

        2.3 Except as required for performance of my work for the Company or as
authorized in writing by the Company, I will not (a) use, disclose, publish or
distribute any Confidential Information, Inventions or Materials or (b) remove
any Materials from the Company's premises. I will hold all Materials in trust
for the Company and I will deliver them to the Company upon request and in any
event at the end of the Term.

        2.4 I will promptly disclose to the Company all Confidential
Information, Inventions and Materials, as well as any business opportunity which
comes to my attention during the Term and which relates to the business of the
Company or which arises as a result of my employment with the Company. I will
not take advantage of or divert any such opportunity for the benefit of myself
or anyone else without the prior written consent of the Company.

        NOTICE: Notwithstanding any other provision of this Agreement to the
contrary, this Agreement does not obligate me to assign or offer to assign to
the Company any of my rights in an invention for which no equipment, supplies,
facilities or trade secret information of the Company was used and which was
developed entirely on my own time, unless (a) the invention relates (i) directly
to the business of the Company or (ii) to the Company's actual or demonstrably
anticipated research or development, or (b) the invention results from any work
performed by me for the Company. This satisfies the written notice and other
requirements of RCW 49.44.140.



<PAGE>   12




SECTION 3.     NO CONFLICTING OBLIGATIONS

        3.1 My execution, delivery and performance of this Agreement and the
performance of my other obligations and duties to the Company will not violate
any other employment, nondisclosure, confidentiality, consulting or other
agreement to which I am a party or by which I may be bound.

        3.2 I will not use in performance of my work for the Company or disclose
to the Company any trade secret, confidential or proprietary information of any
prior employer or other Person if and to the extent that such use or disclosure
may violate any obligation or duty that I owe to such other Person (e.g., under
any agreement or applicable law). My compliance with this paragraph will not
prohibit, restrict or impair the performance of my work, obligations and duties
to the Company.

SECTION 4.     DEDUCTIONS FROM WAGES

        4.1 I hereby authorize and specifically agree to allow the Company to
deduct from my wages the value of any equipment, goods, or other items provided
to me by the Company during my employment which I fail to return when requested
to do so by the Company, provided that such deduction (1) does not exceed the
cost of the item, (2) does not reduce my wages below minimum wage or overtime
compensation below time and a half, (3) is not made for normal wear and tear on
the provided item(s), and (4) is accompanied with a list of all items for which
deductions are being made.

        4.2 I hereby authorize and specifically agree to allow the Company to
deduct from my wages amounts equivalent to any cash shortages, breakage, or loss
of equipment due to my dishonesty, willful act, or gross negligence.

SECTION 5.     EMPLOYMENT AT WILL

        5.1 I agree that my employment is "at will" which means that it can be
terminated at any time by Wall Data, with or without cause and with or without
notice. I agree that any promise or obligation that my employment be on any
other basis than "at will" is invalid unless in writing signed by the Chief
Executive Officer of Wall Data. I agree to abide by the Company's rules,
regulations, policies and practices as revised from time to time.

SECTION 6.     MISCELLANEOUS

        6.1 This Agreement is not a contract of employment for a specified term
or for any length, and no rights of employment are hereby created. My
obligations under this Agreement will survive any termination of my employment.

        6.2 I acknowledge that my obligations under this Agreement are important
to the Company, and that the Company would not employ me without my agreement to
such obligations. I also acknowledge that if I do not abide by my obligations in
this

<PAGE>   13




Agreement in any way, the Company will suffer immediate and irreparable harm,
and that the damage to the Company will be difficult to measure and financial
relief will be incomplete. Accordingly, I agree that in the event of any breach
or default under this Agreement by me, the Company will be entitled to
injunctive relief, specific performance, and other equitable relief. I expressly
waive any defenses to such relief based on whether irreparable harm has occurred
and whether there is an adequate remedy at law. The rights and remedies of the
Company under this paragraph are in addition to, and not in lieu of, any other
right or remedy afforded to the Company under any other provision of this
Agreement, by law or otherwise. Further, if the Company brings an action against
me to enforce its rights under this Agreement or to seek damages for my breach,
and if the Company obtains any relief in such action, I will pay the Company's
attorneys' fees and costs in such action.

        6.3 This Agreement will be enforced to the fullest extent permitted by
applicable law. If for any reason any provision of this Agreement is held to be
invalid or unenforceable to any extent then (a) such provision will be
interpreted, construed or reformed to the extent reasonably required to render
the same valid, enforceable and consistent with the original intent underlying
such provision, and (b) such invalidity or unenforceability will not affect any
other provision of this Agreement or any other agreement between the Company and
me. If the invalidity or unenforceability is due to the unreasonableness of the
scope or duration of the provision, the provision will remain effective for such
scope and duration as may be determined to be reasonable.

        6.4 The failure of the Company to insist upon or enforce strict
performance of any other provisions of this Agreement or to exercise any of its
rights or remedies under this Agreement will not be construed as a waiver or a
relinquishment to any extent of the Company's rights to assert or rely on any
such provision, right or remedy in that or any instance; rather, the same will
be and remain in full force and effect.

        6.5 This Agreement sets forth the entire Agreement, and supersedes any
and all prior agreements, between me and the Company with regard to the
Confidential Information, Inventions, Materials, Proprietary Rights and other
matters of the Company. This Agreement may not be amended, except by writing
signed by the party against whom such amendment is sought to be enforced.

        6.6 The waiver by the Company of any breach of this Agreement by me
shall not be effective unless in writing, and no such waiver shall operate or be
construed as a waiver of the same or another breach on a subsequent occasion.

        6.7 This Agreement will be governed by the laws of the State of
Washington without regard to its choice of law provisions. I irrevocably consent
to the jurisdiction of the courts of the State of Washington, King County, the
United States District Court for the Western District of Washington at Seattle,
and all applicable appellate courts, in connection with any action relating to
this Agreement. Further, I will not bring any action relating to this Agreement
other than in the court specified in this paragraph.



<PAGE>   14




        6.8 I have carefully read all of the provisions of this Agreement and
agree that (a) the same are necessary for the reasonable and proper protection
of the Company's business, (b) the Company has been induced to enter into and
continue its relationship with me in reliance upon my compliance with the
provision of this Agreement, (c) every provision of this Agreement is reasonable
with respect to its scope and duration, and (d) I have received a copy of this
Agreement.



                                                   /s/ James Simpson
                                            ------------------------------------
                                            Signature



                                                     James Simpson
                                            ------------------------------------
                                            FULL NAME (print or type)

                                            Soc. Sec. No
                                                        ------------------------

ACCEPTED:

Wall Data Incorporated

By
  ------------------------------
   Its
      --------------------------